HKSA 320 - Materiality in Planning and Performing an Audit (Condensed)
| Section | Key Concept | Brief Description |
|---|---|---|
| Introduction & Scope | Scope of HKSA 320 | Deals with auditor's responsibility to apply materiality in planning and performing an audit; read with HKSA 450. |
| Materiality in Context | Definition & Characteristics | Misstatements are material if they could influence users' economic decisions; affected by size, nature, or both. |
| User Assumptions | Auditor's Assumptions | Users have reasonable knowledge, understand materiality levels, recognize uncertainties, and make reasonable decisions. |
| Application Throughout Audit | Planning, Performing, Evaluating | Materiality applied in risk assessment, further procedures, evaluating misstatements, and forming opinion. |
| Objective | Objective of Auditor | To apply materiality appropriately in planning and performing the audit. |
| Definitions | Performance Materiality & Aggregation Risk | Performance materiality is set below overall materiality to reduce aggregation risk; aggregation risk is the probability that total uncorrected and undetected misstatements exceed materiality. |
| Requirements | Determining, Revising, Documenting | Auditor shall determine materiality and performance materiality, revise as needed, and document amounts and factors. |
| Application Guidance | Benchmarks, Public Sector, Small Entities | Guidance on selecting benchmarks (e.g., profit before tax, total revenue), percentages, and special considerations. |
Introduction & Scope (Para. 1-3)
Introduction & Scope
Scope of HKSA 320
HKSA 320 deals with the auditor's responsibility to apply the concept of materiality in planning and performing an audit of financial statements. This Standard should be read in conjunction with HKSA 450, which explains how materiality is applied in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements on the financial statements.
Conformity with International Standards
As of January 2026, this HKSA conforms with ISA 320, Materiality in Planning and Performing an Audit. Compliance with the requirements of this HKSA ensures compliance with ISA 320.
Materiality in the Context of an Audit (Para. 4-7)
Materiality in the Context of an Audit
Definition of Material Misstatements
Misstatements, including omissions, are considered material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
Judgment Factors
Judgments about materiality are made in light of surrounding circumstances and are affected by:
- The size of a misstatement
- The nature of a misstatement
- A combination of both size and nature
User Perspective
Judgments about matters material to users are based on consideration of the common financial information needs of users as a group. The possible effect on specific individual users is not considered.
Auditor's Assumptions About Users
| Assumption | Description |
|---|---|
| (a) | Have a reasonable knowledge of business and economic activities and accounting, and a willingness to study the information with reasonable diligence |
| (b) | Understand that financial statements are prepared, presented and audited to levels of materiality |
| (c) | Recognize the uncertainties inherent in measurement based on estimates, judgment and consideration of future events |
| (d) | Make reasonable economic decisions based on the information in the financial statements |
Application of Materiality Throughout the Audit (Para. 8-9)
Application of Materiality Throughout the Audit
Areas of Application
The concept of materiality is applied by the auditor in:
- Planning and performing the audit
- Evaluating the effect of identified misstatements on the audit
- Evaluating uncorrected misstatements on the financial statements
- Forming the opinion in the auditor's report
Basis for Judgments in Planning
In planning the audit, judgments about materiality provide a basis for:
- Determining the nature, timing and extent of risk assessment procedures
- Identifying and assessing the risks of material misstatement
- Determining the nature, timing and extent of further audit procedures
It is not practicable to design audit procedures to detect all misstatements that could be material solely because of their nature. However, consideration of the nature of potential misstatements in disclosures is relevant to the design of audit procedures to address risks of material misstatement.
Objective & Definitions (Para. 1-2)
Objective & Definitions
Objective
The objective of the auditor is to apply the concept of materiality appropriately in planning and performing the audit.
Definitions
| Term | Definition |
|---|---|
| Performance Materiality | The amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce aggregation risk to an appropriately low level. If applicable, performance materiality also refers to the amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions, account balances or disclosures. |
| Aggregation Risk | The probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. |
Requirements: Determining, Revising, and Documenting Materiality (Para. 10-14)
Requirements
Determining Materiality and Performance Materiality When Planning the Audit
Special Circumstances: If, in the specific circumstances of the entity, there is one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users, the auditor shall also determine the materiality level or levels to be applied to those particular classes.
