Here we find out interrelationship among materiality, audit risk, and audit evidence. There is an inverse relationship between materiality and audit evidence, and an inverse relationship between audit risk and audit evidence.
The above figure illustrates these relationships as well as the interrelationship among all three concepts. For example, if in the figure, we hold audit risk constant and reduce the materiality level, audit evidence must increase to complete the circle.
Similarly, if we hold the materiality level constant and reduce audit evidence, the audit risk must increase to complete the circle. Or, if we wish to reduce audit risk, we can do any of the following:
- Increase the materiality level while holding audit evidence constant,
- Increase audit evidence while holding the materiality level constant, or
- Make a smaller increase in both the amount of audit evidence and the materiality level.
Audit Risk Alerts
Audit risk alerts are those that are intended to provide auditors with an overview of recent economic, professional, and regulatory developments that may affect audits for clients in many industries.
Periodically, the AICPA staff, in consultation with the Auditing Standards Board, issues audit risk alerts. In addition to the general audit risk alerts, updates are issued covering developments related to specific industries.
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