Page 56 - CA Inter Audit PARAM

CA Ravi Taori
The risk that the financial statements are materially misstated prior to audit.

Components
As per SA 200, the risks of material misstatement at the assertion level consist of two
components: inherent risk and control risk. Inherent risk and control risk are the entity’s risks;
they exist independently of the audit of the financial statements. The nature of each of these
types of risk and their interrelationship is discussed below

➢ Inherent Risk
Definition
The susceptibility of an assertion about a class of transaction, account balance or disclosure
to a misstatement that could be material, either individually or when aggregated with other
misstatements before consideration of any related controls. (E.g. Retail, Jewellery, Telecom)

➢ Control Risk
Definition
The risk that a misstatement that could occur in an assertion about a class of transaction,
account balance or disclosure and that could be material, either individually or when
aggregated with other misstatements, will not be prevented, or detected and corrected, on
a timely basis by the entity’s internal control.

QNO— RMM at 2 Levels Old Course – (N23R)
315.11.50 Bhaskar CNO - SA315.P1.020
Risk of material misstatement refers to the risk that the financial statements are materially misstated
prior to audit. Discuss the levels at which this risk exists.
Answer The risks of material misstatement may exist at two levels:
(i) The overall financial statement level - Risks of material misstatement at the overall financial
statement level refer to risks of material misstatement that relate pervasively to the financial
statements as a whole and potentially affect many assertions.

(ii) The assertion level for classes of transactions, account balances, and disclosures - Risks of
material misstatement at the assertion level are assessed in order to determine the nature,
timing, and extent of further audit procedures necessary to obtain sufficient appropriate audit
evidence. This evidence enables the auditor to express an opinion on the financial statements
at an acceptably low level of audit risk.

QNO Combined assessment of the “risks of material Old Course – (SM17/N19R/ SM20/SM21)
315.13 misstatement Bhaskar CNO- SA315-P1.020 New Course -- (SM25)
The SAs do not ordinarily refer to inherent risk and control risk separately, but rather to a combined

assessment of the “risks of material misstatement”. Explain.
Answer ➢ Combined Vs Separate Assessment
The SAs do not ordinarily refer to inherent risk and control risk separately, but rather to a
combined assessment of the “risks of material misstatement”. However, the auditor may make
separate or combined assessments of inherent and control risk depending on preferred audit
techniques or methodologies and practical considerations.
The assessment of the risks of material misstatement may be expressed in quantitative terms,
such as in percentages, or in non-quantitative terms.
In any case, the need for the auditor to make appropriate risk assessments is more important
than the different approaches by which they may be made.
(In big assignments go for separate analysis, further if auditor is relying extensively on
test of controls then separate analysis id preferred)

It can be concluded from the above that-
Risk of Material Misstatement= Inherent Risk x Control Risk

www.auditguru.in 3.11