Materi­ality is an important concept in auditing. The point of an audit is to certify the financial state­ments as being free of material misstatement. A material misstatement is one which would affect the decisions of a user of those statements.

This recent blog post at the VeraSage Institute, more known for their pioneering work in the area of value pricing for profes­sional services firms than their work revolu­tion­izing the audit report, brings up an inter­esting idea:

During a specific conver­sation on materi­ality and how it should be deter­mined I suggested that maybe the first step to improving our audit reports would be to include the level of materi­ality used in performing the audit.

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Would the reader of audited financial state­ments utilize and appre­ciate knowing the level of materi­ality used to test and determine the correctness and completeness of the associated financial statements?

I think it’s pretty clear that the answer is yes. I also think it would go a long way to closing the expec­tation gap when it comes to audited financial state­ments. It further empha­sizes that an audit doesn’t mean 100% of trans­ac­tions are examined, and that there is a level of accep­tance for errors within the statements.

Unfor­tu­nately, it doesn’t seem to me (with my limited experience) that much is done within the profession until it is mandated by the governing bodies or various govern­ments. Going above and beyond what is required isn’t seen very frequently in terms of the disclosure in financial state­ments, either in the audit report or the explanatory notes appending the statements.

I don’t think it is entirely the auditor’s fault. The state­ments are still the respon­si­bility of management, but it is the auditor who is in the unique position to make the suggestion to management that additional details would be helpful. For that matter, auditors need to start making the suggestion to their governing bodies as well.

We’re essen­tially in the business of ensuring that complete and useful infor­mation is provided, and this might be a situation where we aren’t doing a great job.