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Advanced Auditing, Assurance and Professional Ethics · Materiality, Risk Assessment and Internal Control

Materiality and Performance Materiality (SA 320) for CA Final Audit

Updated 5 October 2026 · Fact-checked

Materiality under SA 320 is the amount above which misstatements, alone or together, could influence users' economic decisions. You pick a benchmark, apply a percentage using judgment, and get overall materiality. Performance materiality is a lower amount that reduces the risk that undetected and uncorrected misstatements together exceed materiality. Revise both if facts change.

Understand Materiality and Performance Materiality (SA 320)

Materiality is a way to decide what matters. Auditors do not check every rupee. They aim to give reasonable assurance that the financial statements are free from material misstatement. So they need a yardstick for "material".

SA 320 says misstatements are material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. The judgment is made in light of surrounding circumstances and is affected by the size or nature of a misstatement, or both. Auditors think of users as a group with common information needs, not of any one user.

Overall materiality is set for the financial statements as a whole. You choose a suitable benchmark (for example profit before tax, revenue, total expenses, total assets, or net assets) and apply a percentage. SA 320 does not fix any percentage. Firms often use rules of thumb, such as a small percentage of profit before tax for a profit-oriented entity, but these are only starting points and need professional judgment. Choose a benchmark that is stable and relevant. If profit is volatile or near zero, profit before tax is a poor benchmark, so use revenue or total assets instead.

Performance materiality is an amount set below overall materiality. Its purpose is to bring down to an appropriately low level the probability that the total of uncorrected and undetected misstatements exceeds overall materiality. It is used to plan and perform procedures, such as deciding sample sizes and which balances to test. A lower performance materiality is used when risks are higher, when there were many misstatements in earlier audits, or when controls are weak.

You may also set a lower materiality level for particular classes of transactions, account balances or disclosures if misstatements below overall materiality could still influence users. Examples are related party transactions, directors' remuneration, or key performance measures. Materiality is not fixed. If you learn new facts, such as actual results differing greatly from the figures you used, you must revise it. You also document materiality, performance materiality, and any revisions, with the reasons.

Key rules to remember

Overall materiality
Overall materiality = chosen benchmark × chosen percentage
SA 320 gives no fixed percentage. The benchmark and percentage are judgments that you must justify and document.
Performance materiality
Performance materiality < Overall materiality
Set by judgment based on risk assessment, past misstatements and control environment. It is not a fixed fraction under SA 320.
Specific materiality
Materiality for particular items ≤ Overall materiality
Set lower where users' decisions could be influenced by smaller misstatements in certain items or disclosures.
Revision rule
New information → revise materiality (and performance materiality)
If a lower amount would have been set initially, reassess performance materiality and whether the audit procedures remain appropriate.
Clearly trivial threshold (SA 450 link)
Clearly trivial < Materiality
Misstatements below this need not be accumulated. It is set by the auditor and is not the same as performance materiality.

How to solve Materiality and Performance Materiality (SA 320) questions

For a case question on materiality, follow this order so that your answer shows provision, facts and conclusion.

  1. 1Identify what the question asks: overall materiality, performance materiality, specific materiality or revision.
  2. 2Pick the benchmark that suits the entity: profit before tax for a stable profit-making entity; revenue, total assets or expenses where profit is volatile, nil or the entity is not-for-profit.
  3. 3Apply the percentage given in the question. If none is given, state that the percentage is a judgment and use a reasonable one, saying so.
  4. 4Compute overall materiality and show the working clearly.
  5. 5Set performance materiality below it, linking the choice to risk factors in the case (weak controls, prior misstatements, fraud risk, first year audit).
  6. 6Consider whether any items need lower specific materiality, such as related party transactions or directors' remuneration.
  7. 7State whether new facts require revision and what follows: revise materiality, reassess procedures, document reasons.
  8. 8Conclude in one line, quoting SA 320 logic.

Quickest way: Benchmark, percentage, reduce, revisit

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

  1. Write the benchmark and amount.
  2. Multiply by the given percentage to get overall materiality.
  3. Give performance materiality as a lower figure (or the figure given) and cite the risk reason.
  4. Check for a specific item needing a lower threshold.
  5. Add one line: revise if new information arises, and document.

Common mistakes in Materiality and Performance Materiality (SA 320)

  • Treating performance materiality as equal to or higher than overall materiality.

    Students confuse it with a tolerance for uncorrected errors.

    Fix: Remember it is always set below overall materiality, to cover aggregate undetected and uncorrected misstatements.

  • Claiming SA 320 prescribes a percentage such as 5% of profit.

