Materiality (audit)
Materiality is the size of a misstatement that could change the decisions of people who rely on the financial statements. Auditors set it at the planning stage and use it to judge what errors matter.
Overall materiality is often set as a percentage of a benchmark such as pre-tax income, revenue or total assets. Performance materiality is set lower so that small uncorrected errors added together stay below overall materiality.
Example. For a client with $4 million of pre-tax income, an auditor might set overall materiality at 5%, or $200,000, and performance materiality at $140,000.
By Binod Raj Singh, CPA (licensed in Montana) · Updated for the 2026-2027 exam windows · Last updated 2026-11-05