Materiality does not override Mandatory Disclosure Requirements Auditor’s Responsibilities and Reporting Considerations
CA Bhawna Grover
Manager Research and Advisory, Taxmann
Materiality does not override Mandatory Disclosure Requirements Auditor’s Responsibilities and Reporting Considerations
CA Bhawna Grover
Manager Research and Advisory, Taxmann
Contents 1.
Introduction
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2.
Mandatory Disclosure Requirements under the Companies Act and applicable Financial Reporting Framework
5
Mandatory Disclosure and Materiality: Two Separate Questions
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Auditor’s response when a prescribed Disclosure is omitted
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ICAI Disciplinary Committee Order: When Materiality was not accepted as a basis for Omitting a Disclosure
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Conclusion
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3. 4. 5. 6.
1. Introduction Can an auditor ignore a disclosure prescribed under law merely because the amount involved is not material? This question is particularly relevant when finalising financial statements, as materiality is an important consideration in evaluating misstatements and determining their effect on the financial statements and the auditor’s report. However, materiality should not be treated as a general exemption from compliance with a specific disclosure requirement under the Companies Act, 2013, Schedule III, applicable accounting standards or other relevant laws and regulations. Where a disclosure is specifically prescribed, the auditor should first determine whether the required information has been disclosed in accordance with the applicable framework. If the disclosure has been omitted, the auditor should then evaluate the nature and significance of the omission and determine its reporting implications. The distinction can therefore be stated simply i.e. whether a disclosure is required and whether its omission is material are two separate questions. This article explains this distinction, examines the auditor’s responsibilities when a prescribed disclosure is omitted, considers the relevant reporting implications under the Standards on Auditing and discusses an ICAI Disciplinary Committee order that illustrates the professional importance of the issue.
2. Mandatory Disclosure Requirements under the Companies Act and applicable Financial Reporting Framework Section 129(1) of the Companies Act, 2013 requires financial statements to give a true and fair view, comply with the applicable accounting standards and be in the form or forms prescribed under Schedule III. Accordingly, financial statement disclosures have to be considered in the context of the specific requirements applicable to the company. Schedule III contains specific presentation and disclosure requirements for various items appearing in the financial statements. For example, prescribed disclosures may apply to investments, borrowings, related parties, accounting policies and other items, depending on the applicable Division and requirements. Similarly, specific information relating to earnings in foreign exchange is required to be disclosed where the relevant requirements apply. The existence of a materiality concept does not mean that every specific disclosure requirement can be disregarded if the amount involved is below the auditor’s materiality threshold. Materiality is relevant to evaluating the significance of a misstatement and its effect on the financial statements; it does not, by itself, determine whether a disclosure requirement exists. The auditor’s responsibilities in this area also need to be considered with reference to section 143 of the Companies Act, 2013 and the applicable Standards on Auditing. SA 250
Materiality does not override Mandatory Disclosure Requirements Auditor’s Responsibilities and Reporting Considerations
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requires the auditor to consider non-compliance with laws and regulations and its possible effect on the financial statements and the auditor’s report. The Standard recognises that certain laws and regulations have a direct effect on the amounts and disclosures reported in the financial statements. At the same time, SA 320 and SA 450 make materiality an important part of the audit process. Materiality therefore continues to play a significant role in evaluating an identified omission or misstatement. The important point is that materiality and mandatory disclosure requirements operate at different stages of the auditor’s evaluation.
3. Mandatory Disclosure and Materiality: Two Separate Questions When a prescribed disclosure is missing, the auditor should consider two questions separately. A. Is the disclosure required? The auditor should identify the applicable provision under the Companies Act, Schedule III, accounting standards or any other relevant law or regulation and determine whether it requires the particular information to be disclosed. B. What is the effect of the omission? Once the requirement has been established, the auditor should evaluate whether the omission results in a misstatement and consider its quantitative and qualitative significance, including its effect on the financial statements as a whole. This distinction is important because a disclosure may be mandatory even though the amount involved is relatively small. The fact that an amount falls below an internally determined materiality threshold does not, by itself, make an expressly prescribed disclosure optional. Further, materiality is not purely a numerical concept. The nature of an item, the circumstances surrounding the transaction and the information that the disclosure is intended to provide may also be relevant in evaluating its significance. SA 450 requires the auditor to consider both the size and nature of identified misstatements and the particular circumstances in which they occur. Accordingly, the auditor should not begin the assessment by asking only whether the amount is material. The appropriate approach is to first establish the disclosure requirement and then assess the significance and reporting consequences of any omission.
4. Auditor’s response when a prescribed Disclosure is omitted Once the auditor identifies an omitted disclosure, the response should follow a logical sequence.
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Materiality does not override Mandatory Disclosure Requirements Auditor’s Responsibilities and Reporting Considerations
A.
Identify the applicable requirement
The auditor should first identify the specific provision requiring the disclosure and determine whether the requirement is applicable to the company and the transaction or event concerned. This is particularly important where management considers that a disclosure is unnecessary because the amount is insignificant. The auditor should assess that conclusion against the actual wording and requirements of the applicable law or financial reporting framework. B.
Evaluate the omission
The auditor should determine whether the omission constitutes a misstatement in the financial statements and evaluate its quantitative and qualitative significance. The assessment should not be based solely on the amount involved. The nature of the information omitted, its relevance to users of the financial statements and the circumstances giving rise to the disclosure requirement may also need to be considered. C.
Communicate and seek correction
Where appropriate, the auditor should communicate the matter to management or those charged with governance and consider whether the financial statements should be corrected before approval and issuance. The objective should be to ensure that the financial statements comply with the applicable financial reporting framework rather than merely accepting the omission because it is below the auditor’s materiality threshold. D.
Consider the reporting consequences
An omitted disclosure does not automatically result in a modified audit opinion merely because the disclosure requirement has been breached. If the resulting misstatement is not material to the financial statements, the auditor would generally not modify the opinion solely on that account. However, the auditor should still consider the need for communication, correction and documentation based on the circumstances. Where the omission results in a material misstatement and remains uncorrected, the auditor should evaluate the effect on the audit opinion in accordance with SA 705. A qualified opinion is generally appropriate where the misstatement is material but not pervasive, whereas an adverse opinion is appropriate where the misstatement is both material and pervasive. Thus, the existence of a mandatory disclosure requirement and the reporting consequence of its omission should not be treated as the same question. E.
Document the auditor’s evaluation
The auditor should appropriately document the applicable disclosure requirement, the nature of the omission, the quantitative and qualitative assessment performed, the discussions with management or those charged with governance, where relevant, and the basis for the reporting conclusion.
Materiality does not override Mandatory Disclosure Requirements Auditor’s Responsibilities and Reporting Considerations
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This documentation is particularly important where management has argued that a prescribed disclosure is unnecessary on grounds of immateriality.
5. ICAI Disciplinary Committee Order: When Materiality was not accepted as a basis for Omitting a Disclosure The distinction between mandatory disclosure requirements and materiality is illustrated by an ICAI Disciplinary Committee order dated 11 February 2026. The order related to audits for financial years 2005-06 and 2006-07 and, therefore, considered the statutory framework applicable at that time, including section 211 read with Schedule VI to the Companies Act, 1956. A.
Investment disclosures
One of the charges concerned disclosures relating to investments. The financial statements did not provide certain particulars required under the applicable Schedule VI requirements, including the relevant details regarding the nature and valuation of investments and the identity of the investee company. The auditor had issued clean audit reports and had stated that the financial statements gave the information required by the Companies Act. The auditor’s defence included, among other matters, the argument that the deviations were minor and did not affect the true and fair view of the financial statements. The Committee, however, considered the relevant disclosure requirements to be mandatory. It held that the auditor should have identified and appropriately dealt with the non-compliance rather than disregarding it on the basis that the overall true and fair view was not affected. B.
Foreign exchange earnings
The proceedings also concerned disclosure of foreign exchange earnings. The Directors’ Reports for the relevant years disclosed foreign exchange earnings of ₹14.07 lakh and ₹34,715 respectively. However, the Notes to Accounts disclosed foreign exchange expenditure but did not disclose the corresponding foreign exchange earnings as required under the applicable framework. The auditor contended that the amounts represented VAT refunds or reimbursements rather than earnings in foreign exchange and also relied on their relative insignificance, noting that the amounts were less than 1% of total income. The Committee did not accept this reasoning. It considered the specific disclosure requirement and held that the omission could not be disregarded merely because the amount involved was small in relation to total income. The significance of this finding lies in the distinction between the size of an amount and the existence of a disclosure requirement. The Committee’s reasoning illustrates that where the applicable framework specifically requires information to be disclosed, an
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Materiality does not override Mandatory Disclosure Requirements Auditor’s Responsibilities and Reporting Considerations
auditor should not assume that the requirement becomes optional merely because the amount involved is quantitatively insignificant. C.
Professional consequence
The Committee ultimately found the auditor guilty of professional misconduct under Clause (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949, in relation to the charges considered in the proceedings. A reprimand was issued and a fine of ₹2,00,000 was imposed. Although the proceedings related to an earlier statutory framework, the order provides a useful professional illustration of the importance of carefully considering prescribed disclosure requirements. The specific statutory provisions considered in the case should, however, be distinguished from the requirements applicable to current financial statements.
6. Conclusion Materiality is fundamental to the planning and performance of an audit and to the evaluation of identified misstatements. It is not, however, a substitute for compliance with an express statutory or financial reporting disclosure requirement. The appropriate approach is therefore to separate two considerations. First, determine whether the disclosure is required. Second, evaluate the effect of its omission, including its quantitative and qualitative significance and its implications for the auditor’s report. An immaterial omission does not automatically require modification of the audit opinion. Equally, the auditor should not disregard a prescribed disclosure merely because the amount involved appears quantitatively immaterial. The auditor should identify the requirement, evaluate the omission, seek correction or communicate the matter as appropriate, determine the reporting consequences and document the basis of the conclusion. The ICAI Disciplinary Committee order discussed above provides a useful practical illustration of why this distinction matters. Although the proceedings related to an earlier statutory framework, the underlying professional lesson remains relevant: a prescribed disclosure should not be treated as optional merely because the amount involved is considered immaterial. The reporting consequences, however, must always be determined by applying the law and Standards on Auditing applicable to the particular engagement and circumstances.
Materiality does not override Mandatory Disclosure Requirements Auditor’s Responsibilities and Reporting Considerations
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