Audit and Assurance · Audit planning and documentation
Materiality and Performance Materiality in ACCA Audit
Updated 11 October 2026 · Fact-checked
Materiality is the size of misstatement that could influence users' economic decisions. Auditors set it using judgement, often as a percentage of a benchmark such as profit before tax, revenue or total assets. Performance materiality is set lower than materiality to cover the risk that small uncorrected and undetected errors add up to a material amount.
Understand Materiality and Performance Materiality
A financial statement is material if omitting or misstating an item could reasonably be expected to influence the economic decisions users make from the statements. ISA 320 deals with this. The key idea is that the auditor is not trying to find every error. The auditor is trying to be reasonably sure there is no material misstatement.
The auditor sets materiality for the financial statements as a whole at the planning stage. This is a judgement. The usual approach is to pick a benchmark that users care about, then apply a percentage to it. Profit before tax suits a stable, profitable company. Revenue suits a company with volatile or low profits. Total assets or net assets suit investment entities. Expenditure or income suits not-for-profit bodies. Benchmarks must be chosen for the entity, not by habit.
Performance materiality is an amount set below overall materiality. It reduces the chance that the total of uncorrected and undetected misstatements goes above materiality. It is used to decide the nature, timing and extent of audit procedures, for example sample sizes. The higher the risk of misstatement, the lower performance materiality should be. Weak controls, many past errors or a first-year audit all push it down.
Materiality is not only about size. Qualitative factors matter too. A small amount can be material if it hides a breach of law, turns a profit into a loss, affects a covenant, or involves directors. Related party transactions and directors' remuneration are examples. The auditor may also set a lower materiality for specific classes of transactions, balances or disclosures.
Materiality is reassessed as the audit goes on. If actual results differ from the figures used at planning, the auditor revises materiality. The auditor also uses it at the end to judge whether uncorrected misstatements are material, and to decide the type of audit opinion.
Key rules to remember
- Materiality
- Materiality = benchmark × chosen percentage
- ISA 320 gives no fixed percentages. In exam questions, use the percentage given or a typical range such as 5% of profit before tax, 0.5% to 1% of revenue and 1% to 2% of total assets, and state it as judgement.
- Performance materiality
- Performance materiality < materiality (often 50% to 75% of materiality)
- Lower percentage when risk is higher. Always lower than overall materiality.
- Clearly trivial threshold
- Clearly trivial < materiality (often a small percentage, such as 5%)
- Misstatements below this need not be accumulated. Use the exam's figure if given.
- Revised materiality
- New materiality = actual benchmark × same percentage
- Recalculate if final figures differ significantly from those used at planning.
How to solve Materiality and Performance Materiality questions
Use this method for calculation and discussion questions on materiality.
- 1Identify the entity type and what users care about most. This tells you the best benchmark.
- 2Pick the benchmark (profit before tax, revenue, total assets and so on). Say why it suits this client. If profit is volatile or near zero, avoid it.
- 3Apply the percentage given in the question, or a sensible one if none is given. Show the calculation.
- 4Set performance materiality below materiality. Choose a percentage and link it to risk: higher risk means a lower percentage.
- 5Consider qualitative factors: legal breaches, covenants, profit turning to loss, related parties, directors' pay, trends and sensitive disclosures.
- 6Say how materiality affects the audit: sample sizes, extent of testing, and evaluation of misstatements found.
- 7State that materiality is reassessed if circumstances or results change, and use it at the end to evaluate uncorrected misstatements and the audit opinion.
Quickest way: Benchmark, percentage, then lower it
When to use it: Use this for short calculation items in Section A or an OT case, where you only have a minute or two.
- Read which benchmark and percentage the question wants. Do not substitute your own.
- Multiply carefully and check the zeros.
- For performance materiality, apply the stated fraction to materiality, not to the benchmark.
- Check the answer makes sense: performance materiality must be smaller than materiality.
- If an option is qualitative, ask whether the item affects law, covenants, trends or users' decisions, even if small.
