What is Materiality?
Materiality is the threshold above which information is considered important enough that its omission or misstatement could influence the economic decisions of users of the financial statements. Material items must be presented and disclosed in compliance with IFRS, while immaterial items may be aggregated or omitted. Materiality is both quantitative (size) and qualitative (nature).
How It Works
- Quantitative thresholds: commonly 5% of pre-tax profit, 1% of revenue, or 0.5-1% of total assets.
- Qualitative considerations: nature of item (e.g., related-party, fraud, covenant breach) can override numerical thresholds.
- Apply at the entity level for the financial statements as a whole.
- Apply performance materiality (lower threshold) at the audit testing level.
- Document the materiality framework and its application in the audit file.
Saudi Context
SOCPA-licensed Saudi auditors apply ISA 320 and ISA 450 in setting materiality for Tadawul-listed audits. Common Saudi practice sets overall materiality at around 5% of profit before tax for profitable entities. CMA reviews of disclosure breaches sometimes turn on materiality judgments. ZATCA’s tax audit does not apply IFRS materiality, so even immaterial accounting items can trigger tax disputes.
Example
A company’s pre-tax profit is SAR 50 million. The auditor sets overall materiality at SAR 2.5 million (5%) and performance materiality at SAR 1.5 million. Misstatements above SAR 2.5 million individually or in aggregate would require adjustment; the SAR 1.5 million threshold drives the planning of substantive procedures.