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Materiality Accounting

How do you keep tabs on the decision making on what is and isn't material?

What litmus test or tests do you use?

Are there different values for different possibilities?

Answers

Chris Shumate
Title: Accounting Manager
Company: Dominion Development Group, LLC
LinkedIn Profile
(Accounting Manager, Dominion Development Group, LLC) |

Whenever I evaluate line items to determine whether or not to investigate I use a 15% over/under the previous months' revenue or expenses, unless the percentage only results in a $1000 to $2000 fluctuation. When the percentage isn't necessary or relevant I will use a fluctuation of $15,000 over/under. I keep track of the prior year's expense average per month to see how the current year is going. If we're expecting a 20% increase in revenue, then I check to see that expenses are tracking in line with the increase, but not exceeding what management thinks it should.

Since I work in construction we will analyze anytime there are underbillings on the jobs. Sometimes it's timing of when the draws are done, other times it's because the margin is slipping.

Lynn Fountain
Title: MBA CGMA CRMA, Past Chief Audit Executiv..
Company: Business Consultant
LinkedIn Profile
(MBA CGMA CRMA, Past Chief Audit Executive, Business Consultant) |

Waynes question is the purpose behind setting "management tolerance" levels. That speaks to concepts such as understanding management risk appetite as well as "tolerance". In other words, how much is the organization willing to take on before they feel their overall goals and objectives may be put at to high of a risk. Tolerance is more than just dollars. Companies must look at other factors such as reputation, operations, compliance, information technology.

Tolerance is a difficult concept for companies because everyone is so used to linking it to some financial threshold. Just as an example, the recent drops in the stock market. My guess is most people have talked or at least thought about whether they should pull out some of their money and hide it in their mattresses. This thinking is most likely tied to the risk of losing their financial nest egg. But if they think further, their decision on what to do should also consider their lifestyle, current living situation, family and personal obligations. If the market crashed tomorrow and you had no access at all to any of your savings or cash --- what would you do? Did you ever think the credit card companies might put a halt or limit on spending due to the concern they wouldn't get it paid back. What about other businesses like grocery stores? Would they continue to accept credit or would they expect cash to allow you to buy food? I could go on....In the end, the impact may be equated to some type of a dollar amount but you have to think much further than just initial money.

Chris Shumate
Title: Accounting Manager
Company: Dominion Development Group, LLC
LinkedIn Profile
(Accounting Manager, Dominion Development Group, LLC) |

Thanks, Lynn, for the clarification on the question.

What are some specifics you use?

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