Audit Materiality Explained: Overall to Trivial
How auditors set materiality under ISA 320: choosing a benchmark and percentage, then deriving performance materiality and the trivial threshold.
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Materiality is the dial that sets how precise an audit has to be. Too low and the audit burns hours on nothing; too high and real errors slip through. ISA 320 asks the auditor to determine materiality for the financial statements as a whole, and lower thresholds for specific areas where needed.
The three numbers
| Term | Meaning | Typical level |
|---|---|---|
| Overall materiality | Misstatements at this level could influence users' decisions | Benchmark × a percentage |
| Performance materiality | Working threshold used when testing, set lower to cover undetected errors | 50%–75% of overall |
| Clearly trivial | Below this, misstatements aren't accumulated | 3%–5% of overall |
Choosing a benchmark
The benchmark should reflect what users of the accounts care about most.
- Profit before tax — the default for stable, profit-oriented companies.
- Revenue — when profit is volatile, small or negative, or for start-ups.
- Total assets — for asset-heavy entities, investment and property companies.
- Total expenses — for not-for-profits and public sector bodies.
- Equity / net assets — for holding companies and cooperatives.
Common rules of thumb: about 5% of profit before tax; 0.5%–2% of revenue or total assets; 1%–2% of expenses or equity. These are practice conventions, not rules. Your firm's methodology and the entity's circumstances decide the final figure.
Setting performance materiality
Performance materiality exists because errors you don't find, plus errors you find but don't correct, can add up to more than overall materiality. Use a lower percentage when:
- Controls are weak or the entity has a history of errors.
- There are significant estimates or judgements.
- The audit is the first year, or management changes were recent.
Use a higher percentage when controls are strong and past audits found few errors.
A worked example
A trading company has profit before tax of AED 2,500,000 and a normal-risk assessment.
- Overall materiality at 5% → AED 125,000
- Performance materiality at 65% → AED 81,250
- Clearly trivial at 5% → AED 6,250
Sample sizes, tolerable misstatement for monetary unit sampling, and which differences get accumulated all follow from those three figures.
Qualitative materiality
Numbers aren't everything. A small misstatement can be material if it turns a loss into a profit, breaches a loan covenant, hides a related-party transaction or affects management bonuses. ISA 320 requires the auditor to consider these qualitative factors and, where needed, set lower materiality for particular classes of transactions or disclosures.
Revising during the audit
Materiality set at planning isn't final. If actual results differ substantially from the forecast — profit comes in far lower, say — revise it, and revisit the procedures accordingly.
Calculate it
The free Audit Materiality Calculator lets you pick a benchmark, adjust the percentage within its typical range, choose a risk level for performance materiality, and copy a summary for the working paper. For the analytical side, compute key ratios with the Financial Ratio Calculator.
For management, materiality is also a useful lens: an unreconciled bank difference or an unexplained journal larger than the clearly trivial threshold is something an auditor will ask about. Pyalm Books keeps bank reconciliation, journals and reports together so those questions have answers ready.
Standards, rates and deadlines change. Confirm the current position with the relevant authority or a qualified adviser before you rely on it.