Materiality and Audit Risk Modelling: Financial Management Perspective

Risk is closely associated with return of investments and materiality. Investments with considerably higher risk normally attract a higher rate of return. Whereas, higher level of risk needs a higher threshold of materiality. There are occasions in which financial managers, fail to take the materiality effects in the process of risk evaluation. This paper assesses risk in the auditing context. Audit risk models established by researchers reveal that there is a need to look into the effects of materiality. An extension on the existing audit models, to incorporate the effects of materiality is made. With this, 128 permutations were resulted. It is understandable that auditors may not be cost benefit for auditors to evaluate all the 128 possible outcomes before the issuance of audit reports; however, this by no means prevents auditors being sued for negligence due to neglecting one of the possible audit outcomes. This model could seriously be served as a reference to both auditors and financial managers in the light of evaluating risk.