What is component materiality?
The group engagement team sets component materiality to reduce aggregation risk. If every component auditor tested to group materiality, the combined undetected misstatements across all components could exceed that threshold without any single component triggering an exception. ISA 600 (Revised).30 addresses this by requiring the group engagement team to determine component materiality at an amount lower than group materiality.
There is no prescribed formula. Most firms apply a percentage of group materiality, typically 50% to 85%, adjusted for the component's relative size and risk profile. A component contributing 60% of consolidated revenue typically receives a higher component materiality than one contributing 5%, but the relationship is not linear. The group engagement team must exercise judgment and document the rationale. ISA 600 (Revised).A63 provides application guidance on the factors to consider, including the number of components in the group and the extent to which misstatements in individual components could aggregate.
Key Points
- Component materiality must always be lower than group materiality.
- The group engagement team determines it, not the component auditor.
- Different components within the same group can have different component materiality amounts.
- Setting component materiality too high is one of the most frequent group audit inspection findings.
Worked example: Vandenberghe Holding N.V.
Client: Belgian holding company, FY2024, consolidated revenue €95M, IFRS reporter, five components based primarily in Belgium, with one subsidiary each in Luxembourg and the Netherlands.
Set group materiality
The group engagement team sets group materiality at €950K (1% of consolidated revenue). Benchmark selected: revenue, as the group is a diversified holding with no single dominant profit driver.
Largest component
Vandenberghe Bouw B.V. (Netherlands, revenue €38M, 40% of consolidated). Component materiality set at €665K (70% of group materiality). The higher percentage reflects the component's size and the group engagement team's direct involvement in the audit work.
Smaller component
Vandenberghe Services Luxembourg S.à r.l. (revenue €8M, 8% of consolidated). Component materiality set at €475K (50% of group materiality). The lower percentage reflects the use of a component auditor in a different jurisdiction and limited oversight visibility.
Test the aggregate
The group engagement team checks that the sum of component materiality levels does not exceed group materiality multiplied by a factor that would eliminate the aggregation protection. Five components with an average component materiality of €570K means €2.85M in combined headroom, against €950K in group materiality. The aggregation risk buffer holds.
Component materiality for each of the five components ranges from 50% to 75% of group materiality, differentiated by size and risk profile. The documentation supports the judgment if reviewed.
What reviewers and practitioners get wrong
Firms frequently set a single flat percentage of group materiality for all components without differentiating by size or risk. ISA 600 (Revised).30 does not require differentiation, but ISA 600 (Revised).A63 makes clear that the group engagement team should consider the component's characteristics. Regulators view a uniform percentage across a 60%-of-group component and a 2%-of-group component as a lack of professional judgment.
Teams sometimes allow the component auditor to set component materiality independently. The standard is clear: the group engagement team determines this amount. If the component auditor receives a number and adjusts it without the group engagement team's agreement, the group audit file has a gap.
Component materiality vs. group materiality
- Who determines it: Component materiality — group engagement team. Group materiality — group engagement team.
- Applies to: Component materiality — individual component financial information. Group materiality — group financial statements as a whole.
- Amount: Component materiality is always lower than group materiality. Group materiality is set using standard ISA 320 benchmarks.
- Purpose: Component materiality reduces aggregation risk across components. Group materiality determines the threshold for the group audit opinion.
- Reassessment trigger: Component materiality — change in group risk assessment or component scope. Group materiality — change in group circumstances or benchmark.
Key standard references
- ISA 600 (Revised).30: Requires the group engagement team to determine component materiality at an amount lower than group materiality.
- ISA 600 (Revised).A63: Application guidance on factors to consider when setting component materiality.
- ISA 320: Standard benchmarks for determining materiality, from which group materiality is derived.
Related terms
Related reading
Frequently asked questions
Can the component auditor set their own component materiality?
No. ISA 600 (Revised) is clear that the group engagement team determines component materiality. If the component auditor receives a number and adjusts it without the group engagement team's agreement, the group audit file has a gap.
Must every component have the same component materiality percentage?
No. Different components within the same group can and often should have different component materiality amounts. Setting a single flat percentage without differentiating by size or risk is a common inspection finding that regulators view as a lack of professional judgment.