## Performance Materiality and Assertion-Level Materiality (SA 320)
### Performance Materiality
Definition: An amount set by the auditor at less than overall materiality for the FS as a whole.
Purpose:
> "To lower the risk that the auditor will not be able to identify misstatements that are material when added together."
In other words — it reduces the probability that uncorrected + undetected misstatements in aggregate will exceed overall materiality.
Key Rule: Performance Materiality < Overall Materiality (always set lower)
Can also be set at a lower level for specific assertions (not just the FS as a whole).
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### Why Is Performance Materiality Needed?
Imagine overall materiality = ₹10 lakhs. If the auditor designs procedures to detect each item of ₹10 lakhs, several items of ₹3–4 lakhs could slip through undetected and in aggregate exceed ₹10 lakhs.
By setting performance materiality at, say, ₹7 lakhs, the auditor catches more items individually → aggregate misstatements are less likely to exceed overall materiality.
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### Assertion-Level / Particular Class Materiality
A separate, lower materiality threshold for specific:
- Classes of transactions
- Account balances
- Disclosures
Factors indicating a need for assertion-level materiality:
| Factor | Example |
|---|---|
| Law, regulations or FRF requirements | Related party transactions; management compensation disclosures |
| Key industry-specific disclosures | R&D costs for pharma companies |
| Focused attention on a specific aspect | Newly acquired business segment |
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### Auditor's Assumptions About Users of FS
The auditor must assume that FS users:
| # | Assumption |
|---|---|
| i | Have reasonable knowledge of business, economic activities & accounting, and willingness to study FS with diligence |
| ii | Understand that FS are prepared, presented & audited to a level of materiality |
| iii | Recognise inherent uncertainties in measurement (estimates, judgement, future events) |
| iv | Make reasonable economic decisions based on information in FS |
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### Auditor's Responsibility at Planning Stage
Key points the auditor must keep in mind:
1. Size AND nature of misstatements both matter — not just the amount.
2. Misstatements below materiality may still be material (e.g., fraud-related items).
3. Statutory requirements — certain disclosures are material regardless of amount:
- Items exceeding 1% of revenue or ₹1,00,000 must be disclosed separately.
- Shareholders owning >5% of shares must be disclosed separately.