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Materiality describes the ability for an action to affect financial statement users’ decisions about a business. Public companies follow Generally Accepted Accounting Principles (GAAP) to prepare financial statements. If an item is immaterial, GAAP does not have to be followed. The most important aspect of materiality is its relevance depends on the dollar amount of a specific transaction. For example, if a large company such as Apple Inc has $20,000 in anticipated bad debts; the amount would be considered immaterial because Apple is a multibillion dollar company. Auditors base their decisions to audit transactions in a company’s financial statements on materiality. Using the materiality concept, auditors will not audit certain transactions if the company and its stakeholders will not benefit from the cost of the audit.
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