Risk Assessment and Materiality
Section 2 accounts for 25-35% of the AUD exam, and materiality plus the audit risk model are among the most heavily tested topics — expect 3-5 MCQs on these concepts alone per sitting. The #1 AICPA trap is reversing the inverse relationship: when assessed risk (IR x CR) goes UP, detection risk must go DOWN (more testing). Under AU-C 320, candidates frequently miss that performance materiality is NOT simply a percentage of overall materiality — the auditor must exercise professional judgment considering the nature and extent of expected misstatements. Also watch for questions that test whether materiality is set by the auditor (correct) or by management (incorrect trap answer).
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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