Materiality in accounting and auditing in the UK

Abstract

The Statement of Auditing Standards 220 (Materiality and the audit, 1995) requires auditors to assess both the quantitative and qualitative aspects of materiality. However, the SAS has not specified the quantitative measurement of materiality. This research assesses the need in the UK for having a specific mathematical guideline in addition to the qualitative aspect of materiality. It evaluates the outcomes of legal cases in both the UK and the US, looks at the accounting statements issued by accounting bodies in other countries on materiality, and responses to the then exposure draft of the SAS 220. Questionnaires were sent in the UK to 1000 auditors (25.6% responded) and 1000 non auditors (26.4% responded), and telephone surveys followed with non respondents and selected individuals. The case studies contained in the questionnaires are materiality impact on losses on discontinuation of a production line, changes in accounting policies, contingent liabilities, and cash defaulcation. Results showed that there are inconsistencies in legal decisions on materiality. Countries having materiality guidelines adopted 10% net profit before tax as the norm. The 10% of net profit before tax is the favourite guideline for materiality from questionnaire respondents and telephone interviewees. Consistency in the results suggest the need for having a standard mathematical measurement of materiality in the UK.