Question

The concept of materiality suggests that certain errors, inaccuracies and/or descrepancies in financial statements, in some instances, are acceptable. Isn't the purpose of auditing to ensure that financial statements are 100% accurate and how do accountants decide what is material, and what is not?

Answer 1

Explanation below

Step-by-step explanation:

Information is termed material, when if omitted or misstated, could rightly influence the economic decision to be made by users on the basis of the financial statement.

Materiality can therefore be related to the importance of balances, transactions and errors found in financial statements.

Example can be this:

Default by a customer who owes like $2000 to a big company that boasts of net assets of over $10 million would be immaterial to the financial statements of the company. But when the default hovers around $3 million, then the information would have been material to the financial statements omission which could lead users into make certain business decisions that could turn out “incorrect”