Question

Materiality has both qualitative and quantitative aspects, meaning that the nature of the item and its relative size, is considered. This concept refers to the relative significance of an amount or informative disclosure, proper presentation of financial position, and the results of operations.

When misstatement affects the interest of the relying person with certain information, such misstatement will be material. Hence, auditor mainly concentrates efforts in proportion to degrees of materiality and relative risk and disregards immaterial items.

The relevant criteria for assessing materiality will depend upon the circumstances, nature of the item, and will vary greatly among companies. For example, an error in current assets or current liabilities will be more important for a company with a flow of fund problems than for one with adequate working capital.

There are rigid standards or guidelines for assessing materiality. The lower bound of materiality has been variously estimated at 5% to 20% of net income, but the determination will vary based upon the individual case and might not fall within these limits. Certain items, such as a questionable loan to a company officer, may be considered material even when minor amounts are involved. In contrast, a large misclassification amount expense accounts may not be deemed material if there is no misstatement of net income.

Think about office supplies.

If a company does not follow accounting rules in this case, will it be considered a material misstatement of financial statements?

Answer 1

Office supplies mainly consist of the stationery items and other small items required by employees on a day to day basis. The proportion of office supplies to the total expenditure of the company is small. Thus, a misclassification or misstatement in accounting will not be considered material based on the size of the items.

However, if the office supplies are being pilfered by employees and this is being covered up in the books of accounts, it will be considered material because this constitutes moral turpitude. The item would become material due to its nature.