Answer (C) is correct . The transaction increases audit risk because a related party is involved, even though the error is small in dollar amount. Related party transactions have a higher inherent risk than ordinary transactions. Given the inverse relationship between audit risk and materiality, the error may be considered material because of qualitative rather than quantitative considerations.
Answer (A) is incorrect because Audit risk and materiality are two separate but overlapping concepts. If audit risk is low, the auditor is less likely to consider the error to be material.
Answer (B) is incorrect because Additional transactions suggest that audit risk may be high, and the auditor will be likely to consider the error to be material.
Answer (D) is incorrect because Even a small error in a related party transaction may indicate significant risk. The auditor is likely to consider the error to be material even if audit risk is low.
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