Many CPA firms are taking a business risk approach to audits. Define what is meant by business risk. Provide an example of a business risk that could result in a risk of a material misstatement of financial statements.
A business risk involves a firm incurring profits that are lower than the expected or it could mean making a loss rather than profits. Therefore, a business risk is always a threat to achieving the objectives of the firm. Notably, most of the business risks result to a risk of material misstatement of financial statements. However, not all risks lead to material misstatements. Generally, a misstatement arises from error or fraud. According to (AICPA, 2016), a misstatement is a difference between amount, classification, and disclosure of some reported item in the financial statement and that, which is required for the item in accordance with the financial reporting framework. Specifically, a misstatement is the difference between what is reported and what should have been or was expected to be reported regarding an item in the financial statement.
Delegate your assignment to our experts and they will do the rest.
An example of a business risk that results in material misstatement is when technology changes in the industry causing the products of a certain client to become obsolete. This means that these products will lose their value since they are no longer relevant in the market. Consequently, the demand for these products will fall significantly. The risk of material misstatement is that the inventory of this client will be overvalued because these products are not valued at the net realizable value. Notably, a misstatement is considered material if it affects the economic decisions made by the users of financial statements. Due to business risks, many CPA firms are now tailoring their audits towards discovering the business risks. The discovery of business risk is essential since these risks could result in business failure if not handled properly.
Reference
AICPA. (2016). Audit guide: assessing & responding to audit risk in a financial statement audit . John Wiley & Sons Inc.
