Why Is Performance Materiality Lower Than Overall Materiality?
Overall materiality addresses what could influence users. Performance materiality creates a safety margin below that threshold.
Overall materiality
The auditor uses professional judgment and relevant benchmarks such as pretax income, revenue, assets, or equity depending on the entity and circumstances.
Performance materiality
Performance materiality is set below overall materiality because several individually small misstatements can aggregate and the auditor may not detect every error.
Tolerable misstatement
In sampling and account-level testing, tolerable misstatement is often connected to performance materiality and the audit plan.
Materiality can change
If circumstances change during the audit, materiality may be revised, potentially affecting sample sizes, procedures, and evaluation of misstatements.
The takeaway
Overall materiality is the financial-statement threshold. Performance materiality builds in a safety margin.
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FAQ
Is performance materiality higher than overall materiality?
No.
Is materiality purely a formula?
No. Professional judgment matters.
Can materiality be revised?
Yes.