Lessons · Accounting · why you work to a number lower than materiality
Why you work to a number below materiality
Performance materiality is set lower than overall materiality, so that many small misstatements, each individually acceptable, do not add up past the line without anybody noticing.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
It is the answer to a question that sounds like a trick and is not: if nothing you found was material on its own, can the accounts still be materially wrong? Yes, easily. Twenty errors below the threshold can total well above it, and working to the overall figure everywhere would let exactly that happen.
How to think about it
Apply the firm's percentage to overall materiality. Use the lower figure when deciding sample sizes and when deciding whether to follow something up.
Worked example
Overall materiality is the line for the statements as a wholeJudged at the end, on the total.
Performance materiality is a lower working figureUsed while doing the work.
It leaves room for the errors you did not findSampling means some exist.
And for many small ones adding upWhich is the failure it exists to prevent.
Your turn
Name why performance materiality is set below overall materiality.
It leaves room for undetected errors and for small ones that
Solve one, graded on the server
The trap
Using overall materiality when selecting samples. It makes the samples smaller and the audit cheaper, and it removes the whole margin that was protecting the conclusion.