ISA 450 - EVALUATION OF MISSTATEMENTS IDENTIFIED DURING THE AUDIT

Question 1

ISA 450

ISA 450

EVALUATION OF MISSTATEMENTS IDENTIFIED DURING THE AUDIT

OVERALL REVIEW - Uncorrected Misstatements

Answer 1

During the course of the audit, misstatements discovered are brought to the client’s attention & USUALLY, client will correct them immediately.

Misstatement – A difference between the amount, classification, presentation, or disclosure of a reported F/S item and that which is required by the accounting standards

Misstatements can arise from error or fraud.

Question 2

ISA 450

3 Different Misstatements Auditor may encounter

QUANTITATIVE aspects of materiality

Answer 2

1/ Factual misstatements
These are misstatements about which there is no doubt. Eg due to :
− Inaccurate data being keyed in the client’s accounting records
− Omission of an amount or disclosure
Client will be expected to correct the misstatement.

If uncorrected when highlighted to management, the factual misstatement is recorded on the Summary of Uncorrected Misstatements.

(Refer to EXAMPLE 1)

2/ Judgmental misstatements
This is not a breach of financial reporting standards, but a difference in how management and the auditor have estimated an uncertain amount.
Management should be asked to confirm the basis on which their estimate was made.
Judgemental misstatements arise in relation to accounting estimates.
Estimates cannot be considered accurate with certainty, and therefore auditors generally develop a range of amounts for each estimate that would be considered reasonable.
Management’s estimate would normally be acceptable if it falls within this range.
However, if the auditors believe that the entity’s estimate is unreasonable, the difference between that estimate and the closest end of the auditors’ range is considered to be a judgemental misstatement – the auditors’ judgement has differed from management’s judgement, perhaps in relation to a specific assumption such as a discount rate that has been used.
The auditors may determine that an appropriate range for an allowance for obsolete inventory is between $160,000 and $200,000.
If the entity has recorded a provision of $140,000, the judgmental misstatement is $20,000 (ie, $160,000 - $140,000).
Client cannot be forced to change their accounting estimate because subjectivity involved
The judgmental misstatement is recorded on the Summary of Uncorrected Misstatements.

(Refer to EXAMPLE 2 & 3)

3/ Projected misstatements
These are the auditor’s best estimate of misstatements, involving the projection of misstatements identified in audit samples to the entire populations from which the samples were drawn.
Client is not expected to amend the projected misstatement because there is potential inaccuracy of projected misstatements.
This projected misstatement is then recorded on the Summary of Uncorrected Misstatements.

(Refer to EXAMPLE 4 & 5)

Question 3

ISA 450

DISCLOSURES - QUALITATIVE aspects of materiality

QUALITATIVE aspects of materiality

Answer 3

As with any other misstatements, auditors need to record incomplete, omitted or inaccurate financial statement DISCLOSURES unless they are clearly trivial, and determine whether they are material.

Some of the DISCLOSURES MAY BE NARRATIVE rather than containing monetary amounts, or at least be a combination of narrative and monetary amounts. IT CAN BE DIFFICULT to assess whether a misstatement in a narrative disclosure is material, in the context of the applicable financial reporting framework and the specific circumstances of the entity, and as ISA 450.A17 notes, it involves the exercise of PROFESSIONAL JUDGEMENT.

MATERIAL / PERVASIVE (by Value/Nature)

• Material non-adjusting events (Material by value)
• Related party transactions (Material by nature)
• The inadequate description of the sensitivity of an exchange rate in an entity that undertakes international trading activities. (Material by nature)
• The omission of information about the events or circumstances that have led to an impairment loss (eg, a significant long-term decline in the demand for a metal or commodity) in an entity with mining operations (Material by nature)
• Financial support by parent company (Material by nature)
• Change of basis of preparation of FS to Break Up Basis (Material by nature)
• Material Uncertainty facing the business (Material by nature)
• Significant Uncertainty facing the business (Material & Pervasive by nature)
• Reason why FS revised AFTER being issued (EoM paragraph, not a misstatement)

Question 4

ISA 450

Auditor’s responsibility in respect of misstatements

Answer 4

ACCUMULATE
Accumulate misstatements in Summary of Uncorrected Misstatements (SUM) unless TRIVIAL.

MATERIAL
Determine whether uncorrected misstatements are material in aggregate or individually.
* If misstatement affects revenue … > 1/2 % is material
* If misstatement affects SOPL … > 5% of PBT is material
* If misstatement affects SOFP … > 1% of TA is material

COMMUNICATE (exam technique for Q on Matters to Discuss with Mgnt)
* Explain the Accounting treatment.
* Explain the Adjustment.
* Inform management of Materiality of each adjustment.
* Management should be encouraged to amend FS if non-compliance with IFRS is material & if it could result in a modification of the auditor’s opinion.

REASSESS OVERALL MATERIALITY
* ISA 320 - materiality may need to be revised as the audit progresses.

• At the review stage of the audit, the auditor considers whether the aggregate of UNCORRECTED misstatements is material. In doing so the auditor must consider whether the materiality level is still appropriate.

FURTHER ACTION (this is not an audit procedure)
* Notify TCWG of misstatements & ask for them to be corrected.

• Inform TCWG of audit report implications if misstatements uncorrected.
• If management refuses to correct, obtain a written representation to confirm this.

Question 5

ISA 450

Answer 5

OVERALL REVIEW - Presentation & Disclosure

1. To review the PRESENTATION of the information in the FS & see whether they are in accordance with accounting standards. The usual means of achieving this is by the completion of a DISCLOSURE CHECKLIST.
2. To consider whether the ACCOUNTING POLICIES adopted by the client are Consistently applied, Appropriate to the entity & Properly disclosed.
3. To review COMPARATIVES to ensure correctly stated.

OVERALL REVIEW - Overall Analytical Review
This process:

• Ensures the financial statements are consistent with
  the auditor’s knowledge of the business and the results of their audit work.
• Corroborates conclusions formed during the audit of individual elements of the financial statements
• Assists the auditor to draw reasonable conclusions on which to form their opinion