Materiality in Audit (SA 320): Meaning, Performance Materiality, Benchmarks & Revision

Materiality in audit refers to the threshold at which a misstatement (or omission) in the financial statements could reasonably influence the decisions of users. Auditors use materiality to plan the audit, focus procedures on what matters most, and evaluate whether identified misstatements are significant in the overall context of the financial statements.

In India, the detailed framework for determining and applying materiality is set out in SA 320 (Materiality in Planning and Performing an Audit). This page explains audit materiality, performance materiality, benchmarks, revision requirements, and auditor responsibilities under SA 320, with practical, audit-planning focused clarity.

Materiality in Audit

Materiality is the level of misstatement that could reasonably be expected to influence the economic decisions of users based on the financial statements. In audit planning, it helps decide what to test, how much to test, and how audit findings are evaluated at completion.

• Materiality drives audit focus (risk-based planning).
• Performance materiality is set lower than overall materiality to reduce aggregation risk.
• Materiality may be revised if new information arises during the audit.

Why materiality matters in auditing

Materiality supports professional judgment throughout the audit and influences the overall audit strategy, including the nature, timing, and extent of audit procedures. It also helps auditors evaluate whether uncorrected misstatements, individually or in aggregate, could impact the users’ decisions.

Concept of materiality as per SA 320

As per SA 320, audit materiality refers to the magnitude of misstatements, including omissions, that could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. The auditor’s judgment of materiality under SA 320 provides a basis for:

• Determining the nature, timing, and extent (NTE) of risk assessment procedures.
• Identifying and assessing the risk of material misstatement at the financial statement and assertion levels.
• Determining the nature, timing, and extent of further audit procedures.

Materiality is applied by the auditor throughout the audit and directly affects audit strategy and professional judgment under SA 320.

Performance materiality in audit under SA 320

In accordance with SA 320, performance materiality is the amount set by the auditor at a level lower than materiality for the financial statements as a whole. This is done to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality.

Performance materiality under SA 320 enables the auditor to respond effectively to assessed risks and design audit procedures that address the risk of material misstatement.

Revision of materiality (SA 320 requirement)

SA 320 requires the auditor to revise materiality during the audit if the auditor becomes aware of information that would have resulted in a different materiality determination initially.

• If new information indicates that materiality for the financial statements as a whole should be revised, the auditor must update materiality and, where applicable, materiality for particular classes of transactions, account balances or disclosures.
• When the auditor concludes that a lower materiality is appropriate, SA 320 requires consideration of whether performance materiality should also be revised and whether the nature, timing, and extent of further audit procedures remain appropriate.

Benchmarks for determining materiality (SA 320)

SA 320 permits the use of an appropriate benchmark as a starting point in determining materiality for the financial statements as a whole. A percentage is typically applied to the selected benchmark based on the auditor’s professional judgment.

Factors affecting benchmark selection

In accordance with SA 320, the auditor considers the following factors when selecting an appropriate benchmark:

• The elements of the financial statements.
• Items on which the attention of users of the entity’s financial statements is likely to be focused.
• The nature of the entity, its life-cycle stage, and the industry and economic environment in which it operates.
• The entity’s ownership structure and method of financing.
• The relative volatility of the chosen benchmark.

Auditor responsibilities for materiality in audit (SA 320)

Under SA 320, the auditor has the following key responsibilities in relation to materiality:

• Upon establishing the overall audit strategy, determine materiality for the financial statements as a whole.
• Determine materiality for particular classes of transactions, account balances, or disclosures where smaller misstatements could influence user decisions.
• Set performance materiality to assess the risk of material misstatement and determine the appropriate nature, timing, and extent of further audit procedures.

If you’re building audit planning documentation or internal review checklists, this topic also connects well with broader internal audit thinking (risk-based prioritization and decision-useful reporting).