When allocating performance materiality,
A) it is easy to predict in advance which accounts are most likely to be misstated.
B) only overstatements need to be considered.
C) professional judgment is critical.
D) the sum of all the performance materiality levels cannot exceed the preliminary judgment about materiality.

Question

Quizplus · Accepted Answer

Professional judgment is critical when allocating performance materiality as it requires considering factors such as the assessed risk of material misstatement, the size and complexity of the entity, and the nature of the accounts and transactions. It is not easy to predict in advance which accounts are most likely to be misstated, so option A is incorrect. Both overstatements and understatements need to be considered when allocating performance materiality, so option B is incorrect. While the sum of all the performance materiality levels should not exceed the preliminary judgment about materiality, this is not the only consideration when allocating performance materiality, so option D is incorrect.

When Allocating Performance Materiality