Materiality is the size of error that could change a reader's decisions about the financial statements. Auditors set three levels: overall materiality for the statements as a whole, a lower performance materiality that leaves room for undetected errors, and a very small "clearly trivial" level below which errors are not tracked. SA 320 covers the first two; the trivial level is generally associated with SA 450.
Last reviewed: 17 October 2026. Facts checked. We ran web searches on SA 320 and materiality thresholds. Search results pointed to the ICAI knowledge-base copy of SA 320, but that host returned a certificate error and we could not open it, so we relied on search summaries and a Taxguru summary of the standard. We did not open SA 450 or the ISA 320 text. No fixed percentages are given in this post: the sources we saw say SA 320 leaves the percentage to professional judgement.
What materiality means
An error is material if it could reasonably be expected to influence the economic decisions users make from the statements. That test is about users, not about the auditor's convenience. It has two sides: size (how big) and nature (what kind). A small amount can be material if it hides a breach of a loan covenant, turns a profit into a loss, or involves a related party.
Materiality is a judgement. The standard does not give a formula.
The three levels
| Level | What it is | Why it exists |
|---|---|---|
| Overall materiality | One amount for the financial statements as a whole | Sets the scale of the audit and the point at which errors matter |
| Performance materiality | One or more amounts set below overall materiality | Lowers the chance that small errors, added up or undetected, exceed overall materiality |
| Clearly trivial | A very small amount | Errors below it need not be accumulated for evaluation |
The search summaries of SA 320 say performance materiality exists to reduce, to an acceptably low level, the probability that uncorrected and undetected misstatements together exceed overall materiality. A secondary source ties the clearly trivial concept to SA 450; we did not open SA 450 to confirm.
There can also be lower, specific materiality for certain items. Related party transactions and directors' remuneration are classic examples, because users care about them more than their size suggests.
How auditors choose overall materiality
The common approach has two steps.
- Pick a benchmark that users of these statements focus on.
- Apply a percentage chosen by judgement.
| Entity type | Benchmarks often considered |
|---|---|
| Profit-making, stable | Profit before tax |
| Profit volatile or near zero | Revenue or gross profit |
| Asset-heavy or debt-funded | Total assets or net assets |
| Not-for-profit | Total expenditure or total income |
Taxguru's summary of SA 320 says the standard does not specify the percentage and leaves it to the auditor's judgement. We have deliberately not quoted any percentage. Firm methodologies set their own ranges. Whichever one your firm uses, document the benchmark, the percentage and the reasons.
Try a quick calculation with the materiality calculator once you have chosen your own benchmark and percentage.
Setting performance materiality
Performance materiality is set lower than overall materiality. How much lower depends on risk. A higher risk of misstatement, errors found in earlier years, weak controls or a first-year audit all point to a bigger gap.
The point is to leave a margin. If every account were tested to overall materiality, a few undetected errors in different accounts could add up to a material total. The lower figure builds in a safety cushion.
Worked example: how the levels drive the audit
Say a company's benchmark is profit before tax, and the firm has set an overall figure using its own policy. The auditor then:
- Records overall materiality and the reasons for the benchmark and percentage.
- Sets performance materiality lower, and explains why, for example "first year, weak controls over inventory".
- Uses performance materiality to decide sample sizes and thresholds for testing each account.
- During the audit, lists all errors above the clearly trivial level on a summary of unadjusted differences.
- At the end, adds up the uncorrected errors and compares them with overall materiality, and also thinks about whether any error is material by nature.
If the total is close to overall materiality, the auditor asks management to correct errors or does more work.
When to revise materiality
Materiality set at planning is not final. The auditor revises it if information emerges that would have led to a different figure, for example actual results turn out very different from the forecast used at planning, or the entity sells a division. If materiality goes down, the auditor must reconsider performance materiality and whether planned procedures are still enough. The search summary of SA 320 lists revision and documentation as part of the standard.
What to document
- The benchmark and percentage chosen, and why.
- Overall materiality, performance materiality and any specific levels.
- The clearly trivial level.
- Any revision as the audit progressed.
See audit documentation under SA 230 for how to record this. For how materiality links to sample sizes, see the audit sampling calculator, and for key audit matters, see KAMs under SA 701.
Common mistakes
- Using the same percentage every year without thought. Reasons change.
- Forgetting qualitative factors. A small error can still matter.
- Not revising when results change.
- Treating performance materiality as optional. It drives testing, so it must be set and documented.
Frequently Asked Questions
What is materiality in an audit?
It is the size or nature of an error that could change decisions made by users of the financial statements.
What is the difference between overall and performance materiality?
Overall materiality is for the statements as a whole. Performance materiality is a lower amount used when testing, to leave room for undetected errors.
What does clearly trivial mean?
It is a level so small that errors below it are not tracked for later evaluation. It is not the same as immaterial, which is larger.
Does SA 320 give a percentage?
The sources we saw say no. The benchmark and percentage are left to the auditor's professional judgement, so each firm sets its own method.
Can materiality change during an audit?
Yes. If new information would have led to a different figure at planning, the auditor revises it and reconsiders the planned procedures.
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