Which of the following best describes when an error is considered material in financial accounting?

• A. An error is material only if it would trigger an IRS audit.
• B. An error is material if it is discovered by external auditors.
• C. An error is material if it would influence the decision of a reasonable user of the financial statements.
• D. An error is material if it results from intentional fraud.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of materiality in financial accounting. Materiality refers to the significance of an error or omission in financial statements that could influence the decision-making of users, such as investors, creditors, or other stakeholders.
2. Step 2: Evaluate the options provided in the problem. The first option, 'An error is material only if it would trigger an IRS audit,' is incorrect because materiality is not solely determined by tax implications or audits.
3. Step 3: Analyze the second option, 'An error is material if it is discovered by external auditors.' This is also incorrect because materiality is not dependent on who discovers the error but rather on its impact on decision-making.
4. Step 4: Consider the third option, 'An error is material if it would influence the decision of a reasonable user of the financial statements.' This is correct because materiality is defined by its potential to affect the decisions of users relying on the financial statements.
5. Step 5: Review the fourth option, 'An error is material if it results from intentional fraud.' While intentional fraud is serious, materiality is not solely determined by the intent behind the error but by its impact on the financial statements and decision-making.