The Materiality Principle in Financial Statements

The Materiality Principle in Financial Statements Is Not Used to Cover up Irresponsible Business Practices
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The Materiality Principle in Financial Statements Is Not Used to Cover up Irresponsible Business Practices
The materiality principle allows for professional judgment and flexibility necessary to handle ambiguous areas in financial statements. Auditors use it during the planning phase and when conducting an audit or evaluating the impact of established misstatements on the financial statements or audit. Whereas materiality is first established in the planning phase, auditors must recognize potential changes in circumstances during the audit or preparation of the financial statements, which implies the need for reassessment (The Institute of Chartered Accountants in England and Wales, 2017).
To illustrate the above argument, Coca-Cola European Partners plc’s Group financial statement audit practices would be employed. The auditors’ materiality assessment enables them to establish a perspective concerning the company’s financial statements. The auditors considers the risk appetite, company size, the effectiveness as well as organization of the firm’s corporate controls, business environment alterations, as well as other variables such as recent internal audit outcomes when evaluating the financial statements (Coca-Cola European Partners plc., 2021). In this way, Coca-Cola applies the materiality concept in planning and conducting an audit on the financial statements, establishing the impact of the identified misstatements on the audit, as well as creating a prudent audit opinion (Kumor & Mackowiak, 2018).
The magnitude of a misstatement or omission that, in aggregate or individually, could reasonably impact the financial choices of the financial statements end-users. In this context, materiality provides an avenue to establish the extent and nature of the company’s audit procedures. For example, the auditors established Coca-Cola European Partners plc.’s materiality to ...