How does high risk of material misstatement affect detection risk in auditing?

What is the impact of high risk of material misstatement on audit procedures?

Based on the data provided, if the risk of material misstatement is high, how does it affect the detection risk in auditing?

When the risk of material misstatement is high, auditors reduce detection risk, which in turn, requires acquiring more audit evidence.

When auditing the financial statements of a company, auditors assess the risk of material misstatement. If the auditor determines that the risk is high, it means that there is a greater likelihood of errors or fraud in the financial statements. In response to this higher risk, auditors need to adjust their detection risk to ensure that they can detect any material misstatements that may exist.

By setting detection risk at a low level when the risk of material misstatement is high, auditors are essentially increasing their level of scrutiny and thoroughness in the audit process. This means that auditors will need to gather more audit evidence to provide assurance that the financial statements are free from material misstatements.

The increased detection risk necessitates the use of more rigorous audit procedures, such as physical inspections, document reviews, and additional inquiries. Auditors may need to conduct more detailed tests and obtain more supporting documentation to verify the accuracy and completeness of the financial information presented in the statements.

Overall, when the risk of material misstatement is high, auditors must adjust their detection risk accordingly by acquiring a higher level of audit evidence through more rigorous audit procedures. This ensures that the financial statements provide a true and fair view of the company's financial position and performance.