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What is the difference between performance materiality and overall materiality?

Performance materiality is a haircut (decrease) from overall materiality. Since overall materiality is the max amount that the financials can be misstated and still be free from material misstatement, the audit team will typically haircut overall materiality to calculate performance materiality.

Performance materiality is considered the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.

For example, if overall materiality was $10,000, and the firm applied a 40% haircut, then performance materiality would be $6,000.

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