Materiality and Risk
1. Apply the concept of materiality to an audit. 2. Make a preliminary judgment about materiality. 3. Allocate preliminary materiality to segments of the audit. 4. Use materiality to evaluate audit findings. 6. Describe the risk model and its components.
8. Know factors that affect inherent risk. 9. Understand the relationships among the components of risk and evidence.
10. Understand the relationship between materiality and risk and how they are integrated into the audit process.
1. Introduction - Audits provide reasonable assurance that the financial statements are free of material misstatements. Auditors need to use judgment in applying materiality to provide the appropriate level of assurance, at a reasonable cost.
2. Definition - (Ch. 3, p. 56)
A misstatement in the financial statements can be considered material if knowledge of the misstatement would affect a decision of a reasonable user of the statements.
• Materiality is defined in terms of financial statement users. • As a result, there are no firm rules for applying materiality - judgment is necessary.
3. Applying Materiality (Figure 9-1, pg. 251 of text)
There are five steps in this process. The first two involve the planning; the latter three concern evaluating the results of tests.
|Steps in Applying Materiality |
|Planning phase |Set preliminary judgment |
| |Allocate materiality to segments |
| |Estimate total misstatement in segment |
|Evaluating results |Estimate combined misstatement |
| |Compare combined