In this guide · 9 sections
- SA 320 requires overall materiality for the financial statements as a whole and performance materiality, set when you plan the audit; overall materiality is revised if facts change.
- Overall materiality = a benchmark × a percentage. SA 320 gives examples (5% of profit before tax for a manufacturing entity; 1% of revenue or expenses for a not-for-profit entity) — the choice is your judgement, and it must be documented.
- Where profit is nominal because owners take it as remuneration — common in partnership firms — profit before that remuneration and tax can be the more relevant benchmark.
- Performance materiality is lower than overall materiality; SA 320 sets no percentage. Firms commonly use 50%–75%, lower where risk is higher.
- SA 450 asks you to accumulate every misstatement except those that are clearly trivial, ask management to correct them, and evaluate what is left uncorrected.
Try SignReady: Set materiality from the TB — benchmarks and percentages shown, rationale recorded.
Start freeEvery audit file needs a materiality working, yet in many small-firm files it is a single number with no reasoning, set after the work is done. SA 320 expects more: materiality is a planning decision that shapes what you test and how much, and it has to be documented. This guide sets out what SA 320 and SA 450 require and a practical way to work out the three figures for a small company or partnership audit.
The three figures
| Figure | What it is | Where it comes from |
|---|---|---|
| Overall materiality | Misstatements are material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users; this is the amount you set for the financial statements as a whole | SA 320 (paras 2 and 10) — determined when establishing the overall audit strategy |
| Performance materiality | An amount (or amounts) set lower than overall materiality, to reduce to an appropriately low level the probability that uncorrected and undetected misstatements together exceed overall materiality | SA 320 — used to decide the nature, timing and extent of further audit procedures |
| Clearly trivial threshold | Misstatements below it are clearly inconsequential, individually or in aggregate, and need not be accumulated | SA 450 — "clearly trivial" is not another expression for "not material" |
SA 320 also allows a lower materiality for particular classes of transactions, balances or disclosures where misstatements of smaller amounts could influence users — for example related party transactions or directors' remuneration.
Choosing the benchmark
SA 320 says that determining materiality involves professional judgement and that a percentage is often applied to a chosen benchmark as a starting point. Its application material lists the factors that affect the choice: the elements of the financial statements, the items users tend to focus on, the nature of the entity and its industry, its ownership and financing, and the volatility of the benchmark. Typical benchmarks and the percentages often used in practice:
| Benchmark | Often used when | Percentage often used |
|---|---|---|
| Profit before tax (continuing operations) | A profit-oriented entity with stable profits | 5% (SA 320's own example for a manufacturing entity) |
| Revenue / total expenses | Profit is volatile, near nil or a loss; not-for-profit entities | 0.5%–1% (SA 320's example: 1% for a not-for-profit entity) |
| Gross profit | Profit before tax is volatile but trading margins are stable | 2%–5% |
| Total assets | Asset-holding or investment entities | 1%–2% |
| Net worth (equity) | Entities where users focus on the net assets | 2%–5% |
The percentages in the last column are practice ranges, not requirements. Higher or lower percentages may be appropriate; what matters is that the choice is reasoned and recorded.
Small companies and partnership firms
SA 320's application material addresses owner-managed entities directly: where profit before tax is consistently nominal because the owners take much of it as remuneration, a benchmark such as profit before remuneration and tax may be more relevant. In a partnership firm, profit after partners' remuneration and interest is often small by design — so materiality on that figure would be unreasonably low. SA 320 refers to remuneration; adding back interest on partners' capital follows the same logic. Profit before partners' remuneration, interest on capital and tax is then usually the better starting point — record why.
Other points for small audits:
- Use the right year's figures. At planning you may only have a provisional TB. Base materiality on it, adjusted for known entries still to be passed, and revise it if the final figures differ significantly.
- Normalise unusual items. A one-off profit on sale of land or a large write-off distorts profit; consider removing it, or use a more stable benchmark.
- Losses. When the entity makes a loss, use revenue or expenses rather than the absolute loss, unless the loss is stable and users focus on it.
SignReady shows each benchmark from the trial balance — profit before tax, revenue, total assets, net worth — with a typical percentage. You choose, record the rationale, and the same limits drive the CY vs PY review.
Performance materiality and the clearly trivial threshold
SA 320 requires performance materiality but sets no percentage. It depends on your understanding of the entity, the misstatements found in earlier audits and your assessment of risk. In practice:
- 50%–75% of overall materiality is common; use the lower end for a first-year engagement, weak controls, many adjustments last year, or significant risks; the higher end for a stable, well-run client with few past misstatements.
