The Financial Reporting Council (FRC) has published the findings of its first Audit Quality Thematic Review examining auditors' materiality judgements, which has concluded they should focus more on the needs and expectations of users in setting and revising overall materiality levels.

The FRC's review makes a number of recommendations to audit committees and encourages them to discuss with their auditors the basis for the materiality levels set including, in particular, how these reflect the needs and expectations of users of the entity's financial statements.

The regulator says that auditors must recognise that qualitative factors relating to the needs and expectations of users of an entity's financial statements should be the overriding consideration in determining the overall materiality level.

Auditors should ensure that where materiality benchmarks are adjusted for 'one-off' items, these adjustments are appropriate in the circumstances. They should also show that they have looked closely at risk when setting performance materiality and avoid the default position of simply setting this at the highest level allowed under their firm's guidance.

The FRC is also calling on auditors to improve the quality and accuracy of their reporting of materiality levels to audit committees and ensure that all uncorrected misstatements above the reporting threshold agreed are collated and reported.

Paul George, FRC executive director, conduct said: 'This report should promote a better understanding of current practice at the largest firms and how materiality decisions affect the scope and extent of auditors' work. Our findings assist the development of good practice within firms and should help audit committees in discharging their responsibilities.'