The risk of material misstatement is the risk of having substantial wrong figures of the financial statements as alleged by auditors. There are a number of factors that increase the chances of achieving misstated books of financial statements. One of such factor is the existence of an information system that fails to capture accurate data pertaining to business transactions as they occur daily. The accuracy of financial statements such as the profit and loss account or the statement of cash flow depends on accurate data captured on a day to day basis. The availability of wrong information pertaining to activities such as sales, purchases or even transactions of the cashbook are definitely meant to portray a material misstatement of the financial statements. There are cases in business organizations where the available information system fails to capture correct information to sales or purchases as they occur daily. This may be as a result of the MIS being newly installed has been compromised by computer viruses. The inaccurate information on the business transactions will eventually translate to material misstatements at the end year books (Alali, 2018).
Available complex transactions may also increase the risk of achieving misstated financial statements. Accounting transactions that revolve around debt management, foreign currency and consolidation present complex assignments which are likely to report mistakes at the end year books. Accounting transactions that relate to treatment of bad and doubtful debts vis-à-vis the policies laid to write off debts are likely to present complex solutions to the accountants with an increased chance that the figures of the sales ledger (debtors accounts) may end up with figures considered as wrong by auditors. When accounting teams are faced with complex accounting solutions, the chance that the end year books will probably be misstated increases (Alali, 2018).
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References
Alali, F. (2018). Teaching Students Financial Statements’ Assertions: Crisp-Drinks Case. Journal of Forensic & Investigative Accounting , 10 (3).
