How does risk relate to materiality?
The goal of risk assessment is '...to reduce audit risk (that is, the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated) to an acceptably low level.' (ISA 200,5)
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Therefore we must decide what level of misstatement is material, and justify that using our professional judgement.
Isa 315 (revised 2019) A233 states that: '...materiality and audit risk are considered when identifying and assessing the risks of material misstatement in classes of transactions, account balances and disclosures. The auditor’s determination of materiality is a matter of professional judgement, and is affected by the auditor’s perception of the financial information needs of users of the financial statements.'
As in all our audit work, our focus must be on what is material, so we don't get lost in irrelevant detail.
Materiality and audit risk are considered throughout the audit, in particular, when:
(a) Identifying and assessing the risks of material misstatement;
(b) Determining the nature, timing and extent of further audit procedures; and
(c) Evaluating the effect of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor’s report.
Therefore, risk assessment, as all parts of the audit, is driven by materiality. Some things are material based not on the dollar amount they represent, but on their potential impact on the needs of the users of the financial statements.
In Audit Assistant, we provide the ability to identify and analyse risk right through the audit process, but the emphasis is on identifying risk during the planning process so that the job may be completed as efficiently as possible - focusing on the identified risks.
Risk is flagged by clicking the star icon which appears next to all trial balance items and all comments. Flagging of risks may be done at any point where a comment has been added. Here for instance on the Sales and Income System page:
Trial balance items may also be flagged - individual items or group totals. The items flagged come down to, like materiality, the auditor's judgement.
These risks are then summarised, analysed and displayed on the Risk and Planning page.