Question

Managing the risk of material misstatement in the purchasing process is critical. Identify two (2) different industries and analyze how these risks differ from one industry to the other. Also, identify internal controls that could help to keep these misstatements to a minimum.

Answer 1

RISK OF MATERIAL MISSTATEMENT (RMM)

RMM is the risk that the financial statements of an organisation are materially misstated prior to the audit.On assertion if the risk is high it needs more evidence and if the risk is low it  needs less evidence.

Identification of the risk of material misstatement in a specialised industry should be approached in the same was as in any other audit, by obtaining appropriate understanding of the business and its environment. To assist audit team members assigned to a specialised industry client, the audit firm is likely to have additional resources available. There may be briefing notes or internal technical guidance on how financial reporting standards should be applied within the sector. For example, in the audit of banking sector clients, an audit firm may produce guidance on the specific application of IFRS Standards relating to the range of financial instruments typically held by banks. Audit staff can then refer to this guidance when performing the audit, particularly when identifying risks of material misstatement.

The auditor can use an auditor’s expert to obtain audit evidence to reduce the RMM to a lower level.Using the Work of an Auditor’s Expert which deals with matters including the evaluation of the objectivity, competence and capabilities of the auditor’s expert, determining and communicating the scope and objectives of their work, and assessing their findings.

Internal controls helps to prevent errors and misstatement of financial statements. Segregation of duties is a fundamental element of internal control. Internal controls including proper SOD help to prevent fraud. The principle of SOD is to share responsibilities in a key process such that no one individual should perform two of the three functions: custody, recording and authorization. internal controls establish safeguards to an organization’s assets and minimize the opportunities of committing fraud.