The materiality of an accounting error is based on whether it impacts the economic decisions of the users of an entity’s financial statements. Thus, if the error is sufficiently significant that it will mislead lenders, investors, creditors, and other financial statement users, then it is considered to be material.

It can be difficult to decide whether an accounting error is material, since it is hard to determine whether it will impact user decisions. Contributing factors to consider when reaching this conclusion can be divided into qualitative and quantitative factors, as follows:

Qualitative factors. These are non-numeric, including errors that would trigger a debt covenant, alter the trend of a performance trend line, or notably impact a business ratio. In effect, these factors trigger decision points that are monitored by financial statement users.
Quantitative factors. These are numeric, including the reported revenue, gross margin, or net profit level.