Materiality in an independent review
How materiality is set and used in an independent review under ISRE 2400 (Revised): focusing inquiries and analytics, and judging misstatements.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Ask a review team what materiality was on its last independent review and a surprising number will say there wasn't one: "it's a review, not an audit". Others will produce an audit planning sheet with three figures copied in, none of which shaped the work. Neither is what the standard expects. A review gives limited assurance, but it still has to decide what matters, and the conclusion at the end is a conclusion about material misstatement.
ISRE 2400 (Revised) requires the practitioner to determine materiality for the financial statements as a whole, and to apply it in designing the procedures and in evaluating the results. That single figure does more work in a review than people assume.
Why reviews need materiality too
A review's conclusion says that nothing has come to the practitioner's attention that causes them to believe the statements are not prepared, in all material respects, in accordance with the framework. "Material" in that sentence needs a measure. Without one, the practitioner cannot say which areas deserved inquiry, which analytical differences needed explaining, or whether the errors found were large enough to change the conclusion.
Materiality in a review rests on the same concept as in an audit: misstatements are material if they could reasonably be expected to influence the economic decisions of users taken on the basis of the statements. The users of reviewed statements are often a small group: shareholders of a private company, its bank, sometimes a landlord or a supplier extending credit. Thinking about them specifically helps more than reaching for a generic benchmark.
Determining it
The judgement follows the same path as in an audit: identify the users, decide which figure they focus on, choose a benchmark that reflects it and apply the firm's methodology. Choosing the benchmark is covered in choosing a materiality benchmark; the same reasoning about loss-making, owner-managed and non-profit clients applies to reviews.
Two differences from an audit are worth noting. ISRE 2400 (Revised) does not use the audit concept of performance materiality, so there is no requirement to set a lower working figure. And the practitioner must revise materiality if, during the review, they become aware of information that would have led to a different figure at the start, such as draft statements that differ significantly from the management accounts used at planning.
Using it to focus inquiries and analytics
Materiality earns its place in the design of the procedures:
- Scoping inquiries. Lines well below materiality, with no particular risk, need little attention. Material lines, and lines where material misstatement is likely, need specific questions.
- Setting thresholds for analytics. When a figure differs from expectation, the practitioner needs a basis for deciding whether the difference must be investigated. A threshold set by reference to materiality gives one, and recording it shows the reviewer why some differences were followed up and others were not.
- Deciding when more work is needed. If an inquiry or analytic points to a possible misstatement that could be material, ISRE 2400 (Revised) requires additional procedures to resolve it.
A worked example in words: in reviewing a distributor's statements, the practitioner expects freight costs to move with sales volumes. They have risen faster. The difference is well below materiality, and the explanation, a fuel price increase, is plausible and consistent with other information. It is noted and not pursued further. Receivables, by contrast, have grown by more than materiality with no matching growth in sales, so the practitioner asks about it, reads the age analysis and looks at receipts after year end. The procedures on inquiry and analytics are covered in inquiry and analytics in an independent review.
Evaluating misstatements found
When the review finds misstatements, the practitioner asks management to correct them. Those left uncorrected are evaluated, individually and together, against materiality. If they are material, the conclusion is qualified; if they are material and pervasive, it is adverse.
Keep a running list of misstatements found on the review file, with management's decision on each, so the evaluation at the end is a matter of adding up rather than searching the file.
Recording the approval in Achekam
Achekam's Materiality screen under Audit & Assurance has staff propose overall, performance and clearly-trivial materiality from a benchmark with a written rationale. Achekam suggests no percentage, and the engagement partner approves, never the preparer. A new approval replaces the old one, which is kept, so a revision during the review leaves the original on the file.
For a review, the figure that matters under ISRE 2400 (Revised) is overall materiality. If your methodology sets a threshold for analytics or for accumulating misstatements on reviews, record it with the approval and explain it in the rationale, so nobody mistakes it for an audit-style performance materiality.
Achekam ships working-paper template packs written in its own words, including ISRE 2400 review packs, for a firm to adopt and approve; the catalogue is marked unapproved platform content until the firm adopts it. On each work item, a step is marked done only with a written response and its documents, or set aside with a reason, and steps are never deleted. Note in the responses on analytical procedures the threshold used, and why a difference was or was not investigated.
Where the review is performed by another firm, the materiality judgement belongs to the reviewer. A firm can send a frozen set of statements to another firm on Achekam, or to an outside practitioner by e-mailed link, for an independent review under ISRE 2400 (Revised), and the reviewer's signed report is bound to that version. The preparing firm should not set or suggest the reviewer's materiality.
IFAC's Guide to Review Engagements is a practical guide to performing reviews under ISRE 2400 (Revised), with examples and adaptable checklists for small practices.
Before the next review starts
Write the materiality rationale for your next review before the client meeting, not after. If it names the users and what they look at, the questions you ask in the meeting will follow from it.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
