Materiality is a concept in auditing that attempts to set a dollar value guideline for the scope of evidence testing at the substantive level, analytical procedures, and to a lesser extent, controls testing.
According to Krupo:
“Materiality is the smallest misstatement of a company’s finances that would cause a person to change how they value the entity in question.”
That sums it up nicely. It’s really based on what’s important to someone with a stake in the financial health of the entity.
For audits of for-profit companies, materiality is usually based on a percentage of revenues or income (pre-tax). 1-2% of revenues or 5-10% of net income is the benchmark. In non-profit organizations, materiality is usually 1-2% of expenditures.