Research On The Recognition Of The Material Misstatement Risk Of Financial Statement

In recent years, both domestic and foreign audit defeated case occurred repeatedly. The audit theorists and practical realm pay attention to the development and utilization of risk-oriented audit more and more .The audit unifying the new economical request, improved the traditional audit risk model. On February 15, 2006, Ministry of Finance has revised our country's audit criteria. The new audit risk model will be: Audit risk = Risks of material misstatement×Detection risk, implementing from January 1, 2007. The new audit risk criterion has introduced"risk of material misstatement", stressing that the audit work should take the recognition and appraisal of the unit's risk of material misstatement as the beginning, guiding auditors according to the level of risk of material misstatement to design and carry out the substantive test order, and assigning audit resources . At present, although various scholars have done certain research on the recognition and appraisal of the risk of material misstatement, but how to resolve the risk factors of material misstatement as well as how to carry on the appraisal of various factors weight, making it scientific and accurate, these have not obtained the deep research and real diagnosis examination. Simultaneously in the audit practice, the accounting firms are also each acts his own way on the recognition and appraisal of audit risk, serious lacking the standard.This article first makes standard research. We make entire audit process into three stages: Service contract stage——Service execution stage——Writing up audit opinion stage, and utilize"risk factor——risk event (behavior)——risk result"this logical mentality to carry on the thorough analysis of the evolutionary mechanism of risks of material misstatement, founding the theory logical relation between enterprise internal and external risk factors and the risks of material misstatement in financial reporting. And basing on this foundation we take enterprise operational risk as a material effect factor in the audit flow, afterwards construct a discriminating mechanism theory frame about risks of material misstatement, combing various stages' risk factor recognition and the appraisal, as well as various factors reciprocity. Then basing on the four big risk factors in theory frame we decompose the risks of material misstatement, and make the company punished by Securities Supervisory Association in 2007——2009 three years as case data, analyzing the illegal company's common factor. Last we using the principal components analysis make the risk factor targets of material misstatement simplify. Through the theoretical analysis and positive research, we draw the following conclusions:1. Identified the risk factors of material misstatement in internal and external business environment and given indicators of specific factors, making identification and assessment of the risk of material misstatement substantial operational in practice. Based on case data we infer 16 factor targets for the risks of material misstatement, including (1) External environment risk: industry, the investor protection index, overseas listing. (2) Business risk:①Corporate Government: Independent director ratio, whether set up the audit committee, chairman and general manager whether for identical person, internal control;②Finance risk: Return on Total Assets, the Current Ratio, Assets Liabilities Ratio, funds used, the connection guarantee, Z index.(3) Fraud Risk: Salary related with achievement, whether withstand company's goal pressure, company staff 's educational level.2. Through the principal component analysis, we make the 16 indicators simplified, to reflect the primary information of the original indicators, simplifying the problem. They divided into four specific risk factors:(1) Client business risk:①Financial risk:Z index, Assets Liabilities Ratio, Return on Total Assets, the Current Ratio;②Corporate Government:Independent director ratio, Salary related with achievement, overseas listing, whether set up the audit committee;③Connected tie up funds: funds used, the connection guarantee; (2) External environmental risk: company staff 's educational level, investor protection index, industry; (3) Internal control risk: chairman and general manager whether for identical person, internal control; (4) Customer fraud risk: whether withstand company's goal pressure .Therefore, the identify institutional framework of risks of material misstatement our article established will help auditors to identify and estimate the level of risks of material misstatement of the financial statements from the client business risks, external environmental risk, internal control risk and client fraud risk ,as well as the 16 indicators they contained .