Austin B. answered • 04/09/19
CPA, Accounting tutor for college and high school students
Materiality is a concept used in the preparation and audit of financial statements. It is a threshold for evaluating whether missing/incorrect information would impact the decision making process of a user of a financial statement. One helpful way of understanding materiality is considering your own bank account -->
If your bank account has a $100 balance, it is likely that you would notice if the balance changed by +/- $5. The change would represent a 5% increase/decrease on the total balance. In contrast, if your bank account has $100,000 balance, it is unlikely that you would notice if the balance changed by +/- $5.
The relative nature of materiality means that as a company gets larger, the threshold for following-up on missing/incorrect information also goes up. This is driven by the cost/benefit of ensuring that the financial statement information is 100% correct.
