misstatements etc

Question 1

What is the completion stage of the audit?

Answer 1

It is when the auditor reviews the work performed and considers the implications for the auditor’s report, including evaluating misstatements identified during the audit.

Question 2

What are the objectives of ISA 450?

Answer 2

1) To evaluate the effect of identified misstatements on the audit, and 2) To evaluate the effect of uncorrected misstatements on the financial statements.

Question 3

Define a misstatement according to ISA 450.

Answer 3

A misstatement occurs when something has not been treated correctly in the financial statements, meaning that the applicable financial reporting framework (e.g., IFRS) has not been properly applied.

Question 4

What are some examples of misstatements?

Answer 4

1) Incorrect amount recognized (e.g., asset not valued as per IFRS),
2) Incorrect classification (e.g., finance cost included in cost of sales),
3) Inappropriate presentation (e.g., results of discontinued operations not separately presented),
4) Incorrect or misleading disclosure (e.g., missing contingent liability disclosure).

Question 5

What does ISA 450 require regarding misstatements?

Answer 5

The auditor shall accumulate misstatements identified during the audit, other than those that are clearly trivial.

Question 6

How does ISA 450 define ‘clearly trivial’ misstatements?

Answer 6

‘Clearly trivial’ refers to misstatements below a monetary benchmark that are not expected to have a material effect on the financial statements. It is not the same as ‘not material’.

Question 7

What should an auditor do with accumulated misstatements according to ISA 450?

Answer 7

The auditor should communicate all accumulated misstatements (except those clearly trivial) with the appropriate level of management and request correction.

Question 8

What are the types of misstatements categorized by ISA 450?

Answer 8

1) Factual misstatements,
2) Judgmental misstatements,
3) Projected misstatements.

Question 9

What is a factual misstatement?

Answer 9

A misstatement about which there is no doubt, such as a clear breach of an IFRS requirement.

Question 10

What is a judgmental misstatement?

Answer 10

Differences arising from management’s judgments concerning accounting estimates or the application of accounting policies that the auditor considers unreasonable or inappropriate.

Question 11

What is a projected misstatement?

Answer 11

An estimate of misstatements in populations based on the projection of misstatements identified in audit samples to the entire population.

Question 12

How should an auditor handle factual misstatements?

Answer 12

There is little room for negotiation; the item has simply been treated incorrectly, and the auditor should request a correction.

Question 13

How should an auditor handle judgmental misstatements?

Answer 13

There will be more discussion with management, and the auditor must present robust evidence to justify the recommended correction.

Question 14

How should an auditor handle projected misstatements?

Answer 14

Normally, management is not asked to correct projected misstatements. Instead, the auditor should consider if further audit testing is necessary.

Question 15

What should an auditor do if management refuses to correct misstatements?

Answer 15

The auditor must understand management’s reasons for not correcting the misstatements and take this understanding into account when evaluating the financial statements.

Question 16

How should uncorrected misstatements be evaluated?

Answer 16

The auditor must determine if uncorrected misstatements are material individually or in aggregate, reassess materiality, and consider the implications for the financial statements.

Question 17

What are some examples of material uncorrected misstatements?

Answer 17

1) Affecting compliance with regulatory requirements,
2) Impacting debt covenants,
3) Obscuring changes in earnings,
4) Affecting financial ratios,
5) Increasing management compensation,
6) Relating to misapplication of accounting policies with potential future material impact.

Question 18

What does ISA 450 require regarding communication with those charged with governance?

Answer 18

The auditor must communicate uncorrected misstatements to those charged with governance, identify material misstatements, discuss implications, and request corrections.

Question 19

What documentation is required under ISA 450?

Answer 19

1) The amount below which misstatements are considered clearly trivial,
2) All accumulated misstatements and their status, 3) The auditor’s conclusion on whether uncorrected misstatements are material and the basis for that conclusion.

Question 20

Why is it important for candidates to understand ISA 450 for the Advanced Audit and Assurance exam?

Answer 20

Because forming an opinion on the financial statements involves evaluating whether they are free from material misstatements, which requires understanding and applying ISA 450 in relation to uncorrected misstatements.