Sa 320 (R)

SA 320 (Revised)
 Whether a particular item is material or not can

be judged from:
Its size or amount
Its nature
Its legality
Contractual violation (if any)
Qualitative aspects (like inadequate or non-disclosure of
related party relationships, etc.)
 The auditor’s determination of materiality is a
matter of professional judgment, and is affected
by the auditor’s perception of the financial
information needs of users of the financial
statements.
 Performance materiality means the amount or
amounts set by the auditor at less than
materiality for the financial statements as a
whole to reduce to an appropriately low level the
probability that the aggregate of uncorrected and
undetected misstatements exceeds materiality
for the financial statements as a whole.
 If applicable, performance materiality also refers
to the amount or amounts set by the auditor at
less than the materiality level or levels for
particular classes of transactions, account
balances or disclosures.
 When establishing the overall audit strategy, the auditor shall
determine materiality for the financial statements as a whole.
 If, in the specific circumstances of the entity, there is one or
more particular classes of transactions, account balances or
disclosures for which misstatements of lesser amounts than
the materiality for the financial statements as a whole could
reasonably be expected to influence the economic decisions
of users taken on the basis of the financial statements, the
auditor shall also determine the materiality level or levels to
be applied to those particular classes of transactions, account
balances or disclosures.
 The auditor shall determine performance materiality for
purposes of assessing the risks of material misstatement and
determining the nature, timing and extent of further audit
procedures.
 The auditor shall revise materiality for the financial statements
as a whole (and, if applicable, the materiality level or levels for
particular classes of transactions, account balances or
disclosures) in the event of becoming aware of information
during the audit that would have caused the auditor to have
determined a different amount (or amounts) initially.
 If the auditor concludes that a lower materiality for the financial

statements as a whole (and, if applicable, materiality level or
levels for particular classes of transactions, account balances or
disclosures) than that initially determined is appropriate, the
auditor shall determine whether it is necessary to revise
performance materiality, and whether the nature, timing and
extent of the further audit procedures remain appropriate.
The audit documentation shall include the
following amounts and the factors considered
in their determination:
a) Materiality for the financial statements as a
whole;
b) If applicable, the materiality level or levels
for particular classes of transactions,
account balances or disclosures;
c) Performance materiality; and
d) Any revision of (a)-(c) as the audit
progressed.
 Audit risk is the risk that the auditor expresses an
inappropriate audit opinion when the financial statements are
materially misstated.
 Audit risk is a function of the risks of material misstatement
and detection risk.
 Materiality and audit risk are considered throughout the
audit, in particular, when:
a) Identifying and assessing the risks of material
misstatement;
b) Determining the nature, timing and extent of further audit
procedures; and
c) Evaluating the effect of uncorrected misstatements, if any,
on the financial statements and in forming the opinion in
the auditor’s report.
 There is an inverse relationship between
materiality and the degree of audit risk which
means higher the materiality level, the lower
the audit risk and lower the materiality level
higher the audit risk.
 For example: The probability that a large

(material) amount in an account will be left
misstated in the financial statements is lower
than the probability that a small (immaterial)
amount will remain misstated.

Sa 320 (R)

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Sa 320 (R)

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SA 320 (Revised)

 Whether a particular item is material or not can

 If the auditor concludes that a lower materiality for the financial

 For example: The probability that a large

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