Determining and using materiality in a review under SSARS No. 25

In this lesson you will

Apply the AR-C 90.19 requirement to determine materiality for the financial statements as a whole
Select and document a benchmark and percentage under firm policy
Revise materiality when AR-C 90.20 is triggered
Use materiality to set analytical thresholds and evaluate uncorrected misstatements

The requirement

Before SSARS No. 25, AR-C 90 referred to material misstatement without requiring an explicit materiality determination. SSARS No. 25 added two requirements, effective for reviews of periods ending on or after December 15, 2021:

AR-C 90.19: determine materiality for the financial statements as a whole, and apply it in designing procedures and evaluating their results.
AR-C 90.20: revise materiality if you become aware of information during the review that would have caused you to determine a different amount initially.

The SSARS No. 25 application material makes a point that surprises staff: your judgment about what is material to the financial statements as a whole is the same regardless of the level of assurance. Materiality in a review is not "audit materiality times two." What differs is the work you do, not the threshold for what matters to users.

The frame of reference

The application material describes materiality as most frameworks do: misstatements, including omissions, are material if there is a substantial likelihood that, individually or in aggregate, they would influence the judgment of a reasonable user; judgments consider size, nature, or both; and they are made for users as a group, not specific individuals. It also lets you assume reasonable users have reasonable business knowledge, understand that statements are reviewed to levels of materiality, and recognize estimation uncertainty.

What AR-C 90 does not require

AR-C 90 does not require performance materiality, a clearly trivial threshold, or a specific benchmark. Those are audit concepts from AU-C 320 and AU-C 450. Many firms still set a posting threshold for review adjustments to control the summary of uncorrected misstatements; if you do, document it as firm practice, not as an AR-C requirement. The SSARS 25 and 26 standard page summarizes the change, and the AICPA publishes a practical application paper on review materiality.

Setting it in practice

Identify the users (lender, owners, surety) and what they watch: covenants, equity, earnings, liquidity.
Pick a benchmark that reflects those needs: pretax income for a stable profitable entity, revenue or total expenses for a thin-margin or nonprofit entity, total assets or equity for an asset-heavy holding entity.
Apply a percentage from firm policy and document the reasoning.
Consider qualitative factors: covenant ratios close to the trip point, related party transactions, a planned sale.

The materiality calculator helps compare benchmarks.

Using it

Designing procedures. AR-C 90.25 requires analytical procedures and inquiries that address all material items, including disclosures, and areas of increased risk. Materiality decides which accounts are "material items."
Analytical thresholds. AR-C 90 requires you to determine the difference from expectation that is acceptable without further investigation. Set it below materiality.
Evaluating results. AR-C 90 requires you to consider uncorrected misstatements from this review and the prior year's review on the statements as a whole. The representation letter must include management's belief that their effects are immaterial, with a summary attached.

Revising

The application material gives the triggers: a change in circumstances during the review (such as a decision to dispose of a major part of the business) or new information, such as actual results that differ substantially from the amounts used initially. Revise, then revisit procedures already designed with the old figure.

Common findings

No materiality documented at all in reviews of periods after the effective date.
Materiality set on preliminary numbers and never updated when final results came in far lower.
Analytical thresholds above materiality, so no fluctuation could ever trigger an inquiry.

Worked example

Setting and revising materiality at Riverside Home Health, LLC

Riverside Home Health, LLC is a calendar-year review client. Its bank covenants test debt service coverage. Firm policy allows 5% of pretax income for stable profitable entities, or 0.5% to 1% of revenue when income is volatile.

Planning (using November 2026 projections): pretax income $1,150,000; revenue $9,600,000. Income has been stable for three years. Materiality = $1,150,000 x 5% = $57,500. The firm sets the analytical investigation threshold at 50% of materiality = $28,750.

Fieldwork: the final trial balance shows pretax income of $620,000 after a large Medicare recoupment recorded in December. That is 46% lower than planned ($530,000 / $1,150,000). Under AR-C 90.20 you revise.

Income is no longer stable, so you test revenue: final revenue $9,350,000 x 0.5% = $46,750. That amount is 7.5% of final pretax income ($46,750 / $620,000), and the lender's coverage covenant runs off earnings, so you judge it too high. You set materiality at 5% of final pretax income, $620,000 x 5% = $31,000, and document the qualitative reason. New threshold = $15,500.

Effect: three expense lines whose year-over-year differences ($18,200, $21,900 and $26,400) fell under the old $28,750 threshold now exceed $15,500 and require inquiry. The aggregate uncorrected misstatements of $12,300 remain below $31,000 and are listed in the representation letter summary.

Self-check

Answer each question before you open the answer.

Is materiality in a review set higher than in an audit of the same entity because the assurance is lower?
Show answer
No. The SSARS No. 25 application material says the judgment about what is material to the statements as a whole is the same regardless of the level of assurance. The procedures differ, not the materiality.
Does AR-C 90 require you to set performance materiality?
Show answer
No. AR-C 90.19 requires materiality for the financial statements as a whole only. Performance materiality and a clearly trivial threshold come from the auditing standards; a firm may use similar thresholds as policy.
Final net income is half of the projected amount you used at planning. What does AR-C 90 require?
Show answer
AR-C 90.20 requires you to revise materiality when you learn information that would have led to a different amount initially. You then reconsider procedures and thresholds designed using the original amount.
Where does materiality show up in the representation letter?
Show answer
The AR-C 90 representation letter requirements call for management to state whether it believes the effects of uncorrected misstatements are immaterial, individually and in aggregate, with a summary of the items included or attached.

Sources

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error