Materiality

Materiality and performance materiality are important concepts in auditing and financial reporting, as they help to determine the nature, timing, and extent of the audit procedures and the disclosures in the financial statements.

Materiality refers to the significance of an item or matter to the financial statements. An item or matter is material if its omission or misstatement could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality depends on the size and nature of the item or matter, and the surrounding circumstances.

Performance materiality is the level of misstatement in the financial statements that the auditor is willing to accept without modifying the audit opinion, taking into account the auditor’s assessment of the risks of material misstatement and the auditor’s professional judgment. Performance materiality is typically set at a lower level than materiality, as it reflects the auditor’s tolerance for misstatements in the financial statements.

There are several benchmarks that can be used to determine materiality and performance materiality, including the relative size of the item or matter, the nature of the item or matter, and the overall size and nature of the financial statements.

For example, the relative size of the item or matter can be used as a benchmark for materiality and performance materiality. An item or matter with a large relative size, such as a significant transaction or account balance, is more likely to be material than an item or matter with a small relative size.

The nature of the item or matter can also be used as a benchmark for materiality and performance materiality. An item or matter with a significant impact on the financial statements, such as a transaction that affects the entity’s revenue or expenses, is more likely to be material than an item or matter with a limited impact on the financial statements.

The overall size and nature of the financial statements can also be used as a benchmark for materiality and performance materiality. For example, an item or matter that represents a large percentage of the entity’s total assets or revenue is more likely to be material for a small entity than for a large entity.

Overall, materiality and performance materiality are important concepts in auditing and financial reporting, as they help to determine the nature, timing, and extent of the audit procedures and the disclosures in the financial statements. There are several benchmarks that can be used to determine materiality and performance materiality, including the relative size of the item or matter, the nature of the item or matter, and the overall size and nature of the financial statements.

Typical Benchmarks

Range of turnover or gross assetsPercentage of turnover or gross assetsMateriality ranges
£0 –    £500,0003.00%£1 – £15,000
£500,001 – £2,000,0002.50%£15,001 – £50,000
£2,000,001 – £3,500,0002.00%£50,001 – £70,000
£3,500,001 – £6,000,0001.50%£70,001 – £90,000
over £6,000,0001.00%over £90,000

Performance materiality

For low risk engagements, performance materiality is generally calculated around 75%-80% of materiality.

For high risk, it may be around 60%.

Trivial

We would normally use 5% of materiality to calculate the level below which misstatements are considered to be trivial.

By Mohammed Haque

Mohammed is a chartered accountant (ICAEW) with many years of experience in dealing with complex audit, accounting and tax matters.