Performance Materiality and Tolerable Misstatement
Applying Materiality During the Audit
Auditors establish overall materiality for the financial statements and then set performance materiality below that amount to reduce the risk that uncorrected and undetected misstatements exceed overall materiality.
Note
Performance materiality is generally lower than overall materiality to provide a safety margin.
Summary
Different materiality thresholds help auditors plan appropriate testing while minimizing audit risk.