Risk of material misstatement
The risk of material misstatement is the risk that an organization's financial
statements have been misstated to a material degree. This risk is assessed by
auditors at the two levels noted below. When material misstatement is high,
detection risk is lowered (increases the amount of evidence obtained from
substantive procedures). Doing so reduces the overall audit risk.
This risk of material misstatement is further subdivided into inherent risk
and control risk. Inherent risk is the susceptibility of an assertion to
misstatement because of error or fraud before considering controls. Control risk
is the risk of misstatement that will not be prevented or detected by a reporting
entity's internal controls [AccountingTools].
The assessment of inherent risk is higher for material misstatement due to
the degree to which the inherent risk factors affect both the likelihood of the
misstatement occurring and the magnitude of the potential misstatement, should
that misstatement occur. Therefore, should a risk factor be in place likely to
result in a more incredible misstatement within the financial statements, then
that risk factor should be considered significant.
The compilation of analytical procedures will assist the auditor in
identifying and assess risks of material misstatement.
Such procedures will involve the analysis of relationships within entity balances
to identify inconsistencies and unexpected relationships. Such procedures
should be carried out at both the risk assessment stage, as well as at the final
stages of the audit. Analytical procedures at the risk assessment stage would
assist the auditor in identifying any aspects within the entity that the auditor
may not have known about. They will further assist the auditor in assessing the
risks of material misstatement to determine the nature, timing, and extent of
further audit procedures [Zampa Debattista].
Risk of material misstatement definition. AccountingTools. Retrieved from: https://www.accountingtools.com/articles/risk-of-material-misstatement
The Risk Of Material Misstatement In Auditing. Zampa Debattista. Retrieved from: https://zampadebattista.com/insights/the-risk-of-material-misstatement-in-auditi ng/