Determining

Question 1

Determine

Answer 1

Determining Performance Materiality

Determining performance materiality requires professional judgment and is not a straightforward calculation. Here’s a step-by-step guide:

Factors to Consider
1. Auditor’s understanding: Familiarity with the entity and its environment.
2. Previous audit misstatements: Nature and extent of misstatements identified in previous audits.
3. Internal control reliability: Effectiveness of the entity’s internal control over financial reporting.
4. Engagement risk: Increased risk associated with the audit engagement.
5. Business changes: Any significant changes in the business.

Calculation
1. Start with the overall materiality amount.
2. Estimate the total amount of uncorrected misstatements expected to be identified.
3. Assume that management will not correct these misstatements.
4. Subtract the estimated uncorrected misstatements from the materiality amount.
5. The resulting amount is the performance materiality.