Risks of material misstatement at financial statement level.
Distinguish between audit risk and RMM at financial statement level. Look at required.
ISA 315R Appendix 2 have lots of examples.
“The risk of the improper use of the going concern assumption increases/decreases due
to the following reasons”
Discuss the risks of material misstatement in the financial statements = This is
risks at both financial statement level and account level!
You need so state the facts given in scenario and then say why it is a risk and how it
impacts the financial statements.
Risk that management override the
controls
Listed company ● Fraudulent manipulation of
statements to meet listing
requirements and shareholder
expectations
● Delisting if they don’t meet listing
requirements which will cause
problems raising capital and
increase going concern risks.
● Risk of fines if they don’t meet
listing requirements which will
increase going concern risks
● Expands access to capital which
reduces going concern risk.
Unreliable clients such as government ● High credit risks, usually have
cash flow problems which increase
going concern.
Dishonest management ● Risk of a lack of integrity and
increase in fraud risk
Legal claim ● Cash flow and profit pressure
which increase going concern risk
Lost of significant clients ● Pressure on profit and cash flows
which increase going concern risk
Consolidated statements for first time ● Complexity of accounting for
acquisition in the separate financial
statements together with lack of
experience increase which risk of
, errors
● Complexity of consolidation with
lack of experience which increase
risk of errors.
● Complexity of auditing
consolidated statements which
increase risk of undetected errors.
● Subsidiaries might not have a
strong control environment
(different auditors), which increase
risk of fraud and errors.
● Subsidiaries is related parties
which increases risk of fraud.
● The company diversified and
expanded their operations which
reduces going concern risk
● Subsidiary have the same year-
end as parent which reduces the
risk of errors
Audit required to be completed in short ● Increase risk of errors by the
period after year-end clients staff
● Increase risk of undetected errors.
Statements prepared for bank to assess ● Increase the risk of fraudulent
loan manipulation to make statements
look better than what they are.
● If the loan is not renewed,
pressure on cash flows which
increase going concern risk.
Small audit team or audit team with not ● Pressure on the staff which lead to
sufficient staff risk of undetected errors.
Working with other auditors. ● Increase the risk of errors due to
unwarranted reliance on their work
Establish company ● Decrease going concern risk
The audit firm is with the client some ● Reduces the risk of undetected
years now errors.
Nature of the product, is it luxury? ● SA usually has weak economic
conditions, the poor cannot afford
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