The audit riskThe risk that an auditor may not detect a material misstatement (when one exists) and may inappropriately issue an unqualified audit opinion in connection with a set of financial statements. model is used to quantify risk and determine how much testing is needed in an audit. Detection risk is the risk that an auditor will fail to detect a material misstatement and is measured by the amount of risk the auditor is willing to accept. When the risk of material misstatement (RMM) is high, the auditor has a lower acceptable detection risk level. Setting the acceptable detection risk at a low level means performing more audit procedures than would be performed when setting acceptable detection risk level high.

MaterialityAn amount that, if omitted from or misstated on a financial statement, can affect the financial decisions of those who use the statement. is a threshold used by auditors to determine which items need to be investigated further (ie, items at or above the threshold are investigated). In addition to performing more audit procedures, an auditor can decrease the materiality threshold in response to a heightened RMM. Decreasing the threshold means that more items are evaluated by auditors than when the threshold is higher.

Things to remember:
Auditors can respond to a heightened risk of material misstatement by reducing the acceptable level of detection risk, which is generally done by increasing the number of audit procedures. They can also decrease the materiality threshold, allowing for smaller transaction amounts to be investigated.