SA-320 – Audit Materiality in Planning and Performing an Audit

Understanding materiality in audit is essential for auditors to assess the significance of misstatements in financial statements. This page explains key concepts, performance materiality, benchmarks, and auditor responsibilities, helping auditors plan and perform audits efficiently.

Concept of Materiality in Audit

In auditing, audit materiality refers to the significance of a misstatement or omission in financial statements that could influence economic decisions of users. Judgment of materiality provides a basis for:

• Determination of Nature, Timing and Extent of Risk Assessment Procedures
• Identification and assessment of Risk of Material Misstatements
• Nature, Timing and Extent of further audit procedures

Performance Materiality in Audit

The amount set by the auditor at less than materiality for financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of the uncorrected & undetected misstatement exceeds materiality for financial statements as a whole.

Revision of Materiality

• In the event of becoming aware of information that would have caused the auditor to have determined a different amount initially, the auditor shall revise materiality for the financial statement as a whole and if required, for particular classes of transactions, account balances or disclosures.
• If the auditor concludes that a lower materiality is appropriate, they must decide whether to revise performance materiality and ensure that the nature, timing, and extent (NTE) of further audit procedures remain appropriate.

Use of Benchmark in Determining Materiality

A percentage is often applied to a chosen benchmark as a starting point in determining materiality for the Financial Statements as a whole.

Factors affecting the identification of appropriate benchmark:

• The elements of the financial statements
• Items on which the attention of the users of the particular entity’s financial statements tends to be focused
• The nature of the entity, where the entity is at in its life cycle, and the industry and economic environment in which the entity operates
• Ownership structure and method of financing. and
• Relative volatility of the benchmark.

Auditor Responsibilities in Audit Materiality

• Upon establishing the overall audit strategy, the auditor determines the materiality of the financial statements as a whole.
• Determine materiality for specific transactions where smaller misstatements could influence user decisions.
• Set performance materiality to assess the risk of material misstatement and the NTE of further audit procedures.