Materiality is a concept or convention within auditing and accounting relating to the importance/significance of an amount, transaction, or discrepancy.
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.
[2] 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.
Information is said to be material if omitting it or misstating it could influence decisions that users make on the basis of an entity's financial statements.
[5] Put differently, "materiality is an entity-specific aspect of relevance, based on the size, or magnitude, or both," of the items to which financial information relates.
The main guidelines on the preparation of non-financial statements (GRI Standards and IIRC
In terms of ISA 200, the purpose of an audit is to enhance the degree of confidence of intended users in the financial statements.
[11] ISA 320, paragraph 10, requires that "planning materiality" be set prior to the commencement of detailed testing.
Gauge is a measure of materiality that experiences a decreasing returns to scale as opposed to the other traditional quantitative metrics aforementioned.
The concave nature of the function leads to a lower materiality threshold (which implies less tolerance for misstatement) as the company becomes larger because more users are relying on the financial statements.
Most importantly, due to the format of state and local government financial statements under GAAP, the AICPA Audit Guide for State and Local Governments requires auditors to consider materiality by "opinion unit" rather than for the financial statements taken as a whole.
The Guide defines opinion units as follows: Government-wide level (three units): Fund level (at least two): This functionally decreases materiality for state and local government financial statements by an order of magnitude compared to materiality for private company financial statements.
Finally, in government auditing, the political sensitivity to adverse media exposure often concerns the nature rather than the size of an amount, such as illegal acts, bribery, corruption and related-party transactions.
While rules of thumb mentioned in the section above are commonly applied to state and local government financial statements, government auditors may also use different means to quantify materiality such as total cost or net cost (expenses less revenues or expenditure less receipts).