## Materiality in Planning and Performing an Audit (SA 320)
### What Is Materiality?
Misstatements (including omissions) are material if they, individually or in aggregate, could influence the economic decisions of users of the financial statements.
> Key phrase: "individually or in aggregate" — even small misstatements can be material when combined.
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### Determining Materiality: The Benchmark Approach
Determining materiality involves professional judgement. The process:
1. Choose an appropriate benchmark from the FS
2. Apply a percentage to that benchmark
3. Use the result as a starting point for overall materiality
Common Benchmarks:
- Profit Before Tax (PBT)
- Revenue
- Gross Profit
- Total Equity
- Net Asset Value
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### Factors Affecting Choice of Benchmark
| Factor | Explanation |
|---|---|
| Elements of FS | Assets, liabilities, income, expenses, equity — which is most relevant? |
| Item attracting special user attention | e.g., revenue is key for a startup — users focus on it |
| Nature, life cycle, industry & economic environment | Mature vs. growth-stage company may use different benchmarks |
| Ownership & financing structure | Listed vs. owner-managed entity |
| Relative volatility of benchmark | A volatile benchmark is a poor anchor |
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### Note on PBT Volatility
- For profit-making entities, PBT is commonly used as a benchmark.
- If PBT is volatile (due to one-off items, cyclical business), the auditor should choose another benchmark (e.g., revenue or gross profit).
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### Relevant Financial Data for Benchmark Selection
| Data | Purpose |
|---|---|
| Prior period financial results | Historical baseline |
| Period-to-date results + budget/forecast for current period | Forward-looking estimate |
| Adjusted for significant changes in circumstances | Ensures benchmark reflects current reality |