Audit and Assurance · Assessing audit risks

Materiality and Performance Materiality in ACCA Audit and Assurance

Updated 11 October 2026 · Fact-checked

Materiality is the size of misstatement that could influence users' decisions. Auditors set overall materiality, usually as a percentage of a benchmark such as profit before tax or revenue. Performance materiality is set lower, to reduce the risk that small errors add up to a material total. Both guide planning and testing.

Understand Materiality and Performance Materiality

Materiality is about users. A misstatement is material if it could reasonably be expected to influence the economic decisions of users of the financial statements. The auditor does not look for every error. The auditor looks for errors big enough to matter.

Materiality has two sides. Quantitative materiality is about size. You pick a benchmark, such as profit before tax, revenue or total assets, and apply a percentage. Qualitative materiality is about nature. A small item can still be material if it hides fraud, breaks a law, turns a profit into a loss, affects a covenant, or involves directors' transactions.

Overall materiality is set for the financial statements as a whole. Performance materiality is a lower amount set to reduce to an appropriately low level the chance that the total of uncorrected and undetected misstatements exceeds overall materiality. Many small errors can add up, so you test to a tighter level.

The benchmark depends on the entity. Profit before tax suits a stable profit-making company. Revenue or total assets suits a loss-making or break-even entity, where profit would give a tiny or meaningless figure. Total expenditure or net assets may suit a not-for-profit body. ISA 320 does not give fixed percentages. Firms use judgement. In the exam, use the percentages in the question. If none are given, common rules of thumb are about 5% of profit before tax or 0.5% to 1% of revenue, but say they are a judgement.

Materiality links to risk. Lower materiality means more testing, larger samples and more work. Higher materiality means less. It is set at planning and revised if new information arises, for example if actual results differ a lot from the figures used. It also helps you judge uncorrected misstatements at the end of the audit.

Key rules to remember

Overall materiality: Overall materiality = benchmark × chosen percentage; Benchmarks include profit before tax, revenue, total assets. Use the percentage given in the question.
Performance materiality: Performance materiality = overall materiality × a lower percentage (often 50% to 75%); Firm policy sets the range. Use the percentage in the question. Lower it when risk is higher.
Overall materiality as a ratio: Misstatement ÷ benchmark × 100 = % of benchmark; Use it to test whether an item is above or below a threshold.
Benchmark for a revised figure: Adjusted profit = draft profit ± proposed adjustments; If a question says to use adjusted figures, recalculate the benchmark before applying the percentage.
Qualitative rule: Material if size or nature could influence users' decisions; A small item can be material because of its nature, even if below the calculated figure.

How to solve Materiality and Performance Materiality questions

Use this method for any materiality question, whether it asks for a calculation, a judgement on an item, or an explanation of the effect on the audit.

1Read what the question asks: calculate, assess an item, or explain the impact on planning.
2Choose the benchmark that suits the entity. Check whether profit is stable, volatile or a loss.
3Apply the percentage given. Show the calculation line by line.
4Calculate performance materiality from overall materiality, using the percentage given or a stated reasonable range.
5Compare each item with the thresholds. Then ask the qualitative question: does its nature matter?
6Link to the audit: say which areas need more work, bigger samples or lower thresholds.
7State your conclusion clearly: material or not, and why.

Quickest way: Three-line materiality check

When to use it: Use it in Section A objective test cases, where you need the figure fast and there is no partial credit.

Write the benchmark and its percentage: for example profit ₹ or $ × 5%.
Multiply and write overall materiality. Then apply the performance percentage.
Compare the item with the figure. If it is close or odd in nature, think qualitatively before picking an answer.

Common mistakes in Materiality and Performance Materiality

Using the wrong benchmark, such as profit for a loss-making company.
Students memorise 5% of profit and apply it automatically.
Fix: Check the entity first. If profit is negative, tiny or volatile, use revenue or assets.
Setting performance materiality higher than overall materiality.
Students mix up which figure is the stricter one.
Fix: Performance materiality is always lower. Its purpose is to leave a margin for errors that add up.
Treating materiality as only a number.
Students forget qualitative factors.
Fix: Always ask what the item is. Fraud, illegal acts, related parties and covenant breaches can be material at any size.
Using unadjusted figures when the question gives adjustments.
Students rush to the percentage.
Fix: Recalculate the benchmark with the adjustments first, then apply the percentage.
Saying materiality is fixed once set at planning.
Students see it as a one-off planning step.
Fix: Say it is revised if circumstances or actual results change, and used again at the end to evaluate uncorrected misstatements.
Writing 'lower materiality means less work'.
Students reverse the link between threshold and testing.
Fix: A lower threshold means more items are material, so more work, larger samples and more risk areas.

Worked examples

Example 1

Planning an audit of Zenith Co. Draft revenue is $48 million and draft profit before tax is $3.2 million. The firm sets overall materiality at 5% of profit before tax and performance materiality at 75% of overall materiality. Calculate both figures.

Show the solution

Benchmark: profit before tax = $3,200,000.
Overall materiality = $3,200,000 × 5% = $160,000.
Performance materiality = $160,000 × 75% = $120,000.

Answer: Overall materiality is $160,000 and performance materiality is $120,000.

Example 2

Corvus Co is loss-making with revenue of $20 million. The audit senior suggests using 1% of revenue as overall materiality and 60% of that as performance materiality. During the audit you find an uncorrected error of $150,000 in a payment to a director that was not disclosed. Calculate the materiality figures and assess the item.

Show the solution

Profit is not a suitable benchmark because the company makes a loss, so revenue is a reasonable alternative.
Overall materiality = $20,000,000 × 1% = $200,000.
Performance materiality = $200,000 × 60% = $120,000.
The $150,000 error is below overall materiality of $200,000 but above performance materiality of $120,000.
The item is also a director transaction that was not disclosed, which is qualitatively significant to users.
Conclusion: treat it as material in nature and raise it with management and those charged with governance, even though it is under the overall quantitative figure.

Answer: Overall materiality is $200,000 and performance materiality is $120,000. The $150,000 error is below overall materiality but should be treated as material because of its nature.

Exam tips

Do the calculation first, then add a line of judgement. Section B marks usually reward both.
Use the percentages in the question. Only fall back on rules of thumb when none are given, and say they are judgement.
In objective questions, check the entity type before choosing a benchmark. The trap is often a loss-making company.
When asked for the effect on the audit, link lower materiality to more testing, larger samples and a closer look at small items.
For uncorrected items, compare with both overall and performance materiality, then consider nature.

Materiality and Performance Materiality in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Materiality and Performance Materiality: frequently asked questions

What is the difference between materiality and performance materiality?

Overall materiality is the level at which misstatements could influence users of the financial statements as a whole. Performance materiality is set lower, so that small errors that add up or go undetected stay below overall materiality. Auditors use it when planning and evaluating tests.

Which benchmark should I use in the AA exam?

Use the one that suits the entity and follow the question. Profit before tax suits a stable profitable company. Revenue or total assets suits a loss-making one. A not-for-profit may use expenditure. State why you chose it.

Can a small misstatement still be material?

Yes. Nature matters as well as size. Items linked to fraud, illegal acts, directors' transactions or breaches of loan covenants may influence users even when small. Always consider qualitative factors.

Is materiality set once at the start of the audit?

No. It is set at planning but revised if new information appears, for example if actual results differ from the figures used. It is also used at the end to evaluate uncorrected misstatements.