Profit fell by a third. What materiality do you set?
Any tool can multiply by 5%. The interview tests which number you multiply, and why.
The question
Wrenhollow’s FY25 draft accounts show revenue of $480m and profit before tax of $24m, down from $36m after a one-off $6m restructuring charge. The company is privately owned; its owners and lenders read the accounts mainly for profit. Last year’s audit found $0.9m of misstatements, and a new ERP system went live in March 2025.
| FY24 | FY25 | |
|---|---|---|
| Revenue | 452 | 480 |
| Profit before tax | 36 | 24 |
| Restructuring charge (one-off) | 0 | 6 |
| Profit before tax and the one-off | 36 | 30 |
| Total assets | 290 | 300 |
Invented data. Years ended December 31; FY25 is draft and unaudited.
“Set overall materiality, performance materiality and the clearly trivial threshold for the FY25 audit, and say why.”
Not saved by this site. Your browser may restore text when you navigate back.
A strong answer, step by step
Open each step in turn. This is one strong answer, not the only one.
Step 1: Pick the benchmark users read
What would you do here? Open the move you’d make.
Use revenue: it’s stable, and 0.5% of $480m is $2.4m.
Tempting, but it misses something. Stable, but not what these users read. And $2.4m is double the $1.2m that 5% of reported profit gives, so more error could pass unchallenged.
Use profit before tax, because owners and lenders read the accounts for profit.
The strong move. Materiality asks what would change users’ decisions; for a profit-making company owned and financed on its earnings, that is usually profit.
Use total assets, because lenders look at the balance sheet.
Tempting, but it misses something. These lenders read profit. An asset benchmark gives a far higher threshold than profit does, set on a figure the users aren’t watching.
See how a strong candidate says it
“Owners and lenders read Wrenhollow for profit, so I’d base materiality on profit before tax, not revenue or assets.”
Why it works: Materiality is about what would change users’ decisions, so the benchmark is the figure they care most about.
Step 2: Adjust for the one-off
What would you do here? Open the move you’d make.
Take 5% of reported profit, $1.2m: stick to the numbers as reported.
Tempting, but it misses something. Mechanical. The $6m charge is one-off, so users judge the business on $30m, and 5% of that is $1.5m.
Use $30m before the one-off charge, so 5% gives $1.5m.
The strong move. It reflects the earnings users will judge the business on, and you can explain the adjustment in one sentence.
Average FY24 and FY25 reported profit: $30m, so $1.5m.
Tempting, but it misses something. The same number by coincidence. Averaging hides the reason; with a $10m charge the average would mislead. Name the one-off and adjust for it.
See how a strong candidate says it
“Reported profit fell to $24m only because of a one-off $6m charge. I’d use $30m before it: 5% gives $1.5m, against $1.2m on reported profit.”
Why it works: A benchmark distorted by a one-off item misstates the earnings users judge the business on.
Step 3: Set performance materiality for the risk
What would you do here? Open the move you’d make.
Set it at 75%, $1.125m: the team knows the business well.
Tempting, but it misses something. Knowing the business doesn’t reduce error. Last year’s $0.9m and a new ERP point to more undetected misstatement, which the higher figure leaves less room for.
Set it at 50%, $750k, because of last year’s misstatements and the new ERP system.
The strong move. Both make undetected misstatement likelier, so you leave more room below overall materiality and name why.
Set it equal to overall materiality, $1.5m, to keep testing efficient.
Tempting, but it misses something. Then errors just under $1.5m in several areas could add up to far more than $1.5m in total, unnoticed.
See how a strong candidate says it
“With $0.9m of misstatements last year and a new ERP system, I’d set performance materiality low, at 50% of $1.5m: $750k.”
Why it works: Performance materiality leaves room for errors the audit won’t find; more risk means more room.
Step 4: Say what the threshold doesn’t cover
What would you do here? Open the move you’d make.
Ignore anything below $1.5m: by definition it isn’t material.
Tempting, but it misses something. Errors below $1.5m still add up, and some are material by nature, such as a misstated payment to a director.
Record every misstatement over $75k, and treat some smaller items as material by nature.
The strong move. You track what could add up, and keep judgment for items users would care about at any size.
Record every misstatement, however small, to be safe.
Tempting, but it misses something. Recording $200 differences buries the ones that matter. A clearly trivial line lets the team focus.
See how a strong candidate says it
“Clearly trivial at 5% of $1.5m is $75k, and I’d record everything above it. A smaller error can still be material by its nature, like a misstated payment to a director.”
Why it works: Materiality is a judgment about users, not only a threshold.
The answer, in short
- Decision
- Overall materiality $1.5m, performance materiality $750k, clearly trivial $75k.
- Because
- Users read Wrenhollow for profit, and $30m before the one-off charge reflects the earnings they judge; last year’s errors and a new ERP justify a low performance materiality.
- What would change it
- Evidence that the restructuring will recur, which would make reported profit of $24m, and $1.2m, the better base.
Common traps
- Picking the benchmark that gives the biggest number.
- Using a one-off year without adjusting it.
- Setting performance materiality without naming the risk.
- Treating materiality as a pass mark for every error.
Check your answer
- Did I pick a benchmark users actually read?
- Did I adjust for the one-off and say why?
- Did I tie performance materiality to named risks?
- Did I mention errors that are material by nature?
Last reviewed Nov 9, 2026