MATERIALITY AND AUDIT

Materiality is a concept which is of huge importance in the Audit of an organization. An item which appears in the Financial Statements of an organization can be termed as material if the omission of it from the Financial Statements results in some serious distortion. Likewise, if the same item is mis-stated and that also causes some serious fallacy then such an item is termed as Material.

Materiality is normally the element which governs the overall depth of the audit. Although audit is carried on the basis of a sample of the whole data, but which things are to be looked into depends on their level of materiality. Similarly, the extent of scrutiny of the item is also governed by this element.

To sum it into a few words, it's all about the significance of the item on the overall Financial Statements. If the impact is likely to be significant then we must surely check in sufficient detail.

Cost Elements

For a manufacturing concern the basic undertaking is the production of goods which are commonly referred to as finished goods.

Now in order to arrive at the cost of these goods produced it is important to classify the costs which are incurred in the process. Furthermore, if the cost calculated is accurate then it also assists management in determining the appropriate pricing policy.

There are three basic cost elements which are part of an organization's manufacturing process: Materials, Labour, and Factory Overheads.

Materials, as the terminology suggests refers to the cost of materials which are consumed in the production process. Similarly, Labour refers to the wages paid to workers during the production process. Finally, Factory Overheads (FOH) are the indirect expenses which were incurred during the production process.

Under these three heads the costs incurred on the product are classified and this ultimately becomes the part of the finished goods produced.