Question

If there is lots of portion for unrealised gain, How might this affect risk assessment?

Answer 1

Risk assessment procedures are among the major criteria used in the audit. The auditor needs to obtain an overall understanding of an entity and should inturn understand the areas of the higher possible risk of misstatements. In the case of Unrealized gain, there are a lot of judgments involved in arriving at the actual amount of gain. Whenever there is significant management judgment involved in an item of the financial statements, there is a higher risk of material misstatement. For example, there is a risk that the management may alter the amounts in order to make their financials more appealing to the investors.

To sum up, if there is lots of portion for unrealized gain, the risk assessment procedures need to be more critical to reduce the risk of any potential misstatements. Since these gains are only in paper (no cashflow involved), it is difficult to assess any risk of mistatement.