SA 320 Materiality explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
SA 320 explains how an auditor decides what size of error would matter to users of the financial statements, and then sets a lower working figure so that small errors do not add up to a big one. It also covers when the figure must be revised and what is recorded.
SA 320, as effective for audits of financial statements for periods beginning on or after 1 April 2010, applies to every audit. ICAI may revise standards, so check icai.org for the current text. SA 450 deals with how materiality is used to evaluate misstatements once found; see our SA 450 article.
The auditor sets materiality for the financial statements as a whole when establishing the audit strategy, sets lower materiality levels for particular items where smaller errors could influence users, and sets performance materiality below the overall figure to leave a margin for undetected errors. Materiality is revised if information during the audit would have led to a different figure, and the amounts and the factors behind them are documented. It is a matter of professional judgment, using a benchmark and a percentage as a starting point.
What materiality means (paragraphs 1-6)
Paragraph 2 summarises what frameworks generally say. Misstatements, including omissions, are material if, alone or together, they could reasonably be expected to influence users' economic decisions based on the statements. Judgments are made in light of surrounding circumstances and are affected by the size or nature of a misstatement, or both. They are based on the common information needs of users as a group, not on any individual user.
The auditor may reasonably assume that users know business and accounting and are willing to study the statements with reasonable diligence; understand that statements are prepared, presented and audited to levels of materiality; recognise the uncertainty of estimates and future events; and make reasonable economic decisions (paragraph 4).
Materiality is applied in planning and performing the audit, in evaluating identified misstatements and in forming the opinion (paragraph 5). In planning, the judgments about size provide a basis for risk assessment procedures, assessing risks and further procedures (paragraph 6). The planning figure is not a line below which everything is immaterial: circumstances can make a smaller item material, and the auditor considers the nature as well as the size of uncorrected misstatements.
Key terms
| Term | Meaning |
|---|---|
| Materiality for the financial statements as a whole | The overall amount set by the auditor when establishing the strategy |
| Materiality level for particular classes of transactions, balances or disclosures | A lower amount where smaller misstatements could influence users |
| Performance materiality (paragraph 9) | The amount or amounts set below overall materiality to reduce to an appropriately low level the probability that uncorrected and undetected misstatements together exceed materiality |
Setting the amounts (paragraphs 10-11)
When establishing the overall audit strategy (see SA 300), the auditor determines materiality for the financial statements as a whole. If, in the entity's circumstances, misstatements of lesser amounts in particular classes of transactions, balances or disclosures could influence users' decisions, the auditor also determines lower levels for those (paragraph 10). A10 gives examples of such items: those where law or the framework affects users' expectations, such as related party transactions and remuneration of management and those charged with governance; key industry disclosures, such as research and development costs for a pharmaceutical company; and a separately disclosed focus of attention, such as a newly acquired business. The auditor may find it useful to understand the views of governance and management (A11).
The auditor also determines performance materiality for assessing risks and designing further procedures (paragraph 11). A12 explains why: planning only to detect individually material misstatements overlooks that many small ones may add up, and leaves no margin for undetected errors. Setting performance materiality is not a mechanical calculation; it is affected by the understanding of the entity and by the nature and extent of misstatements found in earlier audits.
Benchmarks and percentages
A percentage applied to a chosen benchmark is often a starting point (A2). Factors in choosing a benchmark include the elements of the statements, what users focus on, the nature and life cycle of the entity and its industry, its ownership and financing, and the volatility of the benchmark. A3 gives examples: profit before tax, total revenue, gross profit, total expenses, total equity or net asset value. Profit before tax from continuing operations is often used for profit-oriented entities, but where it is volatile gross profit or revenue may be better. A4 says that if profit is exceptionally high or low, a normalised figure based on past results may be more suitable.
On percentages, A6 says there is a relationship between the percentage and the benchmark: a percentage applied to profit before tax will normally be higher than one applied to total revenue. The SA offers one illustration: the auditor may consider "five percent of profit before tax from continuing operations" appropriate for a profit-oriented manufacturer, while "one percent of total revenue or total expenses" may suit a not-for-profit entity, and higher or lower percentages may be appropriate in different circumstances. These are examples in the standard, not rules, and the standard does not prescribe any percentage. For a different topic, a separate post covers materiality under Ind AS 1, which is about preparing the statements.
For small entities, if profit before tax is consistently nominal because the owner takes profit as remuneration, a benchmark such as profit before remuneration and tax may be more relevant (A7). Materiality relates to the statements on which the auditor reports, including for a period of more or less than twelve months (A5).
Revision as the audit progresses (paragraphs 12-13)
The auditor revises materiality if information during the audit would have led to a different amount at the outset (paragraph 12). A13 gives examples: a decision to dispose of a major part of the business, new information, a changed understanding of the entity, or actual results turning out substantially different from the anticipated results used to set materiality. If a lower materiality is appropriate, the auditor decides whether performance materiality must be revised and whether the nature, timing and extent of further procedures are still appropriate (paragraph 13).
Documentation (paragraph 14)
The file includes the amounts and the factors considered for: materiality for the financial statements as a whole; materiality levels for particular items, if any; performance materiality; and any revisions of these. See SA 230 for general rules.
How it fits with other standards
The concept runs through SA 200 (reasonable assurance), SA 315 (assessing risk), SA 330 (designing responses), SA 450 (evaluating misstatements) and SA 700 (the opinion).
Illustrative example
Pioneer Packaging Ltd, an invented company, reports profit before tax from continuing operations of Rs 9.0 crore this year, but it was Rs 2.1 crore last year. The auditor considers a normalised figure of Rs 6.0 crore as the benchmark and applies a percentage chosen by judgment, setting materiality at Rs 30 lakh (illustrative figures only). Because key management remuneration is a sensitive disclosure, the auditor sets a lower level of Rs 5 lakh for it. Performance materiality is set at Rs 22 lakh because last year's audit found several uncorrected errors. In October, the board decides to sell a division, so the auditor revises materiality and reassesses the extent of testing.
Need help with audit readiness?
If you want to understand which items an auditor is likely to treat as sensitive in your accounts, such as related party balances and management remuneration, TaxClue's books of accounts compliance team can help you review and tidy them before the audit. Finance heads can also use our books of accounts compliance support to clear small errors early.
Key takeaways
- Materiality is a judgment based on the common information needs of users as a group.
- Set overall materiality at the strategy stage; set lower levels for sensitive items where relevant.
- Performance materiality sits below materiality to allow for aggregation and undetected errors.
- Revise if the facts change, and document the amounts and the factors.
- SA 320 prescribes no fixed percentage; A6 only gives illustrations.
Read next
- SA 450: evaluating misstatements
- SA 315, part 2: assessing risks
- SA 200: overall objectives of the auditor
- Materiality under Ind AS 1
Disclaimer: Based on the Standards on Auditing and quality standards issued by the Institute of Chartered Accountants of India, in the versions named in the article, and ICAI's announcement of 31 March 2026 on SQM 1 and SQM 2, as consulted on 3 October 2026. ICAI revises standards from time to time; check the current text and effective dates on icai.org. This article is general information, not legal advice; check the official text before acting.