Question

Tracy, senior accountant at JFM CPA Firm, is determining the performance materiality for her client in Year 2. Tracy expects that there will be a high likelihood of uncorrected and undetected misstatements.

JFM CPA Firm's materiality guidelines advise the auditor to set performance materiality in the range of 50 percent to 70 percent of overall materiality based on the likelihood of misstatement. Tracy has calculated overall materiality at $140,000.

Tracy will most likely set performance materiality closest to:

A. $98,000

B.$70,000

C. $140,000

D. $168,000

Answer 1

Solution:

Performance materiality is also called as tolerable misstatement. Performance materiality varys for different classes of transactions, account balances, or disclosures especially if there is a focus on particular area.
high risk audit areas = low performance materiality

Therefore in this question, tracy expects there will be a high likelihood of uncorrect and undetected misstatements, therefore Tracy will set performance materiality at lower level of 50% of overall materiality.

Performance materiality will be set closest to = 140000*50% = $70,000.