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Dear Ken,
Is Performance materiality and tolerable error same? I have read an article which stated in rare cases there will be difference among them.
Lets suppose I took 1% Overall materiality of sales which is $500,000 materiality.
Now I will take, lets say, 75% of 500000 to calculate tolerable error, which will be used on account balance working papers.What you say? I just want to know the difference between PM and TE and Di minimis.
Performance materiality (ISA 320) “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.”
Tolerable misstatement (ISA 530) “Tolerable misstatement – A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population. ” or… A tolerable misstatement is the amount by which a financial statement item can differ from its true amount without impacting the fair presentation of the entire financial statements.” [the term ‘tolerable misstatement’ has replaced ‘tolerable error’.]
So, performance materiality is used whilst carrying out audit tests to catch relatively small errors that might add up to something material to the FS; tolerable error is used when assessing the FS as a whole to see if they show a T&F view.
I have not really seen the phrase ‘de minimis’ used in auditing.
So, if I have a Materiality of say $500,000, how should I calculate PM?
There is a judgement call? I can reduce the Materiality to $300,000, so this is PM?
if the error due to fraud or error is above TE, we should aggregate those errors right? And if they are below we can ignore it. TE is calculated by taking 70-85% of PM?
Query 1 = judgement
Tolerable error is not a phrase that should be used any more.
Errors should always be aggregated – that’s why performance materiality was invented.
PM<TM.
So PM might be set at $30k and TM might be set at $50K. Two errors of $35K could aggregate to $70K so the FS would be showing a material misstatement if they were not corrected.
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