Materiality (auditing)

Materiality is a concept or convention within auditing and accounting relating to the importance/significance of an amount, transaction, or discrepancy. The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in conformity with an identified financial reporting framework such as Generally Accepted Accounting Principles (GAAP).

As a simple example, an expenditure of ten cents on paper is generally immaterial, and, if it were forgotten or recorded incorrectly, then no practical difference would result, even for a very small business. However, a transaction of many millions of dollars is almost always material, and if it were forgotten or recorded incorrectly, then financial managers, investors, and others would make incorrect decisions as a result of this error. The assessment of what is material – where to draw the line between a transaction that is big enough to matter or small enough to be immaterial – depends upon factors such as the size of the organization's revenues and expenses, and is ultimately a matter of professional judgment.

The IFRS Foundation has as its mission to develop a single set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles.

These reporting standards consist of a growing number of individual standards. The Conceptual Framework is not an International Financial Reporting Standard (IFRS) itself and nothing in the Framework overrides any specific IFRS. However, the Framework has as its purpose to, inter alia, assist the International Accounting Standards Board (IASB) and individual national standard-setting bodies in promoting harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by IFRSs.

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