Pop Quiz Materiality

Answer: Company B would have a lower materiality level.

• It's at a much earlier stage in its organizational life cycle.
• Therefore its net income is likely much lower so smaller swings in net income would have a proportionately greater impact on decision-making (versus Company A.)

Other considerations in setting a materiality level might include: [Hint: F-STARS]

F   FINANCIAL strength

–

S   SIZE (of entity)

T   TYPE of business

A   ACCESS (to capital)

R   net RETENTION

S   STAGE (of organization's life cycle)