An auditor is determining the appropriate materiality for a new audit client. Which of the following factors would most likely lead the auditor to select a LOWER percentage for determining performance materiality?

Answer options:

The client has a strong system of internal controls.

The risk of material misstatement is assessed as high.

The auditor plans to use extensive analytical procedures.

The client is a public company.

How to approach this question

Understand the relationship: Higher Risk = Lower Materiality Threshold (need to look closer).

Full Answer

B.The risk of material misstatement is assessed as high.✓ Correct

The risk of material misstatement is assessed as high.

Performance materiality is set 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. When the risk of material misstatement is high, the auditor sets performance materiality at a lower percentage of overall materiality to increase the scope of testing.

Common mistakes

Thinking high risk means high materiality (it's the inverse relationship for testing scope).

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