A4/M8 - Misstatements and AJEs

Question 1

what amount should use to calculate the adjusted balance (difference between audit and client’s recorded)?

Answer 1

use the closet end of the auditor’s range. Ex:

Client’s recorded is $800. Auditor’s range is $1500 to $1800. Use the $1500 to calculate the adjusted difference (1500-800=700)

Question 2

what should an auditor consider when evaluating materiality of uncorrected misstatement for issuers?

Answer 2

Both quantitative and qualitative

• Qualitative: cost of correction, effect of misclassifications, significance of misstatement relative to the needs of users
• Quantitative: dollar amount of the error
• Example of immaterial quantitatively but material qualitatively: audit’s tolerable materiality $125k, and client did not disclose $45k of related party transactions in the footnotes. $45k is not material but not disclosing related party transactions could be significant at arm’s-length

Question 3

when evaluating misstatements, what should the auditor consider regarding misstates in PY and CY?

Answer 3

should consider the impact of both PY uncorrected misstatement on CY and CY misstatement on PY. If a misstatement identified in CY would have a material impact on PY FS, the auditor must determine if PY opinion needs to be amended

Question 4

what is control deficiency in design?

Answer 4

it occurs when a necessary control is missing or when an existing control does not achieve the designed objective. Ex: a employee has both custody and recording functions is a lack of segregation of duties

Question 5

what is control deficiency in operation?

Answer 5

it occurs when a properly designed control does not operate as designed, or is performed by an inappropriate person. Ex: management control override or undue bias or lack of objectivity