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Greetings. i would like to know the relationship between audit risk and materiality. Thank you.
Audit risk is the risk that the audit opinion is wrong. For example, that the FS contain a material misstatement that was not found.
If something is not material it cannot really contribute to audit risk, though performance materiality recognises that several relatively small errors could add up to a material misstatement and so can affect audit risk
may i know the reason why the audit risk and materiality has inverse relationship ?
Say that materiality is set at 100,000. Errors over 100,000 are the prime source of audit risk, eg an error of 200,000.
If materiality were 1m, errors of 200,000 would (generally) be a source of audit risk.
So, higher materiality levels can be thought of as generating fewer incidents of audit risk.
Note that the size of an error is not the only criteria. It’s nature and incidence can also be relevant.
Does it mean that the audit procedure and assessment done will be depend on Materiality level. if its so material, then the risk will be low due to auditor’s assessment ?
Materiality affects the amount and type of audit procedures to be carried out. The total audit risk depends on inherent risk, control risk and detection risk.
If the risk of material misstatement is assessed to be high, the auditor will do more work to lower the ddte tion risk and hence lower the audit risk.
This is explained in the lectures on risk.
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