Question

Comment on the statement that materiality is in the eye of the beholder. How does this statement relate to the discussion in the chapter of how to gauge materiality in assessing financial statement restatements. at least 300 words

Answer 1

The concept of Materiality is different for every company prospective and also from viewer and maker prospective. If you are the auditor, materiality would be different being the maker of financials accounts. Whereas for investors, it will be different too. How significant a transaction or amount is, depends on person to person. Being the auditor, their job is to audit the accounts and financial statements of the business and present a report on it in the form of opinion and make sure they are complete in all material terms as per auditing guidelines and rule.

One example to explain it briefly, is in my company, the auditors identified the reclassification and split up of share capital of the company. Now financially, such transaction doesn’t raise any additional funds, nor any new investors were added. But only reclassification and split of exiting share capital into new number at existing value like 100,000 previous shares of $1 each is now reclassified as 10,000 shares of $10 each equivalenting to same amount.

This doesn’t affect the audit report; however, it affects the existing shareholders as their number of shares will be reduced, the internal process and valuation that would be arrived and how it does. Therefore, materiality is different for different users of the data.

Financial restatements depend on how material the transaction was for the user. For example, if the amount of the transaction is such a way as affect the decision of the investor to invest in a company or not. If it is material, restatement would require otherwise it doesn’t. This may affect the accuracy of the financials as the material transactions are recorded but immaterial as per accounting point is ignored which may be useful for another user. This happened most of the time as company accounting guidelines and standard are complex and auditors focus on important points only.