AUD, Auditing and Attestation

Sources for Materiality

Last reviewed 2026-09-14

The standards and authorities behind PocketCPA's AUD lessons on Materiality. The topic rests on AU-C 320.

About this topic

Not every error matters. Materiality is the auditor's answer to one question: how large does a mistake have to be before it would change a reader's mind about the company?

Stated technically, a misstatement is material if it could reasonably be expected to influence the economic decisions of users taken on the basis of the statements. That is what ties the audit to its users. The auditor applies materiality twice: when planning and performing the audit, and when evaluating the effect of identified misstatements.

Key points

• Materiality is the magnitude of a misstatement that would influence the decisions of a reasonable user.
• Performance materiality is set below overall materiality to reduce the risk that aggregate uncorrected misstatements exceed it.
• Materiality is a matter of professional judgment; no fixed percentage or formula is mandated.
• Materiality may be revised during the audit when new information changes the auditor's understanding.

What the lessons cover

1. Materiality for the statements as a whole
2. Performance materiality
3. Timing, revision, and the trivial threshold
4. Specific materiality: lower amounts for particular classes, balances, and disclosures
5. What the amounts drive: materiality, audit risk, and sample size
6. Qualitative factors: when a small number is material anyway
7. From planning to evaluation: accumulating and evaluating misstatements
8. Documenting the materiality judgments (AU-C 320.14)
9. AU-C 320 against PCAOB AS 2105: the terminology is not interchangeable

Authoritative references

Where these requirements sit in the literature. Each entry names the standard, then breaks it out paragraph by paragraph.

