Definition
For audit sampling, AU-C 530 defines tolerable misstatement as an amount set by the auditor to obtain an appropriate level of assurance that it is not exceeded by actual misstatement in the population. It is the application of performance materiality to a particular sampling procedure, and it can be set equal to, or lower than, performance materiality.
Why it matters in an audit or review
Tolerable misstatement drives the sample size, with a lower amount producing a bigger sample. It is also the yardstick for evaluation. If the projected misstatement exceeds it, the sample does not support the balance as recorded. If it comes close, the auditor considers the risk that another sample would exceed it. Either way the auditor may extend work or ask management to adjust.
Example
Overall materiality is $400,000 and performance materiality is $300,000 (illustrative). For a receivables sample, the auditor sets tolerable misstatement at $300,000. If the projected misstatement from the sample is $180,000, there is room left. If it is $310,000, the result exceeds tolerable misstatement and the auditor considers whether the population is acceptable.
Common mistakes
- Setting tolerable misstatement above performance materiality for convenience.
- Using the same amount for every account without considering how much misstatement might exist elsewhere.
FAQ
Is tolerable misstatement the same as materiality?
No. It is derived from performance materiality, which is set below materiality, so it leaves room for undetected and uncorrected misstatements in other accounts.
Sources
- AICPA, AU-C Section 530, Audit Sampling
- AICPA, AU-C Section 320, Materiality in Planning and Performing an 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