## Materiality Levels in Audit Sampling (SA 320)

Audit sampling decisions are governed by three interconnected materiality/tolerance concepts:

### 1. Financial Statement (FS) Level Materiality

The overall materiality threshold for the financial statements as a whole.
Set at the planning stage; forms the ceiling for all lower-level thresholds.

### 2. Performance Materiality

Set below FS-level materiality.
Used for individual account balances, classes of transactions, or disclosures.
Acts as a buffer — catches aggregated smaller misstatements that could collectively breach FS materiality.

### 3. Tolerable Error (Tolerable Misstatement)

The maximum monetary misstatement the auditor is willing to accept in an individual account without changing the audit opinion.
Always lower than overall materiality.
Relevant at the individual account (Alc) level.
Applied in Tests of Details.

### 4. Tolerable Level of Deviation

The maximum rate of deviation from an internal control that the auditor is willing to accept.
Applied in Tests of Controls.

### 5. Expected Rate of Deviation / Expected Misstatement

The auditor's advance estimate of actual deviation or misstatement in the population.
Higher expectation → larger sample required.

### 6. Sampling Risk and Sample Size

The auditor must determine a sample size large enough to reduce sampling risk to an acceptably low level.
Inverse relationship: the lower the sampling risk the auditor is willing to accept → the larger the required sample size.

Worked example

### Example 1

Example — Tolerable Error vs. FS Materiality:

FS-level materiality = ₹10 lakhs. The auditor sets performance materiality at ₹7 lakhs and tolerable error for the Debtors balance at ₹5 lakhs. The tolerable error (₹5 L) is lower than overall materiality (₹10 L), ensuring that even if the Debtors balance is misstated up to ₹5 L, it won't automatically breach FS materiality when combined with other small errors.

### Example 2

Example — Tolerable Deviation:

For testing 'invoice approval' control, the auditor sets a tolerable deviation rate of 5%. This means: if more than 5% of sampled invoices lack proper approval, the auditor concludes the control cannot be relied upon.

⚠️ Common exam mistakes

Confusing 'tolerable misstatement' (for Tests of Details, monetary amount) with 'tolerable deviation' (for Tests of Controls, a rate/percentage).
Setting tolerable error equal to or above overall FS materiality — it must always be lower.
Thinking performance materiality and tolerable error are the same concept; performance materiality applies to the planning/overall level, while tolerable error is applied during sample evaluation.

Bare-Act text SA 320 — Materiality in Planning and Performing an Audit · SA 320 · click to expand

The auditor shall determine materiality for the financial statements as a whole... The auditor shall also determine performance materiality for purposes of assessing the risks of material misstatement and determining the nature, timing, and extent of further audit procedures.

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