Introduction
SA 320 explains how an auditor applies the concept of materiality while planning and performing an audit of financial statements.
In simple words, materiality means the size of an error or misstatement that can influence the decisions of users of financial statements. If an error is big enough to affect decisions, we treat it as material.
1. What is Materiality?
Materiality depends on:
- The size (amount) of the misstatement, and
- The nature (type) of the item.
Therefore, the auditor uses professional judgment to decide what level of misstatement will be considered material.
2. Materiality During Audit Planning
While planning the audit, the auditor decides:
- What amount of misstatement will be material for the financial statements as a whole.
This decision helps the auditor to:
- Determine the nature, timing and extent of risk assessment procedures;
- Identify and assess the risks of material misstatement; and
- Decide the nature, timing and extent of further audit procedures.
Thus, materiality directly affects audit planning and audit strategy.
3. Performance Materiality
In addition to overall materiality, the auditor sets performance materiality.
Performance materiality means an amount lower than overall materiality.
The auditor sets this lower amount to reduce the risk that the total of uncorrected and undetected misstatements exceeds overall materiality.
If required, the auditor may also set separate performance materiality for:
- Particular classes of transactions,
- Account balances, or
- Disclosures.
This ensures better control over audit risk.
4. Revision of Materiality
During the audit, new information may come to the auditor’s notice.
If such information would have changed the materiality amount earlier, the auditor must revise:
- Materiality for financial statements as a whole; and
- If applicable, materiality for specific classes, balances or disclosures.
Therefore, materiality is not fixed. The auditor updates it whenever necessary.
5. Documentation Requirements
The auditor must clearly document the following:
- Materiality for the financial statements as a whole;
- Materiality level for particular classes of transactions, account balances or disclosures (if applicable);
- Performance materiality; and
- Any revision made during the audit and the reasons for such revision.
Proper documentation supports audit quality and professional judgment.
Key Focus Areas
Now, auditors also:
- Apply materiality more carefully in areas involving judgment and estimation;
- Consider qualitative factors such as compliance with laws, related party transactions, and management bias;
- Link materiality closely with risk assessment procedures under SA 315 and SA 330;
- Evaluate materiality both at the planning stage and at the time of forming the audit opinion.
This approach strengthens audit quality and transparency.
Conclusion
SA 320 ensures that the auditor focuses on matters that truly affect users of financial statements.
By setting appropriate materiality and performance materiality, revising them when required, and documenting all decisions, the auditor performs an effective and risk-based audit.
In short, materiality guides the entire audit process and helps the auditor form a reliable opinion.