Evaluating the effect of misstatements on the financial statements Referring

Evaluating the effect of misstatements on the

This preview shows page 325 - 327 out of 566 pages.

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
Image of page 325
Audit & Assurance Chartered Accountants Program Page 11-16 CC 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.
Image of page 326
Image of page 327

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture