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May i know what is the purpose of having performance materiality ? i read the video and lecture note from OT and it basically concludes that it ensures that auditors can notice any aggregated misstatement that may surpass the materiality level. But audit firm has already set the materiality level but i really do not understand why they have set performance materiality to watch out for possible materiality level ?
Say overall materiality is $100k.
If each audit area is tested to a performance materiality of $50k (say), there could be misstatements of $45k, $38k and $37k that you don’t detect – total is $120.
If performance materiality was $40k you would expect to detect the $45k misstatement so the total undetected is only $80k.
Performance materiality is always less than overall materiality and will be set, based on past experience, etc to have a reasonable expectation of finding the errors which could, in total, be material. (E.g. if there were four balances in the SoFP likely to have errors, divide total materiality ($100k) by 4 and audit each area to a materiality level of $25k.)
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