Definition
AU-C 320 requires the auditor to set performance materiality to reduce, to an appropriately low level, the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. It guides which accounts are tested, how large samples are and how much a single misstatement can be before it needs attention. It may differ by account where lower amounts are warranted.
Why it matters in an audit or review
Without a buffer, an audit could pass every test and still carry a material misstatement in total, because many small unfound errors add up. The size of the buffer is judgment and depends on risk, prior misstatements and the reliability of the control environment. Many firms set a percentage band in policy, which is not a standard requirement.
Example
Overall materiality is $400,000 (illustrative). The firm policy band is 50 to 75 percent. For a first-year client with weak controls the auditor chooses 50 percent, or $200,000. For a stable client with a clean history the choice is 75 percent, or $300,000. The lower number drives larger samples.
Common mistakes
- Using the top of the firm's range without considering risk.
- Not revising performance materiality when materiality changes during the audit.
FAQ
Is it disclosed in the report?
No. It is an internal planning amount.
Sources
- AICPA, AU-C Section 320, Materiality in Planning and Performing an Audit
- AICPA, AU-C Section 450, Evaluation of Misstatements Identified During the Audit
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error