The Institute of Chartered Accountants of India

Disclaimer
The utility on Materiality has been prepared for assisting the
(set up by an Act of Parliament) members for determining and documenting overall materiality
including performance materiality. The benchmarks and the
%age range to be applied are purely suggestive and the
member is required to apply his PROFESSIONAL JUDGEMENT

Utility for assessing the Risk of Material Misstatement at the

engagement level and corresponding % age of the
for benchmarks. The ICAI is not in any way responsible for the
result of any action taken on the basis of usage of this utility.
Determining Materiality
By
For feedback & query reach us at: caq@icai.in
Objective

- The Objective of this Template is to enable a user, primarily a Chartered Accountant, performing a Statutory Audit of
an entity to assess and gauge the Materiality Threshold for a Statutory Audit of an entity.

Need for determining materiality

- An Audit is an independent examination of the books and records of an entity or person with a view to expressing
an opinion thereon. The Auditor in this process is expected to confirm if the financial statements are free from
material misstatements.

- In order to ensure that the opinion issued by an Auditor is free from material misstatement and get an assurance that
the scope and coverage of the audit is adequate to express this opinion, a quantitative yardstick of Materiality is
both relevant and necessary to enable such levels of audit checks to derive conclusions.

When should Materiality be determined

- Determining Materiality helps to ensure that firstly, the scope of audit was adequate to express an opinion and
secondly to establish that the financial statements are free from material misstatement or otherwise.

- Materiality is required to be determined at the beginning of the audit to plan the scope of work and is compared at the
end of the audit to the aggregate of known and likely misstatements.

Revisiting Materiality Thresholds as determined by the Auditor

- Materiality during the course of Audit is not a static concept. Hence, throughout the audit, Auditor need to review
the materiality level & may need to revise it, if necessary.

Types of Materiality to be determined by the Auditor

- The Auditor usually determine two types of Materiality i.e. Overall Materiality & Performance Materiality

- Overall Materiality: Materiality in the setting of auditing is the amount of influence a misstatement or omission of
information on a financial statement could have on the decisions of an investor or leader based on what was interpreted.

- Performance Materiality: Performance materiality means the amount or amounts set by the auditor at less than
materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the
aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.

How Should an Auditor Determine Materiality

- While there is no specific rule on how to determine materiality, the benchmarks may be different from one entity to
another, based on the auditor's experience & Professional Judgement.

Materiality as stated in Auditor's Report

- Materiality is the magnitude of misstatements in the standalone financial statements that, individually or in aggregate,
makes it probable that the economic decisions of a reasonably knowledgeable user of the standalone financial statements
may be influenced.

- We consider quantitative materiality and qualitative factors in

(i) Planning the scope of our audit work and in evaluating the results of our work.
(ii) To evaluate the effect of any identified misstatements in the financial statements.

Calculating Amount of Material Misstatements

- The Auditor shall calculate total material misstatements and consider its impact on the opinion of the financial statements.
Some Key Definitions

S. No. Particulars Definitions

1 Total Equity Equity + Reserves

2 Net Asset Value The entity’s net assets are those assets that remain after deducting all other
claims on its assets.
3 Total Revenue The total receipts generated by selling goods or services

4 Materiality It is the threshold above which missing or incorrect information in financial

statements is considered to have an impact on the decision making of users.

5 Performance Materiality The amount or amounts set by the auditor at less than materiality for the
financial statements as a whole to reduce to an appropriately low level the
probability that the aggregate of uncorrected and undetected misstatements
exceeds materiality for the financial statements as a whole. If applicable,
performance materiality also refers to the amount or amounts set by the auditor
at less than the materiality level or levels for particular classes of transactions,
account balances or disclosures.

Reference Documents

- Please refer SA 320 "Materiality in Planning and Performing an Audit" at:

https://kb.icai.org/pdfs/PDFFile5b3b2ab8cbcfd6.67521046.pdf

- Please refer SA 450 "Evaluation of Misstatements Identified during the Audit" at:
https://resource.cdn.icai.org/16841sa450revised.pdf

- Please refer "Implementation Guide to Planning and Performing an Audit" at:

http://kb.icai.org/pdfs/PDFFile5b276cb332ad68.89428708.pdf
Steps involved in determining Materiality

- The determination of materiality by an auditor involves the following steps:

· Step 1: Assessing the risk of material misstatements.

