One of the key tools for the auditor is the relative importance or materiality. We understand this concept as the magnitude that implies that an error may have consequences for the addressee of the financial information.
From the accounting point of view, there is not a big difference. Materiality is also a key aspect, recognized even as an accounting principle: “The strict non-application of some of the accounting principles and criteria will be admitted when the relative importance in quantitative and qualitative terms of the variation that such a fact produces is scarcely significant and, consequently, do not alter the expression of the faithful image “.
In audit, the materiality is the degree of error from which it is considered that the faithful image of the accounts is distorted. However, in the development of the audit work it is practically impossible to review each and every one of the operations carried out by the audited company, so that the totality of the existing errors can not be detected either. To achieve this, the cost and the extension over time of the works should be of such magnitude that it would imply that their execution would be unfeasible. Thus, in order to perform the audit effectively applying resources and ensure that undetected errors are not significant (that is, by minimizing the risk of issuing an erroneous audit opinion), the auditor needs to establish a level of materiality or error tolerable, so that it allows to make a selection of the operations to be verified.
The materiality thresholds are calculated applying percentages on certain accounting quantities (assets, results, turnover, etc. ). But, with regard to the qualitative information contained in the accounts, given the casuistry and diversity of the statements, it is not possible to establish criteria that predetermine what is material and what is not. , so it is not possible to establish a rule on when the inclusion of erroneous information or the non-inclusion of information should lead to qualifications in the audit report. Consequently, it should be the auditor’s professional judgment, based on their experience and knowledge, that qualifies the accounts based on the relevance of the erroneous or omitted information.
For an account auditor, the relative importance is interpreted in terms of a reasonable user, since when assessing an incidence detected during the audit work, it is evaluated if such error can affect the economic decisions of the users of the accounts (who are supposed to have a basic and reasonable understanding of the accounts and have a good aptitude to examine the information contained in the accounts), since they make economic decisions based on the information of said financial statements.
Even so, these users (who may be from shareholders to management, management, external control, potential investors, etc. ) may have different expectations about the submitted accounts and expect the opinion of an auditor according to their particular needs. The auditor then has to determine what erroneous information or omissions could hypothetically affect the decisions that could be made by one of these reasonable users, performing an analysis and interpretation of what may or may not be relevant to them, and highlighting their audit report those errors or accounting omissions that due to their quantitative or qualitative importance affect the faithful image of the accounts.
On the other hand, when the auditor can not fully apply the audit procedures on certain headings or operations, he must decide whether or not to include in the audit report a limitation on the scope also depending on the relative importance of said headings or operations. not verified, and the risk of significant errors, evaluated according to his/her professional judgment and taking into account the information and documentation that they have provided. In addition, materiality should also be considered to assess whether the inclusion of uncertainties in audit reports is appropriate or not.
Therefore, we could conclude that to determine the materiality, the auditor’s judgment and professional experience prevail over specific figures or percentages.