ISA 450 - Evaluation of Misstatements Identified during the Audit

Question 1

ISA 450: Objective:

Answer 1

1) Responsibilities of Auditor when they identify Misstatements.
2) Impact of uncorrected Misstatements of Financial Statements.

Question 2

ISA 450: Reasons for Misstatements:

Answer 2

> Accidental Omissions,
Unreasonable estimates.
Inappropriate Accounting entries.

Misstatement means, what was supposed to be, has not been, there is a mismatch. The way an item was supposed to be posted in the P/L is not the way it was posted.

Auditors does the following in stages:
Stage 1 > Audit Planning
Stage 2 > Risk Assessment Procedure
Stage 3 > Identify Risks
Stage 4 > Response to Risks

Question 3

ISA 450: Audit Procedures

Answer 3

Sufficient and Appropriate Audit Evidence.

Misstatements are categorized into two:

1) Material
2 Immaterial

When the aggregated Misstatements are Immaterial, the Auditor ignores them.

When the one or aggregated Misstatements are Material, then the Auditor needs to do the following:
> Need to revise the Audit Strategy or Plan.
> There might be need for Revision in Nature, Time, and Extent.
> Also reassess Materiality Level, set as per ISA320 Materiality in Planning and Performing the Audit.
> Auditor will ask management at Appropriate levels to make a Rectification of Misstatements.
> Management can agree for correction of Misstatements, if they do:
- Auditor need to perform additional procedures.
- Auditor need to recheck the corrections made.
- Do not just believe their words, check the work yourself.

> On the other hand, Management can disagree to make the corrections, and if they do that:
- Auditor must ask for Reasons for disagreement.
- If the Reasons are justifiable, they must be Accepted.
- If the Reasons are Not justifiable, they will impact on the Financial Statements and you must communicate this to TCWG. This is because, this will lead to Modification of the opinion and so must be communicated to TCWG.
- Reference to ISA710 for prior period Misstatements that remain uncorrected in the current period, report to TCWG and give a Modified Opinion.

For uncorrected Misstatements:
> Consider Materiality Level as per ISA 320. Can it continue to be the same, or it needs to be changed?
> Conclusion on Modification of opinion (if any).

> Misstatements can be at P/L items, Balance Sheet Level or Disclosure Notes Level.

Written Representation:
> By Management
> For disagreeing of Rectification of Misstatements.
> That the Misstatements individually or aggregated are Immaterial and they don’t impact Financial Statements, therefore the opinion must not be affected.

Question 4

ISA 450: Documentation by Auditor:

Answer 4

1) Material Misstatements- Level of Materiality,
- Below which they are Immaterial/ trivial.
2) Misstatements accumulated by Auditor and corrected by Management.
3) Conclusion on uncorrected Misstatements- if individually or aggregated they are Material.