Ethical Obligations and Decision-Making in Accounting 2nd Edition by Steven Mintz, Roselyn Morris

Exercise 4

According to SEC Advisory Committee on Improvements to Financial Reporting, the determination of materiality with respect to financial statement disclosures should be based on an evaluation of the needs of the users of financial statements. Explain what the SEC meant by this statement in its report. Do you agree that materiality judgments should be directly influenced by the perceived needs of the users? Why or why not?

Step 1 of 2

Concept of materiality:

The concept of materiality is defined as a measurement of an item that influences the decision of the users of the financial statement. It is the situation where the financial information of the organization is considered to be material, from the point of view to prepare the income statement and the balance sheet. This financial information influences the judgment and the knowledge of the person to capture that financial information in the books of account.

There are two types of users of accounting information:

1. Internal users ( Owners, management, employee and workers)

2. External users (Banks and the financial institution, investors, and creditors)