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1 the amount or amounts set by auditor at less than materiality for financial statements as a whole to reduce to an appropriately low level
the probability that the aggregate of uncorrected & undetected misstatements exceeds materiality for the financial statements as a whole.How to understand this ? Thanks.
Let’s say the profit is $1M. The materiality guides based on profit are 5 – 10% of profit; let’s take 10% ie $100,000. So any error found that’s greater than $100,000 is prima facie material.
However, what if electricity costs were understated by $60,000 (not of itself material) and repair costs understated by $70,000 (again, not material). The combined effect on profit would be to overstate it by $130,000 (ie $60,000 + $70,000).
Performance materiality therefore sets materiality levels lower than they might otherwise be to try to trap aggregate errors. Here, the auditors might set performance materiality at $50,000 (though there is no really scientific way of deciding that.
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