Establishing Materiality - Example 1 

Planning materiality

Start with pretax income

5% to 10% based on risk level

If excessive fluctuation in income year-to-year

use total sales instead of income

use ½% to 1%

If sales not stable

use gross margin

use 1% to 2%

If gross margin not stable

use total assets

use .25% to .5%

 

Tolerable error (performance materiality)

Set at 50% to 75% of materiality

if very stable company use 50%

this becomes nominal amount

if error found above this amount, include in audit differences

if below this amount pass on it 

Evaluation

Summarize all errors over nominal amount

then compare to planning materiality

McGraw-Hill/Irwin

Larger of ClientTotal Revenues or Total Assets is …

         

 Over

 But not Over

Planning Materiality

 +

 Factor

 X

 Excess Over

$0 $30 thousand $0 + .0593 X $0

30 thousand 100 thousand 1,780 + .0312 X 30 thousand

100 thousand 300 thousand 3,960 + .0215 X 100 thousand

300 thousand 1 million 8,260 + .0145 X 300 thousand

1 million 3 million 18,400 + .00995 X 1 million

3 million 10 million 38,300 + .00674 X 3 million

10 million 30 million 85,500 + .00461 X 10 million

30 million 100 million 178,000 + .00312 X 30 million

100 million 300 million 396,000 + .00215 X 100 million

300 million 1 billion 826,000 + .00145 X 300 million

1 billion 3 billion 1,840 + .000995 X 1 billion

3 billion 10 billion 3,830,000 + .000674 X 3 billion

10 billion 30 billion 8,550,000 + .000461 X 10 billion

30 billion 100 billion 17,800,000 + .000312 X 30 billion

100 billion 300 billion 89,600,000 + .000215 X 100 billion

300 billion . . . 82,600,000 + .000148 X 300 billion

Materiality Table - Example 2