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Audit risk and materiality are used to determine the nature, timing, and extent of audit procedures to be completed, as well as their evaluation. Audit risk is the risk that an auditor will give an unqualified (everything is fine) opinion, when in reality there is one or more than one material misstatement. The risk of a material misstatement is the calculated result of the multiplication of three risk factors. These three risks are (1) inherent risk, the risk that is natural in an element of the financial statements or the function being audited, assuming that there are no controls; (2) control risk, the risk that an internal control will not prevent or detect a material misstatement in a timely manner; and (3) detection risk, the risk that an auditor will not detect a material misstatement in the financial statements through their audit testing. Since related party transactions have a higher inherent risk than other transactions, the audit risk will be higher than with other transactions. Therefore, the auditor is more likely to consider the error to be material.
Audit risk and materiality are used to determine the nature, timing, and extent of audit procedures to be completed, as well as their evaluation. Audit risk is the risk that an auditor will give an unqualified (everything is fine) opinion, when in reality there is one or more than one material misstatement. The risk of a material misstatement is the calculated result of the multiplication of three risk factors. These three risks are (1) inherent risk, the risk that is natural in an element of the financial statements or the function being audited, assuming that there are no controls; (2) control risk, the risk that an internal control will not prevent or detect a material misstatement in a timely manner; and (3) detection risk, the risk that an auditor will not detect a material misstatement in the financial statements through their audit testing. Since related party transactions have a higher inherent risk than other transactions, the audit risk will actually be higher than with other transactions and will increase with further transactions with the same stockholder. When audit risk is higher, an auditor is more likely to consider the error to be material.
Audit risk and materiality are used to determine the nature, timing, and extent of audit procedures to be completed, as well as their evaluation. Audit risk is the risk that an auditor will give an unqualified (everything is fine) opinion, when in reality there is one or more than one material misstatement. The risk of a material misstatement is the calculated result of the multiplication of three risk factors. These three risks are (1) inherent risk, the risk that is natural in an element of the financial statements or the function being audited, assuming that there are no controls; (2) control risk, the risk that an internal control will not prevent or detect a material misstatement in a timely manner; and (3) detection risk, the risk that an auditor will not detect a material misstatement in the financial statements through their audit testing. Since related party transactions have a higher inherent risk than other transactions, the audit risk will be higher than with other transactions. Therefore, the auditor is more likely to consider the error to be material even though the amount of the error is small.
Audit risk and materiality are used to determine the nature, timing, and extent of audit procedures to be completed, as well as their evaluation. Audit risk is the risk that an auditor will give an unqualified (everything is fine) opinion, when in reality there is one or more than one material misstatement. The risk of a material misstatement is the calculated result of the multiplication of three risk factors. These three risks are (1) inherent risk (the risk that is natural in an element of the financial statements or the function being audited, assuming that there are no controls); (2) control risk (the risk that an internal control will not prevent or detect a material misstatement in a timely manner); and (3) detection risk (the risk that an auditor will not detect a material misstatement in the financial statements through their audit testing). Since related party transactions have a higher inherent risk than other transactions, the audit risk will actually be higher in this situation. When audit risk is higher, an auditor is more likely to consider the error to be material.