SA 450 Evaluation of Misstatement Identified During the Audit

Let’s understand in detail about SA 450 Evaluation of Misstatement Identified During the Audit in detail

Scope

SA 450 Evaluation of Misstatement Identified During the Audit deals with the auditor’s responsibility to evaluate the effect of identified misstatements and uncorrected misstatements. SA 700 (Forming an opinion and reporting on financial statements) takes into account the evaluation of uncorrected misstatements for auditor’s conclusion     SA 450 is effective for the audit of financial statements for periods beginning on or after 1st April 2010

What are the objectives of an Auditor?

• Evaluate the effect of identified misstatements on the audit
• Effect of uncorrected misstatements, if any of the financial statements  

Definition

Uncorrected Misstatement – Misstatement that the auditor has accumulated during the audit and that have not been corrected

Requirements

Misstatement can be accumulated apart from those that are clearly trivial. As the audit progresses overall audit strategy and plan has to be revised if:

• Nature of identified misstatements and circumstances of their occurrence indicate that other misstatements may exist if accumulated could be material
• An aggregate of misstatements accumulated during the audit approaches materiality per SA 320

Auditor’s Communication & Correction of Misstatements

• Communicate on a timely basis to the appropriate level of management (unless prohibited by law or regulation)
• Request management to correct those misstatements
• If management refuses to correct misstatements, the auditor should understand the reason for the same
• Based on the understanding auditor should evaluate whether the financial statements as a whole are from material misstatements.

Effect of Uncorrected Misstatements

Before evaluating the effect of uncorrected misstatements, the auditor should reassess materiality per SA 320 to confirm whether it remains appropriate to the entity’s financial results by taking into account:

• Size and Nature of the misstatements both in relation to particular classes of transactions account balance or disclosures etc and circumstance of their occurrence
• Effect of uncorrected misstatements related to prior periods on the relevant classes of transactions, account balance or disclosure, and the financial statements as a whole

Communication by the Auditor to those charged with governance

• Uncorrected misstatements and the effect they may have on the auditor’s report unless prohibited by law or regulation
• Identified material uncorrected misstatements individually
• Request uncorrected misstatements are corrected

Written Representation

If in an auditor’s opinion, the effect of uncorrected misstatements is immaterial (individually or in aggregate) to the financial statements, a written representation should be obtained from the management with the summary of such items.

Documentation

• Materiality limit – determining the trivial amount
• All misstatements accumulated during the audit and if those are corrected
• Whether uncorrected misstatements are material, individually or in aggregate and its conclusion

Examples – Misstatements

• ASales income of a company is materially overstated, then financial statement as a whole will be materially misstated
• Misclassification between balance sheet items may not be considered material if the amount of misclassification is small compared to other balance sheet items and it does not affect the P&L or key ratios