Assessing Risk of Material Misstatement

Two levels

• Financial statement level (pervasive) → overall responses (staffing, skepticism, unpredictability).
• Assertion level → further procedures.

Assertions

• Transactions: occurrence, completeness, accuracy, cutoff, classification, presentation.
• Balances: existence, rights and obligations, completeness, accuracy/valuation/allocation, classification, presentation.
• Overstatement → existence/occurrence. Understatement → completeness.

Statement on Auditing Standards (SAS) No. 145

• Inherent risk on a spectrum; factors: complexity, subjectivity, change, uncertainty, bias/fraud susceptibility.
• Control risk assessed separately; no testing → maximum.
• Stand-back: substantive procedures for every material item.

Significant risks

• Upper end of inherent risk spectrum; fraud (revenue presumed, override always).
• Evaluate controls; specific substantive response incl. tests of details; test relied-on controls this year.

Highly automated, no paper trail

Must test controls — substantive alone insufficient.

Exam traps

• A significant risk is identified from inherent risk alone — before considering controls.
• Risk assessment procedures alone never provide enough evidence for the opinion.
• Presentation and disclosure is an assertion too: a misstatement in the notes can be material on its own.