Materiality &audit risk

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30 May 2012 what is materiality and audit risk

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CA Harish Suwalka

CA Harish Suwalka (Expert)
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30 May 2012 When planning the audit, auditors consider what would make the financial statements materially
misstated. The auditors' assessment of materiality, related to specific account balances and classes of
transactions, helps them decide such questions as what items to examine and whether to use sampling
and analytical procedures. This enables auditors to select audit procedures that, in combination, can
be expected to reduce audit risk to an acceptably low level. It also enables auditors to adopt an
efficient and effective audit approach.

There is an inverse relationship between materiality and the level of audit risk, that is the higher the
materiality level, the lower the audit risk and vice versa. Auditors take into account the inverse
relationship between materiality and audit risk when determining the nature, timing and extent of
audit procedures.

refer icai modules for detailed understanding of the concept