AU-C Section 200.07: The Concept of Materiality

AU-C Section 200.07 says:

"The concept of materiality is applied by the auditor when both planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and uncorrected misstatements, if any, on the financial statements. 1 In general, misstatements, including omissions, are considered to be material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users that are taken based on the financial statements. Judgments about materiality are made in light of surrounding circumstances, and involve both qualitative and quantitative considerations. These judgments are affected by the auditor's perception of the financial information needs of users of the financial statements, and by the size or nature of a misstatement, or both. The auditor's opinion addresses the financial statements as a whole. Therefore, the auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by fraud or error, that are not material to the financial statements as a whole, are detected."

 
Let's break this down piece by piece:

• "the planning AND performing stage": At the beginning of the audit, the auditor will decide materiality levels that might be appropriate based on his understanding of the entity and its users.  This will allow the auditor to develop procedures that are appropriate to address his most significant risks of material misstatement and the concerns of the financial statement users.  As the auditor performs the audit procedures, he will consider these materiality levels and respond appropriately, sometimes even changing the materiality levels as new information comes to light.
• "uncorrected misstatements": At the end of the audit, the auditor will accumulate the misstatements that have not been corrected by management, and decide whether the accumulation of those misstatements are material to the financial statements as a whole.
• "reasonably be expected to influence the economic decisions of users": A misstatement is considered to be material if it would alter the decision of the financial statement users in relation to the company; for example, regulators may find different areas of the financial statements important as compared to investors, vendors, customers, etc.  The materiality levels need to be developed based on what these users find important.
• "qualitative and quantitative considerations...size or nature of misstatement": The auditor should develop materiality levels not only on dollar amounts, but should also consider the qualitative aspect of the misstatement.  For example, the misstatement amount might be quantitatively small, but the financial statement user's decisions might be altered by that tiny misstatement based on qualitative factors.  
• "financial statements as a whole": The determination of the auditor's opinion is not on one particular account or assertion; it is on the financial statements as a whole.  For that reason, the auditor needs to determine whether all misstatements when aggregated together affect an economic decision that could be made by a financial statement user.  The auditor has no responsibility to plan and perform the audit to detect immaterial misstatements.

 https://www.aicpa.org/content/dam/aicpa/research/standards/auditattest/downloadabledocuments/au-c-00200.pdf