Materiality is the size of error, or omission, that the auditor judges could reasonably influence the decisions of people who use the accounts. Under ISA (UK) 320 the auditor sets an overall materiality figure for the accounts as a whole, then a lower performance materiality figure that drives how much testing is done. Lower materiality means more work, larger samples and closer scrutiny of smaller errors.

What does materiality mean in an audit?

Paragraph 2 of ISA (UK) 320 explains that misstatements, including omissions, are material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. Judgements are made in the light of the surrounding circumstances and can turn on the size of an error, its nature, or both. The auditor considers the common information needs of users as a group, not the needs of one particular shareholder or lender.

The standard lets the auditor assume that users have a reasonable knowledge of business and accounting, understand that accounts are prepared and audited to levels of materiality, recognise that estimates carry uncertainty, and make reasonable decisions on the information given (paragraph 4). Materiality is therefore not a promise that the accounts are accurate to the pound. It is the threshold at which an error would change the picture for a reasonable reader, which is what an auditor’s true and fair view opinion is built around.

How do auditors set overall materiality?

Paragraph 10 requires the auditor to determine materiality for the financial statements as a whole when establishing the overall audit strategy. Paragraph A4 says a percentage is often applied to a chosen benchmark as a starting point. The choice of benchmark depends on what users focus on, the nature and life cycle of the business, how it is financed and how volatile the figure is.

  • Profit before tax from continuing operations is often used for profit making entities (paragraph A5).
  • Gross profit or total revenue may be more suitable where profit is volatile (paragraph A5).
  • Total equity or net asset value may suit an entity whose users look mainly at its assets, for example one financed by debt (paragraphs A4 and A5).
  • Profit before remuneration and tax may be more relevant for an owner managed business where the owner takes much of the profit as pay, leaving profit before tax consistently nominal (paragraph A9).

Paragraph A8 gives examples rather than rules: five percent of profit before tax from continuing operations for a profit oriented manufacturing entity, or one percent of total revenue or total expenses for a not for profit entity, with higher or lower percentages possible. Where profit has an exceptional rise or fall, paragraph A6 allows a normalised profit based on past results. Paragraph A7 confirms that materiality relates to the period being reported on, so a short or long first period uses that period’s figures.

What is performance materiality and why is it lower?

Planning only to find individually material errors ignores the risk that lots of small errors add up to a material one, and leaves no room for errors that are never found. Paragraph 9 of ISA (UK) 320 defines performance materiality as an amount set below overall materiality to reduce “aggregation risk”, the probability that uncorrected and undetected misstatements together exceed overall materiality, to an appropriately low level. Paragraph 11 makes setting it a requirement.

Paragraph A13 stresses that performance materiality is not a simple mechanical calculation. It reflects the auditor’s understanding of the business and the errors found in previous audits. A client with a history of adjustments will usually get a lower figure than one whose records have been clean for years. When the auditor samples, ISA (UK) 530 paragraph A3 describes tolerable misstatement as the application of performance materiality to that particular sampling procedure, at the same amount or lower.

When is a lower materiality used for particular items?

Some balances and disclosures attract attention out of proportion to their size. Paragraph 10 requires a separate, lower materiality level for any class of transactions, account balance or disclosure where smaller misstatements could reasonably be expected to influence users. Paragraph A11 lists examples, including related party transactions, the remuneration of management and those charged with governance, and key industry disclosures such as research and development costs for a pharmaceutical company. In a private company this often means directors’ remuneration disclosures and related party disclosures are tested to a much tighter threshold than the rest of the accounts.

How does materiality shape the work done?

Paragraph 6 of ISA (UK) 320 says planning judgements about materiality provide a basis for the nature, timing and extent of risk assessment procedures, for identifying and assessing the risks of material misstatement, and for designing further audit procedures. In practice:

  • balances below performance materiality with low assessed risk may receive little detailed testing, while larger balances are tested in depth;
  • a lower tolerable misstatement needs a larger sample, as shown in Appendix 3 of ISA (UK) 530;
  • ISA (UK) 330 paragraph 7(b) requires more persuasive evidence the higher the assessed risk, so materiality and risk work together.

Materiality is not a cut off below which errors can be ignored. Paragraph 6 states that some misstatements may be judged material because of their circumstances even though they are below materiality. The risk assessment side of this is covered in our page on audit risk assessment under ISA (UK) 315.

What happens to errors found during the audit?

ISA (UK) 450 deals with evaluating misstatements. Paragraph 5 requires the auditor to accumulate every misstatement found other than those that are clearly trivial. Paragraph A2 warns that “clearly trivial” is not another way of saying “not material”: trivial errors are of a wholly different, smaller order of magnitude, and if there is any doubt the item is treated as not clearly trivial. The auditor must document the clearly trivial amount (paragraph 15).

Accumulated misstatements must be communicated to management, who are asked to correct them (paragraph 8). If management refuses, the auditor must understand why. Paragraph 10 requires the auditor to reassess materiality against the actual results before evaluating uncorrected misstatements, and paragraph 11 requires consideration of both size and nature. Paragraph A21 lists circumstances that can make a small error material, such as one that affects compliance with loan covenants, masks a change in earnings or other trends, affects key ratios, or increases management bonuses.

Uncorrected misstatements are reported to those charged with governance (paragraph 12), and the auditor must obtain a written representation that management believe their effect is immaterial, with a summary of the items attached (paragraph 14). If uncorrected errors are material, the result is a modified opinion, explained in our guide to types of audit opinion.

How might this work for a small company?

Illustration only. A family company has revenue of £4 million. The director takes a salary of £300,000 and profit before tax is £40,000, as it is most years. Five percent of £40,000 would give materiality of £2,000, which would force the auditor to chase very small differences that no reader would care about. Following paragraph A9, the auditor instead uses profit before remuneration and tax of £340,000 and, applying five percent, sets overall materiality at £17,000.

The auditor then judges that last year’s audit found several cut off errors and sets performance materiality at £12,000, with a clearly trivial threshold of £850. Because directors’ remuneration and related party transactions are of particular interest to the shareholders, the auditor sets a much lower specific materiality for those disclosures. During fieldwork a missed accrual of £600 is not accumulated, but a £3,000 understatement of stock is recorded, reported to the director and corrected before the accounts are signed.

Can materiality change during the audit?

Yes. Paragraph 12 of ISA (UK) 320 requires the auditor to revise materiality if information comes to light that would have produced a different figure at the outset. Paragraph A14 gives the example of actual results turning out substantially different from the forecasts used at planning. If materiality falls, paragraph 13 requires the auditor to consider revising performance materiality and whether the planned procedures are still enough. ISA (UK) 450 paragraph 6 also requires the plan to be revisited when accumulated misstatements approach materiality.

Paragraph 14 of ISA (UK) 320 requires overall materiality, any specific levels, performance materiality and any revisions to be documented together with the factors considered.

What mistakes do companies and preparers make?

  • Assuming that an error below the auditor’s materiality figure never needs correcting. The auditor will still ask for every accumulated misstatement to be corrected.
  • Treating the “five percent of profit” example as a fixed rule. The benchmark and percentage are professional judgements and differ between firms and clients.
  • Producing draft accounts very late or with large unexplained movements, which can force the auditor to lower materiality and extend testing.
  • Overlooking disclosures. Errors in directors’ pay or related party notes can be material at small amounts.
  • Signing the written representation on uncorrected misstatements without reading the attached schedule.

For the wider audit process, see our page on how a statutory audit works.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.