Section 2: 25–35%A6
Risk Assessment and Materiality
Exam Insight
The audit risk model and materiality are tested heavily on the CPA exam. Candidates must understand how inherent risk, control risk, and detection risk combine to determine audit risk, and how materiality thresholds drive the scope of testing.
What AICPA Wants You to Know
- 1Apply the audit risk model: AR = IR x CR x DR
- 2Distinguish between inherent risk, control risk, and detection risk
- 3Explain the inverse relationship between assessed risk and detection risk
- 4Determine materiality at the financial statement and performance levels
- 5Understand the concept of tolerable misstatement