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Auditing & Assurance › Audit Risk & Materiality

How is materiality calculated in practice?

Intermediate

Answer

Auditors apply a percentage to a chosen benchmark reflecting users' focus: commonly 0.5-1% of revenue or total assets, or 5-10% of profit before tax. The benchmark and percentage depend on the entity and users. This gives overall materiality; performance materiality is set lower to reduce the risk that aggregated errors exceed materiality.
Overall materiality example:
  5% x profit before tax (2,000,000) = 100,000
Performance materiality:
  75% x 100,000 = 75,000
Real-world example For a profitable company, the team sets overall materiality at 5% of PBT and performance materiality at 75% of that.

Common follow-ups: What benchmarks are common? | Why apply a percentage to a benchmark?

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All 18 Audit Risk & Materiality questions