Which of the following statements is not correct about materiality?

 Options:

a) Materiality is a relative concept b) Materiality judgments involve both quantitative and qualitative judgments c) Auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of an informed decision maker who will rely on the financial statements d) At the planning state, the auditor considers materiality at the financial statement level only

The Correct Answer Is:

d) At the planning state, the auditor considers materiality at the financial statement level only

Let’s discuss why option (d) is the correct answer:

(d) At the planning state, the auditor considers materiality at the financial statement level only:

This statement is not correct. In the planning stage of an audit, the auditor considers materiality at both the financial statement level and the individual account balance or class of transactions level. This is because materiality is not only about the overall financial statements but also about specific components that may have a significant impact.

During the planning phase, auditors set a preliminary judgment about materiality for the financial statements as a whole. However, this judgment is then used to determine the materiality for individual accounts or classes of transactions.

The auditor considers the nature and size of potential misstatements, both qualitative and quantitative factors, and the impact on the financial statements.

In summary, option (d) is incorrect because auditors consider materiality at both the financial statement level and the individual account or transaction level during the planning stage.

(a) Materiality is a relative concept:

Materiality is indeed a relative concept. It implies that the significance or importance of an item or an error in financial statements is evaluated concerning its potential impact on the decision-making process of users. What might be considered material in one scenario may not be material in another due to varying circumstances, contexts, and users’ needs.

For instance, a small error might be considered immaterial in a large corporation but could be significant for a smaller business.

(b) Materiality judgments involve both quantitative and qualitative judgments:

This statement is accurate. Materiality judgments are not solely based on numerical values. While quantitative thresholds are often used as guidelines, qualitative aspects such as nature, context, relevance, and impact on users’ decisions are equally important.

For instance, an error in a company’s financial statements related to its compliance with environmental regulations might be qualitatively significant even if the monetary value appears small.

(c) Auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of an informed decision-maker who will rely on the financial statements:

This statement is correct. Auditors consider materiality in light of the needs of users who rely on financial statements. The goal is to ensure that any misstatements that could impact these decisions are considered material and disclosed appropriately. The perspective of an informed decision-maker guides the auditor’s assessment of what information could influence their judgments.

The process involves evaluating materiality not only at the aggregate level of financial statements but also at lower levels, considering specific accounts, balances, or classes of transactions.

This approach ensures that the auditor identifies material misstatements that could impact the accuracy and reliability of the financial statements, regardless of whether they affect the overall financial picture.

In essence, materiality in auditing encompasses both quantitative and qualitative aspects, considers the needs of users relying on financial information, and is applied not only at the financial statement level but also at lower levels to ensure the accuracy and fairness of specific components within the financial statements.

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