Material misstatement
In one sentenceAn error or omission in the financial statements, intentional or not, large enough to change the decision of someone relying on those statements.
Simply put
A misstatement is any difference between the figure presented and the correct figure, due to error or fraud. It becomes material if it exceeds the materiality threshold set by the auditor, alone or together with others.
If management does not correct a material misstatement, the auditor modifies his opinion, issuing a qualified or adverse opinion depending on its effect.
Worked example
An auditor set materiality for a food factory at 5% of net profit before Zakat of 800,000 SAR, and found two misstatements that management did not correct.
Materiality800,000 × 5% = 40,000 SAR
Misstatement in inventory25,000 SAR
Misstatement in accrued expenses20,000 SAR
Total misstatements25,000 + 20,000 = 45,000 SAR
The total exceeds 40,000: the misstatement is material45,000 SAR
Formula: A misstatement is material if total uncorrected misstatements ≥ materiality
Don't confuse it with
Financial fraudFraud is an intentional misstatement, while a misstatement may be an innocent error in calculation or classification.