What does the auditor assess when determining materiality?

When determining materiality, the auditor assesses the influence of misstatements on users' decisions. Materiality is a fundamental concept in auditing that pertains to the significance of financial information in influencing the economic decisions of users. This means that when auditors evaluate materiality, they consider how omitting or misstating information might impact the judgment of stakeholders, such as investors, creditors, and other parties relying on the financial statements.

The evaluation of misstatements involves understanding the context in which users operate and how they might interpret financial information. A misstatement, whether due to error or fraud, is deemed material if it is likely to affect the economic decisions made by users, meaning that it could potentially lead them to make different choices than they would have with accurate information. Auditors often consider both quantitative and qualitative factors in this assessment, including the nature of the item and the potential effects on the financial statements as a whole.

In contrast, assessing only financial ratios or historical performance data provides a limited view that does not fully encompass the broader implications for user decision-making. Additionally, focusing solely on client satisfaction with services is unrelated to the financial reporting aspects that materiality addresses in an audit.