## Materiality: User Assumptions and Benchmark Selection
### What is Materiality?
Materiality is a threshold below which misstatements are considered insignificant. Determining it requires professional judgment and is shaped by the auditor's perception of what users need from financial statements.
### Reasonable Assumptions About Users (SA 320)
The auditor may reasonably assume that users:
- Have reasonable knowledge of business, economics, and accounting, and study financial statements with reasonable diligence.
- Understand that financial statements are prepared and audited to certain levels of materiality.
- Recognize inherent uncertainties in estimates, judgments, and future-event considerations.
- Make reasonable economic decisions based on the information provided.
> Key point: The auditor does NOT assume users are experts or that they read every footnote in detail.
### Selecting the Right Benchmark
A percentage is typically applied to a chosen benchmark as a starting point for overall materiality. The choice of benchmark is not mechanical — several factors guide it:
| Factor | How It Affects Benchmark Choice |
|---|---|
| Elements of financial statements (assets, liabilities, equity, revenue, expenses) | Directs focus to the most significant line items |
| What users focus on (e.g., profit, revenue, net assets) | Benchmark should mirror user focus |
| Nature, life-cycle stage, industry, ownership structure | e.g., a debt-financed entity → users focus on assets/claims, not earnings |
| Relative volatility of the benchmark | A volatile benchmark may not give a stable materiality figure |
### Practical Example Logic
For a retail company opening new stores and closing underperforming ones:
- Revenue is volatile and distorted by expansion/contraction → may not be the most stable benchmark.
- Auditors should consider whether net assets or gross profit provides a more stable and representative base.