What is the Difference Between Materiality and Performance Materiality?

The difference between materiality and performance materiality lies in their purpose and application in the context of financial statement audits.

Materiality: This refers to the maximum amount of misstatement or error that an auditor is willing to accept in a class of transactions, or disclosure without considering the financial statements to be materially misstated. Materiality is used to plan and perform audit procedures, assess the risk of material misstatement, allocate audit resources, and evaluate audit findings.
Performance Materiality: This is a haircut (decrease) from overall materiality. Performance materiality is set by the auditor at less than materiality for the financial statements as a whole to reduce the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements. For example, if overall materiality was $10,000, and the firm applied a 40% haircut, then performance materiality would be $6,000.

In essence, performance materiality is derived from the overall materiality threshold and serves to further reduce the risk of undetected misstatements in the financial statements. The difference between the terms primarily lies in the terminology used rather than the underlying concept. The choice of using one term over the other may depend on the preference of the audit firm, the specific audit standard being followed, or the jurisdiction where the audit is being conducted.

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What is the Difference Between Materiality and Performance Materiality?

Comparative Table: Materiality vs Performance Materiality

Here is a table comparing Materiality and Performance Materiality:

Feature	Materiality	Performance Materiality
Definition	Materiality refers to the ability of financial information to impact the economic decisions of users. It is the maximum amount that the financials can be misstated and still be considered free of material misstatement.	Performance materiality is an amount less than materiality for the financial statements as a whole. It is calculated to reduce the probability that the total of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.
Basis of Determination	Determining materiality involves the exercise of professional judgment and the consideration of factors such as the elements of the financial statements and the specific circumstances of the entity. A percentage is often applied to a chosen benchmark as a starting point in determining materiality for the financial statements as a whole.	Performance materiality is set based on materiality for the financial statements as a whole and is often adjusted based on the auditor's assessment of risks and professional judgment.
Application	Materiality is applied by the auditor when planning and performing the audit. It is used to evaluate audit findings and their effect on the financial statements as a whole.	Performance materiality is used to plan audit procedures and determine the amount or amounts set by the auditor at less than materiality for the financial statements as a whole. It is also applied to particular classes of transactions, account balances, or disclosures when there is a substantial likelihood that misstatements of lesser amounts than materiality for the financial statements as a whole may exist.

In summary, materiality refers to the maximum amount that the financials can be misstated and still be considered free of material misstatement, while performance materiality is an amount less than materiality for the financial statements as a whole, calculated to reduce the probability that the total of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.

Guilherme Mazui

Guilherme Mazui is graduated in journalism from the Federal University of Minas Gerais (UFMG) and a master's degree in Communication from the University of São Paulo (USP). In addition, he has experience in advertising writing and has worked as a content editor in several companies.