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What is the independent auditor's report on compliance and internal controls over compliance applicable to each major federal award program? In a Single Audit, auditors are required to report on their tests of internal controls over compli- ance for major federal award programs, describ- ing both the scope of testing and results. In addition, the auditor is required to express an opinion (or a disclaimer of opinion) on whether the government complied with laws, regulations, and provisions of contracts or grant agreements that could have a direct and material effect on each major federal award program. As a practical matter, the report on compliance and internal controls over compliance applicable to each major federal award program often refers readers to a separate set of findings for informa- tion on specific control weaknesses and specific instances of noncompliance disclosed by the Single Audit. What is "materiality"? A potential error is considered to be material (i.e., important, significant) to the financial statements if it could have the effect of changing a reader's impression of the government's fi- nances. In making judgments concerning a po- tential error's materiality, auditors consider both its quantitative and qualitative impact. The size alone of a potential error can make it quantitatively material. For example, an auditor is likely to consider a potential error that ex- ceeds acertain percentage (e.g., 5 percent) of net assets or revenues to be material based on size. Another criterion of materiality is a potential er- ror's qualitative impact. For instance, a potential error that changed what would have been a defi- cit into a surplus might be considered material, regardless of size. Similarly, errors that affect long-term trends also may be considered mate- rial, even though relatively small. Assume, for example, that fund balance had been increasing steadily over afive-year period as a percentage of current expenditures in the general fund. If an error in the current year gave the impression that this trend was continuing, when in fact fund balance had slightly declined as a percentage of current expenditures, the error might be consid- ered material, regardless of size. Many consider errors that reflect violations of fi- nance-related legal or contractual provisions to be qualitatively material by their very nature. 36 AN ELECTED OFFICIAL'S GUIDE TO AUDITING 13