The materiality benchmark — profit before tax, revenue, total assets, or equity — changes the resulting figure by multiples before the percentage applied to it even matters, because these bases can differ by an order of magnitude or more within the same company. A business with thin margins and a large asset base will produce a tiny PBT-based materiality and a much larger assets-based one; neither is wrong, but picking between them is the real judgement call SA 320 asks for, not the percentage that gets applied afterward.
Why the gap between benchmarks can be so large
| Benchmark | Value | Typical % | Resulting materiality |
|---|---|---|---|
| Profit before tax | ₹2 crore | 5% | ₹10 lakh |
| Revenue | ₹40 crore | 0.75% | ₹30 lakh |
| Total assets | ₹60 crore | 1% | ₹60 lakh |
| Total equity | ₹25 crore | 3% | ₹75 lakh |
A six-fold gap between the smallest and largest figure above, on the exact same company, is normal — not a sign one of the calculations is wrong. The benchmark choice is where the real judgement sits.
How the choice actually gets made
- A stable, profit-making company with a normal margin usually benchmarks off PBT — it's the figure users of the financial statements care most about.
- A loss-making or break-even entity makes PBT unstable or near-zero, which is exactly when auditors switch to revenue or total assets instead.
- A capital-intensive business (real estate, infrastructure) sometimes benchmarks off total assets, since that's the figure that dominates the balance sheet.
- A holding company with little operating activity of its own often benchmarks off equity or total assets rather than a PBT that doesn't reflect the group's real scale.
None of this is prescribed by SA 320 itself — the standard requires materiality to be set and documented, but leaves the benchmark and percentage to the auditor's judgement. The documentation that actually survives review explains why that benchmark fit this entity, not just what number came out the other end.
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 320: materiality in planning and performing an auditOverall materiality and performance materiality are not the same number with a safety margin added — they answer two different questions.
- 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.
- Audit workflow & automationAudit sampling methods for Indian CA firmsStatistical vs judgmental sampling, when full-population testing removes the need to sample, when sampling still applies, and what drives sample size.
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