Definition of Materiality Management

Question: Describe about the Materiality? Answer: Definition of Materiality: Any piece of information is considered to be material when its omission or its mis-statement would lead to the wrong decisions making by the users of the financial statements. The materiality of any transaction depends upon the nature and the amount of the item that has been judged in the circumstances when the same has been omitted or misstated. When the nature of the materiality is being considered, it becomes very difficult to consider the concept except when it relates with the qualitative characteristics of relevance and the faithful representation. Therefore, the materiality is something that decides whether the information will affect the decision making of the user of the financial information or not. (IFRS, 2015) Examples of materiality: For example the Cookie Jar reserves: Many of the companies try and build the excess reserves with the intention that the same could be used to inflate the income in the time of need. For example, the company increases its loan reserves when it recognizes the expenses in excess for 3 periods with the aim of reducing the stated reserve. The net effect of the transaction is that there is a cumulative approach that focusses on the misstatement amount at the end of the period that calculates the quantitative materiality based on that misstatement. Sometimes, he companies hold the current period amounts and the cumulative approaches yield an altogether different figure. For example the firm has a recurring late cut off error so that the current year sales includes the sake of the next year and the also the previous sales. All the figures must state the amount that is included for all the previous amounts and the same must be quantified so that the amounts are correctly reported. (www3.nd.edu, 2015) Articulation of the financial statements: There are two elements that have a connection in the way in which the assets, liabilities and the net assets are changed and are affected by the change in the elements of another type. At any period of given period, the cumulative result of the transactions is an increase in the asset that cannot occur without the corresponding decrease in either another asset or a decrease in the liability. These are the relations that are sometimes called articulation. It results in the interconnection of the financial type. The assets, liabilities of an organization describes the amounts of the resources that an organization has and the claims that the organizations has as against it. All of these elements affect the transactions and the other such events that affects the entity during the regular course of the activities. When it comes to a business enterprise, the second type of the element includes the revenues, expenses, gains, losses and the investment by the owners and the distribution of the same to the owners. When it comes to not for profit organization, it includes revenues, expenses, gains and losses. (FASB, 2015) References: /www3.nd.edu, (2015). Quantitative Materiality Perspectives and Auditors Disposition of Detected Misstatements. [online] Available at: https://www3.nd.edu/~carecob/Workshops/03-04%20Workshops/Nelson.pdf [Accessed 23 Mar. 2015]. www.fasb.org, (2015). Statement of Financial Accounting Concepts No. 6. [online] Available at: https://www.fasb.org/resources/ccurl/792/293/CON6.pdf [Accessed 23 Mar. 2015]. www.ifrs.org, (2015). Conceptual Framework Qualitative Characteristics 4: Definitions of understandability and materiality. [online] Available at: https://www.ifrs.org/Meetings/MeetingDocs/IASB/Archive/Conceptual-Framework/Previous%20Work/CF-0507b07b.pdf [Accessed 23 Mar. 2015].