AAA.Materiality

Question: When can a discrepancy be ignored? Answer: When it is 'small enough' not to matter. (In other words, when it's not material.)

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Study Tips

This is an important topic, but it's already discussed thoroughly in the SAO (Statement of Actuarial Opinion) reading. You probably don't need to spend much time here.

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Based on past exams, the main things you need to know (in rough order of importance) are:

• this reading has not been tested on any exam from the year 2012 and subsequent

reference	part (a)	part (b)	part (c)	part (d)
no prior questions

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In Plain English!

Alice the Actuary just accepted an actuarial job offer at a salary of $120,000. Woo-hoo!

• But the next day, HR called and said they'd made a mistake. The salary is only $119,500. Do you think she would accept the revised offer?
• What if the revised offer were $115,000, or $110,000, or even lower.

Question: How low do you think HR could go before Alice would reject the revised offer?

Obviously this question doesn't have a single correct answer. (For Alice, it depends on this month's credit card bill)

• Let's suppose Alice would be willing to accept $115,000, but nothing less.
• Then the level of materiality in this situation would be $5,000. That's because any reduction less than $5,000 would not affect her decision. But any reduction more than $5,000 would affect her decision.

That's the idea behind materiality:

==> What is the smallest amount that would change your decision?

Let's elaborate but do it in as confusing a way as possible. (Joke, but not really.)

Question: describe the concept of materiality

• An omission, understatement or overstatement in a work product is material if it is likely to affect either the intended principal user’s decision-making or the intended principal user’s reasonable expectations

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