“The amount set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.” The performance materiality aims to reduce the impact of materiality.
performance materiality is always less than overall materiality. So, they need to decide how much lower it should be. Auditors usually determine the performance materiality based on the level of risks that are involved in the audit. While overall materiality is for financial statements as a whole, performance materiality is the materiality for particular classes of transactions, account balances, or disclosures.
the level of performance materiality that auditors determine will need to reflect the identified and assessed risks of material misstatement for particular classes of transactions, account balances, or disclosures.
Performance Materiality (PM) is calculated as a percentage of materiality.
The Percentage is subjective and dependent on several factors including
Knowledge obtained from the prior year audit of the same entity,
Understanding of the client and its industry,
Auditor Professional Judgement,
Misstatements or errors noted during the previous year audits etc.
If the auditor’s re-evaluation results in a lower amount for the materiality level than initially established by the auditor, the auditor should evaluate the effect, if any, of the lower amount or amounts on risk assessments and audit procedures and modify the nature, timing, and extent of audit procedures as necessary to obtain sufficient appropriate audit evidence.
