Publicly traded companies are required by law to exercise full risks disclosure as a means to ensure transparency and grand prospective investors vital information that can guide their investment decisions (Knechel & Salterio, 2016). According to the Public Company Accounting Oversight Board, auditors have the obligation to impartially and accurately identify and understand the risks surrounding an organization’s operations. The International Standards on Auditing state that the objective of an auditor is to assess and identify the risk of material misstatement, whether the inconsistency emanated as a result of fraudulent activities or error, by understanding the entity’s internal controls; hence, providing a basis for designing best practices for responding to the assessed risks.
Given that not all risks result in material misstatements, an auditor is not obliged to assess all risks because an auditor’s objective, as aforementioned, is to identify and understand misstatement (Knechel & Salterio, 2016). Although an auditor’s assessment is not limited to account balances, financial transactions, and disclosures, these are the primary risks that an auditor is obliged to identify in his or her assessment of material misstatement.
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In the process of performing a risk assessment or an audit, an auditor is expected to understand the company’s external environment; which entails the economic stability, political stature, and the prevailing social conditions. Moreover, an auditor must take the availability of credit and capital, industrial trends, shifts in the supply chain, and the degree of market competition that the entity faces into account. Also, an auditor must understand the regulatory and applicable financial reporting frameworks that are relevant to the industry (Knechel & Salterio, 2016). Other aspects of consideration include the entity’s strategies and objectives, accounting policies, and the firm’s financial measurement frameworks. The bottom line is by understanding both the internal and external environments of an entity; an auditor can identify and determine material misstatements and recommend feasible approaches can be used to mitigate the occurrence of discrepancies in the future.
References
International Federation of Accountants (IFAC). (2009). Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment. International Standards on Auditing 315. New York, NY: IFAC.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk . Routledge.
