ASA 320 - Materiality and Audit Adjustments - April 2006
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Quantitative Factors
17 Ordinarily, the auditor selects benchmark(s) appropriate to the entity’s circumstances for a quantitative evaluation of materiality at the financial report level and in relation to classes of transactions, account balances and disclosures. For example, an evaluation of materiality based on profit impact might not be appropriate when the entity’s earnings are volatile.
18 An auditor ordinarily applies a percentage to a chosen benchmark as a starting point in determining materiality. When identifying an appropriate benchmark, the auditor ordinarily has regard for factors such as the elements of the financial report, items users are likely to focus on, the nature of the entity, its life cycle, industry and economic environment, the size of the entity, ownership and financing and the relative volatility of the benchmark.
19 Under paragraph 27 of this Auditing Standard, the auditor needs to consider the possibility that the cumulative result of uncorrected misstatements below the materiality level could have a material effect on the financial report. For example, an error in a month end procedure could be an indication of a potential material misstatement if that error is repeated each month and the cumulative error is not corrected.