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CA Intermediate · Auditing and Ethics · Audit Strategy, Audit Planning and Audit Programme

During the audit of Himalaya Foods Ltd, the auditor planned materiality for the financial statements as a whole at ₹10 lakh. The auditor also sets performance materiality for the engagement. Which statement about performance materiality is correct under SA 320?

Performance materiality is set below overall materiality, so that the chance that uncorrected and undetected misstatements together exceed overall materiality is kept appropriately low. Setting it higher, equal to the trivial threshold, or leaving it to management is incorrect because it is the auditor's own judgement under SA 320.

  1. AIt is set at an amount higher than overall materiality to save audit time
  2. BIt is set at an amount less than materiality for the financial statements as a whole to reduce the risk that aggregate uncorrected and undetected misstatements exceed materialityCorrect
  3. CIt is always equal to the trivial threshold for clearly trivial misstatements
  4. DIt is determined by the management and communicated to the auditor

Explanation

SA 320 defines performance materiality as an amount set below overall materiality, so that the probability of aggregate uncorrected and undetected misstatements exceeding materiality is appropriately low. Setting it higher would increase that risk. It is the auditor's judgement, not management's, and it differs from the clearly trivial threshold.

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