Document ID: chunk:federal_register_of_legislation:F2023C01123:reg:9:p7
Version: federal_register_of_legislation:F2023C01123
Segment Type: reg
Provision Reference: reg 9 (pt 7/9)
Character Range: 23603–26728

in the financial reporting period, materiality relates to the financial report prepared for that financial reporting period.

A8.             Determining a percentage to be applied to a chosen benchmark involves the exercise of professional judgement.  There is a relationship between the percentage and the chosen benchmark, such that a percentage applied to profit before tax from continuing operations will normally be higher than a percentage applied to total revenue.  For example, the auditor may consider five percent of profit before tax from continuing operations to be appropriate for a profit-oriented entity in a manufacturing industry, while the auditor may consider one percent of total revenues or total expenses to be appropriate for a not-for-profit entity.  Higher or lower percentages, however, may be deemed appropriate in the circumstances.

Considerations Specific to Small Entities

A9.             When an entity's profit before tax from continuing operations is consistently nominal, as might be the case for an owner-managed business where the owner takes much of the profit before tax in the form of remuneration, a benchmark such as profit before remuneration and tax may be more relevant.

Considerations Specific to Public Sector Entities

A10.         In an audit of a public sector entity, total cost or net cost (expenses less revenues or expenditure less receipts) may be appropriate benchmarks for program activities.  Where a public sector entity has custody of public assets, assets may be an appropriate benchmark.

Materiality Level or Levels for Particular Classes of Transactions, Account Balances or Disclosures (Ref: Para. 10)

A11.         Factors that may indicate the existence of one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than materiality for the financial report as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report include the following:

           * Whether law, regulation or the applicable financial reporting framework affect users' expectations regarding the measurement or disclosure of certain items (for example, related party transactions the remuneration of management and those charged with governance, and sensitivity analysis for fair value accounting estimates with high estimation uncertainty).

           * The key disclosures in relation to the industry in which the entity operates (for example, research and development costs for a pharmaceutical company).

           * Whether attention is focused on a particular aspect of the entity's business that is separately disclosed in the financial report (for example disclosures about segments or a significant business combination).

A12.         In considering whether, in the specific circumstances of the entity, such classes of transactions, account balances or disclosures exist, the auditor may find it useful to obtain an understanding of the views and expectations of those charged with governance and management.

Performance Materiality (Ref: