[molly]

HELP! I don’t get why Detection Risk and the Risk of Material Misstatement have an inverse relationship. If the RMM increases the DR decreases??? That doesn’t make sense to me for some reason. If the RISK of a material mistatement increases shouldn’t the RISK of NOT detecting it go up as well? Is it as simple as -if the RMM is likely to happen, then detecting it will be easier so therfore decrease the risk of not finding it?

And I also don’t get the relationship between audit risk and materiality. If audit risk decreases –meaning that the auditor will probably get it right on the report and the materiality is appropriate, then why would the auditor do more work? I am totally lost…. Can anyone help me with this basic concepts????

[jenuno01]

@Molly If RMM increases, this means that the auditor will do more substantive testing and this additional testing is what decreases the Detection Risk. If RMM decreases, this means the auditor will not do as much testing and hence the Detection Risk will increase (limited testing will increase the chances of the auditor missing something).

Keep in mind that Detection Risk is the only part of the Audit Risk ecuation that the auditor can manipulate (by either doing more or less testing).

Audit risk and materiality are inversely related because the more material a mistatement is, the less likely it is for an auditor to miss it… in more simple terms…if a misstatement is big, it will be more evident and the auditor will catch it easier, hence Audit Risk is reduced.

Hope this helps!

Class of 2012

[jeff]

^ what they said 🙂

[molly]

Thank Jenuno! That helped a bunch!!!

[Author]

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