MATERIALITY WITH REFERENCE TO THE FINANCIAL STATEMENTS
Abhishek Agrawal | Chartered Accountant
INTRODUCTION Materiality is a widely used concept for the preparation and presentation of financial statements and reporting thereon. Management assesses the materiality with respect to the preparation and disclosures made in the financial statements, aiming at the information needs of the primary users of the financial statements (i.e., existing and potential investors, lenders and other creditors) that can influence their decisions regarding investments, and providing their services or resources to the entity.
Auditors, on the other hand, assess the materiality while making judgements about the nature, timing and extent of the audit procedures to be performed and the implications of the misstatements observed during the audit to express an opinion as to whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
Further, from the auditor’s perspective, there could be other considerations like the type of audit opinion based on the pervasiveness of misstatements, reporting under CARO 2020, internal financial controls with reference to the financial statements, and the restatement of financial statements etc., wherein materiality plays a crucial role.
In this article, an attempt has been made to discuss the importance of materiality for the preparers and the auditors along with the key aspects of the guidance available for its assessment.
MATERIALITY FROM MANAGEMENT’S PERSPECTIVE The Institute of Chartered Accountants of India (‘ICAI’) had issued SA 320 - Materiality in Planning and Performing an Audit, and Implementation Guide to Materiality in Planning and Performing An Audit (‘Implementation Guide’) to define the auditor’s responsibility to apply the concept of materiality in planning and performing an audit of financial statements, and SA 450 - Evaluation of misstatements, to explain how materiality is applied in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements. However, there is limited guidance for determining the materiality for the preparation and presentation of the financial statements from the management’s perspective.
Materiality, amongst others, is a fundamental qualitative characteristic to identify the types of information that are likely to be most useful for the primary users of the financial statements, as described in the Conceptual Framework for Financial Reporting under Ind AS, as issued by ICAI. As per Ind AS 1 - Presentation of Financial Statements and Ind AS 8 - Accounting Policies, Changes in Accounting Estimates and Errors, ‘Information is material if omitting, misstating or obscuring it could reasonably be expected to inf