Evaluating the effect of misstatements on the financial statements
Referring again to the earlier diagram under ‘Audit objectives’, the auditor needs to consider
the effect of uncorrected misstatements on the financial statements. This requires evaluating
whether the uncorrected misstatements are material to the financial statements. Before doing
this, the auditor must reassess materiality.
Reassessing materiality before evaluating uncorrected misstatements
Before evaluating any uncorrected misstatements, the auditor should reassess materiality levels
for the financial statements as a whole, as materiality is often based on estimated financial
results at the planning stage, before actual results are known.
Evaluating the effect on the financial statements – individually and in aggregate
The auditor is required to determine whether uncorrected misstatements are material
individually and in aggregate. This evaluation should consider both the:
•
Size of a misstatement.
•
Nature of a misstatement.
Misstatements and materiality
As part of the planning of the audit, an auditor makes judgements about the size of
misstatements that will be considered material. This includes establishing overall materiality.
As discussed in Unit 7, overall materiality refers to materiality for the financial statements
as a whole. It is the dollar amount that the auditor sets for the financial statements above
Audit & Assurance
Chartered Accountants Program
Page 11-16
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Core content – Unit 11
which any misstatement (individual or in aggregate) would result in the financial statements
being materially misstated. In addition, the auditor must assess whether or not uncorrected
misstatements are material, as this will directly impact the auditor’s opinion.
Many audit firms adopt their own materiality methodology. However, the one consistent
approach across every financial statement audit is the assessment of uncorrected misstatements,
both individually and in aggregate, against the overall materiality level set at the planning stage
of the audit.
Commonly, and in the absence of other firm- specific methodology, if aggregated uncorrected
misstatements do not exceed the overall materiality, then the auditor would issue an
unmodified audit report. In practice, where aggregated misstatements exceed overall
materiality, management would likely correct some or all misstatements to result in the
auditor issuing an unmodified audit opinion. Indeed, in many cases, even if the aggregated
misstatements do not exceed materiality, management would adjust for the misstatements to
alleviate any concerns or questions that may arise and to ensure the overall accuracy of books
and records.
In line with ISA 450 para. 11, the auditor must also consider misstatements in relation to the
account balance, class of transaction or disclosure to which it relates. This will commonly be the
financial statement line item from the balance sheet, profit and loss account or respective note
disclosure. Many audit firms will have a specific methodology that addresses this requirement.
