Concept of Materiality

Steve Collings
Steve Collings Registered Posts: 997 Epic contributor šŸ˜
Hi All,

Just recently I have received several emails from students (both of Unit 17 and ACCA auditing papers) about the concept of 'materiality'. Materiality is an issue both in accounting and moreso in auditing. Students ask me "what amounts would you consider material in scenarios presented in questions?" The answer I generally give is "how long is a piece of string?!"

In most simulations/exams you would calculate monetary amounts of materiality. However consider the following scenario:

An entity makes small losses year on year, then it produces a Ā£15,000 profit. Materiality has been calculated as Ā£50,000.

In the above the auditor would usually accept errors below Ā£50,000 in isolation provided they don't become material when aggregated with other (potential) misstatements. However consider that the auditor discovered a Ā£30,000 unprovided accrual and this was the only error discovered.

Ā£30,000 on the face of it would seem immaterial when compared to our materiality level of Ā£50k. However, an unprovided accrual of Ā£30,000 would turn our Ā£15,000 profit into a Ā£15,000 loss. Would this still be immaterial in the circumstances?

What you have to consider with materiality issues is not simply the "benchmark" number, but how it would influence the user of the accounts. Certainly the objective of financial statements prepared under IFRS have the user primarily in mind, not management. In the illustration above potential investors would almost think twice if a Ā£15,000 profit turned into a Ā£15,000 loss.

I thought I would post this up for IAP students and those of you considering going on to further studies as materiality is very much judgemental and the "rule of thumb" (ie 1% of revenue, 2% gross assets etc) is not necessarily a "blanket" approach.

Kind regards
Steve

Comments

  • Glynis
    Glynis Registered Posts: 488 Dedicated contributor šŸ¦‰
    Steve does this happen in ACCA where you have to think about other issues? Surely its unfair to expect a student who doesn't work in an audit office to be able to know this.
  • *Jo
    *Jo Registered Posts: 509 Epic contributor šŸ˜
    Glynis wrote: Ā»
    Steve does this happen in ACCA where you have to think about other issues? Surely its unfair to expect a student who doesn't work in an audit office to be able to know this.

    actually I would have thougth this would be common sense Glynis? Thank you Steve, you and others like you such as Sandy, must put alot of your time into helping Students on here and not get much reward.
  • Rachey
    Rachey Registered Posts: 589 Epic contributor šŸ˜
    Glynis wrote: Ā»
    Steve does this happen in ACCA where you have to think about other issues?
    Materiality is an issue BOTH IN ACCOUNTING and moreso in auditing.

    I think this answers your question!!!!!!
  • Bluewednesday
    Bluewednesday Registered Posts: 1,624 Beyond epic contributor šŸ§™ā€ā™‚ļø
    Glynis wrote: Ā»
    Steve does this happen in ACCA where you have to think about other issues? Surely its unfair to expect a student who doesn't work in an audit office to be able to know this.

    Is it fair to expect a student who has done an audit paper to know how it interrelates with other issues?

    Of course it is!

    The idea is that by doing the auditing paper you will know the underpinning concepts of auditing - you need to show competence in this to pass the paper regardless of whether you work in auditing or not. If it's any consolation in my class of 20 only one person was an auditor.

    There is a law paper in ACCA too so you have to know how it fits in with what you do, it's not making you a competent lawyer but gives you a basic understanding.
  • A-Vic
    A-Vic Registered Posts: 6,970 Beyond epic contributor šŸ§™ā€ā™‚ļø
    that to me is like saying a fiancial practise accountant shouldnt have to learn how to do variances as they would never have to produce management accounts. Silly as to understand anything you need the whole picture.
  • Julia
    Julia Registered Posts: 78 Regular contributor ā­
    Glynis can I ask what tuition material you are using please? Your F8 paper has a new examiner this sitting so you need to keep that in mind if you are not attending revision classes.

    Julia

    P.s. Congrats steve! I read about your promotion to partner at your firm!
    Julia.
  • Rachey
    Rachey Registered Posts: 589 Epic contributor šŸ˜
    Julia wrote: Ā»

    P.s. Congrats steve! I read about your promotion to partner at your firm!
    Julia.

    http://www.lwaltd.com/live/wp-content/uploads/2010/04/LWA-Appointment1.pdf

    Congratulations Steve!
  • A-Vic
    A-Vic Registered Posts: 6,970 Beyond epic contributor šŸ§™ā€ā™‚ļø
    wow very well done steve :thumbup:
  • cornflower
    cornflower Registered Posts: 129 Dedicated contributor šŸ¦‰
    Aww congratulations Steve! Couldn't have happened to a nicer, more dedicated person than you!

    Laura x
  • Glynis
    Glynis Registered Posts: 488 Dedicated contributor šŸ¦‰
    Well done Steve.
  • Gem7321
    Gem7321 Registered Posts: 1,438 Beyond epic contributor šŸ§™ā€ā™‚ļø
    Well done Steve, truly deserved! x
  • Rinske
    Rinske Registered Posts: 2,453 Beyond epic contributor šŸ§™ā€ā™‚ļø
    Good news Steve, congratulations and well done!
  • Steve Collings
    Steve Collings Registered Posts: 997 Epic contributor šŸ˜
    Cheers guys!!
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