· Step 2: Choosing the appropriate benchmark.
· Step 3: Determining a level (usually a percentage) of this benchmark.
· Step 4: Documenting the choice with proper justification.

Step 1: Assessing the risk of material misstatements.

- The first consideration when calculating materiality at the planning stage is the assessed risk associated with the business.

- There is inverse relationship between risk and materiality. The higher the assessed risk of material misstatement within the
financial statements, the lower the materiality and vice versa.

- The assessment of the risk level of the engagement depends on multiple considerations and is based on professional judgment
of the auditor. Accordingly, the auditor may choose the level of risk associated with each of the consideration / add other
considerations

- If the materiality is too high, the auditor may not perform additional audit procedures or if it is too low, the auditor may
perform more additional procedures, than necessary.

Step 2: Choosing the appropriate benchmark.

- Determining Materiality is based on two key aspects - Relevant benchmarks and the type of the entity for which materiality
is required to be determined.

- Benchmarks:

The following benchmarks can be chosen based upon the types of entities (Para A2 of SA 320):

· a) Total Revenue
· b) Total Assets
· c) Net Profit or normalized (adjusted) PBT
· d) Total Expenses
· e) Total Equity

- Types of Entities

a) Profit Oriented: The entity which is commercial entity/ formed with the main objective of earning profits.
b) Not for Profit: The entity which is formed with different objective other than earning profits.
C) Debt Financed: The entity majorly financed through debt funds.
d) Volatility in Profit: Entities which face Volatility in profits. In such cases, n ormalized profit before tax from continuing operations
may be used in case of exceptional increase/decrease in profits.
e) Liquidity: The entity facing liquidity crises.
f) Entities Executing Public Utility Project/ Program: Central/State governments and related government entities (for example, agencies,
boards, commissions).

Applying Benchmarks based on Entity Types

- Benchmarks based on entity type can be considered to be applied as under

- a) Profit Oriented: The entity which is commercial entity/ formed with the main objective of earning profits. (Para A4 of SA 320)
Benchmark(s)
Net Profit before Tax or normalized (or adjusted) profit before tax from continuing operations figure based on past results

- b) Not for Profit: The entity which is formed with different objective other than earning profits. (Para A6 of SA 320)
Benchmark(s)
i) Total Revenue
ii) Total Expense

- C) Debt Financed: The entity majorly financed through debt funds. (Para A2 of SA 320)
Benchmark(s)
Net Asset Value

- d) Volatility in Profit: Normalized profit before tax from continuing operations may be used in case of exceptional increase/decrease in profits.
(Para A3 of SA 320)
Benchmark(s)
i) Total Revenue
ii) Gross Profits
 - e) Liquidity: The entity facing liquidity crises.
Benchmark(s)
Total Equity

- f) Entities Executing Public Utility Project/ Program: Central/State governments and related government entities (for example, agencies,
boards, commissions). (Para A8- A9 of SA 320)
Benchmark:
i) Total Cost
ii) Net Cost
iii) Assets

Step 3: Determining a level (usually a percentage) of this benchmark.

- Once the entity types and the benchmarks are cognized for, it is now relevant to identify percentages relevant for the
determination of materiality

- There are a number of benchmarks which can be selected to help calculate materiality and a range of materiality percentages that could be
used when calculating materiality.
- SA 320 doesn't specifically mention the ranges of percentages that can be used as again this is left to the Auditor's Professional Judgement,
however, common percentages used are given below. Ideally the one selected by the auditor should be the benchmark that most represents the
needs of the users of financial statements. Examples of common percentages based on benchmarks are as follows:

a) Total Revenue (0.5% to 1%)

b) Total Assets (1% to 2%)
c) Net Profit or normalized (adjusted) PBT (5% to 10%)
d) Total Expenses (0.5% to 1%)
e) Total Equity (2% to 5%)

- If assessed risk is high then the lower percentages for calculating materiality will be selected. If assessed risk is low then the higher percentages
will be used.

