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- September 3, 2014 at 5:08 pm #193517
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.
September 3, 2014 at 7:54 pm #193548Let’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.
September 4, 2014 at 1:18 am #193574Very clear explanation. Thank you so much
September 9, 2014 at 2:19 am #194378Thank you Mr Gromit
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