Materiality in audit

How it is determined

Materiality is calculated from figures in the financial statements — as a rule, from a benchmark that matters most to the users of the particular company. The calculation is documented and justified: an arbitrarily set materiality undermines all subsequent work.

What it affects

• The extent of procedures: the lower the level, the more intensive the testing
• Sample selection: transactions below a certain threshold may not be included at all
• Evaluation of misstatements found: they are aggregated and compared with materiality
• The form of the opinion: if aggregate misstatements exceed materiality, the opinion is modified

Materiality by nature, not by amount

Some misstatements are material regardless of the amount — for example, those related to transactions showing signs of fraud, or those affecting the disclosure of related-party transactions. A small amount does not make such a misstatement immaterial.

Three levels of materiality (ISA 320, 450)

• overall materiality — for the financial statements as a whole;
• performance materiality — below overall materiality, so that the total of undetected errors does not exceed overall materiality;
• the clearly trivial threshold — errors below it are not accumulated.

Example with illustrative figures

Profit before tax is UZS 5 billion. If the auditor chooses 5% of profit as the benchmark (this is practice, not a rule), overall materiality is 250 million, performance materiality is, for example, 175 million (70%), and the clearly trivial threshold is 12.5 million. An uncorrected error of 300 million leads to a modified opinion.

Legal basis

The auditor chooses the methodology independently (Article 28 of Law No. ZRU-677 “On Auditing Activity”) within the framework of International Standards on Auditing (Article 9).