(a) Misstatements
ISA 450 Evaluation of Misstatements Identified During the Audit considers what a misstatement is and deals with the
auditor’s responsibility in relation to misstatements.
It identifies a misstatement as being: A difference between the amount, classification, presentation, or disclosure of a reported
financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in
accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud.
It also then defines uncorrected misstatements as: Misstatements that the auditor has accumulated during the audit and that
have not been corrected.
There are three categories of misstatements:
(i) Factual misstatements are misstatements about which there is no doubt.
(ii) Judgemental misstatements are differences arising from the judgements of management concerning accounting
estimates that the auditor considers unreasonable, or the selection or application of accounting policies that the auditor
considers inappropriate.
(iii) Projected misstatements are the auditor’s best estimate of misstatements in populations, involving the projection of
misstatements identified in audit samples to the entire populations from which the samples were drawn.
The auditor has a responsibility to accumulate misstatements which arise over the course of the audit unless they are very
small amounts.
Identified misstatements should be considered during the course of the audit to assess whether the audit strategy and plan
should be revised.
The auditor should determine whether uncorrected misstatements are material in aggregate or individually.
All misstatements should be communicated to those charged with governance on a timely basis and request that they make
necessary amendments. If this request is refused then the auditor should consider the potential impact on their audit report.
A written representation should be requested from management to confirm that unadjusted misstatements are immaterial.
Tutorial note: The model answer is more comprehensive than would be expected for 4 marks; this is because ISA 450 is a
relatively new auditing standard and the above has been presented as a teaching resource. |
