Performance materiality means the amount set by auditor at less than materiality for the financial statement as whole, to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatement exceeds materiality for the financial statement as whole.
Performance materiality can be set for financial statement as whole or for class of transaction, account balance or disclosure.
Performance materiality is set when audit is preparing audit strategy. Purpose of setting performance materiality is to assess the risk of material misstatement and to determine the nature timing and extent of further audit procedures.
Performance materiality is set to ensure that the risk of aggregate of uncorrected and undetected misstatement in the financial statements exceeding the materiality for financial statement as whole is kept to an appropriately low level.
Determination of performance materiality is not simple mechanic calculation and it involves the use of professional judgement.
Determination of performance materiality is affected by factors such as:
- Auditors understanding of the entity obtained during the performance of risk assessment procedures and
- Nature and extent of misstatement identified in previous audit and thereby the auditor’s expectations in relation to misstatement in the current period.