Materiality in auditing

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 thoughts on “Materiality in auditing

  1. 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. 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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