- Assessing the risks of material misstatement
- Determining the nature, timing and extent of further audit procedures
Revision as the Audit Progresses
- Revise performance materiality
- Determine whether the nature, timing and extent of the further audit procedures remain appropriate
Documentation
| Documentation Item | Reference |
|---|---|
| (a) Materiality for the financial statements as a whole | Paragraph 10 |
| (b) If applicable, materiality level(s) for particular classes of transactions, account balances or disclosures | Paragraph 10 |
| (c) Performance materiality | Paragraph 11 |
| (d) Any revision of (a)-(c) as the audit progressed | Paragraphs 12-13 |
Application Guidance: Materiality and Audit Risk (Para. A1-A3)
Application and Other Explanatory Material
Materiality and Audit Risk
In conducting an audit, the overall objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. The auditor obtains reasonable assurance by obtaining sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.
Audit Risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of:
- Risks of material misstatement
- Detection risk
Materiality and audit risk are considered throughout the audit, particularly when:
- Identifying and assessing the risks of material misstatement (HKSA 315 (Revised 2019))
- Determining the nature, timing and extent of further audit procedures (HKSA 330)
- Evaluating the effect of uncorrected misstatements on the financial statements (HKSA 450) and forming the opinion in the auditor's report (HKSA 700 (Revised))
Materiality in the Context of an Audit
Identifying and assessing the risks of material misstatement involves professional judgment to identify those classes of transactions, account balances and disclosures, including qualitative disclosures, the misstatement of which could be material.
| Factor for Qualitative Disclosures | Example |
|---|---|
| Circumstances of the entity for the period | Entity may have undertaken a significant business combination |
| Applicable financial reporting framework, including changes | New financial reporting standard requiring new qualitative disclosures |
| Qualitative disclosures important due to nature of entity | Liquidity risk disclosures for a financial institution |
Application Guidance: Determining Materiality and Performance Materiality (Para. A4-A14)
Determining Materiality and Performance Materiality When Planning the Audit
Use of Benchmarks in Determining Materiality
Determining materiality involves the exercise of professional judgment. A percentage is often applied to a chosen benchmark as a starting point.
| Factor Affecting Benchmark Selection | Description |
|---|---|
| Elements of financial statements | Assets, liabilities, equity, revenue, expenses |
| User focus | Items on which users' attention tends to be focused (e.g., profit, revenue, net assets) |
| Entity nature, life cycle, industry and economic environment | Where the entity is in its life cycle and operating environment |
| Ownership structure and financing | Debt vs. equity financing affects user focus |
| Relative volatility of benchmark | Stability of the chosen benchmark |
Examples of Appropriate Benchmarks:
- Profit before tax (most common for profit-oriented entities)
- Total revenue
- Gross profit
- Total expenses
- Total equity
- Net asset value
| Entity Type | Typical Benchmark | Typical Percentage |
|---|---|---|
| Profit-oriented entity (manufacturing) | Profit before tax from continuing operations | 5% |
| Not-for-profit entity | Total revenue or total expenses | 1% |
Considerations Specific to Small Entities
When an entity's profit before tax from continuing operations is consistently nominal (e.g., owner-managed business where owner takes profit as remuneration), a benchmark such as profit before remuneration and tax may be more relevant.
Considerations Specific to Public Sector Entities
In an audit of a public sector entity:
- Total cost or net cost (expenses less revenues) may be appropriate benchmarks for program activities
- Where the entity has custody of public assets, assets may be an appropriate benchmark
Materiality Level or Levels for Particular Classes
| Factor Indicating Need for Lower Materiality Levels | Example |
|---|---|
| Law, regulation or applicable financial reporting framework affecting user expectations | Related party transactions, management remuneration, sensitivity analysis for fair value estimates |
| Key disclosures related to industry | Research and development costs for a pharmaceutical company |
| Focus on particular aspect of business separately disclosed | Disclosures about segments or significant business combination |
Performance Materiality
Purpose: 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.
Key Characteristics:
- Set at less than materiality for the financial statements as a whole
- Reduces aggregation risk to an appropriately low level
- Relating to a particular class, set to reduce probability that aggregate of uncorrected and undetected misstatements in that class exceeds the materiality level for that class
Determination Factors:
- Not a simple mechanical calculation
- Involves exercise of professional judgment
- Affected by auditor's understanding of the entity (updated during risk assessment procedures)
- Nature and extent of misstatements identified in previous audits
- Auditor's expectations in relation to misstatements in the current period
Application Guidance: Revision as the Audit Progresses (Para. A15-A16)
Revision as the Audit Progresses
Circumstances Requiring Revision
| Circumstance | Example |
|---|---|
| Change in circumstances during the audit | Decision to dispose of a major part of the entity's business |
| New information | Discovery of new facts affecting materiality |
| Change in auditor's understanding | Results of performing further audit procedures |
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