Advanced Auditing, Assurance and Professional Ethics · Review of Financial Information

Materiality in a Review of Financial Statements (SRE 2400)

Updated 5 October 2026 · Fact-checked

Materiality in a review under SRE 2400 (Revised) means the practitioner determines materiality for the financial statements as a whole and uses it to design procedures and evaluate misstatements. It rests on the common information needs of users as a group. To solve: pick a benchmark, apply judgment, plan inquiry and analytical procedures, then compare misstatements with it.

Understand Materiality in a Review of Financial Statements

A review gives limited assurance. You do not test everything. You use mainly inquiry and analytical procedures. So you need a yardstick for deciding what is big enough to matter. That yardstick is materiality.

Paragraph 44 of SRE 2400 (Revised) requires you to determine materiality for the financial statements as a whole. You then apply it in two places: when you design procedures and when you evaluate the effect of identified misstatements. It is not a one-time number written in the file and forgotten.

Paragraph A71 explains the thinking. Materiality is a matter of professional judgment, made in light of surrounding circumstances. It is affected by the size or nature of a misstatement, or a combination of both. It is based on your view of the common financial information needs of users as a group. You do not consider the possible effect on specific individual users, because their needs vary widely.

The standard does not fix a percentage or a benchmark. Choosing one is your judgment. A common approach is to take a benchmark such as profit before tax, revenue or total assets, and apply a percentage you can justify. Pick the benchmark that users of this entity care about most.

Compared with an audit, the idea is the same: the same user-focused definition applies. What differs is the depth of work and the level of assurance. In your answer, the SA 320 steps (such as performance materiality) should not be assumed to apply automatically. The standard asks for materiality for the financial statements as a whole, and you apply it through your procedures and evaluation.

Key rules to remember

SRE 2400 para 44 – requirement: Determine materiality for the financial statements as a whole → apply it (a) in designing procedures and (b) in evaluating identified misstatements; Learn this as a two-use rule: design and evaluate.
SRE 2400 para A71 – basis of judgment: Materiality = judgment based on the common financial information needs of users as a group, affected by size, nature or both; Do not consider the effect on specific individual users.
Illustrative working: Materiality = chosen benchmark × chosen percentage; This is a working method, not a prescribed formula. The standard sets no percentage. Justify both choices.
Evaluation of misstatements: Compare each misstatement and the total of uncorrected misstatements with materiality; also consider nature; A misstatement below the amount can still be material because of its nature.

How to solve Materiality in a Review of Financial Statements questions

Use this order for any question on materiality in a review. Write it in provision-facts-conclusion form.

1State the requirement: para 44 of SRE 2400 (Revised) requires materiality for the financial statements as a whole, used in designing procedures and evaluating misstatements.
2Identify the users and their common information needs as a group (para A71). Ignore any single user's special needs.
3Choose a benchmark that suits the entity (for example profit before tax, revenue or total assets) and say why. Note if the benchmark is unstable or unsuitable.
4Apply a percentage using judgment and compute the amount. Say clearly that the standard fixes no percentage.
5Link it to procedures: more inquiry and analytical focus on areas where misstatements could exceed or approach the amount.
6Evaluate misstatements: add up uncorrected ones, compare with materiality, and consider nature (for example effect on trends, covenants, or related parties).
7Conclude: say whether further procedures, management correction, or a modified conclusion is needed.

Quickest way: Four-line materiality answer

When to use it: Use this for short written answers or case-scenario MCQs where time is tight.

Rule: para 44 – whole financial statements; use in design and evaluation.
Basis: para A71 – judgment; users as a group; size and nature.
Apply: name the benchmark, state the percentage, give the amount.
Conclude: compare misstatements with it, think about nature, and state the effect on the review.

Common mistakes in Materiality in a Review of Financial Statements

Stating that SRE 2400 prescribes a fixed percentage such as 5% of profit.
Students carry over rules of thumb from audit practice.
Fix: Say that the standard sets no percentage. The percentage and benchmark are professional judgment that you must justify.
Using materiality only at the evaluation stage.
Students link materiality only to adjusting misstatements.
Fix: Para 44 requires use in both designing procedures and evaluating misstatements. Mention both.
Basing materiality on one specific user, such as the lender or a promoter.
Students think about whoever is asking for the review.
Fix: Para A71 says to consider the common information needs of users as a group, not the effect on specific individual users.
Judging a misstatement only by its size.
Students compare the number with the amount and stop.
Fix: Materiality depends on size, nature or both. A small item can be material because of its nature.
Copying audit terms such as performance materiality into a review answer without support.
SA 320 is better known and students mix the two standards.
Fix: Anchor the answer on the requirement of SRE 2400 (determine for the financial statements as a whole and apply it). Make audit comparisons only when the question asks for them.

