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Assessing The Risk of Material Misstatement

The auditor assesses the risk of material misstatement at two levels: the overall financial statement level and the assertion level for classes of transactions, account balances, and disclosures. Risk assessment procedures include inquiries, analytical procedures, observation, inspection, team discussions, and other procedures. The audit risk model expresses the relationship between inherent risk, control risk, detection risk, and acceptable audit risk. An increase in planned detection risk can occur from an increase in acceptable audit risk or decreases in control or inherent risk, while a decrease occurs from the opposite circumstances.

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72 views2 pages

Assessing The Risk of Material Misstatement

The auditor assesses the risk of material misstatement at two levels: the overall financial statement level and the assertion level for classes of transactions, account balances, and disclosures. Risk assessment procedures include inquiries, analytical procedures, observation, inspection, team discussions, and other procedures. The audit risk model expresses the relationship between inherent risk, control risk, detection risk, and acceptable audit risk. An increase in planned detection risk can occur from an increase in acceptable audit risk or decreases in control or inherent risk, while a decrease occurs from the opposite circumstances.

Uploaded by

Ari Prtma
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Assessing the Risk of Material Misstatement

1. At what two levels does the auditor assess the risk of material misstatement?
2. Describe the types of procedures that constitute risk assessment procedures.
3. Define the audit risk model and explain each term in the model.
4. Explain the causes of an increased or decreased planned detection risk.

Answer

1. The two levels does the auditor assess the risk of material misstatement is :
 Overall level of financial statements: refers to all matters relating to the
financial statements as a whole that may affect several transactions and
accounts.

 Assertion levels for classes of transactions, account balances, and


presentation and disclosure. This type of risk includes 2 components:
inherent risk and controlled risk. Innate risk describes the auditor's
suspicion of material error before considering the client's effectiveness in
resolving material errors. Controlled risk describes the auditor's assessment
of the risk of material errors occurring without detection from the client's
internal control.

2. 1. Inquiries of management and others


2. Analytical procedures
3. Observation and inspection
4. Discussion among engagement team members
5. Other risk assessment procedures
3. The Audit Risk Model is as following :

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 auditor’s assessment of the susceptibility of an


assertion to material misstatement, before considering the effectiveness of
related internal controls.

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 control.

Acceptable Audit Risk : a measure of how willing the auditor is to accept that
the financial statements may be materially misstated after the audit is
completed and an unmodified opinion has been issued.

4. An increase in planned detection risk may be caused by an increase


inacceptable audit risk or a decrease in either control risk or inherent risk.
Adecrease in planned detection risk is caused by the opposite: a decrease
inacceptable audit risk or an increase in control risk or inherent risk.

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