SA 320 requires the auditor to determine materiality for the financial statements as a whole (overall materiality) at the planning stage, and then set performance materiality at an amount below it, specifically to reduce the risk that the sum of several small, individually immaterial misstatements adds up to something material in aggregate. Both figures are set using professional judgment against a chosen benchmark — commonly a percentage of pre-tax profit, revenue, or total assets, chosen based on which figure users of the financial statements are most likely to focus on for this particular entity.
Why two numbers, not one
| Figure | Question it answers | Typical relationship |
|---|---|---|
| Overall materiality | What size of misstatement, uncorrected, could reasonably influence a user's decisions? | Set first, based on the chosen benchmark |
| Performance materiality | What threshold should individual procedures be designed to detect, so the AGGREGATE of several small misstatements doesn't exceed overall materiality undetected? | Set below overall materiality — commonly 50-75% of it, based on judgment about the entity's risk profile, not a fixed rule |
Common practice, not a requirement
A first-year audit, an entity with a history of audit adjustments, or an entity in a volatile industry typically justifies performance materiality closer to the lower end of that range — more conservative, not less, because the risk of several small errors stacking up undetected is higher.
Choosing the benchmark
- 01Identify what users of the financial statements actually focus onA profit-making trading company: typically pre-tax profit. A company near break-even or loss-making: profit becomes an unstable, unreliable benchmark, so revenue or total assets is usually more appropriate.
- 02Apply a percentage appropriate to that benchmarkCommon ranges — roughly 5-10% of pre-tax profit, 0.5-1% of revenue, 1-2% of total assets — are starting points for judgment, never a formula applied mechanically regardless of circumstances.
- 03Adjust for qualitative factorsA misstatement well below the quantitative threshold can still be material if it affects compliance with a loan covenant, changes a profit into a loss, or relates to a related-party transaction users would reasonably focus on regardless of size.
- 04Document the rationale, not just the numberWhy this benchmark, why this percentage, for this specific entity — a number without the reasoning behind it can't be evaluated on review or defended if questioned later.
Revising materiality mid-engagement
Materiality set at planning is based on the best information available at the time — often prior-year or interim figures. If actual results during the audit differ significantly from what was expected (a profit far below forecast, an unexpected loss), materiality has to be reconsidered and, if appropriate, revised, with the effect on the already-performed procedures evaluated. Carrying forward a materiality figure that no longer reflects the entity's actual year-end position is not compliant with the standard's intent, even if the original calculation was reasonable at the time.
Tolerable misstatement, used specifically in sampling to size a sample and evaluate its results, is set with reference to performance materiality but is not simply the same figure — it reflects the specific population being sampled, and should be documented separately from the overall planning materiality calculation.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Audit workflow & automationSA 315: identifying and assessing the risks of material misstatementA risk assessment that doesn't name a specific assertion isn't a risk assessment under SA 315 — it's a general impression written down.
- Audit workflow & automationSA 330: the auditor's responses to assessed risksA higher-risk item doesn't just need more testing. It needs more persuasive evidence — those are two different design decisions.
- Audit workflow & automationStatutory audit planning checklistUnderstanding the entity, setting materiality, risk assessment at planning, and briefing the team against a realistic timeline — a rounded planning reference.
Free tools, no signup
Each one reads a file entirely in your browser — or, for two of them, just answers a few questions — and nothing is ever uploaded.
- Purchase register checkDuplicate payments, round-sum amounts, weekend-dated invoices, incomplete records.
- GSTR-2B reconcilerMatches your purchase register against GSTR-2B — missing invoices either side, amount mismatches.
- Bank reconciliation checkerMatches your cash book against a bank statement — what's outstanding on each side.
- Fixed asset register checkDuplicate asset codes, missing location or useful life, negative net book value.
- Payroll red-flag scannerBank accounts shared across employees, and records missing an ID, PAN or salary.
- CARO applicability checkerAnswer a few questions about the company and see which CARO 2020 clauses likely apply.
- MSME payment delay checkerMSME-flagged invoices paid — or still unpaid — beyond the 45-day Section 22 limit.
- Related-party transaction screenerTransactions above a threshold you set with no approval reference, grouped by counterparty.
- Depreciation useful life checkerCompares a useful life in use against the Schedule II, Part C indicative figure.
- Materiality calculatorOverall and performance materiality against PBT, revenue, assets or equity, with reasoning shown.
- Sample size calculatorStatistical sample size for a test of controls or a substantive test of detail.