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

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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