Materiality concept

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I am bit confused with all these new concepts and standards.<BR>Please help and explain what problems could occur when applying the concept of materiality!?<BR>Thanks!

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Materiality concept

The concept of materiality is in relation to how much it matters if something is wrong or missed out of a company's accounts. An item is material if it is considered to have a large impact on the overall financial statements. For example, if a purchase invoice for £20,000 is missed out of a small limited company's accounts, this item would be considered material. If the materiality concept in this scenarios was simply ignored, the financial statements would not give a true and fair view of the entity's affairs, therefore misleading the user of the accounts. If a purchase invoice for say £120 is not included in the financial statements of a multi million pound turnover company, the effect of the ommission is negligible because £120 on a turnover of, say £6million is neither here nor there so the financial statements would not be considered misleading.<BR><BR>Materiality is very much judgemental in relation to the overall size of the organisation, users of the financial statements, the industry in which the reporting entity is involved in and also shareholder expectations (e.g. maximising shareholder wealth). Ignoring materiality issues therefore could have a very serious impact on entity's financial position and also going concern. Materiality is not just considered from an auditor's perspective - it can be used in everyday life when considering issues such as cut off dates for purchase and sales invoices (i.e. will the ommission of a purchase invoice(s) have a serious impact on the accounts or will it not really mislead the user).<BR><BR>Problems can arise when you compare materiality issues for companies in the same industry but not necessarily the same size. For example, Tesco's materiality levels will be a lot different than that of, say, Spar - similarly a small firm of accountants materiality will be considered a lot different than that of KPMG. <BR><BR>Hope that helps.<BR><BR>Regards<BR>Steve

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Materiality concept

Thanks Steve, it helped a lot! <img src="i/expressions/face-icon-small-smile.gif" border="0"><BR><BR>Regards<BR>Eniko

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Materiality concept

Materiality for FRA exams etc... usually also relates specifically to the purhcase of fixed assets. For example some items which are fixed assets are sometimes put as sundry expenses instead because they are not considered 'material' e.g. a waste paper bin theoretically is a fixed asset and therefore should be included in the register and depreciated but it is too small a purchase for most companies.<BR><BR>Again all depends on companies size as put above e.g. some may have a threshold of £500 for fixed assets to be included in the register, others a £1,000 or more.