What does risk of material misstatement mean on the CPA exam?
Risk of material misstatement. The risk that the statements are materially misstated before the audit begins. At the assertion level it consists of inherent risk and control risk. The auditor assesses it and cannot change it; detection risk is the only half the auditor sets.
Defined against AU-C 200.14.
Which CPA exam sections use risk of material misstatement?
Risk of material misstatement appears in the AUD section of the CPA exam.
Other terms defined against AU-C 200
- applicable financial reporting framework: The framework management adopts for the statements, such as GAAP or a special purpose framework.
- control risk: The risk that the entity's own controls will not prevent, or detect and correct, a material misstatement on a timely basis.
- inherent risk: The susceptibility of an assertion to material misstatement before any control is considered.
- level of assurance: How much confidence the practitioner expresses.
- professional skepticism: An attitude that includes a questioning mind and a critical assessment of evidence.
Related terms
- assessed risk: The auditor's judgment about the risk of material misstatement at the assertion level, combining inherent and control risk.
- significant risk: A risk of material misstatement that warrants special audit attention because of its likelihood or its size.
- material misstatement: An error or omission in the financial statements large enough, or of a kind, that it could change the decision of a reasonable user relying on them.
- risk assessment procedures: The audit procedures designed and performed to identify and assess the risks of material misstatement at the financial statement and assertion levels.
- accelerated filer: A public company with public float of at least 75 million dollars that has been reporting for at least a year.
- tolerable misstatement: A monetary amount set so that the risk of the actual misstatement in the population exceeding it is acceptably low.