Question

Which of the following statements is true regarding the concept of materiality?

1) Auditors must focus on finding all misstatements in financial statements.
2) Materiality is always based on quantitative factors, not qualitative factors.
3) A lower level of materiality assessed by the auditor, means a smaller likelihood that a misstatement may potentially impact or change the decision-making process.
4) Materiality refers to the content of any audit evidence gathered.

Answer 1

The true statement about materiality is that a lower level of materiality indicates a smaller likelihood of misstatements impacting decision-making. Materiality involves both quantitative and qualitative factors and helps auditors determine significant errors in financial statements.

Step-by-step explanation:

The concept of materiality is crucial in auditing and finance. It refers to the significance of an amount, transaction, or discrepancy that may influence the economic decisions of users based on the financial statements. Regarding the statements provided, the third option is the true statement:

3) A lower level of materiality assessed by the auditor, means a smaller likelihood that a misstatement may potentially impact or change the decision-making process.

Auditors use materiality as a threshold to gauge the importance of misstatements. While not all misstatements are pursued, auditors focus on those that could potentially influence the decisions of individuals reliant on the report. This concept considers both quantitative and qualitative factors, and it is wrong to assume that materiality is based only on quantitative factors.