What is Materiality Threshold?
A materiality threshold is the quantitative or qualitative limit above which an error, omission, or misstatement in the financial statements is considered significant enough to influence the decisions of the people who rely on them.
How It Works
- Select a benchmark — typically revenue, profit before tax, total assets, or equity.
- Apply a professional percentage to the benchmark (commonly 0.5%–5%) to set the overall materiality.
- Set a lower performance materiality used during fieldwork to leave room for undetected error.
- Define a clearly trivial threshold below which differences are not even tracked.
- Reassess the threshold whenever new information changes the benchmark.
Saudi Context
External auditors of Saudi joint stock companies follow ISA 320 as adopted by SOCPA, which requires documented materiality calculations in the audit file. For ZATCA-registered VAT taxpayers, even amounts below financial-statement materiality can be qualitatively material if they affect tax compliance.
Example
An auditor sets overall materiality at 5% of pre-tax profit. With pre-tax profit of SAR 4,000,000, overall materiality is SAR 200,000 and performance materiality is set at 75% of that — SAR 150,000.