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.

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.