Skip to content

Advanced Audit and Assurance (International) · Planning, materiality and assessing the risk of material misstatement

Materiality and Performance Materiality for ACCA AAA

Updated 11 October 2026 · Fact-checked

Materiality is the size of misstatement that could influence users' decisions. You set overall materiality using a benchmark such as profit before tax or revenue. Performance materiality is a lower amount that reduces the risk that small errors add up to a material total. You revise both if facts change.

Understand Materiality and Performance Materiality

Materiality is about users. A misstatement is material if it could reasonably be expected to influence the economic decisions users take based on the financial statements. Size and nature both matter. A small amount can be material if it hides a breach of loan covenants or turns a profit into a loss.

The auditor cannot test every item. So you set a figure for overall materiality at the planning stage. It is a matter of professional judgement. You usually pick a benchmark, then apply a percentage to it. Common benchmarks are profit before tax for a stable profit-making company, revenue for a loss-making or break-even entity, total assets for an investment or property entity, and net assets or expenditure for a not-for-profit body. The benchmark should be one that users focus on and that is stable. If profit is volatile or unusually low, use an average or another benchmark.

Performance materiality is set below overall materiality. Its purpose is to cover the risk that uncorrected and undetected misstatements, added together, exceed overall materiality. You use it to design procedures and decide sample sizes. Higher risk, weak controls or many past misstatements mean a lower performance materiality. Lower risk means it can sit closer to overall materiality.

Specific materiality is a lower level for particular classes of transactions, balances or disclosures where users' decisions could be affected by smaller amounts. Typical examples are directors' remuneration, related party transactions and items linked to covenants or bonuses.

Materiality is not fixed. If you learn new information, such as actual results that differ a lot from the forecast used at planning, you revise it. You also set a clearly trivial threshold under ISA 450. Items below it need not be accumulated. Document the levels and any revision. ISA 320 does not set percentages, so state your judgement and reason.

Key rules to remember

Overall materiality
Overall materiality = benchmark × chosen percentage
ISA 320 gives no fixed percentages. Use the rate given in the question. Say why you chose the benchmark.
Performance materiality
Performance materiality < overall materiality
Often expressed as a percentage of overall materiality. Lower it when risk is higher.
Specific materiality
Specific materiality < overall materiality
Used for items users are sensitive to, such as related party transactions or directors' pay.
Revision rule
If new information would have led to a different amount, revise materiality and reassess the procedures
ISA 320 requires revision if information comes to light during the audit that would have caused a different amount to be set.

How to solve Materiality and Performance Materiality questions

Use this method for any materiality question, whether it asks for a calculation, a judgement or a revision.

  1. 1Read the requirement. Is it asking you to calculate, explain or revise materiality?
  2. 2Pick the benchmark that suits the entity. Check whether profit is stable, positive and representative.
  3. 3Apply the percentage or range given. If none is given, state a reasonable one and say it is judgement.
  4. 4Compute overall materiality and show the working.
  5. 5Set performance materiality below it. Link the level to risk, controls and prior misstatements.
  6. 6Consider whether any items need specific materiality.
  7. 7Say what happens next: lower materiality means more work, larger samples or extra procedures.
  8. 8If results change, recalculate and explain the effect on the audit.

Quickest way: Benchmark, rate, lower, link

When to use it: Use this when a question gives financial figures and a percentage and the time is short.

  1. Underline the figures and percentages given.
  2. Reject any benchmark that is loss-making or distorted, and say why in one line.
  3. Multiply benchmark by the percentage and write the result.
  4. Take the performance materiality percentage given and calculate it. If none is given, choose a lower figure and justify it by risk.
  5. Add one sentence on the effect on audit work.

Common mistakes in Materiality and Performance Materiality

  • Using profit before tax when the company is making a loss or profit is unusual.

    Students apply the textbook benchmark without checking the facts.

    Fix: Test the benchmark against the scenario. Switch to revenue, total assets or an average if profit is not representative.

