General comments Materiality should convey a sense of significance or importance of an item Audit should provide reasonable assurance that material errors and fraud will be detected Materiality has both quantitative and qualitative features. Overall vs. Individual Materiality Planning materiality - must be developed as a basis for determining the amount of work to be performed if an audit is to detect material misstatements. Planning materiality is usually allocated to individual account balances, such that a material misstatement for an account will be significantly less than the materiality set for the entire audit. Risk Concepts Engagement risk - public accountant's risk of association with certain clients. Higher risk may result from business failure, volatile industry, likelihood of lawsuit.
Engagement risk exists separately from the audit.
It is the auditor's objective to assess engagement risk accurately. Audit risk - risk that the auditor will give an unqualified opinion on financial statements that are materially misstated. Audit risk is controlled by the auditor. Auditors can set audit risk at any level with which they feel comfortable. The lower the audit risk, the more work for the auditor Relationship between audit and engagement risk Generally, an inverse relationship, such that the higher the engagement risk, the lower the auditor will set audit risk.