Planning materiality is set higher, addressing errors at the financial statement level; performance materiality is set lower, addressing errors at the balance or transaction level.

Planning materiality is set higher, addressing errors at the financial statement level; performance materiality is set lower, addressing errors at the balance or transaction level.

• A. Planning materiality is lower than performance materiality
• B. Planning materiality is set to balance level
• C. Planning materiality is higher at the financial statement level; performance materiality is lower at balance or transaction level
• D. They are the same

Answer: (C)

Planning materiality is the overall threshold used to plan the audit and relates to the financial statements as a whole; it is set higher because a misstatement that is not material at the FS level could still be tolerated across the entire set of statements. Performance materiality, or tolerable misstatement, is set lower and targets misstatements at the account or transaction level. This lower level ensures that when testing and sampling are done, the combined effect of unidentified misstatements won’t exceed the planning materiality, providing a safeguard against material errors slipping through. In practice, performance materiality is often a portion of planning materiality (for example, about 50–75%), reinforcing why the correct statement is that planning materiality is higher at the financial statement level while performance materiality is lower at the balance or transaction level.

Planning materiality is the overall threshold used to plan the audit and relates to the financial statements as a whole; it is set higher because a misstatement that is not material at the FS level could still be tolerated across the entire set of statements. Performance materiality, or tolerable misstatement, is set lower and targets misstatements at the account or transaction level. This lower level ensures that when testing and sampling are done, the combined effect of unidentified misstatements won’t exceed the planning materiality, providing a safeguard against material errors slipping through. In practice, performance materiality is often a portion of planning materiality (for example, about 50–75%), reinforcing why the correct statement is that planning materiality is higher at the financial statement level while performance materiality is lower at the balance or transaction level.