You have been asked by the partners of your firm to prepare a draft memorandum on materiality which will provide guidance to members of staff in conducting the audit of the accounts of limited companies. Required: Suggest some criteria for determining cut-off point in order to assess the materiality of an error

  • Materiality guidelines can be derived by answering the following questions:-
  • Who are the relevant users of the financial information?
  •  What are their decision making needs?
  •  For a given item, what is the appropriate context for assessing its materiality?
  •  In what range of values do items become critical in terms of materiality?
  •  How should particular items in these critical ranges be decided and reported?
    The auditor should also consider:-
  •  Is the item so fundamental that the accounts can no longer be said to give a true and fair view?
  •  Materiality is a relative factor and the item must be considered in relation to the accounts as a whole, the total of which it would form part and the corresponding amount in the previous years.
  •  Some items are capable of exact calculations others like depreciation are merely estimated and providing the estimate is reasonable, should be acceptable.

However, it is generally accepted that:-

a) Errors over 10% are material
b) Errors between 5 – 10% may be material
c) Errors under 5% may not be material.

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