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RESEARCH OF INTERRELATION OF MATERIALITY LEVEL AND AUDIT RISK
Abstract
The objective of the paper is to analyze the relation between materiality level and the audit risk. The presence of this relation comes from International Standard on Auditing ISA 200 "Overall Objectives of the Independent Auditor, and the Conduct of an Audit in Accordance with International Standards on Auditing”. In accordance with ISA 200, the audit risk may be considered as if it consists of two components: risk of material misstatement and detection risk. Authors have mathematically demonstrated that the decrease in materiality level causes a proportional reduction in the detection risk. During and experiment authors also revealed the inverse relation between the materiality level and the risk of material misstatement: with the decreasing materiality level the risk of material misstatement increases. The results of cross-checking the annual financial statements audits of a number of companies, conducted under the supervision of the authors, allowed to support the hypothesis about an exponential nature of distribution of the relative errors in financial statements. The possibility of practical application of the revealed relationships was considered on a practical example.
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