Setting and approving materiality on an audit
How overall, performance and clearly-trivial materiality are proposed and approved in Achekam, why no percentage is suggested, and what waits for approval.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Materiality is one of the few judgements on an audit that shapes almost everything after it: which balances get tested, how big the samples are, which misstatements are worth chasing and, at the end, whether the uncorrected ones matter. Yet on many files it is a single cell in a planning spreadsheet, copied from last year, with a benchmark nobody remembers choosing.
ISA 320 asks for more than a number. It asks for the reasoning, and for the figures to be revisited when the auditor learns something that would have changed them. This article explains how materiality is proposed and approved in Achekam, who can approve it, and what in the audit waits until it has been.
Three figures from one judgement
Under Audit & Assurance, Materiality, staff propose three figures together:
- Overall materiality for the financial statements as a whole.
- Performance materiality, set lower, to reduce to an appropriately low level the risk that undetected and uncorrected misstatements together exceed overall materiality.
- The clearly-trivial threshold, below which misstatements need not be accumulated, which is the idea ISA 450 builds on.
All three are proposed from a benchmark, with a written rationale. The rationale is not decoration: it is where the engagement team explains to the reviewing partner, and later to an inspector, why this benchmark and this level suit this entity and its users.
Choosing the benchmark, in words
A worked example. The client is a property-holding company. Its profit swings between a small profit and a small loss depending on fair-value movements and interest, and its main external user is the bank that lends against the properties. A profit benchmark would produce a materiality that jumps from year to year for reasons unrelated to what the bank cares about. The team proposes total assets as the benchmark, and writes the rationale in those terms: the users, the instability of profit, and the nature of the balances.
Performance materiality is then set lower than overall materiality by a margin the team explains: the history of audit adjustments on this client, whether controls can be relied on, and how many balances are estimates. Clearly trivial is set with the same care, because it decides which differences get carried to the evaluation at the end.
ICAEW's guide to materiality in the audit of financial statements works through the ISA requirements in practice: choosing a benchmark, setting performance materiality and evaluating identified misstatements.
Why no percentage is offered
Achekam suggests no percentage. The benchmark and the level are the firm's judgement, applied through its methodology, and the software does not put a starting figure in front of the team for it to accept without thinking.
That fits a wider rule in Achekam's AI engine, which refuses any task whose type is giving an opinion, reaching a conclusion, approving or signing. Materiality is a conclusion of exactly that kind. If your methodology has ranges for common benchmarks, keep them in your methodology and have the team cite them in the rationale.
Who approves, and what happens on revision
The engagement partner approves materiality, never the preparer. A manager can draft the proposal and the rationale; the approval is recorded against the partner.
Materiality is often revised during an audit, when draft figures change or the auditor learns something new. In Achekam a new approval replaces the old one, and the old approval is kept. So the file shows the history: the planning figure, the revised figure, who approved each, and the rationale for the change. That is the documentation ISA 320 asks for when materiality is revised, and it is far easier to read than a spreadsheet with overwritten cells.
The audit strategy is recorded and approved separately, on the Planning screen.
What waits for approved materiality
Materiality is not just recorded and left. In Audit Intelligence, no sample size is proposed without approved materiality and a confidence level. A team that tries to plan its samples before the partner has approved materiality will find nothing proposed, which is the right order of work. How sampling then proceeds is covered in audit samples a reviewer approves before drawing.
Journal entry testing has its own selection criteria rather than a materiality threshold, but the two are planned together on most files; see journal entry testing on a whole population.
The end of the audit: one limit to plan for
Clearly trivial matters most at completion, when misstatements above it are accumulated and evaluated under ISA 450. Here a limit applies. Staff can record an audit adjustment on a lead schedule line with a reason. But the completion Summary of Uncorrected Misstatements stays empty, because no screen or route writes to the misstatement register it reads.
Until that changes, keep your accumulation of misstatements and the evaluation against overall and performance materiality on a working paper of its own, and make sure the partner reads it before approving the auditor's report.
A planning checklist
- Choose the benchmark with the users of the statements in mind, and write down why.
- Propose overall, performance and clearly-trivial materiality together, each with its reasoning.
- Cite the firm's methodology range in the rationale, rather than a number from last year's file.
- Have the engagement partner approve, never the preparer.
- Plan sampling only after approval.
- Revisit materiality when the draft figures change, and have the revision approved.
- Keep the misstatement evaluation on its own working paper at completion.
Before the next planning meeting
Open the materiality paper from your last completed audit and read only the rationale. If it would not tell a stranger why that benchmark was chosen, rewrite your firm's template so that the next one does.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
