It relates to things like loss of reputation, loss of revenue, litigation costs and damages and, in the government sector, loss of face and political backlash. We talked a bit about the history of the ARM and how, in the early days, auditors tried to quantify risks. This was singularly unsuccessful. However, also note that the major audit agencies have developed expert systems that give explicit guidance on the appropriate mix of audit procedures. Next, we attempted the audit risk model exercises given in the handout.
Equivalent terms are 'significance', 'tolerable error' and 'tolerable error rate'.
Materiality is discussed in the two accounting standards, AAS 5 and AASB 1031, as well as the auditing standard, AUS 306. Something is material if it affects users' decisions. You offered some good insights into what might be material in amount vs material by nature. There are also specific account items which, though not material in amount, may be of special interest to users, e.g. related party transactions, executive remuneration and audit fees, and hence material by nature. Planning materiality is a term sometimes used to refer to the relative dollar amount that provides the benchmark for deciding whether financial statements, taken as a whole, will be considered materially misstated.