ACCA Advanced Audit and Assurance (AAA) Practice Exam

Which statement is true regarding performance materiality?

1. It is always equal to overall materiality for financial accounts

2. It can be set lower than materiality to mitigate risks of misstatements

3. It only relates to specific classes of transactions

4. It is used solely for detecting fraud

The correct answer is: It can be set lower than materiality to mitigate risks of misstatements

Performance materiality is an important concept in auditing that reflects the amount set by the auditor that is lower than overall materiality. The primary purpose of setting performance materiality at a lower level is to reduce the risk that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements. Auditors use this measure to ensure that they conduct sufficient audit procedures to identify any potential misstatements, thereby mitigating the overall risk of material misstatements in the financial statements. By establishing performance materiality, auditors acknowledge that there may be individual misstatements that, when considered together with other misstatements, could collectively lead to a material misstatement of the financial statements. Thus, setting performance materiality lower than overall materiality allows auditors to have a more conservative approach in their assessment and provides a buffer against the risk that undetected misstatements could accumulate to a level that impacts the integrity of the financial statements. The other options have limitations or inaccuracies that prevent them from being true. For instance, performance materiality is not always equal to overall materiality; it is typically set at a lower level. Additionally, it applies to the set of financial statements as a whole rather than just specific classes of transactions, and its primary