- Clearly trivial is often set at about 3%–5% of overall materiality. SA 450 leaves the amount to judgement; where there is any uncertainty whether an item is clearly trivial, it is not.
A worked example
A private company: revenue from operations ₹12 crore, profit before tax ₹60 lakh, steady over three years, no special risks identified.
| Step | Working | Amount |
|---|---|---|
| Benchmark | Profit before tax — stable and the focus of the owners and the bank | ₹60,00,000 |
| Overall materiality | 5% of ₹60 lakh | ₹3,00,000 |
| Performance materiality | 75% of overall — stable client, few adjustments last year | ₹2,25,000 |
| Clearly trivial | 5% of overall | ₹15,000 |
The same business run as a partnership firm: profit before partners' remuneration, interest and tax is ₹60 lakh, of which ₹45 lakh goes to the partners as remuneration and interest on capital, leaving ₹15 lakh before tax. 5% of ₹15 lakh would give materiality of only ₹75,000 — far too low for a ₹12 crore business. Using profit before partners' remuneration, interest and tax (₹60 lakh) gives ₹3,00,000, consistent with the company above.
Using materiality during the audit
- Scoping. Balances well above performance materiality need work on their own; small balances can often be covered by analytical procedures. It also guides sample sizes.
- Analytical review. SA 520 (para 5(d)) leaves the difference you accept without further investigation to judgement, influenced by materiality; many firms start from performance materiality.
- Revising it. SA 320 requires you to revise materiality if you become aware of information that would have caused a different amount initially — for example, audit adjustments that halve the profit. If it comes down, decide whether performance materiality and the further audit procedures need to change too.
- Misstatements (SA 450). Accumulate everything above clearly trivial, communicate it to management on time and ask them to correct it; if the total approaches materiality, revisit the audit strategy. For what remains uncorrected, re-assess materiality first, then decide whether the uncorrected misstatements are material individually or together; communicate them to those charged with governance and request correction; and request a written representation on whether management believes their effects are immaterial, individually and in aggregate, with a summary of them attached.
What to document
SA 320 requires the documentation to include overall materiality, any lower materiality for particular items, performance materiality, and any revision as the audit progresses — together with the factors considered in setting them. A short note covering the benchmark, why it was chosen, the percentage and why, and the risk factors behind performance materiality meets this, and makes the partner's review quick. SA 450 adds the clearly trivial amount, the misstatements accumulated and whether they were corrected, and your conclusion on those left uncorrected, with its basis.
Try SignReady: The materiality you set drives the CY vs PY review and review points automatically.
Start freeFrequently asked questions
Does SA 320 prescribe the percentages for materiality?
No. SA 320 says a percentage is often applied to a benchmark and gives examples — 5% of profit before tax for a manufacturing entity and 1% of total revenue or expenses for a not-for-profit entity — but the benchmark and percentage are matters of professional judgement.
What percentage should performance materiality be?
SA 320 does not set one. Firms commonly use 50%–75% of overall materiality, choosing a lower percentage where the risk of misstatement is higher, for example on a first-year engagement or where many adjustments were needed last year.
What benchmark should I use for a partnership firm?
SA 320 says that for owner-managed entities, profit before remuneration and tax may be more relevant. For a firm, adding back interest on partners' capital follows the same logic. Record the reasoning.
Can materiality change during the audit?
Yes. SA 320 requires you to revise materiality if you become aware of information during the audit that would have caused you to set a different amount initially. Where it is lowered, you decide whether performance materiality and the nature, timing and extent of further procedures remain appropriate.
What is "clearly trivial"?
Under SA 450, misstatements that are clearly trivial are of a wholly different, smaller order of magnitude than materiality and clearly inconsequential, individually or in aggregate. All other misstatements are accumulated. If there is uncertainty whether an item is clearly trivial, it is not.
Sources
- ICAI — SA 320 Materiality in Planning and Performing an Audit
- ICAI — SA 450 Evaluation of Misstatements Identified during the Audit
- ICAI — SA 520 Analytical Procedures
- ICAI — SA 230 Audit Documentation
In SignReady, the materiality you set flags the movements to look at, the ledgers to check on mapping and the review points — and prints in the Analytical Review Note. First 3 finalisations free.
Version history: 4 Oct 2026 — first published.
