Definition
The risk of material misstatement (RMM) is the risk that the financial statements contain a material misstatement before any audit work. Under AU-C 315 the auditor identifies and assesses it at two levels: the financial statement level, which affects many assertions at once, and the assertion level for classes of transactions, account balances and disclosures. Each assertion-level assessment has an inherent risk and a control risk component.
Why it matters in an audit or review
RMM is the auditor's output from risk assessment and the input to the response. AU-C 330 requires overall responses to the financial statement level risks and further audit procedures whose nature, timing and extent respond to the assessed risks at the assertion level. A weak assessment gives a weak audit plan: too little work on risky areas, too much on safe ones.
Example
A client is a growing distributor with a new ERP system. At the financial statement level the auditor notes new-system conversion risk. At the assertion level, inventory existence and valuation get high inherent risk because of multiple warehouses and slow-moving items, while prepaid expenses get low. The plan puts an inventory observation and an NRV test on inventory and analytics only on prepaids.
Common mistakes
Giving the same risk rating to every assertion in an account. Existence of cash and valuation of a long-term receivable do not carry the same risk.
Sources
- AICPA, AU-C Section 315 (as amended by SAS No. 145)
- AICPA, AU-C Section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained
- AICPA, AU-C Section 200, Overall Objectives of the Independent Auditor
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error