Types of materiality

Focusing on the two main types you listed:

Quantitative materiality

Qualitative materiality

1. Quantitative Materiality (By Amount / Size)

Quantitative materiality looks at “how big is the misstatement in RM?”

Auditors usually set a materiality level using a percentage of a base figure, such as:

• Profit before tax
• Revenue (sales)
• Total assets or equity

Example of Quantitative Materiality

Suppose the auditor decides:

• Overall materiality = 5% of profit before tax
• Profit before tax = RM 800,000

Then:

• Materiality = 5% × RM 800,000 = RM 40,000

How to use this?

• If an error = RM 5,000 → not material (by amount).
• If an error = RM 60,000 → material (by amount).
• If total uncorrected errors add up to more than RM 40,000 → financial statements may be materially misstated.

So, quantitative materiality = based on size/amount in ringgit.

2. Qualitative Materiality (By Nature / Character)

Qualitative materiality looks at “what is the error about?”, not just how big it is.

Even a small amount can be material if it affects:

• Compliance with law or regulations
• Fraud or illegal acts
• Whether the company shows a profit or a loss
• Whether management gets a bonus based on profit
• Whether the company breaches a loan covenant
• Related party transactions (with directors, family, etc.)

Examples of Qualitative Materiality

1. Small fraud

• Bribe of RM 3,000 to a government officer.
• Amount is small, but because it’s illegal and ethical issue, it is material qualitatively.

2. Turning profit into loss

• Profit before correction = RM 2,000
• Error = RM 4,000 understatement of expense
• After correction, company shows a loss of RM 2,000.
• Amount maybe not huge, but it changes profit to loss, so material qualitatively.

3. Breaking a bank loan condition

• Loan agreement says: current ratio must be at least 1.5.
• A small misstatement in current assets makes ratio drop from 1.51 to 1.49.
• Bank may demand repayment → material because it affects loan covenant, even if the amount is not big.

So, qualitative materiality = based on importance of the issue, not just the number.

Aspect	Quantitative Materiality	Qualitative Materiality
Focus	How big? (RM amount)	What is it about? (nature)
Based on	% of profit, revenue, assets	Laws, fraud, ethics, covenants, profit/loss
Example (material?)	Error > RM 40,000	RM 3,000 bribe, small but illegal → material
Judgement	More numerical	More professional judgement / context-based

Exam Tip (Diploma Level)

If the question asks: “Explain types of materiality”, you can answer:

1. Quantitative materiality – related to the amount of misstatement, usually determined as a percentage of a benchmark (e.g. profit before tax, revenue, total assets). A misstatement is material if its amount is large enough to influence users’ decisions.

2. Qualitative materiality – related to the nature or characteristics of the misstatement, not just the amount. Even a small misstatement can be material if it involves fraud, non-compliance with law, changes a profit to a loss, affects management bonuses or loan covenants, or involves related parties.