Question

Which accounts and assertions are most at risk of material misstatement?

Describe these accounts.

Answer 1

The risk of material misstatement is the risk that the financial statements of an organization have been misstated to a material degree. This risk is assessed by auditors at the following two levels:

• At the assertion level. This 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.

• At the financial statement level. Relates to the financial statements as a whole. This risk is more likely when there is a possibility of fraud.

When the risk of material misstatement is high, the level of detection risk is lowered (increases the amount of evidence obtained from substantive procedures). Doing so reduces the overall audit risk.