Question

Discuss, in detail, the relationship between audit risk, materiality, and evidence.

Answer 1

Materiality is the amount above which an auditor needs to perform audit procedures . for example if materiality is $ 500 then it means audit would be checking the the items in financial statement which are above $500.

Audit risk is the risk that the auditor expresses an opinion that the financial are free from material misstatements but in actual the financial statements contain material misstatements, hence audit risk is the risk of that an audit would give incorrect audit opinion.

Evidence is obtained by an auditor by performing the audit procedures during an audit. Audit evidence are obtained so that the auditor can give opinion that whether the financial statements are free from material misstatements or not.

So if there are higher chances of audit risk then the matiality would be kept at lower side because by doing this , the auditor would cover more items for checking and thereby the risk could be reduced ,hence during more checking/ audit procedures , the evidence would also be collected more

On the other hand, if there are lower chances of audit risk then the matiality would be kept at higher side because by doing this , the auditor could do effective auditing within less time and cost ,hence during less checking/ audit procedures , the evidence would also be collected less.