Overall Materiality in Financial Reporting: This represents the highest level in an audit, guiding the overall audit strategy for the entire financial statement. The overall materiality threshold determines the maximum amount of misstatement that an auditor can tolerate without it potentially influencing users' understanding of the financial statements. Auditors set this level based on factors such as the company's size, industry specifics, and the needs of the intended users.

Performance Materiality: This level of materiality is lower than the overall materiality and applies to substantive testing. Performance materiality acts as a benchmark during the audit process to decide which monetary amounts require scrutiny. Misstatements below this threshold may not require correction, while those above it would necessitate investigation and possible adjustment. Auditors often set a percentage slightly below the overall materiality as the performance materiality.

Component Materiality: For specific segments within the financial statements, like significant assets, liabilities, revenues, or expenses, auditors might establish a lower level of materiality. These items can have a substantial impact on decision-making by financial statement users even if their absolute amounts are smaller than the overall materiality. The auditor assesses the nature and potential impact of these items to determine their individual materiality levels.