Document Type
Article
Publication Date
10-1-2017
Publication Source
Internal Auditor
Abstract
Because the term materiality arose within the context of financial reporting and statement assurance, internal auditors have been challenged in adapting or creating a definition that is relevant for themselves and their stakeholders. In the context of financial reporting, materiality is relevant to three stakeholder groups: 1) preparers of financial statements, 2) auditors, and 3) users of financial statements. Although materiality decisions are made by only two of these three groups--preparers and auditors--most internal auditors' conception of materiality likely has a user orientation. The auditor might ask, "How would a reasonably prudent investor react to the magnitude of misstatement (under- or over-reported amounts) or omission of a specific financial statement item in terms of its presentation and disclosure?"
Given this backdrop, the term materiality can be a significant cause of confusion in determining what to audit, how much to audit, what to correspondingly report, and for what matters it is necessary to gain consensus regarding management action. In many situations, stakeholders come to the table with their own concept of materiality--sometimes vaguely defined--that can be at odds with internal audit's definition. Sometimes managers attempt to mitigate or downplay an issue and internal audit's proposed recommendation because it reflects poorly on their performance in their respective areas of responsibility. In such instances, supposed lack of materiality can be used as the basis for an argument to convince internal audit that the issue under discussion has no real merit.
If internal auditors are not well-prepared to articulate and defend what they believe to be the relevant concept of materiality, the discussion of audit issues can easily become contentious or seriously impaired. It is therefore imperative that internal auditors fully understand the meaning and contexts of the term materiality so they are prepared to use it authoritatively and appropriately.
Inclusive pages
45-50
ISBN/ISSN
0020-5745
Copyright
Copyright © 2017, Institute of Internal Auditors
Publisher
Institute of Internal Auditors
Volume
74
Issue
5
eCommons Citation
Fabrizius, Michael P. and Ramamoorti, Sridhar, "Materiality Defined: Differing Concepts of Materiality Can Cause Confusion Among Stakeholders" (2017). Accounting Faculty Publications. 94.
https://ecommons.udayton.edu/acc_fac_pub/94
Included in
Accounting Commons, Business Administration, Management, and Operations Commons, Business Law, Public Responsibility, and Ethics Commons, Corporate Finance Commons, Nonprofit Administration and Management Commons
Comments
The document available for download is the published version, provided in compliance with the publisher's copyright policy. Permission documentation is on file.