If the risk of material misstatement is high, should I perform more or less substantive testing?
If the risk of material misstatement is high, that means that inherent risk is high and that control risk is also high. When that is the case, in order to reduce overall audit risk, more effective substantive testing procedures should be performed.
To perform more effective substantive procedures, the audit team should consider what type of test would provide the highest level of assurance (e.g. confirmations over detailed testing).
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What is audit risk?
Audit risk is the risk that the auditor will fail to modify an opinion on the financial statements when they are in fact materially misstated. This will typically arise because an auditor will never be able to obtain absolute assurance by conducting audit procedures. Audit risk will only be able to be reduced to an […]
What is inherent risk in an audit?
Inherent risk is the susceptibility of a relevant assertion to a material misstatement, assuming no internal controls exist. The auditor will assess inherent risk as high if the financial statements are likely to contain material misstatements and will assess inherent risk as low if the financial statements are not likely to contain material misstatements. Some […]
What are some examples of risks related to financial reporting that the audit team should be aware of?
Risks related to financial reporting may increase due to economic impacts to a client’s business or industry. Risks may arise or directly be related to any of the following: