Materiality Examples
Practical illustrations of quantitative and qualitative considerations in determining whether financial statement items are significant enough to influence user decisions.
Materiality Examples
Practical illustrations of how auditors and preparers determine whether financial statement items are significant enough to influence user decisions, encompassing both quantitative thresholds and qualitative factors.
For instance, quantitative materiality examples include:
- A manufacturing company using 5% of pretax income as a materiality benchmark, establishing $250,000 as the threshold for a company with $5 million pretax income
- A nonprofit organization using 0.5% of total expenses ($100,000 for a $20 million organization) as materiality
- A startup company using 1% of total assets as materiality due to minimal or negative earnings
Qualitative materiality examples include:
- A $50,000 misstatement below quantitative threshold becoming material because it converts a small loss to a profit
- A technically immaterial executive compensation understatement becoming material because it conceals related party transactions
- A small error becoming material because it triggers debt covenant violations
Materiality judgments evolve throughout the audit process, involving preliminary estimates during planning, refinement during fieldwork, and final evaluation considering both uncorrected misstatements and disclosure deficiencies. The concept recognizes that significance depends on both size and nature, with some matters material regardless of dollar amount, particularly those involving fraud, illegal acts, or management integrity questions.