Performance materiality and clearly trivial amounts
How to set performance materiality and the clearly trivial threshold, what pushes each lower, and how they drive sample sizes and the misstatement log.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Overall materiality gets the debate at planning. The two figures beneath it usually get a line each, calculated as a fixed fraction of the first and never mentioned again. Yet performance materiality is the figure the team actually works with in fieldwork, and the clearly trivial threshold decides which errors are written down at all. Set them carelessly and the audit either tests far more than it needs to, or quietly lets small errors add up to a material one.
ISA 320 and ISA 450 treat both figures as judgements, not formulas. This article covers how to set them, what should push them lower, and how they work through the audit.
Why performance materiality sits below overall materiality
If every area of the audit were planned to find only errors larger than overall materiality, several undetected errors just below that level could together exceed it. Performance materiality addresses that aggregation risk. ISA 320 defines it as the amount set below overall materiality to reduce to an appropriately low level the probability that the total of uncorrected and undetected misstatements exceeds materiality for the statements as a whole.
The gap between the two is a measure of how much the team expects might go undetected or uncorrected. A wide gap says "we expect trouble". A narrow gap says "this client's records are reliable and we have the history to show it".
ISA 320 also allows lower amounts for particular classes of transactions, balances or disclosures where users would be influenced by smaller misstatements: directors' remuneration, related-party transactions, or a sensitive covenant figure. Each needs its own performance materiality if it is set.
Factors that push it lower
Write down which of these apply, and let them move the figure:
- A history of misstatements, especially adjustments found by the auditor rather than the client.
- A first-year audit, where the team has no history with the client's records.
- Weak or untested controls, so that the team relies on substantive work alone.
- Many estimates, where misstatements are likely and hard to measure.
- Change: a new system, new finance staff, an acquisition, a restructuring.
- Pressure on the figures, such as a covenant close to breach or a sale of the business.
The reverse also holds: a stable client with clean prior audits, reliable controls and few estimates can justify performance materiality closer to overall materiality. Whatever the result, the rationale should name the factors, not just the fraction.
The clearly trivial threshold and accumulating misstatements
ISA 450 requires the auditor to accumulate misstatements identified during the audit, other than those that are clearly trivial. Clearly trivial is not another word for "not material". It means matters of a wholly different, smaller order of magnitude than materiality, inconsequential whether taken individually or together, by size, nature or circumstances. When there is doubt whether something is clearly trivial, it is not.
In practice the threshold does two jobs:
- It decides which differences the team records in the misstatement log.
- It sets the floor for what is communicated to management and those charged with governance as uncorrected misstatements.
A threshold set too high means the log is incomplete, and the evaluation at the end understates the problem. A threshold set too low turns the log into a list of rounding differences. Nature matters as well as size: a small misstatement caused by fraud, or affecting a sensitive disclosure, is never clearly trivial.
How it feeds sample sizes
Performance materiality is the basis for tolerable misstatement in sampling. ISA 530 describes tolerable misstatement as the application of performance materiality to a particular sampling procedure; it may be the same as performance materiality or lower. The lower the tolerable misstatement, the larger the sample needed for the same confidence.
In Achekam's Audit Intelligence, the team loads a population, Achekam risk-scores it and proposes a sample, a reviewer who did not prepare the plan approves it before the draw, and every draw can be reproduced from its stored seed. No size is proposed without approved materiality and a confidence level. So a team cannot plan its samples until the partner has approved the figures, which puts the work in the right order.
When a sample finds errors, they are projected and compared with tolerable misstatement; the method is set out in the ACCA's article on evaluation of misstatements, which explains ISA 450 and the effect of uncorrected misstatements with worked examples.
Recording misstatements and adjustments
In Achekam, lead schedules are built from the engagement's trial balance with each figure traceable to its lines, staff can record an audit adjustment on a line with a reason, and findings can be raised from a working paper and closed or withdrawn.
One limit shapes how the log should be kept. The completion Summary of Uncorrected Misstatements stays empty, because no screen or route writes to the misstatement register it reads. Keep the misstatement log on its own working paper: every misstatement above clearly trivial, factual, judgemental and projected, with management's decision on each and the running total against performance and overall materiality. How that schedule is built and evaluated is covered in the uncorrected misstatements schedule.
Approval by the engagement partner
All three figures are proposed together in Achekam: staff propose overall, performance and clearly-trivial materiality from a benchmark with a written rationale, Achekam suggests no percentage, and the engagement partner approves, never the preparer. A new approval replaces the old one, which is kept.
That means the partner approves performance materiality and clearly trivial as judgements, with reasons, not as arithmetic. If the rationale for performance materiality says only "a standard proportion of overall materiality", send it back. The choice of the benchmark beneath all three is covered in choosing a materiality benchmark.
A check at completion
Before signing, compare the misstatements actually found with the expectation behind performance materiality at planning. If the team found far more than it expected, ask whether performance materiality was too high and whether enough work was done, before the opinion is given, not after.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