- Indeed there may also be separate balances and classes of transactions that require a much lower materiality figure to be used than the one
calculated for the financial statements as a whole, since misstatements of a lesser amount than materiality in these particular balances or
classes of transactions could reasonably be expected to influence the economic decisions of the users.

- For less/ more than 12 month Financial Statement period, materiality relates to whole of that period. (Para A5 of SA 320)

- The determination of performance materiality is not a simple mechanical calculation and involves the exercise of professional judgement. It is
affected by the auditor's understanding of the entity, updated during the performance of the risk assessment procedures and the nature & extent
of misstatements identified in previous audits and thereby the auditor's expectations in relation to misstatements in the current period. in
general, many auditors are using 50% to 90% of materiality as reasonable estimates of performance materiality. When looking at the schedule of
unadjusted errors, the aggregate of this will be compared with the performance materiality figure to decide whether the financial statements
require further adjustment.

- Some of the factors that can be used to determine the percentage are placed below

· New Engagement
· Startup Entity
· Significant concerns identified at client acceptance/ continuing.
· Doubt on integrity of management
· Concerns about operating effectiveness of controls
· Effectiveness of Internal Audit Function
· Ongoing investigations
· Negative publicity
· Complexity in operations, organization structure and products
· Significant changes in economic accounting & regulatory environment.
· Going-concern and liquidity issues including loss of significant customers
· Operating losses making the threat of bankruptcy
· Installation of significant new IT systems related to financial reporting
· Prior history of fraud or error
· Increased risk of override of controls, fraud or error
· Constraints on the availability of capital and credit
· Use of complex financing arrangements
· Corporate restructurings
· Significant changes in entity from Prior Period
· Significant transactions with related parties
· Changes in key personnel/ exit of key personnel
· Weaknesses in internal control/IFCoFR qualified
· Inefficient accounting systems and records
· Previous year's audit report qualified
· Changes in accounting policies
· Rapid growth or unusual profitability especially compared to that of other companies in the same industry
· Any other which the auditor may consider significant

Clearly Trivial: Meaning

- In addition to the materiality levels, the auditor also determines the triviality benchmark and hence it is needed to understand
the meaning of Clearly Trivial

- Clearly Trivial: Meaning

These are usually matters that are:
i) Wholly smaller than that determined in accordance with Revised SA 320. (Para 1.32 of Implementation Guide)
ii ) are clearly inconsequential, individually or in aggregate and by any criteria. (Para 1.32 of Implementation Guide)
 - If there is an uncertainty whether one or more items are clearly trivial, the matter is not considered clearly trivial.
Up to 5% of materiality is often considered as clearly trivial. (Para 1.33 of Implementation Guide)

- Auditor may determine, based on the facts & circumstances of the entity in the audit engagement, that the lower level is appropriate.
Factors affecting the threshold for Clearly Trivial Include: History of misstatement and number of locations.

Step 4: Documenting the choice with proper justification.

- The Auditor may consider to include following amounts & the factors considered in their determination and maintain the same as part of Audit
Documentation. (Para 14 of SA 320)
1) Materiality for Financial Statement as a whole.
2) Materiality level for:
a) Class of Transactions
b) Account Balance
c) Disclosures
3) Performance materiality.
4) Include:
o Amount below which misstatements would be regarded as clearly trivial.
o All misstatements accumulated during the audit and whether they have been corrected.
o Auditor’s conclusion as to: -
i)Whether uncorrected misstatements are material, individually or in aggregate.
ii) Basis for that conclusion.

5) Any revision to any of above.

Reference Documents

Please refer SA 320 "Materiality in Planning and Performing an Audit" at:

https://kb.icai.org/pdfs/PDFFile5b3b2ab8cbcfd6.67521046.pdf

Please refer SA 450 "Evaluation of Misstatements Identified during the Audit" at:
https://resource.cdn.icai.org/16841sa450revised.pdf

Please refer "Implementation Guide to Planning and Performing an Audit" at:

http://kb.icai.org/pdfs/PDFFile5b276cb332ad68.89428708.pdf
 DETERMINING MATERIALITY
Name of Entity
Financial Year
Materiality Stage Planning
Type of Engagement Statutory Audit
Prepared By
Reviewed By
Date

