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Standards and Materiality Definitions

1) How is materiality defined, and by whom?

2) If the standards are set in a process that often results in compromise between different parties, do the qualities of accounting information provide much value? How?

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(1) The most authoritative definition of materiality is found in Financial Accounting Concepts Statement 2, Qualitative Characteristics of Accounting Information: "The magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement."
Because materiality is the foundation of almost all judgments made during an audit and because it is so vaguely defined, there is enormous latitude and variation in its application. On September 28, 1998, Arthur Levitt, then chair of the SEC, delivered what was the shot heard around the world with respect to materiality issues in his "Numbers Game" speech. Levitt described the abuse of materiality as "another way we build flexibility into financial reporting" and said that materiality should no longer be used to hide or disregard "deliberate misstatements of performance." Shortly thereafter, both the SEC and the Auditing Standards Boards issued standards addressing problems related to materiality judgments in financial statement audits.
External auditors consider materiality at ...

Solution Summary

The solution defines materiality and considers the roles that standards play.