ABSTRACT
The concepts of risk, materiality and analytical review are closely related but they are treated (relatively) separately here in the interests of clarity.
In America, the concepts of risk and materiality in auditing, which had not explicitly appeared in the 1934 edition, were firmly established at least by the seventh edition of Montgomery’s Auditing in 1949. The textbook noted how: ‘In the performance of field work the auditor must keep in mind the elements of materiality and relative risk. The exercise of due care implies greater attention to the more important items in the financial statements than to those of less importance’ (Montgomery et al. 1949: 13). ‘If a total is composed of a large number of small items there is less risk of material error than when the total is composed of a few large items’ (ibid.: 45). By the 1957 edition, Montgomery (Lenhart and Defliese 1957: 50) was arguing that:
the financial soundness of a business has a bearing on the degree of risk the auditor may safely assume . . . the newly organised business struggling for a foothold, or the established business fallen on hard times, may
endeavour to postpone write-offs, adopt less conservative accounting policies, and conceal pledging of assets and creation of liabilities.
