Revising materiality as the audit progresses

• Identify events that require revising materiality under AU-C 320.12.
• Apply AU-C 320.13 when revised materiality is lower.
• Reassess materiality against actual results under AU-C 450.10.

Planning numbers are estimates

AU-C 320.A16 notes you may determine planning materiality before the statements are prepared, using annualized interim results or prior years. If actual results look substantially different, such as after a significant merger or a change in the economy or industry, you may need to revise.

AU-C 320.12 requires you to revise materiality, including particular-item levels, when you become aware of information during the audit that would have caused you to determine a different amount initially. AU-C 320.A17 lists sources:

• a change in circumstances during the audit, such as a decision to dispose of a major part of the business;
• new information; or
• a change in your understanding of the entity from performing further procedures.

When it goes down

AU-C 320.13 requires that, if a lower materiality is appropriate, you determine whether to revise performance materiality and whether the nature, timing and extent of further procedures remain appropriate.

Practical effect: work already done to a higher precision may not be enough. Samples sized on a larger tolerable misstatement may need to be extended. Accounts scoped out because they were below the old performance materiality may now need procedures. Substantive analytics with thresholds based on the old number need their differences re-examined.

When it goes up

If actual results are higher than planned, you may revise upward. Work already performed at the lower amount remains valid; you have more precision than needed. Revise upward with care: AU-C 320.12 requires revision when you would have determined a different amount, and documentation should show the change is driven by information, not by a wish to pass misstatements.

Reassessment before evaluation

AU-C 450.10 requires that, before evaluating the effect of uncorrected misstatements, you reassess materiality to confirm it remains appropriate in the context of actual financial results. AU-C 450.A19 explains why: planning materiality is often based on estimates. AU-C 450.A20 says that if the reassessment gives a lower amount, performance materiality and the nature, timing and extent of procedures are reconsidered.

This step is required at completion. A completion memo that evaluates uncorrected misstatements against planning materiality based on a budget that missed by 40% fails AU-C 450.10.

Documentation

AU-C 320.14(d) requires documentation of any revision of materiality, particular-item levels and performance materiality as the audit progressed, with the factors considered. Record:

1. The original amounts and basis.
2. The new information.
3. The revised amounts and basis.
4. The effect on procedures already performed and any additional work.

A workflow that avoids surprises

• Recompute materiality on final draft numbers before closing fieldwork, not after the report draft.
• Flag any benchmark change of more than a set percentage in the firm's methodology for manager review.
• Keep sample design worksheets linked to the materiality figure so extensions are easy to calculate.

The materiality calculator lets you rerun the numbers on final results, and the performance materiality lesson covers the downstream effects.

Common findings

• No reassessment against actual results.
• Materiality lowered at completion with no reconsideration of procedures.
• Upward revisions without documented reasons, made after misstatements were found.

Budget versus actual