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?
A. Evaluate the effect of identified misstatements on the audit
B. Effect of uncorrected misstatements, if any of the financial statements
Uncorrected Misstatement – Misstatement that the auditor has accumulated during the audit and that have not been corrected
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:
a. Nature of identified misstatements and circumstances of their occurrence indicate that other misstatements may exist if accumulated could be material
b. An aggregate of misstatements accumulated during the audit approaches materiality per SA 320
Auditor’s Communication & Correction of Misstatements
a. Communicate on a timely basis to the appropriate level of management (unless prohibited by law or regulation)
b. Request management to correct those misstatements
c. If management refuses to correct misstatements, the auditor should understand the reason for the same
d. 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:
a. Size and Nature of the misstatements both in relation to particular classes of transactions account balance or disclosures etc and circumstance of their occurrence
b. 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
a. Uncorrected misstatements and the effect they may have on the auditor’s report unless prohibited by law or regulation
b. Identified material uncorrected misstatements individually
c. Request uncorrected misstatements are corrected
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.
a. Materiality limit – determining the trivial amount
b. All misstatements accumulated during the audit and if those are corrected
c. Whether uncorrected misstatements are material, individually or in aggregate and its conclusion