• AU-C 320.04 makes materiality a matter of professional judgment influenced by the auditor's perception of the financial information needs of users of the financial statements. It is the paragraph behind three separate answers:
  • no percentage is mandated.
  • management does not determine the auditor's materiality.
  • the applicable financial reporting framework does not determine it either.
• AU-C 320.09 defines performance materiality as the amount, or amounts, the auditor sets below two levels:
  • materiality for the financial statements as a whole.
  • where applicable, the materiality level or levels for particular classes of transactions, account balances, or disclosures.
  • The purpose is 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.
• AU-C 320.10 requires a separate, lower materiality level for particular classes of transactions, account balances, or disclosures where misstatements of lesser amounts than overall materiality could reasonably be expected to influence users' economic decisions. AU-C 320.A11 gives related-party and management-compensation disclosures as the examples. Read with AU-C 320.A6 through .A8, the same paragraph supports the ordinary mechanics of overall materiality as a judgmentally selected percentage of an appropriate benchmark.
• AU-C 320.11 is the requirement to determine performance materiality, and it names two uses:
  • assessing the risks of material misstatement.
  • determining the nature, timing, and extent of further audit procedures.
• AU-C 320.A7 and .A8 address benchmark volatility. When profit before tax from continuing operations is volatile or near breakeven, a more stable benchmark such as total revenues or gross profit is generally more appropriate, because a percentage of a near-zero profit produces an unreasonably small materiality.
• AU-C 320.A1 carries the inverse relationship between materiality and audit risk. A lower materiality means the auditor seeks to detect smaller misstatements, which generally increases the extent of the procedures needed to hold detection risk at an appropriately low level.
• AU-C 320.A12 explains why performance materiality sits below overall materiality. The gap exists to allow for two things:
  • undetected misstatements.
  • the possibility that individually immaterial misstatements aggregate to a material amount.
  • It also confirms that no mandatory percentage applies, so setting the two amounts equal is not a permissible judgment.
• AU-C 320.12 and .13 govern revision.
  • Paragraph .12 requires the auditor to revise overall materiality, and any materiality for particular classes, balances, or disclosures, upon becoming aware of information that would have caused a different amount to be determined initially. The standard illustration is actual results well below the interim or budgeted figures used at planning.
  • Paragraph .13 then requires the auditor to determine whether performance materiality should be revised and whether the nature, timing, and extent of further audit procedures remain appropriate.
• AU-C 320.14 is the documentation requirement, and its list is closed:
  • materiality for the financial statements as a whole.
  • any materiality for particular classes of transactions, account balances, or disclosures.
  • performance materiality.
  • any revisions of those amounts as the audit progressed.
  • the factors considered in determining them.
• AU-C 450 carries the accumulation requirement and the meaning of clearly trivial. All identified misstatements other than clearly trivial ones are accumulated, and clearly trivial is not another expression for not material. Three conditions describe the items:
  • they are of a wholly smaller order of magnitude than materiality.
  • they are inconsequential whether taken individually or in aggregate.
  • they are inconsequential whether judged by size, nature, or circumstances.
  • Any uncertainty about whether an item is clearly trivial resolves against triviality, so the item is accumulated. AU-C 450.05 is the paragraph the practice convention of a posting threshold set at a small fraction of overall materiality operationalizes.
• AS 2105.02, .03 and .06 carry the PCAOB framing.
  • Paragraph .02 quotes the Supreme Court's securities-law test, that a fact is material if there is a substantial likelihood it would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.
  • Paragraph .03 requires alertness to misstatements material due to quantitative or qualitative factors, and concedes that it ordinarily is not practical to design procedures to detect misstatements material based solely on qualitative factors.
  • Paragraph .06 requires materiality for the financial statements as a whole to be established as a specified amount, considering the company's earnings and other relevant factors, and its note permits an initial level built on estimated or preliminary amounts.
• AS 2105.07, .08, .09 and .10 carry the lower amounts.
  • Paragraph .07 requires separate materiality levels for accounts or disclosures where there is a substantial likelihood that misstatements of lesser amounts would influence the judgment of a reasonable investor, with a note pointing to qualitative factors such as conflicts of interest in related-party transactions.
  • Paragraph .08 requires tolerable misstatement at the account or disclosure level, less than financial-statement materiality and less than any account-level materiality.
  • Paragraph .09 requires the nature, cause if known, and amount of prior-period accumulated misstatements to be taken into account.
  • Paragraph .10 requires location- or business-unit-level tolerable misstatement on multi-location engagements.
• AS 2105.11 and .12 are the PCAOB reevaluation rules, and .04 with AS 2201.20 is the integrated-audit link. Reevaluation is required when changes in circumstances or additional information create a substantial likelihood that misstatements of amounts differing significantly from the initial levels would influence a reasonable investor's judgment, and two situations are named:
  • initial levels built on estimated or preliminary amounts that differ significantly from actual.
  • later events or changes in conditions likely to affect investors' perceptions.
  • If the reevaluation produces a lower amount, the auditor evaluates the effect on risk assessments and procedures and modifies the nature, timing, and extent as necessary.
  • AS 2201.20 requires the same materiality considerations in planning an ICFR audit as in planning the annual financial statement audit.
• AS 2810.10, .11 and .12 are the evaluation-side counterparts.
  • Paragraph .10 requires accumulation of everything other than clearly trivial, and carries the definitional note.
  • Paragraph .11 makes a designated posting threshold permissive and requires it set so nothing below it could be material individually or in combination, considering the possibility of undetected misstatement.
  • Paragraph .12 requires the accumulation to be the auditor's best estimate of total misstatement in the accounts and disclosures tested, including estimate differences and projected misstatements from audit sampling.
• AS 2810.13, .14, .17 and .18 finish the evaluation.
  • Paragraph .13 measures an estimate misstatement to a reasonable estimate, and to the closest reasonable estimate when the recorded amount falls outside a supported range, with a note that a reasonable estimate determined in conformity with the framework ordinarily is not a misstatement.
  • Paragraph .14 requires the strategy and plan to be reconsidered when accumulated misstatements approach the planning materiality.
  • Paragraph .17, with Appendix B at AS 2810.B2, requires uncorrected misstatements to be evaluated individually and in combination, against the specific accounts and disclosures and the statements as a whole, on quantitative and qualitative factors. Its notes carry the illegal-payment and intentional-misstatement examples and the instruction to use a lower reevaluated materiality.
  • Paragraph .18 pulls in prior-year uncorrected misstatements and current-year misstatements relating to prior years.
  • AS 2810.A3 defines uncorrected misstatements as misstatements other than clearly trivial ones that management has not corrected.
• AS 1101.04, .10 and .11 supply the risk mechanics behind the extent of work:
  • Paragraph .04 makes audit risk a function of the risk of material misstatement and detection risk.
  • Paragraph .10 provides that the higher the risk of material misstatement, the lower the level of detection risk needs to be.
  • Paragraph .11 provides that as the appropriate level of detection risk decreases, the evidence the auditor should obtain from substantive procedures increases.
• AS 2315.18, .18A, .23, .26 and .27 connect the amount to the sample.
  • Paragraph .18 defines tolerable misstatement as the maximum monetary misstatement for an account balance or class of transactions that may exist, in combination with other misstatements, without causing the financial statements to be materially misstated.
  • Paragraph .18A requires a separate tolerable misstatement for the population to be sampled when it is only a portion of the account, ordinarily less than the account-level amount.
  • Paragraph .23 makes sample size a function of tolerable misstatement for the population, the allowable risk of incorrect acceptance, and the population's characteristics.
  • Paragraph .26 requires the sample results to be projected and the total projected misstatement compared with tolerable misstatement, with appropriate consideration of sampling risk.
  • Paragraph .27 adds the qualitative evaluation of the misstatements found, including nature and cause and the broader implications of fraud.
• AS 2110.60 lists the risk factors for identifying significant accounts and disclosures:
  • the size and composition of the account.
  • the susceptibility to misstatement due to error or fraud.
  • the volume of activity and the complexity and homogeneity of the transactions.
  • the nature of the account or disclosure.
  • the associated accounting and reporting complexities.
  • It is the paragraph that stops materiality from being read as the sole test of what to audit.

How PocketCPA uses these sources

Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.

See also

• Sources for every AUD topic
• Free AUD sample questions
• The CPA exam glossary