Page 107 - Microsoft Word - 00 P1 IW Prelims.docx

Planning, materiality and assessing the risk of material misstatement

Exam focus

6.1 Explain the right type of risk

A common mistake that students make in exams is to explain all risks as business
risks. Take care to ensure your answer is relevant to the requirement.

Factor Audit risk Business risk

Customers are struggling Receivables may be Bad debts may arise
to pay debts overstated if bad debts are reducing the profit of the
not written off company

The client operates in a Inventory may be Inventory may have to be
fast paced industry overstated if the inventory written off reducing the
is obsolete and NRV is profits of the company
lower than cost

6.2 Provide a sufficiently detailed answer

Many students simply identify risks and do not provide an explanation or evaluation
of the risk. Most risks are worth 1½ – 2 marks if sufficiently explained. Identifying a
risk is worth a maximum ½ mark. Therefore students who do not sufficiently explain
risks will lose a significant number of marks.

Follow this approach to ensure a sufficiently detailed answer:

Audit risks / Risks of material misstatement

 Identify the information from the scenario that creates the potential risk.

 If numbers are provided, calculate whether the balance is material. This helps to
assess whether or not the risk is significant.

 State the required accounting treatment from the relevant accounting standard.

 State the risk to the financial statements if the required treatment is not
followed.

Business risks

 Identify the information from the scenario creating the risk.

 Explain the impact it will have on the business operations.

 Explain the financial impact to the company e.g. impact on profit or cash flow.

103