Field notes · 11 May 2026
How we set materiality for mid-size manufacturers
A practical look at choosing performance materiality when inventory turns slowly and export receivables dominate the balance sheet.
When a manufacturer in southern Japan carries three months of finished goods and invoices most sales in foreign currency, a single percentage of revenue rarely tells the whole story. We start with profit before tax when results are stable, then stress-test against equity and total assets if margins swing with exchange rates.
Performance materiality sits below overall materiality so that the sum of undetected misstatements stays within tolerance. For inventory-heavy clients we often set a tighter band on stock and a wider band on prepaid expenses that rarely move the opinion.
Directors sometimes ask why we re-evaluate materiality after a large asset sale mid-year. The answer is simple: the users of the statements care about the remaining business. If the disposal removes a third of revenue, we recalculate rather than carry forward last year’s figure.
Document the judgment. A short memorandum naming the benchmarks considered, the percentages chosen, and any qualitative factors (covenant proximity, related-party volume) keeps the engagement team aligned through fieldwork.