Risk of material misstatement definition
/What is the Risk of Material Misstatement?
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 two levels noted below. 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.
Risk of Material Misstatement at the Assertion Level
This risk 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.
Risk of Material Misstatement at the Financial Statement Level
The risk of material misstatement at the financial statement level relates to the financial statements as a whole. This is a key risk to address, because a high risk makes it difficult for an auditor to issue an unqualified audit opinion. There are multiple factors that can increase this risk, including declining economic conditions, ineffective accounting systems, poor oversight by the board of directors, and the incompetence of management. It is also possible that rapid changes within the industry are increasing this risk.