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QNO Materiality Old Course – (P16M/M16R/N17M/N17R/N18R/M21R)
320.01 Bhaskar CNO SA320.020 New Course – (N23E)
Discuss the concept of materiality in the context of the preparation and presentation of financial
statements.
OR
Concept of ‘Materiality’.
OR
The auditor's determination of materiality is a matter of professional judgement and is affected by the
auditor's perception of the financial information needs of users of the financial statements. In this context,
what are the assumptions that an auditor reasonably makes in respect of the users of the financial
statements?
Answer ➢ Definition of Materiality
According to SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, financial reporting frameworks often discuss the concept of
materiality in the context of the preparation and presentation of financial statements. Although financial
reporting frameworks may discuss materiality in different terms, they generally explain that:
Misstatements, including omissions, are considered to be material if they, individually or in the aggregate,
could reasonably be expected to influence the economic decisions of users taken on the basis of the
financial statements.

➢ Depends on Circumstances
Judgments about materiality are affected by the size or nature of a misstatement, by the auditor’s
perception of the financial information needs of users of the financial statements, or a combination of
both; and (CSR expenditure after Sec 135 was notified) and are made in the light of surrounding
circumstances.

➢ Common needs of users as group
The auditor’s determination of materiality is a matter of professional judgment and is affected by the
auditor’s perception of the financial information needs of users of the financial statements.

Judgments about matters that are material to users of the financial statements are based on a
consideration of the common financial information needs of users as a group. The possible effect of
misstatements on specific individual users, whose needs may vary widely, is not considered. (E.g.
Advertisement costs are analysed in depth in FMCG industry by public at large but some individuals may
pay more attention to employee costs)

➢ FRF
Such a discussion, if present in the applicable financial reporting framework, provides a frame of
reference to the auditor in determining materiality for the audit. If the applicable financial reporting
framework does not include a discussion of the concept of materiality, the characteristics referred above
provides the auditor with such a frame of reference.

➢ Assumption about users
In this context, it is reasonable for the auditor to assume that users:
Have a reasonable knowledge of business and economic activities and accounting and a
willingness to study the information in the financial statements with reasonable diligence.
Understand that financial statements are prepared, presented and audited to levels of
materiality.
Recognize the uncertainties inherent in the measurement of amounts based on the use of
estimates, judgment and the consideration of future events; and
Make reasonable economic decisions on the basis of the information in the financial statements.

➢ Applied Throughout the audit
The concept of materiality is applied by the auditor both in planning and performing the audit, and in
evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any,
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