Research On Material Misstatement Risk Based On Analytical Procedures

In 2007,China began to implement with modern risk-oriented auditing standards,though the accounting fraud case of KANGMEI still shocked capital markets,eroding trust in the independence of certified public accountants.According to the audit risk model,the risk of material misstatement directly affects the level of audit risk,when certified public accountants usually use analytical procedures to identify and assess the risk of major misstatement.Certified public accountant(CPA)issued an inappropriate audit opinion about KANGMEI,the reason is due to the improper application of analytical procedures,lack of proper professional judgment on the impact of multi-level risks including external and internal environment of the company,and lack of professional skepticism in financial fraud.In view of the issues above,the question of this paper is how to apply the analysis procedure to analyze the risk of material misstatement from multiple risk levels in accordance with the requirements of risk-oriented auditing,and eventually find out the audit problems thus put forward improvement measures.It is lack of study about the risk of material misstatement of specific industries and enterprises using analytical procedures among the current literatures.In addition,through the analytical procedures,they still rely more on the financial data,other than the internal and external environment-related risk factors of the company.Therefore,feature of this paper is using KANGMEI as a representative case,following the sequence of the way of how material misstatement grow,which is from the external environment of the company to the internal mechanism,then to the specific items of the financial statements,using analytical procedures to identify the risk of misstatement based on the impact of various dimensions of risk,detecting the material misstatement risk at both financial statement and determination level,then to discover the audit problems during this process.This paper found:(1)material misstatement risk areas of KANGMEI at financial statement level including the industry risk,business risk under radical strategies and weaknesses in internal control environment.(2)The company's material misstatement at determination level including currency capital,inventory,illiquid assets,main business income and so on.(3)CPA failed to find out the above material misstatements risk at two level trough audit process with the help of analytical procedures.(4)The use of scientific and complete major risk assessment procedures can reduce the risk of assessment failure,the following improvements can be made: CPA should fully understand the external and internal environmental risks of the company,pay attention to key risk areas,expand the scope and perspective of the analysis program,and maintain professional suspicion of abnormal relationships;accounting firms should carry out industry classification services and strengthen industry information database construction.The application value of this paper is to find out the insufficiency of using analysis procedures to assess the risk of material misstatement,especially for companies that belong to the pharmaceutical industry.Besides,trough the case study of combining theory and practice together,throw light on putting the audit principles into practice application.