Materiality is a concept in auditing that attempts to set a dollar value guideline for the scope of evidence testing at the substantive level, analytical procedures, and to a lesser extent, controls testing.
According to Krupo:
“Materiality is the smallest misstatement of a company’s finances that would cause a person to change how they value the entity in question.”
That sums it up nicely. It’s really based on what’s important to someone with a stake in the financial health of the entity.
For audits of for-profit companies, materiality is usually based on a percentage of revenues or income (pre-tax). 1–2% of revenues or 5–10% of net income is the benchmark. In non-profit organizations, materiality is usually 1–2% of expenditures.
2 responses so far ↓
1 Krupo // May 29, 2006 at 12:00 am
Ah, intellectual discourse between CA students. Too bad so few of us are actually bothering to write anything.
As for your comment on NPOs, good point — I haven’t had the joy of doing much in the way of NPO audits. Although just after writing this I realized I couldn’t say “any”, just not “much”.
One observation I made to myself while writing that post, though, was the fact that writing up a post like that requires a heck of a lot more concentration than just going off on any other topic. But that concentration does make it feel like real “learning” is taking place.
2 nm // May 31, 2006 at 8:38 pm
NPO audits kinda suck in my opinion. Not because I’m against NPOs — quite the opposite, I think a great deal of government programs should be ceded to non-profits — but just because I find the pursuit of profit to be more interesting.
No doubt writing that post of yours requires more concentration. Just check out the lack of writing I do on the technical aspects of the job!
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