Section 2: 25–35%A6

Risk Assessment and Materiality

Exam insight

Materiality and the audit risk model are among the most heavily tested topics in Section 2 (25-35% of the exam), so expect 3-5 MCQs on them per sitting. What sinks people here is flipping the inverse relationship. When assessed risk (IR x CR) goes up, detection risk must go down (more testing). Under AU-C 320, candidates often miss that performance materiality is not just a percentage of overall materiality, you set it using professional judgment about the nature and extent of expected misstatements. Also watch for questions testing who sets materiality: the auditor (correct), not management (the trap answer).

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

Patterns in this topic

The exam re-skins the same archetypes. Recognize these here, then drill them in the Pattern Lab.

The Audit Risk ModelAudit risk equals inherent times control times detection risk, and the auditor only steers detection risk.The Materiality StackOverall materiality sets the ceiling, performance materiality sits below it, and misstatements are judged against both.

Exam tip

Study smarter: before you expand each card, cover the screen and try to recall what the concept means from its title alone. Retrieving it from memory builds the recall the exam actually tests, and it beats re-reading.