Evaluation of Misstatements Identified During the Audit

CAS 450

Evaluation of Misstatements Identified During the Audit

CAS 450

Requirements
  • Accumulate misstatements identified during the audit, other than those that are clearly trivial
    • Matters that are clearly trivial will be of a wholly different (smaller) order of magnitude than materiality determined in accordance with CAS 320, and will be matters that are clearly inconsequential, whether taken individually or in aggregate
  • Determine whether the overall audit strategy and audit plan need to be revised if:
    1. The nature of identified misstatements and the circumstances of their occurrence indicate that other misstatements may exist that; or
    2. The aggregate of misstatements accumulated during the audit approaches materiality
  • If, at the auditor’s request, management has corrected misstatements that were detected, the auditor should perform additional procedures to determine whether misstatements remain
  • Communicate on a timely basis all misstatements accumulated during the audit with the appropriate level of management and request management to correct those misstatements
    • The appropriate level of management is the one that has responsibility and authority to evaluate the misstatements and to take the necessary action (i.e. CFO, Controller)
  • If management refuses to correct the misstatements, obtain an understanding of management’s reasons for not making the corrections and take that understanding into account when evaluating whether the F/S as a whole are free from material misstatement
Evaluating the Effect of Uncorrected Misstatements
  • Before evaluating the effect of uncorrected misstatements, reassess materiality to confirm whether it remains appropriate in the context of the entity’s actual financial results (note: preliminary planning materiality will often change due to misstatements in net income or other bases on which materiality is determined)
  • Determine whether uncorrected misstatements are material, individually or in aggregate, and consider:
    1. The size and nature of the misstatements, both in relation to particular classes of transactions, account balances or disclosures and the F/S as a whole
      • It may be appropriate to offset misstatements within the same account balance or class of transaction (i.e. you can offset an overstatement in revenue with an understatement in revenues; but not revenues with expenses)
      • The risk that further undetected misstatements may exist is considered before concluding that offsetting even immaterial misstatements is appropriate
      • Consider qualitative factors also to determine if something is material (even if the misstatement is lower than the materiality amount; these could include misstatement that:
        • Affects compliance with regulatory requirements;
        • Affects compliance with debt covenants or other contractual requirements
        • Affects ratios used to evaluate the entity
    2. The effect of uncorrected misstatements related to prior periods on the relevant classes of transactions account balances or disclosures, and the F/S as a whole
      • Note that immaterial uncorrected misstatements related to prior periods may have a material effect on the current period’s F/S (i.e. materiality may be lower in the current year)
Communication with Those Charged with Governance
  • Communicate with those charged with governance
    • The uncorrected misstatements and the effect that they, individually or in aggregate, may have on the opinion in the auditor’s report; and
    • The effect of uncorrected misstatements related to prior periods on the relevant classes of transactions, account balances or disclosures, and the F/S as a whole
Written Representations
  • Request a written representation from management and those charged with governance whether they believe the effects of uncorrected misstatements are immaterial, individually and in aggregate, to the financial statements as a whole.
    • A summary of these items should be attached to the written representation.
Documentation
  • Document the following
      Amount below which misstatements would be regarded as clearly trivial
    • All misstatements accumulated during the audit and whether they have been corrected
    • Auditor’s conclusion as to whether uncorrected misstatements are material, individually or in aggregate, and the basis for that conclusion

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