Note on Materiality
(Following draft may be used as an example)
Purpose:
This Note documents the determination of materiality, performance materiality and clearly trivial threshold for the statutory audit of {{client_name}} for the year ended {{period_end}}, in compliance with SA 320, 'Materiality in Planning and Performing an Audit'.
1. Concept
Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. Judgements about materiality are made in light of surrounding circumstances and are affected by the size and / or nature of a misstatement.
2. Materiality for the Financial Statements as a Whole (Overall Materiality)
Overall materiality has been determined using a benchmark and a percentage as below. The basis of materiality is documented separately in 2.9 — Note on Basis of Materiality.
Benchmark used:
- Profit before tax — for profit-oriented entities operating at normal profitability levels (typical range: 5% to 10%).
- Revenue from operations — for entities with volatile or near-break-even profits (typical range: 0.5% to 1%).
- Total assets / Total equity — for asset-heavy entities (NBFCs, holding companies) or where profit is loss-making or near-zero (typical range: 0.5% to 1%).
- EBITDA — for entities where investors / lenders use EBITDA as the primary metric (typical range: 3% to 5%).
3. Performance Materiality
Performance materiality is set at a level lower than overall materiality, to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. Typical range: 50% to 75% of overall materiality. The percentage used reflects management's history of misstatements, the auditor's understanding of the entity, and the result of any previous audit.
4. Specific Materiality (for particular classes of transactions, balances or disclosures)
Lower materiality may be appropriate for items where misstatements of lesser amounts than overall materiality could reasonably be expected to influence the economic decisions of users — for example, related-party transactions, directors' remuneration, sensitive law-specific disclosures (Section 188, Section 135 CSR), or specific regulatory ratios.
5. Clearly Trivial Threshold
Misstatements that are clearly trivial — i.e., individually and in aggregate clearly inconsequential, whether by size or nature — are not accumulated for management's consideration. Threshold set at typically 5% of overall materiality.
Computation for {{client_name}} for the year ended {{period_end}}
| Step | Particulars | Amount (₹) | Basis / Rationale |
|---|
| 1 | Benchmark — selected | | e.g. Profit before tax / Revenue from operations / Total assets |
| 2 | Benchmark — value as per draft financials | | |
| 3 | Percentage applied to benchmark | | % |
| 4 | Overall materiality (1) × (3) | | |
| 5 | Performance materiality (typically 50–75% of overall materiality) | | % applied |
| 6 | Clearly trivial threshold (typically 5% of overall materiality) | | |
| 7 | Specific materiality for related-party transactions | | Lower of overall materiality and any qualitative threshold |
| 8 | Specific materiality for directors' remuneration / KMP compensation | | |
6. Revision During the Audit
Materiality and performance materiality will be revised during the audit if information comes to the auditor's attention that would have caused them to determine a different amount initially (SA 320 paragraph 12). Examples: a change in circumstance leading to a different benchmark, a change in the auditor's understanding of the entity, or a significant change in results between planning and completion. Any revision and its reasons will be documented and the affected procedures updated accordingly.
7. Communication
Materiality and performance materiality, together with the basis of determination, will be discussed with the engagement quality control reviewer at planning and will be reported to Those Charged With Governance (SA 260) where required.
Approved by:
- Engagement Partner: ____________________________
- Engagement Manager: ____________________________
- Date: ____________________________
