What does an Auditor mean by “Materiality”

An auditor will calculate a monetary value as the “materiality” level applicable to those financial statements he/she is auditing.

The value will be based on the auditor’s professional judgement and their perception on the financial information needs of the users of the financial statements.

The auditor will generally calculate materiality by applying a percentage value to a benchmark such as: Turnover; Assets; Liabilities; certain individual assets/liabilities; Profits; Equity.

Once materiality is determined, the auditor will also calculate (a) Performance Materiality – normally 70-80% of materiality and (b) Trivial – normally 10% of materiality.

During the course of the audit, the auditor will accumulate all detected errors and misstatements in excess of the ‘Performance Materiality’ value.  If these errors or misstatements, either individually or together, exceed the materiality value, the auditor will request that the financial statements are corrected.

An auditor may also deem an error or misstatement material if it were to affect the following:

  • Compliance with regulatory requirements
  • Compliance with debt covenants or contractual requirements
  • Masks a change in a Key Performance Indicator
  • Has the effect of increasing management compensation
  • Relates to items involving particular parties
  • Disclosure of information users of the financial statements would require to understand the financial position of the reporting entity

If you have any queries in relation to the above please do not hesitate to contact a member of the Cooney Carey team at 01 677 9000 or by email at info@cooneycarey.ie

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