What are Risks of Material Misstatement at the Financial Statement Level and Risks of material misstatement at the assertions level?

 An auditor identifies the risks of material misstatement and determine whether they exist at:

(a) The financial statement level; or

(b) The assertion level for classes of transactions, account balances and disclosures

(a) Risks of material misstatement at the financial statement level refer to risks that relate pervasively to the financial statements as a whole, and potentially affect many assertions.

Events or conditions that may indicate risks of material misstatement at the financial statement level may following matters:

● Lack of personnel with appropriate accounting and financial reporting skills.

● Control deficiencies – particularly in the control environment, risk assessment process and process for monitoring, and especially those not addressed by management.

● Past misstatements, history of errors or a significant amount of adjustments at period.

Risks of material misstatement at the financial statement level due to fraud is also relevant to the auditor’s consideration.

Identification and assessment of Risks of material misstatement at the financial statement level is influenced by the auditor’s understanding of the entity’s system of internal control, in particular the control environment, the entity’s risk assessment process and the entity’s process to monitor the system of internal control.

( b) Risks of material misstatement at the assertions level

Risks of material misstatements that do not relate pervasively to the financial statements are risks of material misstatement at the assertion level.

Assessing Risks of Material Misstatement at the Assertion Level

For identified risks of material misstatement at the assertion level, the auditor shall assess inherent risk and control risk

Assessing Inherent Risk

Inherent risk is assessed by assessing the likelihood and magnitude of misstatement.

The likelihood of a misstatement means the possibility that a misstatement may occur, due to inherent risk factors.

The magnitude of a misstatement means the qualitative and quantitative aspects of the possible misstatement (i.e., misstatements in assertions about classes of transactions, account balances or

disclosures may be judged to be material due to size, nature, or circumstances)

The auditor shall determine whether any of the assessed risks of material misstatement are significant risks. Significant risk is an identified and assessed risk of material misstatement that, in the auditor’s judgment, requires special audit consideration. Significant risk are those on the upper end on the spectrum of inherent risk (with high likelihood of occurrence and high magnitude of potential misstatement). The determination of significant risks is a matter of professional judgment.

The determination of significant risks allows for the auditor to focus more attention on those risks through the performance of certain required responses such as:

· Controls that address significant risks are required to be identified and evaluated weather it is designed and implemented effectively.

· Controls that address significant risks to be tested in the current period.

· Requires communicating with those charged with governance about the significant risks identified by the auditor.

Risks of material misstatement that may be assessed as having higher inherent risk and may therefore be determined to be a significant risk, may arise from matters such as the following:

● Transactions with multiple acceptable accounting treatments.

● Accounting estimates that have high estimation uncertainty or complex models.

● Complexity in data collection and processing to support account balances.

● Account balances or quantitative disclosures that involve complex calculations.

● Accounting principles that may be subject to differing interpretation.

● Changes in the entity’s business that involve changes in accounting, for example, mergers and acquisitions

Assessing Control Risk

If the auditor plans to test the operating effectiveness of controls, the auditor should assess control risk first. The initial expectation of the operating effectiveness of controls is based on the auditor’s evaluation of the design, and the determination of implementation, of the identified controls in the control activities component. If the controls are not operating effectively as expected, then the auditor will need to revise the control risk assessment.

ISA 315