Materiality - Common misunderstanding when calculating

I'm including this here because this is a HUGE issue with students. Most students misunderstand the relationship between the risk of material misstatement and the materiality calculation

We talk about 'material misstatement' a lot. Our opinions, our risks etc, continuously refer to whether there's a 'material' misstatement or not, and we know that 'material' is something that will influence the user's decision.

For practical purposes, we have to allocate a number to this. We calculate a 'materiality amount'. So, when we're performing the audit, we have a guideline about the size of errors or information we need to pay attention to. If an account balance is greater than our materiality number, then it's a 'material balance'. If an error is greater than our 'materiality figure', than it's a 'material misstatement'.

Quantifying materiality is tricky, and is covered in it's own Auditing Standard, which I'm not covering here.

What I want to emphasise here though, is the relationship between RISK and your materiality calculation. So, when you get to learning how to calculate materiality... you're going to need to be aware of what you SHOULD and SHOULD NOT be basing your calculation on.

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