What is the relationship between materiality and audit risk?

The relationship between materiality and audit risk is established through the concept that materiality thresholds help auditors determine the nature, timing, and extent of audit procedures. When materiality is set at a higher level, it indicates that the auditor has assessed that only larger misstatements need to be concerned, which directly influences their approach to the audit.

When materiality is higher, the auditor may perceive a lower likelihood of misstatements that could influence the decisions of users of financial statements. Therefore, with less concern about smaller misstatements affecting the overall financial statements, the level of audit risk is considered lower. As a result, the auditor may focus resources on the areas that are more likely to contain material misstatements, leading to a more efficient audit process.

In contrast, lower materiality levels necessitate a broader focus, as even small misstatements can be significant, thus increasing the perceived audit risk. By understanding this relationship, auditors can effectively tailor their audit strategies and resource allocation, ensuring that they maintain an acceptable level of audit risk throughout the engagement.