Explain how you determine overall materiality and performance materiality for a new audit client. What factors influence your judgment?
A core Audit & Assurance interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
I start by identifying a benchmark—typically profit before tax for a profitable entity, but could be total revenues or total assets for others. I apply a percentage, usually 5% of PBT, but adjust for qualitative factors like industry volatility or user needs. Performance materiality is set lower, say 50-75% of overall materiality, to allow for aggregation risk. For a new client, I'd consider their control environment, history of misstatements, and any known fraud risks. If controls are weak, I might set performance materiality at the lower end.
WHAT INTERVIEWERS LISTEN FOR
- ✓Select appropriate benchmark
- ✓Apply percentage with judgment
- ✓Adjust for qualitative factors
- ✓Set performance materiality lower for aggregation risk
- ✓Consider client-specific risks
COMMON MISTAKES
- ✗Saying materiality is always 5% of PBT without adjustment
- ✗Ignoring performance materiality
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