Materiality in Auditing Essay Example | Topics and Well Written Essays - 2000 words - 6

Materiality in Auditing - Essay Example Materiality levels of organization are often undisclosed to avoid fraud that may be conducted by the parties involved in preparing financial statements. Analysis of the fundamentalism and the secrecy of materiality are essential in understanding how this concept is applicable in the auditing profession. Materiality is a concept that describes discrepancies in the financial statements that may mislead the decision making process of users of those records (Stuart, 2012). The discrepancies may be included or omitted in the financial statements intentionally or as a result of errors in recording. If users of accounting records would not change their decision after the correction of the discrepancies, the misstatement are said to be immaterial. However, if users of financial statements would change their decisions after the corrections, then the discrepancies are said to be material (Messier, Martinov-Bennie, & Eilifsen, 2005, p. 5). Materiality in the financial statements may be individual or collective. Individual materiality is the one that occurs when a record in an account is recorded wrongly. Collective materiality, on the other hand, is the one that arises when the total discrepancies in two or more accounts of a similar classification mislead decision makers (FRC, 2013). Auditors have to determine the level of discrepancies that they will find to be immaterial and those that are material at the planning stage. The materiality level is usually stated in quantitative figures such as percentages. For example, the auditors may state that a misstatement of the income before tax by 5% and below is immaterial while the error is material of it exceeds this allowance (Lessambo, 2013). Examiners use professional judgement to determine the materiality allowances because there is no formula of calculating the amount. Auditors make their judgements based on their understanding of the factors that influence the decisions of users of financial reports (IAASB, 2009).