What is risk of material misstatement?

What is the risk of material misstatement?

The risk of material misstatement is the risk that financial statements are materially misstated prior to the audit. It is the risk that the figures and disclosure in the financial statement are not in accordance with the accounting standards and the acceptable financial reporting framework.

The risk of material misstatement consists of two components, namely inherent risk and control risk.

  • Inherent risk – this is 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.
  • Control risks – this is the risk that a misstatement that could in an assertion about a class of transaction, account balance, or disclosures and that can 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.

2 thoughts on “What is the risk of material misstatement?”

  1. Pingback: Why is absolute assurance in auditing impossible? – ACCOUNTING CLASS

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