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Is financial statement Risk = the material misstatement risk = breach of accounting standard ( IAS ) ?
Ooooh – I’m not sure that business risk is the same as financial statement risk! Oh no! Business risk is a risk facing a business and may be paraphrased as risks that the company faces when trying to achieve its objectives. Financial statement risk is the risk that the financial statements are materially misstated and material misstatement risk is a risk involved in the assessment of audit risk
Going back to my first response on this thread, I was a little careless in my response, sorry!
As stated in the previous paragraph in this post, financial statement risk is the risk of the financial statements being misleading to a material degree whereas material misstatement risk is the combination / product of control risk x detection risk used by the auditor in their assessment of overall audit risk
Sorry to have been so reckless in my first response
so then what to write when asked about to consider financial statement risk and material misstatement risk from scenario given in the exam?
Arun, I’m yet again in the situation where I have to admit to carelessness. Material misstatement risk is the combination of inherent risk and control risk (NOT as I previously stated control risk and detection risk)
Material misstatement risk is a matter for the auditor to determine / estimate in arriving at the level of detection risk when planning an audit. Consideration will be given by the auditor to those inherent risks facing a client and to the strengths and weaknesses of the client’s internal control system.
There’s not a lot that can be done to avoid the inherent risks but an assessment of the control system will enable an auditor to arrive at a justifiable conclusion re the level of detection risk and that, in turn, will provide the basis for determining materiality levels
Financial statement risk is the risk that the financial statements contain a material error. It is closely associated with audit risk in that the auditor should plan the audit in such a way that they gather sufficient appropriate audit evidence so as to provide reasonable assurance that the financial statements are free from material misstatement
To quote a recent article from Student Accountant, financial statement risk and material misstatement risk are “inextricably intertwined”
Better?
I only want to know that what to write when asked to consider about in financial statement risk ,material misstatement risk and audit risk.
Material misstatement risk is part of audit risk and is a matter for the auditor ie the risk that the auditor will issue an inappropriate opinion.
Financial statement risk is the risk that the financial statements will be incorrect / misstated. Financial statement risk is a problem facing management and is addressed by management’s risk reduction procedures (internal auditors, risk committee, audit committee and so on)
There’s no way that I can begin to set out the sort of things you need to say in an exam answer. Life is too short!
Get hold of a revision kit, exam kit from a reputable publisher and start reading the answers from the examiner. That should give you a pretty comprehensive idea of the sort of points to include. Read also the examiner’s comments from previous exams
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