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How is materiality defined, and by whom?

Updated on June 22, 2017

The Generally Accepted Accounting Principles (United States) defined the materiality as the degree of an error or errors in any accounting details, in the consideration or about the present or existing conditions and concerns. It will be realistic if the findings of a rational individual would have been altered or inclined by the error or errors from the information given and interpreted by the same person. The considerations mentioned earlier should be both regarding quality and quantity.

The second definition is of the International Accounting Standards. Any accounting details are considered with materiality if its error or omissions might persuade the financial conclusions of the person which are based on the financial reports. It will also be based on the degree of inaccuracy reviewed and will also depend on specific conditions of its error or mistakes.

Consequently, materiality gives an entry or end point and usually not to a certain extent as being a primary qualitative attribute, in which details ought to have if it is helpful. Overall, any materiality matters will be based on the auditor’s professional assessment and should be influenced by the examiner’s view of the requirements of the persons who will use the financial reports. Based on the New Auditing Standard SAS No. 107, the assessment whether the error or omission could influence any financial decisions, in other words with materiality, involves the qualities or traits of the users.

The said users are already understood that they have acquired the following characteristics:
having enough appropriate knowledge of the business specifically financial or economic activities;
aware of every detail of the financial reports and audited to degrees of materiality;
capable of recognizing some uncertainties and the capability to create suitable monetary or any business decision based on the details of the financial statements

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