CHAPTER 9
ASSESSING THE RISK OF MATERIAL
MISSTATEMENT
Audit Risk
Risk : the acceptance by the auditors that there is some level of uncertainty in
performing the audit function.
a. Risk of Material Misstatement at the Overall Financial Statement Level
- Risk that relate pervasively to the fnancial statements as a whole and
potentially afect a number of diferent transactions and accounts.
- Influencing factors:
o Defciencies in managementss intergrity or competence
o Inefective oversight by the board of directors
o Inadequate accounting systems and records
b. Risk of Material Misstatement at the Assertion Level
- Inherent risk : represents the auditorss assessment of the susceptibility
of an assertion to material misstatement, before considering the
efectiveness of clientss internal control.
Example : inherent risk may be higher for accounts whose
valuations are dependent on complex calculations or accounting
estimates subject to signifcant estimation judgement.
- Control risk : represent the auditorss 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 clientss internal control.
Example : control risk may be higher if the clientss internal
control procedures fail to include independent review and
verifcation by other client personnel of complex calculations
used or signifcant estimates developed to determine the
valuation of an account balance recorded in the clientss fnancial
statements.
Risk Assessment Procedure
Include the following:
- Provide input for understanding
entity and its environment,
1. Inquiries of management and others
including internal control
2. Analytical procedures - Help auditor identify and assess
3. Observation and inspection the risk of material misstatement
- Used to develop audit strategy
4. Discussion among engagement team members and audip plan in response to
5. Other risk assessment procedures assessed risks.
Considering Fraud Risk
The audit must be planned and performed with an attitude of professional
skepticism, consist of two components:
A questioning mind
, A critical assessment of audit evidence
The auditorss consideration of the risk of material misstatement due to fraud is
made at both fnancial statements level and assertion level for classes of
transactions, account balances, and presentation and disclosure.
Example: auditor should ask the management to describe the frequency of
managementss assessment and the extent of their consideration of risks due to
fraud.
Identification of Significant Risks
Signifcant risk : represents an identifed and assessed risk of material
misstatement that in the auditorss professional judgement, requires special audit
considerations.
Nonroutine transactions
- Transactions that are unsual, either due to size or nature and that are
infrequent in occurrence.
- May increase the risk of material misstatement because they often
involve a greater extent of management intervention.
Matters that require signifcant judgement
- Because include the development of accounting estimates for which
signifcant measurement uncertainty exists.
Fraud Risk
- Involves concealment difficcult to detect
- Auditor needs to consider signifcant risk which triggers required
responses to those risks
Audit Risk Model
AAR
PDR=
IR x CR
PDR : Planned Detection Risk
AAR : Acceptable Audit Risk
IR : Inherent Risk
CR : Control Risk
Planned Detection Risk : the risk that audit evidence for an audit objective
will fail to detect misstatements exceeding performance materiality.
Inherent Risk : measures the auditorss assessment of the susceptibility of
an assertion to material misstatement, before considering the
efectiveness of related internal controls.
Control Risk : measures the auditorss 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 clientss internal control
ASSESSING THE RISK OF MATERIAL
MISSTATEMENT
Audit Risk
Risk : the acceptance by the auditors that there is some level of uncertainty in
performing the audit function.
a. Risk of Material Misstatement at the Overall Financial Statement Level
- Risk that relate pervasively to the fnancial statements as a whole and
potentially afect a number of diferent transactions and accounts.
- Influencing factors:
o Defciencies in managementss intergrity or competence
o Inefective oversight by the board of directors
o Inadequate accounting systems and records
b. Risk of Material Misstatement at the Assertion Level
- Inherent risk : represents the auditorss assessment of the susceptibility
of an assertion to material misstatement, before considering the
efectiveness of clientss internal control.
Example : inherent risk may be higher for accounts whose
valuations are dependent on complex calculations or accounting
estimates subject to signifcant estimation judgement.
- Control risk : represent the auditorss 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 clientss internal control.
Example : control risk may be higher if the clientss internal
control procedures fail to include independent review and
verifcation by other client personnel of complex calculations
used or signifcant estimates developed to determine the
valuation of an account balance recorded in the clientss fnancial
statements.
Risk Assessment Procedure
Include the following:
- Provide input for understanding
entity and its environment,
1. Inquiries of management and others
including internal control
2. Analytical procedures - Help auditor identify and assess
3. Observation and inspection the risk of material misstatement
- Used to develop audit strategy
4. Discussion among engagement team members and audip plan in response to
5. Other risk assessment procedures assessed risks.
Considering Fraud Risk
The audit must be planned and performed with an attitude of professional
skepticism, consist of two components:
A questioning mind
, A critical assessment of audit evidence
The auditorss consideration of the risk of material misstatement due to fraud is
made at both fnancial statements level and assertion level for classes of
transactions, account balances, and presentation and disclosure.
Example: auditor should ask the management to describe the frequency of
managementss assessment and the extent of their consideration of risks due to
fraud.
Identification of Significant Risks
Signifcant risk : represents an identifed and assessed risk of material
misstatement that in the auditorss professional judgement, requires special audit
considerations.
Nonroutine transactions
- Transactions that are unsual, either due to size or nature and that are
infrequent in occurrence.
- May increase the risk of material misstatement because they often
involve a greater extent of management intervention.
Matters that require signifcant judgement
- Because include the development of accounting estimates for which
signifcant measurement uncertainty exists.
Fraud Risk
- Involves concealment difficcult to detect
- Auditor needs to consider signifcant risk which triggers required
responses to those risks
Audit Risk Model
AAR
PDR=
IR x CR
PDR : Planned Detection Risk
AAR : Acceptable Audit Risk
IR : Inherent Risk
CR : Control Risk
Planned Detection Risk : the risk that audit evidence for an audit objective
will fail to detect misstatements exceeding performance materiality.
Inherent Risk : measures the auditorss assessment of the susceptibility of
an assertion to material misstatement, before considering the
efectiveness of related internal controls.
Control Risk : measures the auditorss 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 clientss internal control
