Materiality
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Materiality guides an auditor's judgment about what's important enough to deserve attention, and it's a heavily tested concept on the AUD section of the CPA exam.
What is materiality?
Materiality is about setting thresholds above which discrepancies must be investigated and potentially corrected. It aligns the audit with the needs of financial statement users, and it can be both quantitative and qualitative in nature.
What are the two stages of materiality?
- Planning materiality — used to establish the scope of the audit and identify which accounts and transactions will be examined
- Performance materiality — a lower threshold used during the execution of the audit to evaluate the materiality of discrepancies and omissions
Example: You're auditing a corporation with $100 million in annual revenue. During the audit, you discover a $200,000 discrepancy in the inventory account. Quantitatively, that discrepancy looks immaterial next to $100 million in revenue. But if the discrepancy is tied to executive bonuses, its qualitative impact is high — making it material after all.
A discrepancy doesn't have to be large in dollar terms to be material. Materiality is set in two stages — a broader planning threshold and a lower performance threshold — and even a small quantitative discrepancy can be material if it carries enough qualitative weight, such as affecting executive compensation.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 90 on AUD. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.