Formalization of Analytical Procedures for Assessing the Risks of Material Misstatement in Financial Statements due to Fraud

Abstract

During an audit, the risk of possible misstatement in financial statements is assessed with analytical procedures, the input information in which is the values of the audited company's financial indicators selected by the auditor. The purpose of this study was to justify the selection and systematization of analytical procedures for assessing the risk of material misstatement in the audited entity's accounting information. For this purpose, the authors analyzed quantitative methods currently used in practice to assess the risk of material misstatement in the financial statements due to their dishonest preparation. The ratios controlled by the known methods generally include only financial performance indicators of organizations. However, in the case of intentional misrepresentation in the financial statements, the financial indicators may also be intentionally misstated so that the control ratios used to check the integrity of the statements remain within acceptable limits. The identified problems make it necessary to find the most effective ways to assess the risk of deliberate misstatement in financial statements. The development of this process is also facilitated by the well-known fact that audit standards contain only framework requirements for the assessment of material misstatement risk in respect of the audited financial statements, so that the development of the corresponding methodology is left to the discretion of each audit company. In this regard, the authors recommend that analytical risk assessment procedures should involve non-financial indicators as well as the financial ones, since non-financial indicators are difficult to manipulate. The study substantiates the choice of non-financial indicators used in analytical procedures for assessing the risk of fraudulent misstatement in financial statements. A set of control ratios has been developed, including non-financial indicators for organizations involved in different types of activity.