Version 2.0
A structured framework for Chartered Accountants to assess, calculate, and document Overall Materiality, Performance Materiality, and the Clearly Trivial threshold in Statutory Audits — aligned with SA 320 and SA 450.
Utility for Determining Materiality
Version 2.0
The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
This utility has been prepared by ICAI to assist Chartered Accountants in determining and documenting overall materiality including performance materiality for Statutory Audits.
The benchmarks and the percentage range to be applied are purely suggestive. The member is required to apply his PROFESSIONAL JUDGEMENT for assessing the Risk of Material Misstatement at the engagement level and the corresponding percentage of the benchmarks.
The Objective of this Template is to enable a user, primarily a Chartered Accountant, performing a Statutory Audit of an entity to assess and gauge the Materiality Threshold for a Statutory Audit of an entity.
The Auditor usually determines two types of Materiality i.e. Overall Materiality & Performance Materiality.
Materiality in the setting of auditing is the amount of influence a misstatement or omission of information on a financial statement could have on the decisions of an investor or leader based on what was interpreted.
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.
We consider quantitative materiality and qualitative factors in:
| # | Term | Definition |
|---|---|---|
| 1 | Total Equity | Equity + Reserves |
| 2 | Net Asset Value | The entity's net assets are those assets that remain after deducting all other claims on its assets. |
| 3 | Total Revenue | The total receipts generated by selling goods or services. |
| 4 | Materiality | It is the threshold above which missing or incorrect information in financial statements is considered to have an impact on the decision making of users. |
| 5 | Performance Materiality | 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. |
SA 320 — "Materiality in Planning and Performing an Audit"
https://kb.icai.org/pdfs/PDFFile5b3b2ab8cbcfd6.67521046.pdfSA 450 — "Evaluation of Misstatements Identified during the Audit"
https://resource.cdn.icai.org/16841sa450revised.pdf"Implementation Guide to Planning and Performing an Audit"
http://kb.icai.org/pdfs/PDFFile5b276cb332ad68.89428708.pdfThe determination of materiality by an auditor involves the following steps:
Determining Materiality is based on two key aspects — Relevant benchmarks and the type of the entity for which materiality is required to be determined.
The following benchmarks can be chosen based upon the types of entities:
Benchmark(s):
Benchmark(s):
Benchmark(s):
Benchmark(s):
Benchmark(s):
Benchmark(s):
| Benchmark | Suggested % Range |
|---|---|
| a) Total Revenue | 0.5% to 1% |
| b) Total Assets | 1% to 2% |
| c) Net Profit or normalized (adjusted) PBT | 5% to 10% |
| d) Total Expenses | 0.5% to 1% |
| e) Total Equity | 2% to 5% |
The determination of performance materiality is not a simple mechanical calculation and involves the exercise of professional judgement. It is affected by the auditor's understanding of the entity, updated during the performance of the risk assessment procedures and the nature & extent of misstatements identified in previous audits and thereby the auditor's expectations in relation to misstatements in the current period. In general, many auditors are using 50% to 90% of materiality as reasonable estimates of performance materiality. When looking at the schedule of unadjusted errors, the aggregate of this will be compared with the performance materiality figure to decide whether the financial statements require further adjustment.
The following factors influence the risk level assessment and thereby the percentage chosen for materiality:
In addition to the materiality levels, the auditor also determines the triviality benchmark and hence it is needed to understand the meaning of Clearly Trivial.
These are usually matters that are:
If there is an uncertainty whether one or more items are clearly trivial, the matter is not considered clearly trivial.
Up to 5% of materiality is often considered as clearly trivial. (Para 1.33 of Implementation Guide)
Auditor may determine, based on the facts & circumstances of the entity in the audit engagement, that the lower level is appropriate.
Factors affecting the threshold for Clearly Trivial include: History of misstatement and number of locations.
The Auditor may consider to include following amounts & the factors considered in their determination and maintain the same as part of Audit Documentation. (Para 14 of SA 320)
SA 320 — "Materiality in Planning and Performing an Audit"
https://kb.icai.org/pdfs/PDFFile5b3b2ab8cbcfd6.67521046.pdfSA 450 — "Evaluation of Misstatements Identified during the Audit"
https://resource.cdn.icai.org/16841sa450revised.pdf"Implementation Guide to Planning and Performing an Audit"
http://kb.icai.org/pdfs/PDFFile5b276cb332ad68.89428708.pdf