Briefly explain the meaning of the following terms as used in auditing: The materiality concept and the going concern concept

(i) Materiality, is defined in the International Accounting Standards Committees
―Framework for the preparation and presentation of financial statements in thefollowing terms:-

―Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.‖ Materiality dependson the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful. The concept of materiality therefore guides the auditor in carrying out the audit. For example if there is a suspected misstatement in an account balance that is deemed to be material to the financial statements the auditor will extend the level of testing because the results from the testing could have an impact on the kind of opinion that the auditor will issue.

(ii) Going concern is one of the fundamental accounting assumptions and is defined by the International Standards on auditing, glossary of terms as ―an assumption that an enterprise will continue in operation for the foreseeable future, and that the enterprise has neither the intention nor the need to liquidate or to curtail materially the scale of its operations.‖

As a result, assets are valued on the basis of continued use, such as historical cost or replacement cost rather that net realizable value or liquidation value.

Share through

Leave a Reply

Your email address will not be published. Required fields are marked *