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The risk of material misstatement refers to the risk that the financial statements are materially misstated
Accounting (ACCtg12)
Taguig City University
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The risk of material misstatement refers to the risk that the financial statements are materially misstated. According to Auditing Standard No. 12, Identifying and Assessing Risks of Material Misstatement, indicates that the auditor should assess the risks of material misstatement at two levels: (1) at the assertion level and (2) at the financial statement level.
Risk of material misstatement at the assertion level consists of the following components:
Inherent risk , which refers to the susceptibility of an assertion to a misstatement, due to error or fraud, that could be material, individually or in combination with other misstatements, before consideration of any related controls.
Control risk , which is the risk that a misstatement due to error or fraud that could occur in an assertion and that could be material, individually or in combination with other misstatements, will not be prevented or detected on a timely basis by the company's internal control. Control risk is a function of the effectiveness of the design and operation of internal control.
Risks of material misstatement at the financial statement level relate pervasively to the financial statements as a whole and potentially affect many assertions. Risks of material misstatement at the financial statement level may be especially relevant to the auditor's consideration of the risk of material misstatement due to fraud.
According to Auditing Standard No. 12, The risk of material misstatement refers to the risk that the financial statements are materially misstated.
Risk of material misstatement at the assertion level consists of the following components:
Inherent risk, Inherent risk measures the auditor's assessment of the susceptibility of an assertion to a misstatement, due to error or fraud, that could be material, individually or in combination with other misstatements, before consideration of any related controls. The auditor concludes that the high likelihood of misstatement exists, the auditor will conclude the inherent risk is high.
Control risk, Control risk measures the auditor's assessment of the risk that a material misstatement could occur in an assertion and not be prevented or detected on a timely basis by the client's internal controls. Assume that the auditor concludes that internal controls are completely ineffective to prevent or detect misstatements.
The combination of inherent risk and control risk is referred to in auditing standards as the risk of material misstatements. The auditor make a combined assessment of the risk of material misstatements or the auditor can separately assess inherent risk and control risk
Yes, The auditor is capable to evaluate the competency of the accounting staff through identifying areas where account balances are more likely to be misstated and exhibit concentration on the direct tests of account balances. The auditor must assess the capabilities and the competencies of the accounting staff to reduce the material misstatement in the presentation of financial statement and to provide fairly presentation and in accordance of the financial statement in general accounting standards.
The auditor evaluation about the competency of the accounting department can be assessed by the way of the presentation of the financial statement wherein must be fairly presented in accordance to the general accounting standards or otherwise it will fall under the non-compliance to the standards that will later on have the presence of material misstatements. This may provide evidence about the fairness of the financial statements that may reveal errors in the recording or reporting of transactions and balances.
The auditor should be able to assess the capability of the accounting personnel. Essentially, the auditor should have good knowledge about accounting. Also, the assurance of competence is a vital component of internal control. Due to professional standards, an audit firm must not accept the commitment unless they have the expertise to evaluate the client’s controls.
- An auditor should be able to assess the capabilities of the accounting personnel in many ways, including (a) evaluating the exceptions that are noted during the audit testing, (b) discussions with accounting personnel regarding audit issues, (c) gathering information from the president or the audit committee, and (d) assessing the academic and work background of the personnel and their experience within the industry as it relates to the company.
Sufficient evidence There needs to be enough evidence to support the auditor's conclusion. What is enough at the end of the day is a matter of professional judgement. However, when determining whether they have enough evidence on file the auditor must consider: (a) the risk of material misstatement, (b) the materiality of the item, (c) the nature of accounting and internal control systems, (d) the auditor's knowledge and experience of the business; (e) the results of controls tests, (f) the size of a population being tested, (g) the size of the sample selected to test, and (h) the reliability of the evidence obtained.
The risk of material misstatement refers to the risk that the financial statements are materially misstated
Course: Accounting (ACCtg12)
University: Taguig City University