` Risk Assessment for the Engagement

S. No. Particulars Level of Risk (Select Weightage (Select from Drop Down)
from Drop Down)
1 New Engagement High_Risk 0
2 Startup Entity NA 0
3 Significant concerns identified at client acceptance/ continuing. High_Risk 10
4 Doubt on integrity of management Low_Risk 3
5 Concerns about operating effectiveness of controls High_Risk 10
6 Effectiveness of Internal Audit Function Medium_Risk 5
7 Ongoing investigations High_Risk 10
8 Negative publicity High_Risk 10
9 Complexity in operations, organization structure and products Medium_Risk 7
10 Significant changes in economic accounting & regulatory environment. Medium_Risk 7
11 Going-concern and liquidity issues including loss of significant High_Risk 10
12 customers
Operating losses making the threat of bankruptcy High_Risk 10
13 Installation of significant new IT systems related to financial reporting NA 0
14 Prior history of fraud or error High_Risk 10
15 Increased risk of override of controls, fraud or error Low_Risk 3
16 Constraints on the availability of capital and credit High_Risk 10
17 Use of complex financing arrangements NA 0
18 Corporate restructurings High_Risk 10
19 Significant changes in entity from Prior Period High_Risk 10
20 Significant transactions with related parties Low_Risk 3
21 Changes in key personnel/ exit of key personnel NA 0
22 Weaknesses in internal control/IFCoFR qualified Low_Risk 3
23 Inefficient accounting systems and records Low_Risk 3
24 Previous year's audit report qualified High_Risk 10
25 Changes in accounting policies Medium_Risk 7 Define Overall RoMM From To (to be filled)
Rapid growth or unusual profitability especially compared to that of
26 other companies in the same industry NA 0 Low Risk 0% 15%
27 Any other which the auditor may consider significant (Refer Note 1) Low_Risk 3 Medium Risk 15% 75%
Overall Risk Assessment Medium_Risk 73% High Risk 75% 100%

Selection of the basis for calculation of the Materiality

S. No. Type of Entity (Select Select Entity (Select from Benchmark Amount (Refer Note 2Suggested Materiality Range Percentage determined Document Rationale for Overall Materiality
from Drop Down) Drop Down) Selecting Percentage
1 Debt_Financed NA Net Asset Value 1,734,946.00 High RoMM =>1% <1.3% 5.00% 86,747.30
Medium RoMM >1.3% <=1.6%
Low RoMM >1.6% <=2%

Performance Materiality 50% to 90% 75.00% 65,060.48

Clearly Trivial Threshold 0% to 5% 5.00% 4,337.37

Specific Performance Materiality

(Refer Note 3)

Note 1 Document Any other which the auditor may consider significant:
i
ii
iii
iv
v

Note 2 Amount :
The auditor may take the average of the previous years for determining materiality base amount or may take the current year financial data as base for
determining materiality.
Extrapolation of numbers, as suitable should be done, in case the base amount is for part of the year
For assessing materiality, transactions which are exceptional, unusual or non-recurring in nature are to be excluded from turnover & profits.

Note 3: Specific Performance Materiality

Auditor can choose a number that is lower than the Performance Materiality in case he wants to test more items in an account balance / group of accounts, if
he is of the view that more coverage is required. Further, in case where the account balances contain scattered / small balances, selecting Performance
Materiality will be more useful
 Evaluation of Material Misstatements Identified during
Particulars
Known Errors Para A5 of SA 450 (Errors found during the Audit)
Relevant Ledger Accounts : List to be given

Total Known Errors

Likely Errors Para 11 of SA 450 (Eg.: Errors on review of Old Balances/
Reconciliation Differences etc.)
Relevant Ledger Accounts: List to be given

Total Likely Errors

Total Uncorrected Misstatements Known & Likely Misstatements

Materiality Determined

Performance Materiality Determined

Conclusion on Adequacy of Audit Scope (The effect of the total

uncorrected misstatements must be assessed by the auditor while
forming his opinion on the financial statements.)
If the auditor concludes the financial statements as a whole are not free from mat
the opinion.
ements Identified during the Audit (SA 450)
Amount Errors Corrected in the Boo Uncorrected Errors
0

0 0 0

86747.3

65060.475

le are not free from material misstatement, the auditor may modified