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Hello sir
If there is subjectivity in the accounting treatment of certain items in the client’s FS (e.g., a choice of valuation model), is it safe to say that there is a risk that FS may give a wrong impression of the entity to users due to its impact on profitability ratios such as asset turnover?
I learned that inherent risk is an element of ROMM at the assertion level so I’m wondering if I can mention the FS cause I feel like it is more like a financial statement level issue.
Thanks in advance
Welcome to my forum!
Q1 in AAA will ask you specifically for audit risk OR RoMM AND/OR business risk (see page 57 of our notes). See on page 62 – RoMM may exist also at the financial statement level – and will have a different auditor’s response.
If a choice of valuation model means that an asset or liability might be overstatement or understated, then THIS is the RoMM that you should focus on. You should be very careful about digressing into waffly stuff about impression on users (for example) because that could be said about ANY material misstatement. That is not to say that you shouldn’t be alert to such things as management bias (as an inherent risk) – e.g. if you see several misstatements all going in the same “direction” (usually to overstate profits/net assets).
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