Final answer:
Performance materiality is the threshold of misstatement used in audit procedures at the account or disclosure level and is a subset of overall materiality in auditing.
Step-by-step explanation:
The amount of overall materiality used to plan and perform audit procedures at the account or disclosure level is referred to as performance materiality. Performance materiality is a subset of overall materiality, which is the maximum amount by which the auditor believes the financial statements could be misstated without affecting the economic decisions of users.
It helps to set an appropriate threshold to detect misstatements that are individually or in aggregate significant enough to be material to the financial statements.
When auditors set performance materiality, they consider various factors, such as the likelihood of misstatements in particular accounts or disclosures and the potential impact on the economic decisions of users of financial statements. Performance materiality, therefore, plays a critical role in guiding the extent, timing, and nature of audit procedures.