Setting Thresholds (+2)

Setting Thresholds

Materiality thresholds determine which variances require investigation and narrative explanation. Set thresholds based on:

1. Financial statement materiality: Typically 1-5% of a key benchmark (revenue, total assets, net income)
2. Line item size: Larger line items warrant lower percentage thresholds
3. Volatility: More volatile line items may need higher thresholds to avoid noise
4. Management attention: What level of variance would change a decision?

Recommended Threshold Framework

Set dollar thresholds based on your organization's size. Common practice: 0.5%-1% of revenue for income statement items.

Investigation Priority

When multiple variances exceed thresholds, prioritize investigation by:

1. Largest absolute dollar variance — biggest P&L impact
2. Largest percentage variance — may indicate process issue or error
3. Unexpected direction — variance opposite to trend or expectation
4. New variance — item that was on track and is now off
5. Cumulative/trending variance — growing each period