Question

Which one of the following statements is correct concerning the concept of materiality?

(1) Materiality is determined by reference to guidelines established by the AICPA.
(2) Materiality depends only on the dollar amount of an item relative to other items in the financial statements.
(3) Materiality depends on the nature of an item rather than the dollar amount.
(4) Materiality is a matter of professional judgment.

Answer 1

The second assertion is accurate, because materiality is decided by reference to AICPA standards. The dollar quantity of an item in relation to other things in the financial records determines its materiality. Materiality is determined by the character of an object rather than its monetary value. Materiality is determined by expert opinion.

There is no hard and fast guideline for identifying the materiality of deals in financial statements. Auditors must depend on a set of standards as well as their professional opinion. When establishing relevance, the quantity and nature of misstatement are considered. In the preceding case, there are two deals with absolute dollar values. Several variables are examined when determining whether an object is material or immaterial. The following are some critical considerations: The term "materiality" applies to the importance of a specific item in relation to other items on financial statements and largely depends on the size of the organization.