ACCA Audit and Assurance (F8) Practice Exam

Which factors contribute to an item being considered "material"?

1. Size of the company

2. Nature and effect of misstatement

3. Historical significance

4. Reputation of the management

The correct answer is: Nature and effect of misstatement

An item is considered "material" primarily based on the nature and effect of the misstatement. Materiality is a fundamental concept in auditing and financial reporting, emphasizing the importance of information that could influence the decisions of users of financial statements. When auditors consider whether an item is material, they assess not only the size of the misstatement in quantitative terms but also qualitative factors, such as the nature of the item and its potential impact on financial statements. For instance, a small misstatement in a highly sensitive area, such as revenue recognition, could have significant implications for stakeholders, making it material. On the other hand, in some instances, a larger misstatement may be immaterial if it relates to areas that do not affect decision-making. Thus, the nature and effect of misstatements encompass both qualitative characteristics and the potential consequences of those misstatements on users of financial information, making this option the correct choice in identifying the factors that contribute to materiality.