Acca aaa s21 Notes

not
considered as 
they may vary widely.)
5. Guidance on materiality
It’s all very well saying that a matter is material if it would reasonably influence decisions of users, but 
that gives very little guidance to the audit team (or to you when you are doing a question).
Therefore, some rules of thumb have been developed. These are only guidelines, but an amount will 
generally be considered 
immaterial
if it is less than the following and 
material
if it is greater: 
๏
0.5% to 1% of revenue
๏
1% to 2% of total assets
๏
5% to 10% of profit before tax
Points to note:
๏
Professional judgement will be used to decide whether amounts within these ranges are 
material (eg considering qualitative factors).
๏
Which benchmarks to use will depend on specific circumstances (eg revenue may be most 
relevant for a company which provides services with few assets or which has a relatively small 
draft profit or a loss).
IT IS VERY COMMON FOR AAA EXAM QUESTIONS TO PROVIDE REVENUE, ASSET AND PROFIT FIGURES. 
YOU MUST USE THE RELEVANT FIGURE(S) TO ASSESS WHETHER MATTERS ARE MATERIAL.
In a real audit a running total of errors is kept so that their net effect can be calculated. However, 
when designing and carrying out audit tests and when noting down errors, smaller amounts should 
be set for materiality to reduce the risk that misstatements in aggregate exceed financial statement 
materiality. This is known as 
performance materiality
: the materiality that is important in the 
performance of the audit work.
Note that errors which are less than the suggested guidelines could be judged to be material. An error 
which turns a small loss into a small profit could cause unfounded optimism in some situations, 
perhaps a feeling that the company has turned a corner. So, although in absolute terms, the size of an 
error is relatively small, the way in which the accounts are then interpreted could lead to 
unreasonable decisions being made. Therefore, you can talk about both quantitative and qualitative 
materiality.
Finally, there are some amounts in the financial statements where no errors are tolerable. For 
example, there is often a statutory duty to disclose directors’ remuneration and that has to be stated 
with absolute accuracy.
Note that the evaluation of misstatements identified during the audit is considered in ISA 450 (see 
Chapter 8).