MATERIALITY DETERMINATION 0420.

MPQ

Sign-off: Initials Date

Client name: Prepared:
Reviewed:
Partner:
Period end:
EQCR:

This form completed annually is to document the calculation of initial planning materiality (calculated at planning stage) which
will be used to guide the overall scope (nature, extent and timing) of the audit procedures to be performed.

The adequacy of planning materiality is reassessed throughout the audit to ensure that sufficient audit procedures are being
performed.

Revised materiality 710.MPQ should be done at the end of the audit.

Part 1 Overall Materiality

No. Audit Procedure Comment and/or Ref.

Identify the principal users of the financial Higher Management,

1.
statements.
Describe the nature and impact of qualitative
considerations (i.e., profitability trends,
2.
regulations, particular sensitivities, compliance
with loan covenants, user expectations, etc.)

3. Selecting a Numerical Threshold

Benchmark Percentage Range Percentage Applied

Total assets 0.5% - 2%

Revenues 0.5% - 2% 2%
Net assets 3% - 5%
Normalised income from continuing operations before taxes 5% - 10%
Other N/A
A typical characteristic of a manufacturing firm is uniform
net income and tax throughout the life of a company. Upon
Reason for selecting an alternative benchmark and percentage prior research this company is a service type firm that is a
applied: big user of human resource. Therefore, we chose revenues
as the benchmark for the client’s threshold because the
total assets of this firm is relatively small.

4. Determine quantitative materiality

This period anticipated Last Period

Normalized Income from continuing operations
£ £

Estimated income pre tax (1,018,121.87) (1,217,231.42)

Adjustments for non-recurring items, discontinued operations

 MATERIALITY DETERMINATION 0420.MPQ

This period anticipated Last Period

Normalized Income from continuing operations
£ £
and misstatements brought forward:
a)
b)
c)
Total Normalized Income from continuing operations (pre tax):

Based on the above considerations, the planning materiality is:

OVERALL MATERIALITY LIMIT - QUALITATIVE

FACTORS
Document qualitative factors, if any, which, in the auditor's
judgment, indicate that a smaller overall materiality limit that
might be otherwise appropriate. (The figure in this section
cannot be higher than the materiality based on quantitative
factors).
The overall materiality with consideration of qualitative factors £
for the engagement is (= Benchmark × Percentage):
Prior year materiality was £
The Overall Materiality for the engagement is: £

Part 2 Performance Materiality

Performance Materiality - Quantitative Factors

Based on the overall audit risk as assessed in 210.MPQ, the £

performance materiality is:

(If Overall Audit Risk is LOW, then 80% of Overall Materiality /

If Overall audit Risk is HIGH, then 70% of Overall Materiality)

Performance Materiality – Qualitative Factors Yes or No Comment or Ref

Are there qualitative factors that, in your judgement, would

require the performance materiality to be reduced? If Yes,
explain.
If Yes then, the Performance Materiality with consideration of £
qualitative factors for the engagement is:

Specific Performance Materiality - Qualitative Factors Yes or No Comment or Ref

Are there qualitative factors that, in your judgement, would

require a lower performance materiality for a specific account or
class of transactions?
If Yes then, List Areas below and determine Specific
Performance Materiality:
 MATERIALITY DETERMINATION 0420.MPQ

Specific Performance Materiality - Qualitative Factors Yes or No Comment or Ref

£
£
£

Part 3 Summary Of Unadjusted Differences

Amount below which misstatements are not carried to SUD £

(before tax) (3% of Overall Materiality)
 MATERIALITY DETERMINATION 0420.MPQ

Guidance

The primary purpose of this form is to document the calculation of planning materiality. Planning materiality will then be used to
guide the extent of the audit procedures performed. Planning materiality will be used at the end of the audit (MAP 722.MPQ) in
the evaluation phase - as will an assessment of quantitative materiality based on the results of the business.

An initial determination of materiality is required at the planning stage of the engagement. Materiality and audit risk are used to
plan the overall scope (nature, extent, and timing) of the audit procedures to be performed. At the end of the audit, we must
evaluate the total effect of the adjustments or potential adjustments to the financial statements to ensure that materiality does
not have to be significantly revised. Therefore, in practice, the adequacy of planning materiality is reassessed throughout the
audit to ensure that sufficient audit procedures are being performed.

Materiality in this MAP will be calculated on a pre-tax basis (if based on normalized earnings before income taxes), however,
materiality may be calculated on an after tax basis.

Guidance for Part 1

Overall Materiality shall be used to:
 Determine whether, quantitatively, the value of each class of transactions, account balances or disclosures are
material; and
 Evaluate, at the conclusion of the audit, whether misstatements identified from audit procedures are material, both
individually and in aggregate.

Guidance for Question 3

This section provides guidance on the selection of an appropriate base and percentage for the calculation of materiality. These
guidelines are not exhaustive, nor do they replace professional judgement.

Guidance for Performance Materiality - Quantitative Factors

Planning the audit solely to detect individually material misstatements overlooks the fact that the aggregate of individually
immaterial misstatements may cause the financial statements to be materially misstated, and leaves no margin for possible
undetected misstatements.

Performance materiality (which, as defined, is one or more amounts) is set to reduce to an appropriately low level the probability
that the aggregate of uncorrected and undetected misstatements in the financial statements exceeds materiality for the financial
statements as a whole.

Similarly, performance materiality relating to a materiality level determined for a particular class of transactions, account
balances or disclosures is set to reduce to an appropriately low level the probability that the aggregate of uncorrected and
undetected misstatements in that particular class of transactions, account balances or disclosures exceeds the materiality level
for that particular class of transactions, account balance or disclosures.

The determination of performance materiality is not a simple mechanical calculation and involves the exercise of professional
judgment. It is affected by the auditor‘s understanding of the entity, updated during the performance of the risk assessment
procedures and the nature and extent of misstatements identified in previous audits and, thereby, the auditor‘s expectations in
relation to misstatements in the current period.

The auditor shall determine Performance Materiality by applying (by means of multiplication) the following percentages to
Overall Materiality:

Low overall audit risk = 80%; or

High overall audit risk = 70%
Performance Materiality = Overall Materiality × Overall Audit Risk Percentage (70% or 80%)
Performance Materiality shall be used to determine the nature, timing and extent of audit procedures.
 MATERIALITY DETERMINATION 0420.MPQ

Guidance for Specific Performance Materiality - Qualitative Factors

Transactions, Account Balances or Disclosures

Certain transactions, account balances and disclosures in the financial statements are by their nature more sensitive than
others. In these cases the auditor may need to determine a Specific Performance Materiality for such items. Typically, the
following transactions, account balances and disclosures may require particular consideration:

 Related party balances and transactions

 Certain profit and loss account balances of financial institutions, charities and pension schemes
 Management estimates or valuations
 Directors‘ remuneration (where there may be extra reporting responsibilities)
 Directors‘ expense accounts
 Disclosure of auditors‘ remuneration and (where relevant) non-audit fees
 Commissions payable (particularly overseas commissions); and
 Other sensitive expense accounts.

In respect of Fair Value Measurements, when auditing the valuation assertion related to significant accounting estimates the
following percentages may be applied (by means of multiplication) to Overall Materiality to determine Specific Performance
Materiality for these account balances:

Low overall audit risk = 40%

High overall audit risk = 30%; or
Listed clients = 20%.