CONDITIONS AND EVENTS THAT MAY INDICATE RISKS OF MATERIAL MISSTATEMENT

The  following list provides examples of conditions or events which may suggest to the auditor that there is a risk 

of material misstatement in the financial statements under audit. Of course, such conditions or events do not 

mean that there is material misstatement but rather there is a possibility of material misstatement which the 

auditor should consider. The list is not exhaustive. 

1. The company’s operations are exposed to volatile markets and/or are subject to a higher degree of 

complex regulation, e.g. trading in futures. 

2. Going concern and liquidity problems with the corresponding difficulty in raising finance. 

3. Changes in the company such as a significant merger or reorganisation or retrenchments. 

4. The existence of complex business arrangements such as joint ventures and other related party 

structures. 

5. Complex financing arrangements, e.g. use of off-balance sheet finance and the formation of special 

purpose entities. 

6. Lack of appropriate accounting and financial reporting skills in the company. 

7. Changes in key personnel, including the departure of key executives, e.g. the financial director. 

8. Deficiencies in internal control. 

9. Incentives for management and employees to engage in fraudulent financial reporting, e.g. unfair 

remuneration structures, poor working conditions, autocratic environment. 

10. Changes in the IT environment, including installations of significant IT systems related to financial 

reporting, or a weakening of the IT control environment, with particular reference to security. 

11. A significant number of non-routine or non-systematic transactions at year end, e.g. inter-company 

transactions. 

12. The introduction of new accounting pronouncements relevant to the company, e.g. IFRS 15. 

13. Accounting measurements that involve complex processes, and events and transactions that involve 

significant measurement uncertainty. 

14. The omission or obscuring of significant information in disclosures as presented to the auditor. 

15. Pending litigation and contingent liabilities, e.g. sales warranties and financial guarantees