QS Study

Importance of setting account balance level Materiality in perspective of Audit

Account balance materiality is the minimum misstatement that can exist in an account balance for it to be considered materially misstated. Misstatement up to that level is known as a tolerable misstatement. The concept of materiality at the account balance level should not be confused with the term material account balance. The latter term refers to the size of a recorded account balance, whereas the concept of materiality pertains to the amount of misstatement that could affect a user’s decision. The recorded balance of an account generally represents the upper limit on the amount by which an account can be overstated. Thus, accounts with balances much smaller than materiality are sometimes said to be immaterial in terms of the risk of overstatement. However, there is no limit on the amount by which an account with a very small recorded balance might be understated. Thus, it should be realized that accounts with seemingly immaterial balances may contain understatements that exceed materiality.

In making judgments about materiality at the account balance level, the auditor must consider the relationship between it and financial report materiality. This consideration should lead the auditor to plan the audit to detect misstatements that may be immaterial individually but that may be material to the financial report taken as a whole when aggregated with misstatements in other account balances.