Materiality

Materiality concept in auditing and in accounting refers to the truthfulness of the material i.e. everything should be exact without the material misstatement or the misstatement in the financial transactions too. The concept in GAAP has no strong or hard rules to make every transaction or the recording with materiality, the truthfulness or the clearness.

This concept tells the omission and the misstatement of the transitions which makes the company’s financial statement wrong and probably any reasonable person like the management will make decisions on the date which do contain the misstatements. Generally Accepted Accounting principles do not have make any strong procedure for allocating and rectifying the spawn origin for this omission of the misstatement, different auditors use different ways or procedures to overcome this misstatement and make the financial report materialized and transparent.

Many security and exchange commission on US has suggested to mark all those small items under the head to materials who present can make the income statement to a net loss or the net profit situations (when there is the situation where net loss or net profit would be nearer to the even position). Other than this, they have also suggested to right all those assets separately in the financial statement which are 5% or more of the total assets. These separate elaborations of the items in the balance sheet will help the auditors to easily allocate the misstatement and rectify them quickly.

Materiality is needed to be considered two times:

1. When planning and designing the audit procedures

2. When allocating the chances of errors in the financial statements in accordance to the GAAP.

Thus the concept of materiality in accounting and in auditing has got an importance in regard of mentioning the amounts which are present in the company’s financial statement, concept makes the financial report transparent.