External audit
External audit: an independent examination of a company's financial statements by qualified auditors, who report an opinion on whether the accounts give a true and fair view.
FrameworkInternational Standards on Auditing
See it move
An auditor sets overall materiality as a percentage of a benchmark such as profit before tax. A company reports profit before tax of €400,000, and the auditor sets materiality at 5%, giving a threshold of €400,000 × 5% = €20,000. Misstatements below that figure, on their own, are judged unlikely to change a user's decisions.
Check yourself
An audit firm is testing a company's revenue account. The company reported revenue of €4,800,000 for the year, and the audit team has set overall materiality at 1% of revenue. During testing, the auditor finds a single recording error that overstated revenue by €36,000. Based on the materiality threshold, how should the auditor most likely treat this error?