Definition

Performance materiality

Performance materiality refers to the amount/amounts set by the auditor less than materiality for a financial statement to appropriately lower the probability that the aggregate of uncorrected/undetected misstatements does not exceed materiality for the financial statement.

It’s a materiality of the particular classes of account balances, disclosures, transactions, etc.

Overall materiality

It’s a specific amount expected to impact financial statement users’ economic decisions. It’s a materiality for the financial statement as a whole.

The amount can be material by amount, nature, and impact.

Scope of ISA 320

This ISA defines the auditor’s responsibility in terms of applying the materiality concept while planning an audit of the financial statement.

Materiality in the context of an audit

• Omissions and misstatements are considered material if, individually or aggregately, they influence the economic decisions of the financial statement users.
• The auditor’s judgment about materiality is affected by the misstatement’s nature and/or size.
• An auditor’s judgment about materiality is affected by the financial information needs of the specific user group.
• Materiality is based on professional judgment and the auditor’s perception of the financial information needs of the users.

Stages to use planning concept

Materiality is applicable in planning, executing, and forming audit opinions.

Use of materiality in audit

The auditor is required to make a judgment about the size of the misstatement that will be considered material. This judgment provides the basis for risk assessment procedures, assessing the risk of material misstatement, and planning further audit procedures.

The amount can be material by size, nature, and particular circumstances of occurrence/impact.

The objective of ISA 320

The goal of ISA 320 is to appropriately define the concept of materiality in doing an audit of financial statements.

Requirements of ISA 320

Following are the requirements of ISA 320.

The auditor must determine the materiality of the financial statement as a whole. However, if there are a number of account balances, transactions, and disclosures, the auditor is required to set performance materiality less than overall materiality, which could be expected to influence the decision of the financial statement users.

Similarly, materiality is determined to assess risk and design nature, extent, and timing of the audit procedures.

Revision of materiality

The materiality can be revised if the auditor learns certain information that could have caused them to reach a different materiality level initially. If the materiality is revised to a lower value than the initial level, the auditor will determine if it’s necessary to revise the extent of audit procedures.

Documentation of materiality

The auditor is required to document the following material aspects.

1. Overall materiality.
2. Materiality levels for particular transaction class, account balance, and disclosures (performance materiality).
3. Any revisions in the materiality.

Wrap up

ISA 320 defines the auditor’s responsibility to set materiality and performance materiality for the financial statement. Any amount is material that comes with the ability to influence the decision of the financial statement users. On the other hand, performance materiality is used for risk assessment and setting audit procedures. It’s a materiality lower than overall materiality determined to appropriately lower the probability that the aggregate of undetected and uncorrected misstatements remains lower.

The auditor can revise materiality if they become aware of information that could result in a different level than if they had that information initially. Similarly, auditors can determine if they need to change the extent of audit procedures to collect sufficient and appropriate audit procedures.