[Madhav]

As per my understanding, Materiality apply to overall audit where as Performance materiality applies to particular audit section like Inventory. Can any one explain in more? Thank You.

[Jui]

Hi,

Your understanding is perfectly correct. Apply Performance materiality when you are deciding whether an inventory balance is correct or not. And apply materiality when you are assessing whether the financial statements as a whole are mistated.

[PDiddy2000]

In a sense, you're correct. Materiality is basically a big picture or higher level concept which is determined by the auditor based on the client's overall needs or the auditor's perception of the client's needs. Performance materiality applies at a lower level which is used to assess risks of material misstatements of financial statements. The amounts set at performance materiality will always be set lower than the amount of materiality. Both of these are determined in the planning stages by the audit team.

[DoubleBogey]

Performance materiality is also supposed to lower the risk of material misstatement since you will be testing at a lower threshold than total materiality.

[Madhav]

Thank you all. How ever i want to be more specific and please help me explain more.

Let suppose Materiality is $6000 and Performance materiality is $5000(Inventory). If i get inventory balance misstated by $5500, my performance materiality of inventory would be affected(materially misstated) however overall misstatement would still be ok since it is below Materiality. So my answer would be: for inventory only it is misstated and for financial statement as whole is it not misstated. Thank You.

[MaLoTu]

is this for the exam or real world?

We typically have an overall materiality, then a performance materiality, then we have a scope. All FSAs over PM are tested, all items over scope (a percentage of PM) in the FSA are tested. If there is a variance above posting (an amount that is clearly trivial, about 5% of overall performance) the variance must be proposed for adjustment. This is how my firm handles it.

[Tim]

I believe the auditor would suggest an adjusting entry to correct the inventory balance. Therefore the overall financial statement materiality threshold won't matter unless management refuses to make the adjustment. If that happened then the auditor may need to lower performance materiality and look for smaller mistatements in other financial statement elements in order to ascertain if the overall financial statements are materially misstated or not.

[Madhav]

@MaLoTu, it is aicpa sample exam test question. Yes it is real exam question.

[Madhav]

@Tim, thank you.

[LongShot]

Your overall planning materiality applies to the financial statements, but your performance materiality applies to your testing sample.

For example, your materiality is $10k you'd apply that to the overall widget expense account. If your performance materiality is $7k you'd apply that to any individual widget invoices you'd pulled for your cash disbursements testing.

Unless I'm remembering wrong, been a few years since I took audit and we use completely different terminology at my firm. But it sounded right when I typed it, so I'll hit submit anyway.

FAR - 75
AUD - 72; 87
REG - 64; 74; 84
BEC - 88

Done!!

[Author]

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