Key points
- Driven by user sensitivity, not audit risk. The trigger is whether users would change their decisions based on misstatements below overall mat.
- Creates a parallel materiality cascade. Specific mat requires its own PM and clearly trivial threshold, running alongside the overall cascade throughout the audit.
- Common triggers are predictable. Related party transactions, key management compensation, regulatory-sensitive balances, and segment disclosures are the most frequent areas.
- ISA 320 .A10 provides guidance but no formula. The standard acknowledges the need for judgement and does not prescribe a fixed percentage or benchmark.
What is specific materiality?
On most audit files, the materiality memo is SALY with a methodology shield: last year's benchmark, last year's percentage, a short paragraph explaining why it's still appropriate. That works for overall mat. But the page where specific materiality should be documented is often blank, or filled with a single sentence stating "no specific materiality has been identified." The problem is that nobody actually asked the question ISA 320.10 requires them to ask.
ISA 320.10 requires auditors to determine whether there are particular classes of transactions, account balances, or disclosures for which misstatements of lesser amounts than overall mat could reasonably be expected to influence users' economic decisions. When they exist, the auditor sets a separate, lower materiality for those areas. That is specific materiality.
Common examples include related party transactions, key management personnel compensation, regulatory-sensitive balances (such as capital adequacy ratios for banks), and segment-level disclosures that investors monitor independently of the consolidated result.
The judgement is about users, not risk. The question is not "is this area risky?" but "would users change their decisions based on a misstatement smaller than overall mat?" A high-risk area that users evaluate at the overall mat level doesn't need specific mat. It needs more testing at the existing threshold.
Once set, specific mat triggers its own cascade. The auditor determines a specific PM (typically 50 to 75% of specific mat) and a specific clearly trivial threshold (typically 3 to 5% of specific mat). Both cascades run in parallel throughout the engagement and feed separately into the ISA 450.11 evaluation at completion.
Worked example: Kowalski Pharma sp. z o.o.
Client: Polish pharmaceutical distributor, FY2025, revenue EUR 92M, IFRS reporter. Kowalski's board includes three executive directors whose combined compensation package totals EUR 1.8M. Overall mat is EUR 920,000 (1% of revenue). Overall PM is EUR 598,000 (65% of mat).
Step 1: identify the user-sensitive area
Kowalski is listed on the Warsaw Stock Exchange. Analyst reports from the last two years show that three of five published notes flagged director compensation as a key governance concern following a 22% increase in FY2024. Minority shareholders raised questions at the last AGM. Users are demonstrably sensitive to this balance.
Step 2: set specific materiality
The engagement team sets specific mat for key management compensation at EUR 90,000 (5% of the EUR 1.8M compensation total). This is well below overall mat of EUR 920,000, reflecting the heightened user sensitivity. The team documents the analyst coverage and AGM minutes as evidence supporting the decision.
Step 3: cascade to PM and clearly trivial
Specific PM is set at EUR 58,500 (65% of EUR 90,000). The specific clearly trivial threshold is EUR 4,500 (5% of EUR 90,000). Testing of compensation disclosures uses these lower thresholds. A EUR 12,000 misstatement in director bonuses would fall below the overall clearly trivial threshold of EUR 27,600 but exceeds the specific clearly trivial threshold of EUR 4,500, so the team accumulates it on the summary of audit differences and evaluates it against specific mat at completion.
Had the team taken the path of least resistance and just rolled forward last year's "no specific materiality identified" conclusion, that EUR 12,000 misstatement would have disappeared entirely from the evaluation. Given the shareholder scrutiny on this balance, that's a risk the firm shouldn't be carrying.
Why it matters in practice
The most common error is setting specific mat for the wrong reason. Auditors frequently confuse risk with user sensitivity. An area can be high-risk without needing specific mat, and a low-risk area can still require it if users are particularly sensitive to the amounts involved. Director compensation disclosures may carry low inherent risk but very high user sensitivity.
The second pitfall is forgetting to cascade. Setting a specific mat number without also determining specific PM and a specific clearly trivial threshold leaves a gap in the methodology. Testing designed using overall PM won't achieve the precision needed for the lower specific mat threshold. We've seen review notes come back asking "you set specific materiality at EUR 50,000, but your sample was designed to detect misstatements above EUR 200,000. How does that work?" It doesn't.
Managing two parallel mat frameworks adds real complexity to both planning and completion. The summary of audit differences must track misstatements against both cascades. A misstatement that falls below the overall clearly trivial threshold may still exceed the specific clearly trivial threshold for related party transactions, requiring accumulation and evaluation in that context. Teams who don't set up the tracking sheet at planning often end up reconstructing it at completion under time pressure, which is exactly when things get missed.
Key standard references
- ISA 320.10 (specific mat determination): requires the auditor to consider whether lower materiality levels are needed for particular transaction classes, balances, or disclosures.
- ISA 320 .A10 (application guidance): factors that may indicate certain areas require specific mat, including legal and regulatory requirements and user expectations.
- ISA 320.11 (performance materiality): determining PM to reduce to an appropriately low level the probability that aggregate uncorrected and undetected misstatements exceed mat.
- ISA 320.14 (documentation): requires the auditor to document mat levels, including specific mat and any revisions during the audit.
- ISA 450 .A2 (misstatement evaluation): guidance on evaluating accumulated misstatements, including those measured against specific mat.
Related terms
Related tools
Related reading
Frequently asked questions
When should you set specific materiality?
When a particular user group would change their decisions based on misstatements smaller than overall mat. Common triggers include related party transactions, director or key management compensation disclosures, regulatory-sensitive balances, and segment-level disclosures that investors monitor independently. The trigger is user sensitivity, not audit risk.
What happens after you set specific materiality?
The entire mat cascade runs separately for the affected area. You need a specific PM (typically 50 to 75% of specific mat) and a specific clearly trivial threshold (typically 3 to 5% of specific mat). Testing of the affected balance or disclosure uses these lower thresholds. Both cascades feed into the ISA 450.11 evaluation separately at completion.
Is specific materiality the same as setting a lower materiality for high-risk areas?
No. Specific mat is driven by user sensitivity, not by audit risk. A high-risk area does not automatically need specific mat. If users would not change their decisions based on misstatements below overall mat, the correct response to high risk is more testing at the existing threshold, not a lower materiality.