Materiality is a decision, not a percentage copied from last year
Copying last year’s materiality percentage is tempting. It is also how teams miss shifts in who relies on the statements.
If a bank covenant is tested on EBITDA or tangible net worth, the “user” of the statements may care about different lines than shareholders focused on revenue growth. Tell your auditor about covenant definitions during planning — not after fieldwork sampling is complete.
A company that disposed of a major division may need a different benchmark than revenue. Total assets or equity can be more faithful when top-line figures no longer represent ongoing operations.
Performance materiality — the lower threshold used for sampling — should also be revisited when prior-year adjustments were numerous. More scatter in past corrections usually means tighter testing, not the same sample sizes with hopeful narratives.
Finance teams help most by stating clearly who will receive the opinion and which decisions hang on it. That conversation belongs in the first planning meeting.