The mis-statement of profits at Tesco raises concerns about the impact of audit materiality on financial reporting, says Julia Penny FCA, raising questions over the decision making process
Despite the strong training in many jurisdictions in the concept of materiality, it would appear that both preparers and auditors sometimes struggle with correctly applying the principle in practice. This is often exacerbated by regulators and standard setters using further terms that might, or might not, mean the same as material.
For example, the word ‘significant’ might imply material, but is it more or less than that? In other requirements an item might need to be reported if not ‘trivial’. The use of the word trivial seems to imply something potentially much smaller than material, but the uncertainty can create differences in reporting.
The International Accounting Standard Board (IASB) is just one of the bodies that have picked up on this potential materiality issue. Its paper, Disclosure Initiative: Materiality, highlights a recent survey of stakeholders which ‘strongly suggests that the way the concept of materiality is being applied is causing problems in financial reporting’.
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