How to choose benchmarks for Determine Materiality?

The benchmarks and the percentage range to be applied are purely suggestive and the auditor is required to apply his PROFESSIONAL JUDGEMENT for assessing the Risk of Material Misstatement at the engagement level and corresponding percentage of the benchmarks. 

I. Determining Materiality is based on two key aspects - Relevant benchmarks and the type of entity for which materiality is to be determined.  

II.  According to the ICAI guidelines, the financial benchmarks to be chosen depend on the type of entity. Some examples are given below: 

a) Profit Oriented: The entity which is a commercial entity/ formed with the main objective of earning profits; Benchmark: Net Profit before Tax

b) Not for Profit: The entity that is formed with a different objective other than earning profit; Benchmark - Total Revenue,  Total Expenses

c) Debt Financed: The entity is majorly financed through debt funds. Benchmark - Net Asset Value

d) Volatility in Profit: Normalized profit before tax from continuing operations may be used in case of exceptional increase/decrease in profits. Benchmark - Total Revenue, Gross Profits 

e) Liquidity: The entity facing liquidity crises. Benchmark  - Total Equity

f) Entities Executing Public Utility Project/ Program: Central/State governments and related government entities (for example, agencies, boards, commissions).  Benchmark  - Total Cost, Net Cost, Assets 

In AssureAI , 7 benchmarks are given by default to choose from.

III. Once the entity types and the benchmarks are cognized for, it is now relevant to identify percentages relevant for determination of materiality. 

SA 320 doesn't  specifically mention the ranges of percentages that can be used, this is left to the Auditor's Professional Judgement. Ideally the one selected by the auditor should be the benchmark that most represents the needs of the users of financial statements. 

Against each benchmark given in AssureAI, the most common percentage range is given for the auditor to choose from. 

If assessed risk is high, then lower percentages for calculating materiality can be selected. If assessed risk is low then higher percentages can be used.