Three materiality numbers
| Type | What it is |
|---|---|
| Overall (planning) materiality | The amount above which misstatements could reasonably influence users' decisions — set for the financial statements as a whole |
| Performance materiality | A smaller amount, set below overall materiality, to reduce the risk that undetected + uncorrected misstatements aggregate above overall materiality |
| Clearly trivial threshold | Below this, misstatements need not even be accumulated on the summary of uncorrected misstatements |
Overall materiality is typically anchored to a benchmark — pre-tax income, total revenue, or total assets — chosen for the entity's circumstances. A specific class of transactions or disclosure may warrant a lower materiality if misstatements of smaller amounts would still influence users (e.g., related-party transactions, executive compensation).
IMPORTANT: Materiality has both a quantitative and a qualitative dimension. A numerically small misstatement can still be material if, for example, it turns a loss into a profit, meets an analyst forecast exactly, affects debt covenant compliance, or conceals an illegal act.
Revising materiality
If the auditor learns during the audit that actual results differ materially from the estimates used in planning (e.g., budgeted income was $10M, actual is $2M), materiality must be revised — and the revision may require more extensive procedures.
Audit strategy vs. audit plan
- Audit strategy — the overall scope, timing, and direction: reporting objectives, materiality, areas of higher risk, resource allocation.
- Audit plan — the detailed nature, timing, and extent of specific procedures: risk assessment procedures, tests of controls, and substantive procedures.
EXAM TIP: Planning is continuous, not a one-time event at the start. The strategy and plan are updated as the audit progresses and new information emerges.