Definition of Materiality

Materiality in audit is something that is important for decision making by the shareholders. In an audit, information is considered as material if the omission or misstatement of which either by the amount or by nature can affect the investment decision of an investor based on that information.

During the performance of the audit, due to a large number of transactions, auditors are required to set a level of materiality with respect to the amount and nature of transactions to be audited. By amount, an item will generally be considered material if the amount is higher than a certain percentage of sales, net assets, total assets, etc. By nature some items are material, for example, related party transactions are material by nature and auditors have to check them critically to assess that either there are any material misstatements in it.