What is a Material Misstatement?

A material misstatement is information in the financial statements that is sufficiently incorrect that it may impact the economic decisions of someone relying on those statements. For example, a material misstatement of revenue could trigger a decision to buy a company's stock, causing losses for the investor when the misstatement is later corrected and the price of the stock declines.

Material misstatements typically arise from one of the following events:

Inaccurate data collection or data processing, which is then summarized into the financial statements.
A presentation of a financial statement line item or account that does not comply with the applicable accounting framework.
A missing financial statement line item or account.
An incorrect accounting estimate, perhaps due to a misinterpretation of the facts or an oversight.
Unreasonable management judgments relating to an accounting estimate, or the manner in which accounting policies are used.
A financial statement disclosure that does not comply with the applicable accounting framework, or which is not disclosed at all.

When an auditor finds a material misstatement and management does not correct it, the auditor should evaluate the effect of the misstatement on the financial statements and decide whether it is necessary to modify his or her auditor’s opinion.