Page 193 - CA Inter Audit PARAM

CA Ravi Taori
Answer (i) In the given case, risk of material misstatement has been assessed as high in respect of assertions
relating to revenue and various direct expenses due to increase in gross profit ratio of company from
14% in year 2022-23 to 24% in year 2023-24.

Few possible reasons which could have led to abnormal jump in gross profit ratio include: -
• Overvaluation of inventories
• Overstatement of revenues
• Understatement of direct expenses

(ii) SA 200, “Overall Objectives of the Independent auditor and the conduct of an audit in accordance
with Standards on Auditing” defines detection risk as the risk that the procedures performed by the
auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and
that could be material, either individually or when aggregated with other misstatements.

Tisha is of a view that detection risk in this engagement should be kept at high level whereas in the
given situation, risk of material misstatement has been assessed as high for assertions relating to
revenue and direct expenses. Therefore, detection risk has to be kept at low level so that a material
misstatement in these assertions does not remain undetected. Therefore, view of Ms. Tisha is not
proper.

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