Applications of the Materiality Concept
1. Financial Reporting: The conceptual framework, which is sometimes referred to as materiality, serves as the standard for professional accountants about what must and must not be included in the financial statements.
2. Disclosure of Decisions: It helps in determining what should be included in footnotes as illustrations to the financial statements so that the users will have a clear overall perspective on the entity’s financial performance and position.
3. Audit Planning: Materiality is the guise for the auditors to appraise the scope of the auditing procedures and to execute them in the appropriate areas, that mean the most to the financial statement users.
4. Error Correction: It is relevant to the clarification of whether mistakes discovered during the process of accounting corrections have to be corrected. The adjustments are made only to the material errors because the financial statements are drawn up.
5. Internal Controls: One of the key ways materiality affects the preparation and validation of internal controls is that designing the controls is focused on the management and transactions of the most risky and high-magnitude areas.