Performance materiality is usually higher than overall materiality. Performance materiality is a threshold set below the overall materiality level to reduce the risk that the aggregate of uncorrected and undetected misstatements exceeds overall materiality.
Risk Mitigation: Performance materiality is set higher to provide a buffer that helps ensure that the risk of undetected misstatements that are individually immaterial but collectively significant is minimized.
Audit Strategy: By setting performance materiality at a higher level, auditors can perform more targeted and effective audit procedures. This helps in identifying and addressing potential misstatements that might otherwise go unnoticed.
Compliance and Trust: Higher performance materiality enhances the reliability of the financial statements, ensuring compliance with accounting standards and increasing stakeholders' trust in the financial reporting process.
[References:, MSCI ESG Ratings Methodology (2022) - Discusses the concept of performance materiality and its role in audit risk management., ESG-Ratings-Methodology-Exec-Summary (2022) - Highlights the importance of performance materiality in ensuring accurate and reliable financial reporting., , , , , ]
