ACCA Audit and Assurance (F8) Practice Exam

What does 'performance materiality' refer to in an audit context?

1. The total materiality for financial statements

2. The reduction in materiality to reduce aggregate misstatements

3. The initial assessment of materiality for planning

4. The threshold for reporting misstatements

The correct answer is: The reduction in materiality to reduce aggregate misstatements

In an audit context, performance materiality refers to the amount set by the auditor that is less than the overall materiality for the financial statements. This concept is crucial because it acts as a safety net to reduce the risk that the total of uncorrected and undetected misstatements exceeds the overall materiality level for the financial statements as a whole. By establishing performance materiality, auditors recognize that even a number of small misstatements could accumulate and lead to a larger impact on the financial statements, which may not be acceptable. This practice helps in designing the audit procedures and ensuring a thorough examination of the financial records. It also minimizes the chance of overlooking significant misstatements that might otherwise go undetected if only a single overarching materiality level was considered. Setting performance materiality is integral to effective audit planning and execution, as it guides the auditor in determining the nature, timing, and extent of audit procedures necessary to gather sufficient and appropriate evidence.