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Planning, materiality and assessing the risk of material misstatement

Risk and the exam

In the exam it is likely that you will be asked to perform a risk assessment for an audit
client.

The three types of risk examinable are:

 Risk of material misstatement

 Audit risk

 Business risk

4.1 Risk of material misstatement

Risk of material misstatement: the risk that the financial statements
are materially misstated prior to the audit commencing.

The financial statements may be materially misstated for 3 main reasons:

 Numbers are misstated – e.g. overstatement of receivables due to bad debts
not being written off.

 Disclosures are missing or inadequate – e.g. going concern disclosures being
omitted.

 The basis of preparation is inappropriate – the going concern basis has been
used when the break up basis should have been used.

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