Question

Explain briefly (2 or three sentences) why the following statement is not compatible with GAAS standards on materiality. “An error of less than 2% of net income can never be material.”

Answer 1

As per GAAS, materiality has no fixed limit. It depends upon the class of transaction and account balances. Sometimes, even immaterial items can reasonably influence the decisions of the users of financial information and hence need to be audited.

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