Sample Scenarios Demonstrating the Application of Tolerable Misstatement and Performance Materiality Understanding the practical application of tolerable misstatement and performance materiality is key to mastering these concepts for the CPA exams. Below are some sample scenarios that illustrate how these thresholds are applied in real-world audit situations: Scenario 1: Auditing a Manufacturing Company's Inventory Background: A mid-sized manufacturing company has a significant inventory balance of $10 million. The overall materiality for the audit is set at $500,000. Given the importance of inventory to the financial statements, the auditor sets performance materiality at $375,000 (75% of overall materiality) and tolerable misstatement for inventory testing at $150,000. Application: During substantive testing, the auditor performs a detailed count of selected inventory items and compares the results to the company's records. The auditor identifies discrepancies totaling $125,000. Since this amount is below the tolerable misstatement level of $150,000, the auditor concludes that the inventory balance is fairly presented and does not require adjustment. However, the auditor documents the findings and considers them in the overall evaluation of the financial statements. What are some insightful questions I can ask from this case