What is Materiality Principle?
Materiality is the accounting principle that an item is material if its omission, misstatement, or obscuration could influence the decisions of users of the financial statements. It governs everything from disclosure granularity to audit sample size to the threshold for correcting errors.
How It Works
- Quantitative: a common benchmark is 5% of profit before tax, but also assessed against revenue, equity, and assets
- Qualitative: nature matters too — fraud, related parties, going concern, regulatory items can be material regardless of size
- Aggregation: small misstatements that add up can become material
- Recently strengthened by IFRS Practice Statement 2 on making materiality judgements
- Different from “trivial” or “tolerable” thresholds used in audit planning
Saudi Context
Saudi listed companies follow IFRS materiality guidance, with SOCPA-licensed auditors applying it in planning and concluding the audit. CMA review of disclosures often probes whether items material to investors are clearly presented and not buried.
Example
A Saudi group earns SAR 800M profit and uses 5% (SAR 40M) as its materiality benchmark. An auditor finds a SAR 35M misstatement in inventory — below the threshold quantitatively but adjusted anyway because it relates to a related-party transaction (qualitatively material).