Which statement about materiality and misstatements is correct?

• A. A misstatement of $10,000 in a $50,000 context is immaterial.
• B. Materiality is only about fraud risk.
• C. A misstatement of $2,000 in a $2,000,000 annual revenue context may be immaterial.
• D. A misstatement of any size in a private company is always material.

Answer: (C)

Materiality is about whether a misstatement could influence the decisions of those using the financial statements. It isn’t a fixed dollar rule; it depends on the size of the misstatement relative to the whole statement and on qualitative factors like the nature of the item and its potential impact on users’ judgments.

In a very large revenue base, a small error can be immaterial because it’s a tiny fraction of total revenue and unlikely to alter decisions. That’s why the statement that a misstatement of a small amount in a very large revenue context may be immaterial is plausible and aligns with practice.

The other statements don’t fit because materiality isn’t solely about fraud risk; misstatements can be material for other reasons. A misstatement in a private company isn’t automatically material—materiality depends on the context and thresholds. And a misstatement isn’t automatically material just because the company is small; it can be immaterial if it falls below the materiality threshold or is unlikely to affect user decisions.