Does Audit Risk Affect Materiality? | AccountingWEB

Does Audit Risk Affect Materiality?

Most of us would answer that audit risk does affect materiality.  That's what SAS No. 107 says, SAS No 47 before that.  Drilling down, perhaps the question should be, "Do we appropriately reflect risks of material misstatements in setting materiality levels that guide audit engagement performance?"  Again, most of us would answer yes. 

Deeper still, maybe the question is, "Do we reflect both high and low levels of applicable risk of material misstatement in calculations of tolerable misstatement and the lower limit for indiviually significant items at both the financial statement level and the assertions level?" Now we are down to it!  A common answer would probably be yes, but many of our materiality computation schedules would likely betray us!

While many providers of audit practice aids could be cited, an example is PPC's Materiality Worksheet.  Designed to generically accomplish a determination of planning materiality, tolerable misstatement and the lower limit for individually significant items, the calculations are based on the largest financial statement bases to estimate the maximum amount of error or fraud, known and unknown, an auditor can accept  in the financial statements taken as a whole without adjustment.  The generic form is designed to facilitate use on a wide range of audits.  It is a good model but it makes some assumptions users must recognize.  Here are a few.

  1. It assumes the table approach to determining percentage calculations is applicable to all audits.  This table is not required by professional standards and, as I understand it, was developed by various studies that have evolved over the years.  This table is one tool for applying materiality standards to audits.  AICPA training seminars suggest using a range of percentages for individual accounts to set materiality levels.
  2. Taken on It's face, the form assumes that tolerable misstatement at the financial statement level is always 75% of planning materiality.  While this may be a commonly applied factor, it is not cast in concrete.  In fact, risk at the financial statement level may cause this factor to be modified.  Higher risk could cause an auditor to reduce tolerable misstatement at the financial statement level to 40% or 50% of planning materiality.  Lower risk could cause an increase in the factor to 80% or 90%.
  3. The lower limit for individually significant items at the financial statement level should also reflect risk.  One-third to one-sixth of tolerable misstatement is a common factor applied in practice.  This factor should, however, reflect risk at the financial statement level and can actually range from 10% to 100% of tolerable misstatement.
  4. While this form has space to calculate differenct levels of tolerable misstatement at the assertion (or financial statement classification) level, most auditors use tolerable misstatement calculated at the financial statement level for setting lower limits of individually significant items and applying the model approach to sampling at the assertion level.  While risk at the assertion level is affected by risk at the financial level, it almost always is greater or lesser.  Tolerable misstatement and the lower limit for individually significant items at the assertion level, therefore, is almost always different from calculations at the financial statement level.

The bottom line in professional standards is that risk always affects materiality.  Depending on practice aids from major publishers may help ensure engagements meet quality control standards, but they may not clearly present the most efficient methods for completing an engagement.  Thinking and reasoning skills are still the keys to engagement efficiency!

I've developed an illustrative Tolerable Misstatements Computation Form that requires users to consider the issues above.  If you'd like to request a copy of this form, please use the "Contact Us" feature on our website, Post a comment here and let us know how you reflect risk in your materiality computations.

This blog

by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs.  He is co-founder of CPA Firm Support Services, LLC (, an organization providing resources, training and consulting to smaller CPA firms.  Larry writes a weekly blog on focusing on small audits, reviews and compilations.  He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.


Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.


Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.


Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".


William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.


Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (, a software development firm of high-volume, high-productivity accounting and payroll technology.


Eva Rosenberg, MBA, EA, is the publisher of, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.


Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website:
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.


The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.


FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.


Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.


Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of a website devoted to training for governmental auditors.


AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish share their ideas, insights, and perspectives from across the pond.