    Coaching rules of thumb get remembered as law.

    Fix: Say the standard gives no fixed percentage. Percentages are judgment, and you use the one provided in the question.

  • Using profit before tax as benchmark when profit is nil or highly volatile.

    It is the usual benchmark, so students apply it automatically.

    Fix: Read the case. If profit is unstable or negative, choose revenue, total assets or expenses and explain why.

  • Thinking materiality is only a quantitative test.

    Numbers are easy to compute, so nature is ignored.

    Fix: Add that qualitative factors, such as fraud, related party dealings or covenant breaches, can make small amounts material.

  • Not revising materiality when facts change.

    Students treat the planning figure as final.

    Fix: State that SA 320 requires revision if information becomes known during the audit that would have led to a different figure, and procedures must be reconsidered.

  • Forgetting documentation.

    It feels administrative.

    Fix: List overall materiality, specific levels, performance materiality and any revisions, with the reasons, as documented items.

Worked examples

Example 1

Case: You are auditing Meru Textiles Ltd, a stable profit-making company. Profit before tax is ₹8,00,00,000 and revenue is ₹120,00,00,000. Your firm uses 5% of profit before tax for overall materiality. Controls are weak in the inventory area and there were misstatements in the previous year. You set performance materiality at 70% of overall materiality. Compute overall and performance materiality and explain your choice of benchmark.

Show the solution
  1. Benchmark: profit before tax is suitable because the company is stable and profit-making, and users focus on earnings.
  2. Overall materiality = 5% × ₹8,00,00,000 = ₹40,00,000.
  3. Performance materiality = 70% × ₹40,00,000 = ₹28,00,000.
  4. Reason for the lower level: weak inventory controls and prior-year misstatements raise the risk that undetected and uncorrected misstatements add up beyond ₹40,00,000.
  5. Under SA 320, performance materiality is used to plan and perform procedures, for example for sample sizes in inventory testing.

Answer: Overall materiality is ₹40,00,000 and performance materiality is ₹28,00,000, set lower because of weak controls and prior misstatements.

Example 2

Case: For Kaveri Traders Pvt Ltd, the auditor set overall materiality at ₹10,00,000 using a budgeted profit before tax of ₹2,00,00,000 at 5%. During the audit, actual profit before tax comes out at ₹1,00,00,000 because of a large loss on a customer's insolvency. Should the auditor revise materiality and what follows?

Show the solution
  1. SA 320 requires revision if information becomes known during the audit that would have led to a different amount initially.
  2. Recompute using actual profit: 5% × ₹1,00,00,000 = ₹5,00,000.
  3. The revised overall materiality of ₹5,00,000 is lower than ₹10,00,000.
  4. Performance materiality must be revised downward as well.
  5. The auditor then decides whether the nature, timing and extent of procedures already done remain appropriate. More work may be needed on balances tested at the higher level.
  6. Document the revised figures and the reasons.

Answer: Yes. Materiality falls to ₹5,00,000, performance materiality is lowered, the earlier procedures are reassessed, and the revision is documented.

Exam tips

  • Show the working: benchmark, percentage, result. Marks go to the method even if the percentage is a judgment.
  • Always link performance materiality to specific risk facts in the case, not generic wording.
  • Mention that materiality has both quantitative and qualitative aspects whenever the case hints at related parties, fraud or covenants.
  • In MCQs, remember performance materiality is below overall materiality and that no percentage is fixed by SA 320.
  • Connect with SA 450: misstatements are evaluated against materiality, and clearly trivial items need not be accumulated.

Practice questions from Materiality, Risk Assessment and Internal Control

Materiality and Performance Materiality (SA 320) 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 (SA 320): frequently asked questions

What is the difference between materiality and performance materiality?

Materiality is the overall amount for the financial statements as a whole above which misstatements could influence users. Performance materiality is a lower amount used to plan and perform procedures so that aggregate undetected and uncorrected misstatements stay below overall materiality.

Does SA 320 give a percentage for the benchmark?

No. SA 320 leaves the benchmark and percentage to professional judgment. Firms may use rules of thumb, but they are not prescribed by the standard.

Which benchmarks can be used for materiality?

Common benchmarks are profit before tax, revenue, total expenses, total assets and net assets. The choice depends on the entity, its ownership and what users focus on. For example, a not-for-profit entity may use expenses or revenue.

When must materiality be revised?

Revise it if information becomes known during the audit that would have led to a different figure at the start, such as actual results differing significantly from those used. Then reconsider performance materiality and the nature, timing and extent of procedures.