Risk Assessment and Materiality
Section 2 is 25-35% of the AUD exam, and materiality plus the audit risk model are among the most heavily tested topics, expect 3-5 MCQs on them per sitting. The #1 AICPA trap is flipping the inverse relationship: when assessed risk (IR x CR) goes UP, detection risk must go DOWN (more testing). Under AU-C 320, candidates often miss that performance materiality is NOT just a percentage of overall materiality, you set it using professional judgment about the nature and extent of expected misstatements. Also watch for questions testing who sets materiality: the auditor (correct), not management (the trap answer).
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What AICPA wants you to know
- 1Apply the audit risk model: AR = IR x CR x DR
- 2Distinguish between inherent risk, control risk, and detection risk
- 3Explain the inverse relationship between assessed risk and detection risk
- 4Determine materiality at the financial statement and performance levels
- 5Understand the concept of tolerable misstatement