Common mistakes in Materiality and Performance Materiality
Applying the percentage to the wrong figure, for example using revenue when profit was asked for.
Students rush and take the first number in the scenario.
Fix: Underline the benchmark in the question. Write it next to the percentage before multiplying.
Setting performance materiality equal to or above materiality.
Students forget its purpose is a safety margin.
Fix: Always reduce it. Remember it exists to cover undetected and uncorrected errors adding up.
Saying that small items are never material.
Students think only in numbers.
Fix: Mention qualitative factors such as illegal acts, covenant breaches, related parties and profit turning to loss.
Using profit before tax as the benchmark for a loss-making or break-even client without comment.
Students memorise profit as the default.
Fix: Explain that profit is unstable here and choose revenue or assets instead.
Treating materiality as fixed once set at planning.
Students overlook that it is a judgement that can change.
Fix: State that it is revised if final results differ or new information appears.
Giving a generic list of factors with no link to the scenario.
Students recall the textbook list instead of reading the facts.
Fix: Tie each factor to a fact in the question, such as a new client, weak controls or a bank covenant.
Worked examples
Example 1
Section A style: Redwood Co has profit before tax of $4,200,000 and revenue of $60,000,000. The audit firm uses 5% of profit before tax for materiality and sets performance materiality at 75% of materiality. What is performance materiality?
Show the solution
- Materiality = 5% × $4,200,000 = $210,000.
- Performance materiality = 75% × $210,000.
- 75% × $210,000 = $157,500.
Answer: $157,500
Example 2
Section C style: Harbour Co is a trading company in its first year as your client. Revenue is $30,000,000 and profit before tax is $300,000, down sharply from last year. Controls are weak. The bank loan has a covenant requiring profit of at least $250,000. Explain how you would set materiality and performance materiality.
Show the solution
- Benchmark: profit before tax is low and volatile, so a percentage of it would give a very small materiality that may not reflect what users need. Revenue is more stable, so it is a better benchmark.
- Calculation: using 0.5% of revenue gives materiality of 0.5% × $30,000,000 = $150,000. This is a judgement and could be lower given the risks.
- Check against profit: $150,000 is half of profit before tax. That is high relative to profit, so the auditor should consider a lower figure.
- Performance materiality: controls are weak and it is a first-year audit, so risk of misstatement is higher. Set it at a low fraction, for example 50% of materiality: $75,000.
- Qualitative factors: profit is only $50,000 above the covenant level. A misstatement of that size could breach the covenant, so it would be material in nature. Also consider that the fall in profit may create pressure to manage results.
- Conclusion: use a lower materiality, test more extensively, and reassess if final profit differs from the figure used.
Answer: Use revenue as benchmark, giving about $150,000 (consider lowering it given the covenant), with performance materiality of about $75,000 at 50%, and treat misstatements near the covenant threshold as material by nature.
Exam tips
- In OT questions, check which figure the percentage applies to, and whether the answer is materiality or performance materiality.
- In written answers, always justify the benchmark. A calculation without a reason scores less.
- Link performance materiality to risk. Say that weak controls or a first-year audit mean a lower percentage.
- Use qualitative factors when the scenario mentions covenants, directors, related parties, legal breaches or a profit that is close to a target.
- Keep the numbers tidy: show the multiplication and state the final figure with units.
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?
Materiality is the overall level of misstatement that could influence users' decisions. Performance materiality is a lower amount used when planning and performing procedures. It gives a margin so that small undetected and uncorrected errors do not together exceed materiality.
Which benchmark should I use for materiality?
Choose the one users of the financial statements care about most. Profit before tax is common for stable profitable companies, revenue for volatile or low profit entities, and assets for investment type entities. Always explain your choice.
Does ISA 320 give fixed percentages?
No. ISA 320 leaves the choice of percentage to professional judgement. In the exam, use any percentage given in the question. If none is given, state a reasonable one and explain it.
Can a small misstatement be material?
Yes. If it affects compliance with law, breaks a covenant, turns a profit into a loss or involves related parties or directors, it can be material by nature even if it is small in amount.