Risk of Material Misstatement

Seven concerns frame RMM: 

1. Existence/cutoff (items exist and are timely recorded), 

2. completeness (all items included), 

3. valuation (GAAP-compliant costing), 

4. rights (client ownership), 

5. presentation (adequate disclosure), 

6. cost of goods sold completeness, and 

7. accuracy. 

Target’s $13.9 billion inventory (64% of current assets) illustrates how a 5% overstatement ($695 million) inflates net income by 11%, showing pervasiveness.