In short
Materiality is the size of a misstatement, alone or with others, that could reasonably be expected to influence the economic decisions of users of the financial statements. Auditors set it during planning as a matter of professional judgment.
Key takeaways
- It is usually set using a benchmark, such as a percentage of pretax income, revenue or total assets.
- Performance materiality is set lower, to reduce the risk that undetected misstatements add up to more than materiality.
- It is revised during the audit if new information would have led to a different amount.
Example
With pretax income of $2,400,000 and a 5% benchmark, overall materiality is $120,000; at 75%, performance materiality is $90,000.
Where it's tested
AUD: Audit Planning & Materiality — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Why does an auditor set performance materiality at an amount lower than overall materiality?