Performance Materiality vs. Planning Materiality

Attribute	Performance Materiality	Planning Materiality
Definition	Materiality level set for specific accounts or classes of transactions to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole	Materiality level set for the financial statements as a whole to ensure that the financial statements are not materially misstated
Timing	Evaluated during the audit to determine the materiality level for specific accounts or classes of transactions	Set at the beginning of the audit as a benchmark for the overall materiality level
Scope	Focuses on specific accounts or classes of transactions	Applies to the financial statements as a whole
Objective	To reduce the risk of material misstatement in specific areas	To ensure the overall financial statements are fairly presented

Definition

Performance materiality and planning materiality are two important concepts in the field of auditing. Performance materiality refers to the amount set by auditors at less than the materiality level for the financial statements as a whole. It is used to determine the nature, timing, and extent of audit procedures for specific accounts or disclosures. Planning materiality, on the other hand, is the amount set by auditors at the planning stage of the audit to determine the scope of the audit work. It is typically higher than performance materiality and is used to assess the overall reasonableness of the financial statements.

Attributes

Performance materiality is usually set at a lower threshold than planning materiality. This is because performance materiality is used to assess the materiality of individual accounts or disclosures, while planning materiality is used to assess the materiality of the financial statements as a whole. Performance materiality is also used to evaluate the risk of material misstatement in specific accounts or disclosures, while planning materiality is used to assess the overall risk of material misstatement in the financial statements.

Application

Performance materiality is applied to specific accounts or disclosures during the audit process. Auditors use performance materiality to determine the nature, timing, and extent of audit procedures for those specific accounts or disclosures. Planning materiality, on the other hand, is used at the planning stage of the audit to determine the overall scope of the audit work. It helps auditors assess the overall reasonableness of the financial statements and identify areas of higher risk that may require more extensive audit procedures.

Relationship

Performance materiality and planning materiality are closely related in that they both play a crucial role in the audit process. Performance materiality is derived from planning materiality and is used to assess the materiality of specific accounts or disclosures. Planning materiality, on the other hand, is used to assess the overall reasonableness of the financial statements and determine the scope of the audit work. Both materiality thresholds are essential in ensuring that the audit is conducted effectively and efficiently.

Importance

Performance materiality and planning materiality are important concepts in auditing as they help auditors determine the appropriate level of audit procedures and assess the materiality of the financial statements. By setting performance materiality at a lower threshold than planning materiality, auditors can focus on specific accounts or disclosures that are more likely to contain material misstatements. Planning materiality, on the other hand, helps auditors assess the overall reasonableness of the financial statements and identify areas of higher risk that may require additional audit procedures.