Is This Really important? The Everyday Art of Materiality in Accounting

26 Jan

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Even accountants don’t have time to chase every cent.

We need to meet VAT deadlines, answer client emails, and deal with bank feed that refuses to reconcile. So, how do we know when something’s worth fixing... and when we should just let it go? That’s where materiality can help us.

Materiality is not just for auditors. Anyone can use it to identify what is important enough to focus on, or resolve first, like a director’s shady loan account or a misclassified donor payment. The kind of things that could get your client in trouble with SARS or make your financial report look unprofessional. Think of materiality as your accounting sixth sense: “If I ignore this, will anyone care?”

In this article we’ll look at what materiality really means, when to use it, and how to calculate it (without needing a maths degree).

What is Materiality?

Materiality is simple: it’s the tipping point. If getting something wrong or leaving something out of the financial statements would change the mind of a reader relying on the financials (like SARS, an investor, or a donor), then it’s material. It’s not about perfection. It’s about knowing when a misstatement is ‘big enough’ to influence decisions. It is important to look at numbers, but materiality is not only about the numbers. Sometimes, a small mistake involving a director, donor, or legal obligation matters more than a big rounding error.

When Do We Use It?

The short answer is: you should use if all the time, especially during professional engagements.

In financial reporting we judge whether we need to pass journals to achieve ‘fair presentation’ as required in the Companies Act.
In independent reviews and assurance engagements we use materiality to decide what accounts or disclosures to analyse further. We also look at materiality to decide whether a misstatement should be included in the reports.
During variance analysis we set limits to decide on red flags. For example, we can decide that all variances over 10% will be further investigated.
Audits to focus efforts and avoid over-auditing the obvious.

Quantitative vs Qualitative Materiality

There are two sides to every materiality decision:

Quantitative consideration: is the amount big enough?
Say your threshold is R8,000. A R2,000 error might be ignored, but not if it’s repeated across 10 accounts.
Qualitative consideration: even a tiny misstatement can be important for users due to the nature of it, or the circumstances surrounding it. For example:

A R2,500 loan to a director that was not recorded in the books is material as it signals potential governance risk.
A R900 VAT claim processed for personal furniture is material as it is fraudulent.
UIF registration missed by an NPO? The fine is tiny, but the compliance risk is big.

If it involves fraud, legal issues, or reputational damage, it is material, no matter the size.

Calculating Materiality

You can calculate materiality using a 3-step approach.

Step 1: Choose the right base

Ask yourself: What do the users of these financials care about most?

Use profit if the client is profit-driven (e.g. consultants, SMEs chasing bottom-line performance).
Use revenue or total assets for NPOs, schools, or asset-heavy businesses, especially when cash flow and stewardship matter.
Use the smallest base if there’s a risk of fraud or tax issues, better to be cautious than to end up explaining yourself to SARS.

Step 2: Pick your percentage

This is where you apply a standard % to the base, based on risk.

Low risk? You might use 5–10% of profit or 1–2% of revenue.
Higher risk? Go lower. Maybe 3% of profit or 0.5–1% of revenue.
If controls are weak, there’s regulatory exposure, or SARS is sniffing around, tighten the threshold.

Step 3: Adjust for red flags

Even if something seems immaterial by size, ask yourself:

Does it involve related parties?
Is it linked to public money or donor funds?
Could it affect compliance, like B-BBEE scoring, SARS submissions, or the Companies Act?

If yes, then it’s material in nature, and you need to treat it that way. Conservative is the name of the game here.

Considering Errors

Even if the error is below your materiality number, you should ask:

“Would this influence a user’s decision?”

If the answer is yes, it’s material. Correct the error, disclose it, or flag it in your report. Ignoring the issue today could mean explaining a big mess tomorrow.

Calculating Materiality Example

You’re doing an independent review for a small education NPO:

Revenue: R1,200,000
Profit before tax: R132,000
Assets: R845,000

Let’s walk through the steps:

Step 1: Pick your base

Since it’s an NPO, and funders care about how money is used, you choose revenue.

Step 2: Apply a %

You judge the risk as moderate → apply 0.7% of revenue
→ Materiality = R8,400

Step 3: Adjust for qualitative factors

Qualitative factors that influence materiality include:

High risk of fraud
The client is a public interest entity (e.g. NGO, school, fund manager)
There’s sensitive reporting (e.g. donor reporting, B-BBEE scores, tax disputes)
Users place greater reliance on specific disclosures or accounts.

Know What Matters and Why It Matters

Materiality is for all accountants. It’s how you decide what’s worth fixing, what’s worth flagging, and what could get your client into trouble if left alone. It helps you focus on the big stuff, not get stuck in the small stuff. When used right, it saves you time, helps you work smarter, and shows your value as a true professional.

You don’t have to be perfect. You just need good judgment. And now you’ve got the tools to make those judgment calls with confidence.

Want to sharpen those skills even further?

Join us for CIBA’s Materiality for Assurance Work: Getting It Right in Independent Reviews webinar and turn what you’ve learned today into a career advantage.

You’ll walk away with the tools to:

Understand exactly what materiality means in real-world reviews and audits
Know which benchmarks to use (and when)
Apply a clear, step-by-step method to calculate materiality confidently
Make judgment calls with authority — especially when risk is involved
Grasp the difference between overall and performance materiality
See how materiality directly affects your planning, testing, and conclusions

We’ll break it down with relatable examples, case-based learning, and templates you can use in your own files.