Acca aaa s21 Notes

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5. Materiality
An important part of the group engagement partner’s responsibility is to consider materiality. A 
matter is material with reference to the group financial statements - not the financial statements of a 
component. Usually this will mean that the materiality limits are higher for group financial statements 
than for component financial statements (simply because the figures in the group financial 
statements are usually the sum of the figures in the components). However, it is possible to construct 
a scenario where materiality levels are smaller in the group financial statements. For example:
$m
Group
Parent
Subsidiary 
A
Subsidiary 
B
Profit/(loss)
15
5
20
(10)
Materiality level 10% for each component
1.5
0.5
2.0
1.0
So, the auditor of Subsidiary A will be working to a materiality level of $2m (possible ignoring 
misstatements up to that amount) but the group materiality level is only $1.5m. In addition, a 
subsidiary might not be a public interest company but the group might be and, generally, the audit of 
public interest entities is carried out more strictly and this could again give rises to conflicts in 
materiality levels.
Therefore, usually the materiality levels for each component will be set substantially lower than the 
group materiality limit. This has to be at a level determined by the group auditor as only that auditor 
has the necessary overview of the group results.