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Performance materiality (ISA 320)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AAA Exams › Performance materiality (ISA 320)

  • This topic has 3 replies, 3 voices, and was last updated 8 years ago by MikeLittle.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • August 10, 2016 at 11:02 pm #332611
    rakhi
    Member
    • Topics: 20
    • Replies: 19
    • ☆

    Hi please can you explain what performance materiality is with a example.This being performed at the planning and risk assessment of a audit. Many thanks for your help rakhi.

    August 11, 2016 at 6:02 am #332633
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23303
    • ☆☆☆☆☆

    This is the definition of performance materiality per the ISA:

    “performance materiality means the amount or amounts 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. If applicable, performance materiality also refers to the amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions, account balances or disclosures.

    So, we have 2 distinct materiality levels – the first is applicable to the financial statements as a whole and that concept has existed since time immemorial (not quite that long but you know what I mean)

    The second is this new(ish) idea of a different materiality concept – performance materiality – where an value is set that is lower than the financial statement materiality level

    The idea is to reduce the possibility that an aggregation of errors discovered during the course of the audit is not material

    Each individual error may be lower than the financial statement materiality level. But when aggregated the total affect is greater than that financial statement materiality level

    Thus the auditor will determine separate, lower values for financial statement component figures in order to minimise the risk of a material aggregation

    Say you had decided that $20,000 was the materiality level for assets. If a receivable balance were wrong, by more than that amount, the possibility of a material misstatement has to be considered and the error has to be noted by the audit team for consideration by the partner and could potentially result in the auditor asking the client to amend / correct the financial statements

    However, what if receivables were overstated by $12,000 and non-current assets overstated by $7,000 and liabilities understated by $10,000? These errors add up to $29,000 and they each represent an overstatement of assets.

    Individually none of these errors causes even a small flutter of excitement in the mind of the auditor but, collectively, they aggregate to a material amount.

    Therefore, materiality is set at a lower level for individual component elements of the financial statements specifically to address such a scenario

    August 14, 2016 at 6:11 am #333049
    louis92
    Member
    • Topics: 3
    • Replies: 6
    • ☆

    Excellent explanation. Thank you Mike.

    August 14, 2016 at 9:03 am #333071
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23303
    • ☆☆☆☆☆

    You’re welcome

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