  • Confusing overall and performance materiality.

    Both are amounts in the planning section and sound alike.

    Fix: Overall materiality is about users' decisions. Performance materiality is lower and drives audit procedures and sampling.

  • Setting performance materiality higher than or equal to overall materiality.

    Students rush and apply the wrong percentage.

    Fix: Check it is below overall materiality. Apply the percentage to overall materiality, not to the benchmark, unless told otherwise.

  • Writing only the calculation and no comment.

    Students treat it as a maths question.

    Fix: Add a sentence on the effect on the audit. Professional skills marks reward analysis and commercial sense.

  • Ignoring qualitative factors.

    Students assume materiality is only a percentage.

    Fix: Mention nature. Misstatements affecting covenants, directors' pay, fraud or compliance can be material at any size.

  • Forgetting to revise materiality when actual results differ from forecasts.

    Materiality is seen as set once at planning.

    Fix: State that you recalculate if new information arises and reassess the nature, timing and extent of procedures.

Worked examples

Example 1

An audit client has revenue of $80 million, profit before tax of $4 million and total assets of $50 million. Profit is stable and the owners focus on it. Your firm uses 5% of profit before tax for overall materiality and sets performance materiality at 75% of overall materiality. Calculate both and explain the effect of the lower figure.

Show the solution
  1. Benchmark: profit before tax is stable and users focus on it, so it is suitable.
  2. Overall materiality = 5% × $4,000,000 = $200,000.
  3. Performance materiality = 75% × $200,000 = $150,000.
  4. Effect: you use $150,000 to design tests and select samples. This leaves a margin so that small undetected and uncorrected errors do not add up past $200,000.

Answer: Overall materiality is $200,000 and performance materiality is $150,000. The lower figure leaves a margin for undetected misstatements.

Example 2

At planning, forecast profit before tax was $6 million and overall materiality was set at 5% of it. At the final stage, actual profit before tax is $4.2 million. Recalculate overall materiality and explain what you do next.

Show the solution
  1. Original materiality = 5% × $6,000,000 = $300,000.
  2. Revised materiality = 5% × $4,200,000 = $210,000.
  3. The fall is $90,000, so it is significant. ISA 320 requires revision if information would have led to a different amount.
  4. Performance materiality must also be revised. If it was 75%, the new level is 75% × $210,000 = $157,500.
  5. Reassess the nature, timing and extent of the procedures already done. Items previously below the old thresholds may now be material, so extend testing or increase samples if needed.
  6. Document the revision and the reasons.

Answer: Revised overall materiality is $210,000 and performance materiality is $157,500. The auditor must reassess earlier procedures and extend work where needed.

Exam tips

  • Show the benchmark, percentage and result on separate lines so markers can award method marks even if a figure is wrong.
  • Always justify the benchmark by reference to the entity. Loss-making, volatile or asset-based entities are common traps.
  • Use the percentages given in the question. If none is given, state your assumption clearly.
  • Link materiality to risk and to audit work. A short comment on sample sizes or extra procedures earns professional skills marks.
  • Mention qualitative factors and specific materiality when the scenario includes directors' pay, related parties or covenants.

Practice questions from Planning, materiality and assessing the risk of material misstatement

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 level of misstatement that could influence users' decisions. Performance materiality is set lower and is used to plan and perform procedures. It reduces the risk that undetected and uncorrected errors together exceed materiality.

Which benchmark should I use in the AAA exam?

Choose the one users care about and that is stable. Profit before tax suits a steady profit-making company. Revenue or total assets suit loss-making, break-even or asset-based entities. Always explain your choice.

Does ISA 320 give fixed percentages?

No. ISA 320 leaves the choice to professional judgement. Use the percentage the question gives, or state a reasonable one and explain it.

When must materiality be revised?

Revise it if information during the audit would have led to a different amount at planning. A big change in actual results compared with the forecast is a common example. Then reassess the planned procedures.