AAA by Kashif Kamran 9/18/2024

Block 3 (Syllabus area D Audit risk /

Risk of material misstatement )
Orientation
How to study effectively this part of the Block 3 ?

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Block 3 Audit risk/ risk of material

misstatement overview
 Topics included are:
1. Audit risk understanding
2. Risk of material misstatement understanding
3. Practice of recent papers, Sep 22, Dec 22, MJ23, SD23, MJ 24 and
practice exam 1 Sep 22.

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Block 3 Audit risk/ risk of material

misstatement overview
 This is a core block from exam perspective
 Majority of the marks in Q1 are based on audit risk and risk of
material misstatement requirement ( at times 50% of the total
Q1 marks)
 You should read recommended articles along with lectures
where recommended by looking at the title slide for each
topic (which are available on the resource section of the
LMS) take a printout and read through them and make
summary.

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Block 3 Audit risk/ risk of material

misstatement overview
 There are total of 8 lectures in this section of Block 3 with
total lecture duration of 8.5 hours
 There are support file for each lecture in pdf which can be
downloaded, and you can use them when watching
lectures and then as your notes for revision.
 The notes are available on the portal titled presentation
for audit risk/ risk of material misstatement and can be
downloaded.

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Developing your own revision notes

 Lecture support file

 Technical articles ( where recommended)
 Presentational notes

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Marking scheme updates

 The marking scheme for audit risk and risk of material misstatement
since Sep 22 exams is as follow:
 3 technical marks for materiality – this will be deducted from the total
technical marks examiner has kept for audit risk or RoMM
 Each audit risk/ RoMM is worth 3 marks , except for the risk like detection risk, or
risk where there is no comment on materiality or accounting treatment , which
are worth 2 marks
 Any calculation or identification of trend will give you an additional 0.5 marks.

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SYLLABUS AREA D:
TOPIC 2 RISK ASSESSMENT

EXAM PAPERS
- Do all Q1 recent papers on ACCA practice platform from Dec 2020 onwards

TECHNICAL ARTICLE TO READ

Approaching Section A question in AAA

Exam technique 1 – planning questions and risk (part 1): Business risk
Exam technique 2 – planning questions and risk (part 2): RoMM and audit risk in the AAA exam

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Types of risk assessment techniques

TYPES

AUDIT RISK OF MATERIAL

BUSINESS RISK
RISK MISSTATEMENTS

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Audit risk & risk of material misstatement

(RoMM) approach

AUDIT RISK

Risk of material
DETECTION
misstatement
RISK
(RoMM)

Inherent Control

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Audit risk / Risk of material misstatement

 Inherent risk is the susceptibility of a class of transaction, account balance or

disclosure to a misstatement, before consideration of any related controls. This is
the most important element of the case study, most of the case moves around
inherent risk in AAA paper
 Control risk is the risk that a misstatement will not be prevented, or detected and
corrected, on a timely basis by the entity’s internal control. This is rarely examined
in the case study around risk, yes sometime, examiner do give you some situation
involving weak controls or monitoring for you to pick control risk
 Detection risk is defined as the risk that the auditor fail to detect a material
misstatement. This is an important element in an audit risk qs, mostly audit risk qs
will tell you this is a first year audit as a most common detection risk.
 Audit risk questions require candidates to identify risks of material misstatements (
inherent risk & control risk) including detection risk
 In a risk of material misstatement question, candidate will only focus on the
elements of inherent & control risk

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Factors which increases

inherent risk in FS
Arises because of the nature of the information or the way
 Complexity
that it is prepared – for example, complex accounting or
reporting requirements such as the audit of a large, multi-
national insurance group

 Change Events or conditions which affect the entity’s business,

regulatory or economic environment.

 Uncertainty/subjectivity Arises when the required information cannot be prepared

based on sufficiently precise and comprehensive data. –
for example, contingent liabilities or provision, including
other estimate in financial statement
 Management bias & Conditions which create susceptibility for intentional or
unintentional failure by management to maintain
 fraud risk factors- neutrality – for example, transactions with related parties, ,
bonus schemes dependent on financial results.

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Risk of material misstatement

 The term 'misstatement' is defined in ISA 450, Evaluation of Misstatements
Identified During the Audit,
 'a difference between the amount, classification, presentation or disclosure of a
reported financial statement item and the amount, classification, presentation or
disclosure that is required for the item to be in accordance with the applicable
financial reporting framework.
 The case study do present you with numerous accounting issues and you need to
evaluate the underlying risk and misstatement from the given information.
 Your strong SBR knowledge is a pre-requisite for answering questions around audit
risk and risk of material misstatement (ROMM)

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Significant audit risk / risk of material

misstatement
 This term was introduced from Sep 22 exams and is now the standard
requirement – the way risk qs is asked for in exams
 Lets explore some recent questions, they way they are examined so to be
comfortable with it.

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Audit risk / Risk of material misstatement-

approach
Risk around accounting treatment
1. Comment on the materiality
2. Concisely comment on the accounting treatment (no credit for
mentioning the name or the reference number of the accounting
standard)
3. Comment on the risk within the accounting treatment (i.e. risk of
wrong recognition, or valuation or disclosure, classification etc.)
4. Comment on the impact on the FS of the risk (i.e. under or
overstatement or the FS are materially misstated
Flagged risk versus hypothetical risk
Involve yourself in case, look for the risk, examiner is trying to draw your attention too.

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TOPIC 2
AUDIT RISK/ RoMM exam practice
EXAM PAPERS
-Q1
• MJ 21 (Old)- ( do it yourself)
• SD 21 (Old)- ( do it yourself)
• MJ 22 (Old)- ( do it yourself)
• Sep 22 (done by tutor)
• Dec 22 (done by tutor)
• MJ 23 (done by tutor)
• SD 23 (done by tutor)
• MJ 24 ( significantly done by tutor / do the rest yourself)
• Specimen 1 exam ( done by tutor)
• Specimen 2 exam ( do it yourself)
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Practice sessions for Audit risk /

Risk of material misstatement
 Completing Block 3 lecture 3 , you will now, do extensive practice of past paper
for audit risk and risk of material misstatement.
 There are eight recent papers, available on ACCA practice platform (Mar/Jun
21, Sep/Dec 21, Mar/Jun 22, Sep 22, Dec 22, Mar/Jun 23, Sep/Dec 23 & Mar/Jun
24)
 Out of these, Sep 22, Dec 22, Mar/Jun 23, Sep/Dec 23 are covered in my premium
webinars ( you will now watch them in order post this lecture).
 After watching the four premium webinars , you will watch the final lecture for
audit risk and risk of material misstatement ( block 3 lecture 4) , on practice of
Mar/Jun 24 Q1, and Specimen 1 exam (Applicable Sep 22) .
 If any qs in sessions are partially solved , complete them as your assignments, or
do the remaining of the eight papers, ( just incorporate the materiality statement
and the term significant in previous qs older than Sep 22)

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Block 3 Lecture 4 (Part 1)

Specimen 1 Sep 22 exams

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Block 3 Lecture 4 (Part 2)

MJ 24 QUESTION 1

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