Accounting technology / Glossary / Materiality

What is materiality in accounting and audit?

Definition

Materiality is the threshold above which a misstatement or omission in financial statements matters. Under IFRS, information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions users make on the basis of those statements. Preparers apply it to decide what to disclose; auditors use it to plan and evaluate their work.

Also calledmateriality thresholdaudit materiality

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IFRS test: Could influence users' decisions
Audit standard: ISA 320
Levels: Overall, performance, trivial

How materiality is set and used

Materiality is a matter of judgement, about both size and nature. For audits, the auditor sets an overall figure for the financial statements, usually a percentage of a benchmark such as profit before tax, revenue or total assets, chosen for what users focus on. A lower performance materiality is used for testing individual areas, so that undetected errors added together stay below the overall figure, and a small clearly trivial threshold sets which errors are not even recorded. Some items are material whatever their size, such as related party transactions or directors' pay. International Standard on Auditing 320 covers materiality in planning and performing an audit; the IFRS definition was clarified in 2018 to add obscuring information as well as omitting or misstating it. Audit platforms such as Caseware, Inflo and Fieldguide calculate the figures and carry them through the file.

Common questions

What is performance materiality?+

A lower amount than overall materiality, used to plan and perform testing on individual areas. It reduces the risk that undetected and uncorrected misstatements together exceed materiality for the statements as a whole.

Is materiality only about the size of an amount?+

No. Nature matters too. A small misstatement can be material if it turns a profit into a loss, affects a loan covenant, hides an illegal act or involves related parties or directors.

Who decides materiality?+

Management applies materiality when preparing the financial statements and deciding what to disclose. The auditor sets its own materiality for the audit and does not have to agree with management's.