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SA 450: Evaluation of Misstatements Identified during Audits - Coggle…
SA 450: Evaluation of Misstatements Identified during Audits
Objective
Auditor's objective is to evaluate
Effect of identified misstatements on audit, and
Effect of uncorrected misstatements, if any, on FS.
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Misstatement
It is a difference between amount, classification, presentation, or disclosure as
reported in FS and required to be reported as per applicable FRFW
.
Sources:
Inaccurate collection and processing of data
Omission of amount or disclosure
Incorrect or unreasonable accounting estimates
Inappropriate accounting policy selection/application
Accumulation of Identified Misstatements BEFORE Communicating to MGT
except those that are clearly trivial
Clearly trivial
Those that are
clearly inconsequentia
l, whether taken individually or in aggregate, by any criteria of size, nature, and circumstance.
Before communicating, may distinguish misstatement between,
Factual
— about which there is no doubt
Judgemental
— difference arising from
Judgement of MGT concerning accounting estimates that auditor concerns unreasonable
Selection or application of accounting policies that auditor considers inappropriate
Projected
— based on misstatement identified in the sample projecting misstatement to total population (SA 530)
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Evaluating Effect of Identified Misstatements on Audit
To assess
whether there is a need to revise overall audit strategy and audit plan
, if
Aggregate of misstatements accumulated approaches materiality level as determined in SA 320, or
Aggregate of misstatements accumulated along with undetected misstatements could be material.
Request MGT to
Examine CT-AB-D
to understand cause of a misstatement identified by auditor
Perform procedures to
determine the amount of actual
misstatements
Make appropriate adjustments
to FS
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Communication and correction of misstatements
Communicate on a timely basis all misstatements accumulated during the audit.
Request MGT to correct > if corrects, then check adjustments in FS
If refuses, understand reasons of not correcting, evaluate whether the FS as a whole are free from MM
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Evaluating Effect of Uncorrected Misstatements
Reassess whether materiality determined in accordance with SA 320 remains appropriate
Evaluate whether uncorrected misstatements are material, individually or in aggregate considering:
Size & nature of misstatement in relation to CT-AB-D, FS as a whole, and particular circumstances of their occurrence.
Effect of uncorrected misstatements in prior period
Communicate w/ TCWG about uncorrected misstatements
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Circumstances leading to evaluate misstatements as material even if they are lower than materiality level for FS as a whole
Affects compliance w/ L&R
Compliance w/ debt covenants or other contractual requirements
Incorrect selection & application of accounting policy
Makes a change in earning or other trends
Affects ratios used to evaluate entity's financial position, results of operations, or cash flows
Increases MGT compensation
Relates to items involving particular parties
Affects other info. that will be communicated in a doc. containing AR
Written Representations
from MGT/TCWG
Whether they believe the effect of uncorrected misstatements is material, individually or in aggregate, to FS as a whole
A summary of such items
In case MGT disputes the misstatement, it may do so in WR
Documentation
Amount below which misstatement would be regarded as clearly trivial
All accumulated, and whether they have been corrected
Conclusion regarding uncorrected and basis for conclusion
Effects