Question

The concept of Materiality is considered to have a  “Quantitative” dimension. This was illustrated by: Quantitative materiality equals [Rate] multiplied by a [Base].

   Show a possible “rate” and “base”.

RATE     _________        BASE _____________________

Answer 1

The materiality in the financial statements refers to the misstatements or omission which can influence economic decision of the users.

Misstatements that are considered to be material to the financial statements based on the quantitative methods:

• 5% to 1% of Sales Revenue
• 1% to 2% of Total Assets
• 1% to 2% of Gross profit
• 2% to 5% of Shareholders Equity
• 5% to 10% of Net Profit

Based on this, we can conclude with an example that the misstatements of sale revenues amounting $1,000 is equal to 1% of total sales revenues per year can significantly influence the users of financial statements change their minds if it is adjusted to financial statements. This misstatement is materially misstated.

Let's assume the total sales revenue is $100,000 and only 5% to 1% of sales revenue can be materially misstated.

Rate = 1% Base = 100,000