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Auditing & Assurance › Audit Risk & Materiality

What is performance materiality and why is it lower than overall materiality?

Intermediate

Answer

Performance materiality is an amount set below overall materiality to reduce the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality (aggregation risk). It's applied to procedures and sample sizes, giving a margin so many small individually-immaterial errors don't collectively become material.
Performance materiality = 50-75% of overall materiality
(lower when risk is higher).
Real-world example Setting performance materiality at 65% of overall gives a buffer so several small undetected errors won't breach materiality in total.

Common follow-ups: What is aggregation risk? | How does risk affect the percentage chosen?

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All 18 Audit Risk & Materiality questions