The Concept of Materiality in Auditing and its Impact on Auditors Opinion

Materiality is one of the comprehensive concepts in accounting and auditing which is used by one definition but different applications. Information is material if its omission or misstatement could influence or change the decisions or Judgments of a reasonable user taken on the basis of financial statements. As auditing standards, auditors should consider materiality and its relationship with audit risk when conducting an audit. For materiality Judgment, auditors consider both quantitative and qualitative factors. The objective of this study is: 1) Identify quantitative and qualitative factors effect on auditor's materiality Judgments and its ranking 2) Determine auditors’ consensus in selecting and applying materiality guidelines in audit 3) Identify problems, restrictions and necessity of issuing materiality guidelines in Iran. In this experimental study fifteen quantitative and fifteen qualitative factors which could affect materiality Judgments, selected and examined. The result of this study indicated that: 1) the size of Judgment item, total assets, total revenue and its average, net profit, equity, related items and related class in financial statement identified as significant quantitative factors in Judging materiality level for conducting an audit. 2) The pervasiveness of errors or misstatement to different item in financial statement, relationship of Judgment item with third parties and arm’s length transactions, unusual items, estimated items, departure from laws and regulations and audit risk of Judgment items identified as significant qualitative factors caused in adjusting materiality level. 3) Materiality guidelines based on total assets, total revenue, its average and equity (between 1 to 3 present) and net profit (above 5 percent) are agreed and applied by audit managers. Furthermore, applying net profit guideline together with average total assets and revenue guidelines will improve materiality Judgments. 4) The result indicated the necessity of issuing materiality guideline by profession. Materiality guideline could improve and consistent audit opinions in similar cases, remove problems when auditors changed, consistent the extent of audit work and eventually improve audit efficiency and effectiveness. 5) The results indicated that: a) Few auditors established materiality level in planning stage of audit b) Few auditors considered relationship between audit risk and materiality, especially in adjusting compliance and substantive tests c) In final stage of audit, the auditors do not consider the effect of likely and possible errors in combining the total effect of errors and misstatements.