Assessing Accounting Risk

The article deals with Assessment of Accounting risk which is inherent part of
financial statements.
Financial statements examined may also contain some material misstatements
due to accounting improprieties(Improper accounting entries/disclosures).
This article further explains how an analyst can identify accounting
misstatements that are material with the help of public information & past
accounting data.
Further there is an Assessment Framework consisting of six assessments which
are used to assess material misstatement.
They are:
 Institutional Context-It refers to the institutional factors like weak security
market regulations in which company operates.

 Opportunity-It contains factors that influence management to engage in

improper accounting practices if opportunities exists for them to do so &
analyst should identify potential accounting transactions for their analysis
which can be manipulated.

 Incentives – It includes those factors which requires or induce

management to engage in accounting improprieties like Management’s
aggressive targets.

 Behaviour-Managements behavior towards the accounting practices also

tends to give analyst evidence of improper accounting practices like
management operates in weak corporate governance.

 Evidence-Analyst should gather relevant evidences to determine whether

accounting improprieties are present to form a basis for his coclusion.

 Likelihood- Finally analyst should conclude based on its judgments &

analysts and as per the relevant information gathered that whether a
material misstatement in financial statements actually exists or not.
Final conclusion
Analyst should exercise Professional skepticism(An attitude that includes
a questioning mind, being alert to conditions which may indicate possible
misstatement due to error or fraud, and a critical assessment of audit
evidence) in exercise of his judgments & forming basis of his opinion &
also analayse the materiality of the misstatements & their impact on
security valuations of Company.