SA 320 - Materiality in Planning and Performing an Audit

Performance Materiality

• Amount set below materiality for FS to reduce risk of uncorrected/undetected misstatements exceeding FS materiality.

• If applicable, also applies to particular classes of transactions, balances, or disclosures, with amounts set below their materiality levels.

Determining Materiality & Performance Materiality:

• Overall audit strategy: Auditor determines materiality for FS as a whole.

• For specific classes, balances, or disclosures where smaller misstatements could influence user decisions, auditor sets materiality levels for those items.

• Performance Materiality: Set to assess ROMM and guide the NTE of further audit procedures.

Determining Materiality:

Requires professional judgment; percentage often applied to a chosen benchmark. Factors affecting benchmark choice:

1. FS elements: (assets, liabilities, equity, revenue, expenses).

2. Items users focus on (e.g., profit, revenue, net assets).

3. Nature of entity: Life cycle, industry, and economic environment.

4. Ownership structure & financing (e.g., debt vs. equity emphasis).

5. Volatility of the benchmark.

• Auditor revises materiality for FS (and specific items) if new info during the audit would have led to a different initial materiality amount.

• If a lower materiality is appropriate, auditor revises performance materiality and assesses if the NTE of further procedures are still suitable.