Materiality: Tolerable Misstatement – CPA Exam Definitions

Materiality Tolerable Misstatement CPA Exam

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Materiality: Tolerable Misstatement

Tolerable misstatement, also known as performance materiality, is a concept used in financial statement audits that represents the maximum amount of misstatement or error that an auditor is willing to accept in a specific account balance, class of transactions, or disclosure without considering the financial statements to be materially misstated. It is derived from the overall materiality threshold calculated for the financial statements as a whole and is usually set at a lower level.

Tolerable misstatement serves several purposes in a financial statement audit:

It is essential for auditors to exercise professional judgment when determining tolerable misstatement levels for each account balance, class of transactions, or disclosure. This judgment should consider the overall materiality threshold, the assessed risks of material misstatement, and the specific circumstances of the entity being audited.

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