The Audit Experience AS/2

Performance Support—Risks of Material Misstatement and Assertions

This performance support provides information on risks of material misstatement, which are central to our audits; it also provides information on the assertions. While planning for the testing of material classes of transactions, account balances, and disclosures, this information is used in order to plan for and apply appropriate audit procedures.

This performance support will cover the following topics (click on a link to go to the topic):

• WHY DO WE NEED TO KNOW ABOUT RISKS OF MATERIAL MISSTATEMENT AND ASSERTIONS

• RISKS OF MATERIAL MISSTATEMENT

o What is a risk of material misstatement?

o Do we seek to address risks in general or only those that would result in a material misstatement?

o What is the process of identifying the risk of material misstatement?

o Where can we find the risk of material misstatement identified?

o Who identifies the risk of material misstatement?

WHY DO WE NEED TO KNOW ABOUT RISKS OF MATERIAL MISSTATEMENT AND ASSERTIONS

The Audit Approach is a risk-based approach and as such, it is designed to focus on the risks of material misstatement that are in the material classes of transactions, account balances, and disclosures. A material class of transaction, account balance, or disclosure is one that we have determined, using professional judgment, has a material impact on the financial statements, and in turn affects our audit engagement.

We identify the risks of material misstatement by considering the different types of potential misstatements that may occur, linking the risks of material misstatement to the applicable assertions, and designing further audit procedures that are responsive to the assessed risks of material misstatements. The purpose of a financial statement audit is to obtain reasonable assurance that the financial statements are not materially misstated. If we know the risk of material misstatement being tested, then we are aware of how misstatements can occur and can perform further audit procedures to address the risks of material misstatement. Much of the design of audit procedures happens during the planning of the audit. However, it is important to know why we perform the tests we perform so that they are applied accurately, we know what to

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The Audit Experience AS/2

look out for during our audit procedures, we can tailor our audit procedures in response to changes, and we can perform audit procedures according to the DTTL methodology.

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The Audit Experience AS/2

RISKS OF MATERIAL MISSTATEMENT

What is a risk of material misstatement?

A risk of material misstatement is the risk that the financial statements are materially misstated prior to audit. Some of the risks of material misstatement can be identified as being a significant risk (i.e., an identified and assessed risk of material misstatement that, in the auditor’s judgment, requires special audit consideration). For more information, see Performance Support–Significant Risks.

We shall identify and assess the risks of material misstatement at:

• The financial statement level

• The assertion level for classes of transactions, account balances, and disclosures. For more information; see Practice Aid- Assertions Used in the new DTT Audit Approach Manual

to provide a basis for designing and performing further audit procedures.

Do we seek to address risks in general or only those that would result in a material misstatement?

We find it more effective and efficient to focus our work on the areas that are more risky and therefore have a greater possibility of being materially misstated. We therefore focus on the risks of material misstatement in the financial statements and not just any risks of misstatement (e.g., those that are not material or those that are not related to the financial statements).

What is the process of identifying the risk of material misstatement?

A risk of material misstatement is identified during the planning stage of the audit by considering the different types of potential misstatements that may occur and could have a material effect on the financial statements. Risks of material misstatement may also be identified throughout the audit. If you believe you have identified a risk of material misstatement while performing audit procedures, you should bring this to the attention of your field senior immediately.

Where can we find the risks of material misstatement identified?

A risk of material misstatement is documented in the planning working papers within the audit file, 158X series–Risk Assessment and Audit Plan by material classes of transactions, account balances, and disclosures (RAAP). The information from the RAAP populates the Model Audit Program (MAP), where you can find the risk of material misstatement including the audit procedures designed to address the risks that you are to perform.

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The Audit Experience AS/2

Who identifies the risk of material misstatement?

Risks of material misstatement are typically identified by members of engagement management (e.g., the engagement partner, audit manager, and field senior) during the planning stage of the audit. Risks of material misstatement can also be identified by any member of the engagement team at any point during the audit engagement.

For more information on risks of material misstatement, refer to the Audit Approach Manual (AAM) topics 2800: Assess risk of material misstatement and G252: Sufficient appropriate audit evidence and audit risk.

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The Audit Experience AS/2

Note that this performance support does not replace the AAM. It should be read in conjunction with the applicable AAM topics, as the manual states the requirements of our audit approach and it provides further guidance.

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