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Ma’am I want to understand how does this make sense? On one hand performance materiality tests “individual” transactions, accountablance… but on the other hand its definition below states that it is done reduce the risk that “total/aggregate” of errors in transactions…
So it has to either right? How can it test both both on individual and aggregate basis?
It is used for testing individual transactions, account balances and disclosures. The aim of performance materiality is to reduce the risk that the total of errors in balances, transactions and disclosures does not in total exceed overall materiality.
If there are 5 audit areas – A, B, C, D and E
And performance materiality is $10k you could have undetected errors in each audit area of less than $10k – say $9k in each = aggregate $45k
If your overall materiality is $20 you will have to modify the audit plan – reduce performance materiality – and do yet more audit work. That’s not efficient.
If from the outset you set performance materiality at $4k for each audit area – the aggregate that you fail to detect will be less than $20k.
You only need to know that performance materiality is less and understand why – you won’t be expected to set performance materaility given overall materiality. In practice this might be simply calculated along the lines here (i.e. overall materiality divided by the # of audit areas) – or it might be different lesser amounts to each audit area depending on their relative risk (the higher the risk – the lower the level of monetary materiality).
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