Worked examples

Example 1

Case: You are the practitioner for a review of the half-yearly financial statements of Kavya Foods Ltd. Profit before tax for the period is ₹2,40,00,000 and has been stable. The lender and the shareholders use the statements to judge profitability. Your firm considers 5% of profit before tax a reasonable percentage for such entities. Determine materiality and explain how you will use it.

Show the solution

Requirement: para 44 of SRE 2400 (Revised) requires materiality for the financial statements as a whole. You then use it in designing procedures and evaluating misstatements.
Basis: under para A71, you judge based on the common information needs of users as a group. Here, lenders and shareholders both focus on profit, so profit before tax is a suitable benchmark. Profit is stable, so it is reliable.
Computation: 5% × ₹2,40,00,000 = ₹12,00,000.
Application to design: focus inquiry and analytical procedures on areas where an error of about ₹12,00,000 or more could arise, such as revenue and inventory.
Application to evaluation: compare identified misstatements, individually and in total, with ₹12,00,000, and also consider their nature.
Note: the 5% is a judgment used for illustration. The standard does not prescribe it.

Answer: Materiality for the financial statements as a whole is ₹12,00,000 (5% of profit before tax of ₹2,40,00,000). It is used to design procedures and to evaluate misstatements.

Example 2

Case: Materiality for a review of Meera Traders Pvt Ltd is set at ₹10,00,000. During the review, you identify these uncorrected misstatements: inventory overstated by ₹3,50,000, accrued expenses understated by ₹4,00,000, and revenue cut-off error overstating sales by ₹2,25,000. Management declines to correct them. All three reduce expenses or increase profit. Evaluate.

Show the solution

Requirement: para 44 requires you to apply materiality when evaluating the effect of identified misstatements.
Aggregate: ₹3,50,000 + ₹4,00,000 + ₹2,25,000 = ₹9,75,000.
Compare: ₹9,75,000 is below ₹10,00,000 by only ₹25,000, so the margin is very thin.
Direction: all three misstatements overstate profit, so they build in the same direction and do not offset each other.
Nature: the cut-off and expense items point to a possible weakness in period-end controls. Para A71 says nature as well as size matters.
Response: ask management to correct, and consider whether other unidentified misstatements could take the total past ₹10,00,000. Do more inquiry and analytical work on cut-off and accruals if needed.

Answer: Uncorrected misstatements total ₹9,75,000, just below materiality of ₹10,00,000. Because the margin is thin, all items overstate profit and the nature points to cut-off and accrual weaknesses, you should not treat them as safely immaterial. Press for correction and extend procedures; if left uncorrected and material, consider the effect on your conclusion.

Exam tips

Quote para 44 for the requirement and para A71 for the basis. Examiners reward the paragraph logic.
Always mention both uses: designing procedures and evaluating misstatements.
In calculation cases, show benchmark, percentage, amount, and then the comparison with misstatements. State that the percentage is judgment.
Use the phrase common information needs of users as a group whenever a question mentions a specific user.
If misstatements total just below materiality, discuss nature and the risk of undetected misstatements, not only the arithmetic.

Practice questions from Review of Financial Information

Materiality in a Review of Financial Statements: frequently asked questions

What does SRE 2400 paragraph 44 say about materiality?

It requires the practitioner to determine materiality for the financial statements as a whole. The practitioner must apply it in designing procedures and in evaluating the effect of identified misstatements.

What is the basis of materiality in paragraph A71?

It is professional judgment in light of surrounding circumstances. It is based on the common financial information needs of users as a group, and size, nature or both can make a misstatement material. The effect on specific individual users is not considered.

Does SRE 2400 give a percentage for materiality?

No. The standard does not prescribe a benchmark or percentage. You choose them by judgment and document why they suit the entity.

How is materiality in a review different from materiality in an audit?

The definition is user-focused in both. The main difference is in the engagement: a review gives limited assurance using mainly inquiry and analytical procedures. Do not assume audit steps such as performance materiality apply to a review unless the question asks for a comparison.