2. With sufficient detail, Discuss how materiality and risk are related and integrated into the audit process.
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Audit Risk and Materiality

These two concepts have an inverse relationship.  When the materiality level is set low, the audit risk envisaged by the auditor is on the high side.  When the materiality level is set high, the audit risk as perceived by the auditor is on the low side.

But, what exactly is materiality?  Materiality refers to the basis that can change or influence the judgment of a reasonable person arising from a quantitative and qualitative omission or misstatement of a fact.  And audit risk refers to the risk of material misstatement in the financial statements presented by a company.

Explanation:

The risk of material misstatement in the financial statements is the reason that professional auditors design their audit procedures to reduce the audit risk to an acceptably low level.  This implies that auditors gather more audit evidence when the materiality is set to a low level, showing that audit risk has increased and vice versa.

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