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Shyam asked 1 year ago
1 Answers
RaviRavi Staff answered 1 year ago

Profit = 10,00,00,000
Financial Statement Materiality = 10,00,00,000 x 5% (Generally Used) = 5,00,000
Performance Materiality (50%-90%) = 5,00,000 x 60% (Apply Judgement) = 3,00,000
Above will be used for each and every financial item as appearing in balance sheet, p&l and notes to accounts items. if required (if area is risky) lower materiality can be set for individual area and also corresponding performance materiality of that area. here we are taking above for area level.
now audit team need to ensure aggregate uncorrected misstatements of all areas taken together are below performance materiality, this will ensure uncorrected misstatements + undetected misstatements (40% margin left for it) are within 5,00,000 and financial statements are not materially misstated.
now performance materiality and tolerable  misstatements are generally same, in sampling at the end we have to compare projected misstatements and tolerable misstatement (acceptable level) to determine whether that particular area is materially misstated. so we will use 3,00,000 as tolerable misstatement.
but if we are performing sampling not for whole financial item but for part for it, for example we are not doing it for whole sale but only for credit sale of last quarter then, which contributes say 40% of total sales then we will take tolerable misstatement for credit sale say 3,00,000 x 40% = 1,20,000
Conclusion, so generally performance materiality and tolerable misstatement both are limits used to find out whether material misstatement  exist, they are generally same. but sometimes they can be different as explained above.

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