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SA 320 (Revised)
Concept
 Materiality vs. Performance Materiality
 SA 320 (R) only defines ‘Performance Materiality’.
 Particular information are considered to be material if
the their misstatement, disclosure or non-disclosure,
individually or in the aggregate, could reasonably be
expected to influence the economic decisions of users
taken on the basis of the financial statements.
 Judgments about materiality are made in the light of
surrounding circumstances, and are affected by the
size or nature of a misstatement, or a combination of
both
JUDGMENTS AFFECTING MATERIALITY
 Whether a particular item is material or not can be judged
from:
 Its size or amount
 Its nature
 Its legality
 Contractual violation (if any)
 Qualitative aspects (like inadequate or non-disclosure of
related party relationships, etc.)
 The auditor’s determination of materiality is a matter of
professional judgment, and is affected by the auditor’s
perception of the financial information needs of users of
the financial statements.
PERFORMANCE MATERIALITY
Performance materiality means the amount or
amounts set by the auditor at less than materiality for
the financial statements as a whole to reduce to an
appropriately low level the probability that the
aggregate of uncorrected and undetected
misstatements exceeds materiality for the financial
statements as a whole.
If applicable, performance materiality also refers to the
amount or amounts set by the auditor at less than the
materiality level or levels for particular classes of
transactions, account balances or disclosures.
Determining materiality and performance materiality
when planning an audit
 When establishing the overall audit strategy, the auditor shall
determine materiality for the financial statements as a whole.
 If, in the specific circumstances of the entity, there is one or more
particular classes of transactions, account balances or disclosures for
which misstatements of lesser amounts than the materiality for the
financial statements as a whole could reasonably be expected to
influence the economic decisions of users taken on the basis of the
financial statements, the auditor shall also determine the materiality
level or levels to be applied to those particular classes of transactions,
account balances or disclosures.
 The auditor shall determine performance materiality for purposes of
assessing the risks of material misstatement and determining the
nature, timing and extent of further audit procedures.
Revision as the Audit Progresses
 The auditor shall revise materiality for the financial statements as a
whole (and, if applicable, the materiality level or levels for particular
classes of transactions, account balances or disclosures) in the event of
becoming aware of information during the audit that would have
caused the auditor to have determined a different amount (or amounts)
initially.
 If the auditor concludes that a lower materiality for the financial
statements as a whole (and, if applicable, materiality level or levels for
particular classes of transactions, account balances or disclosures) than
that initially determined is appropriate, the auditor shall determine
whether it is necessary to revise performance materiality, and whether
the nature, timing and extent of the further audit procedures remain
appropriate.
DOCUMENTATION
The audit documentation shall include the following
amounts and the factors considered in their
determination:
a) Materiality for the financial statements as a whole;
b) If applicable, the materiality level or levels for
particular classes of transactions, account balances
or disclosures;
c) Performance materiality; and
d) Any revision of (a)-(c) as the audit progressed.
Materiality and Audit Risk
 Audit risk is the risk that the auditor expresses an inappropriate audit
opinion when the financial statements are materially misstated.
 Audit risk is a function of the risks of material misstatement and
detection risk.
 Materiality and audit risk are considered throughout the audit, in
particular, when:
a) Identifying and assessing the risks of material misstatement;
b) Determining the nature, timing and extent of further audit
procedures; and
c) Evaluating the effect of uncorrected misstatements, if any, on the
financial statements and in forming the opinion in the auditor’s
report.
Inverse relation
 There is an inverse relationship between materiality
and the degree of audit risk which means higher the
materiality level, the lower the audit risk and lower the
materiality level higher the audit risk.
 For example: The probability that a large (material)
amount in an account will be left misstated in the
financial statements is lower than the probability that
a small (immaterial) amount will remain misstated.

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Materiality in Planning and Performing an Audit

  • 2. Concept  Materiality vs. Performance Materiality  SA 320 (R) only defines ‘Performance Materiality’.  Particular information are considered to be material if the their misstatement, disclosure or non-disclosure, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.  Judgments about materiality are made in the light of surrounding circumstances, and are affected by the size or nature of a misstatement, or a combination of both
  • 3. JUDGMENTS AFFECTING MATERIALITY  Whether a particular item is material or not can be judged from:  Its size or amount  Its nature  Its legality  Contractual violation (if any)  Qualitative aspects (like inadequate or non-disclosure of related party relationships, etc.)  The auditor’s determination of materiality is a matter of professional judgment, and is affected by the auditor’s perception of the financial information needs of users of the financial statements.
  • 4. PERFORMANCE MATERIALITY Performance materiality means the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. If applicable, performance materiality also refers to the amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions, account balances or disclosures.
  • 5. Determining materiality and performance materiality when planning an audit  When establishing the overall audit strategy, the auditor shall determine materiality for the financial statements as a whole.  If, in the specific circumstances of the entity, there is one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than the materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements, the auditor shall also determine the materiality level or levels to be applied to those particular classes of transactions, account balances or disclosures.  The auditor shall determine performance materiality for purposes of assessing the risks of material misstatement and determining the nature, timing and extent of further audit procedures.
  • 6. Revision as the Audit Progresses  The auditor shall revise materiality for the financial statements as a whole (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures) in the event of becoming aware of information during the audit that would have caused the auditor to have determined a different amount (or amounts) initially.  If the auditor concludes that a lower materiality for the financial statements as a whole (and, if applicable, materiality level or levels for particular classes of transactions, account balances or disclosures) than that initially determined is appropriate, the auditor shall determine whether it is necessary to revise performance materiality, and whether the nature, timing and extent of the further audit procedures remain appropriate.
  • 7. DOCUMENTATION The audit documentation shall include the following amounts and the factors considered in their determination: a) Materiality for the financial statements as a whole; b) If applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures; c) Performance materiality; and d) Any revision of (a)-(c) as the audit progressed.
  • 8. Materiality and Audit Risk  Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.  Audit risk is a function of the risks of material misstatement and detection risk.  Materiality and audit risk are considered throughout the audit, in particular, when: a) Identifying and assessing the risks of material misstatement; b) Determining the nature, timing and extent of further audit procedures; and c) Evaluating the effect of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor’s report.
  • 9. Inverse relation  There is an inverse relationship between materiality and the degree of audit risk which means higher the materiality level, the lower the audit risk and lower the materiality level higher the audit risk.  For example: The probability that a large (material) amount in an account will be left misstated in the financial statements is lower than the probability that a small (immaterial) amount will remain misstated.