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

Harbour Ltd, a manufacturing company, is audited by Keel & Co. At the planning stage the audit team calculates overall materiality as 1% of revenue. Which statement best describes how performance materiality relates to this figure under ISA 320?

Performance materiality is set below overall materiality at the planning stage. Its purpose is to lower the probability that the total of uncorrected and undetected misstatements exceeds overall materiality. It is not the clearly trivial threshold and is not set after the audit.

  1. APerformance materiality is set below overall materiality to reduce to an appropriately low level the probability that uncorrected and undetected misstatements in aggregate exceed overall materialityCorrect
  2. BPerformance materiality is set above overall materiality so that minor errors in individual balances can be ignored
  3. CPerformance materiality is the same figure as the clearly trivial threshold used for accumulating misstatements
  4. DPerformance materiality is set only after the audit is complete, based on the misstatements found

Explanation

ISA 320 defines performance materiality as an amount set below materiality for the financial statements as a whole to reduce the risk that aggregate uncorrected and undetected misstatements exceed materiality. It is set at planning, not at the end. The clearly trivial threshold is a separate, much lower figure.

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