## Significant Risk

### Definition

During the Risk Assessment Process (SA 315), the auditor must identify which identified risks are Significant Risks — those requiring special audit consideration due to their nature or circumstances.

This identification requires the auditor to exercise professional judgement.

### Factors for Identifying Significant Risks

The auditor shall consider at least the following:

#	Factor	Description
i	Fraud Risk	Whether the risk involves risk of fraud
ii	Related Parties	Whether significant transactions with related parties are involved
iii	Complexity	Degree of complexity in transactions
iv	Unusual Transactions	Transactions outside the normal course of business
v	Regulatory/Developments	Risk relates to significant new regulatory requirements or developments
vi	Measurement Uncertainty	High uncertainty in measurement — especially provisions

### Two Categories of Transactions Giving Rise to Significant Risk

Category 1: Non-Routine Transactions

Unusual in size or nature
Occur infrequently
Example: one-time sale of a major asset

Category 2: Judgemental Matters

Involve measurement uncertainty
Require accounting estimates
Example: fair value estimates, revenue recognition under complex methods

### Always Significant (Mandatory)

These two are always treated as significant risks — no exception:

1. ROMM due to Fraud

2. Significant transactions with related parties outside the normal course of business

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## Why ROMM Is Greater for Significant Non-Routine Transactions

1. Greater management intervention to specify accounting treatment

2. Greater manual intervention for data collection and processing

3. Complex calculation or accounting principles involved

4. Nature of the transaction makes it difficult to impose effective controls

## Why ROMM Is Greater for Significant Judgemental Matters

1. Accounting principles may be subject to different interpretations

2. Required judgement may be subjective or complex

3. May require certain assumptions (e.g., fair value estimation requires discount rate assumptions)

### Memory Aid for 6 Factors: FR-CU-RM

Fraud risk
Related party transactions
Complexity
Unusual/outside normal course
Regulatory developments
Measurement uncertainty

Worked example

### Example 1

A manufacturing company sells its factory land (a one-time transaction worth Rs. 10 crore). This is a non-routine transaction — unusual in size, occurring infrequently, with greater management involvement in accounting treatment. The auditor identifies this as a significant risk and designs specific procedures to verify valuation and authorisation.

### Example 2

A construction company uses the percentage-of-completion method for long-term contracts. Determining the completion percentage involves significant judgement about costs incurred vs. total estimated costs. This is a judgemental matter with measurement uncertainty — making it a significant risk. ROMM is higher because different engineers and accountants may reach different completion percentages.

⚠️ Common exam mistakes

Forgetting that fraud risk and significant related party transactions (outside normal business) are ALWAYS significant risks — not discretionary
Confusing routine complex transactions with non-routine transactions — non-routine means unusual in size/nature or occurring infrequently, not simply complicated
Thinking only one factor needs to be present — the auditor should consider all six factors and weigh them together
Not distinguishing between the two categories (non-routine vs. judgemental) — both give rise to significant risk but for different reasons

Bare-Act text Paragraph 28 – Significant Risks · SA 315 – Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment (ICAI) · click to expand

In exercising judgment as to which risks are significant risks, the auditor shall consider at least the following: whether the risk is a risk of fraud; whether the risk is related to recent significant economic, accounting or other developments and, therefore, requires specific attention; the complexity of transactions; whether the risk involves significant transactions with related parties; the degree of subjectivity in the measurement of financial information related to the risk; whether the risk involves significant transactions that are outside the normal course of business for the entity.

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