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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Planning, materiality and assessing the risk of material misstatement

Auditors of Orion Co are planning an audit. Which of the following situations would most justify setting performance materiality at a lower percentage of overall materiality, for example 50% rather than 75%?

A lower percentage is justified when the risk of misstatement is higher, such as a first-year audit with a history of many misstatements. Strong controls and clean history support a higher percentage, and audit fees are irrelevant to setting performance materiality.

  1. AThe audit is a first-year engagement and the client has a history of numerous corrected and uncorrected misstatements in prior years' auditsCorrect
  2. BThe client has a strong control environment and very few misstatements were found in prior audits
  3. CThe client is a stable, owner-managed company with simple transactions and no previous audit issues
  4. DThe audit client has agreed a low audit fee

Explanation

Performance materiality should be lower where risk of misstatement is higher, such as a history of misstatements, weak controls or lack of audit knowledge in a new engagement. Strong controls and few prior errors support a higher percentage. Audit fee level is not a valid factor for setting performance materiality.

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