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of Material Misstatement
Audit risk
The risk that the auditor expresses an inappropriate audit opinion
when the financial statements are materially misstated.
Audit risk model
A numerical depiction of the relationship between inherent risk, control
risk, detection risk, and audit risk.
Brainstorming
A group discussion designed to encourage auditors to creatively assess
client risks, particularly those relevant to the possible existence of
fraud in the organization.
Business Risk
Inherent risk at the financial statement level that affects the business
operations and potential outcomes of organizational activities.
Clearly trivial
An amount that is clearly inconsequential, whether taken individually
or in the aggregate and whether judged by any criteria of size, nature,
or circumstances. This term is also referred to as posting materiality.
Control risk
The risk that a misstatement that could occur in an assertion about a
class of transaction, account balance, or disclosure and that could be
material, either individually or when aggregated with other
misstatements, will not be prevented, or detected and corrected, on a
timely basis by the entitys internal control.
Detection risk
The risk that the procedures performed by the auditor to reduce audit
risk to an acceptably low level will not detect a misstatement that
exists and that could be material, either individually or when
aggregated with other misstatements.
Extent of risk response
Refers to the amount of evidence that is necessary given the clients
assessed risks, materiality, and the level of acceptable audit risk.
Inherent risk
The susceptibility of an assertion about a class of transaction, account
balance, or disclosure to a misstatement that could be material, either
individually or when aggregated with other misstatements, before
consideration of any related controls.
Materiality
The magnitude of an omission or misstatement of accounting
information that, in view of surrounding circumstances, makes it
probable that the judgment of a reasonable person relying on the

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of Material Misstatement
information would have been changed or influenced by the omission or
misstatement.
Misstatement
An error, either intentional or unintentional, that exists in a transaction
or financial statement account balance.
Nature of risk response
The types of audit procedures applied given the nature of the account
balance and the most relevant assertions regarding that account
balance.
Performance materiality
The amount or amounts set by the auditor at less than the materiality
level for the financial statements as a whole or for particular classes of
transactions, account balances, or disclosures.
Posting materiality
The amount below which errors are treated as inconsequential. This
term is also referred to as clearly trivial.
Ratio analysis
An analytical technique that is useful in identifying significant
differences between the client results and a norm (such as industry
ratios) or between auditor expectations and actual results; ratio
analysis is also useful in identifying potential audit problems that may
be found in ratio changes between years.
Risk of material misstatement
Risk that exists at the overall financial statement level and at the
assertion level, and within these levels risk can be categorized as
involving inherent risk and control risk.
Risk
A concept used to express uncertainty about events and/or their
outcomes that could have a material effect on the organization.
Significant risk
An identified and assessed risk of material misstatement that, in the
auditors professional judgment, requires special consideration.
Timing of risk response
Refers to when audit procedures are conducted and whether those
procedures are conducted at announced or predictable times.
Tolerable misstatement
The amount of misstatement in an account balance that the auditor
could tolerate and

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of Material Misstatement
still not judge the underlying account balance to be materially
misstated.
Trend analysis
An analytical technique that includes simple year-to-year comparisons
of account balances, graphic presentations, and analysis of financial
data, histograms of ratios, and projections of account balances based
on the history of changes in the account.