EVALUATION OF MISSTATEMENTS IDENTIFIED DURING THE AUDIT (ISA 450)
SCOPE
This ISA deals with the auditor’s responsibility to evaluate the effect of identified
misstatements on the audit and of uncorrected misstatements on the financial
statements.
OBJECTIVE
The objective of the auditor is to evaluate:
• Effect of identified misstatements on the audit; and
• Effect of uncorrected misstatements on the FS.
DEFINITIONS
(a) Misstatement = a difference between the reported amount, classification,
presentation, or disclosure of a financial statement item and the amount,
classification, presentation, or disclosure that is required for the item to be in
accordance with the applicable financial reporting framework.
Misstatement can arise from error or fraud. Commented [PVNN1]: Misstatement can arise from:
1. inaccuracy in gathering or processing data
2. omission of an amount/disclosure, including
(b) Uncorrected misstatements = Misstatements that the auditor has accumulated inadequate/incomplete disclosure.
during the audit and that have not been corrected. 3. judgement of management concerning accounting
estimates that the auditor considers unreasonable.
REQUIREMENTS 4. inappropriate classification of information
5. omission of a disclosure necessary to achieve fair
ACCUMULATION OF IDENTIFIED MISSTATEMENTS presentation
5. the auditor shall accumulate misstatements identified during the audit, other than
those that are clearly trivial. Commented [PVNN2]: Misstatements that are of a small
magnitude, whether tsking individual or in aggregate
CONSIDERATION OF IDENTIFIED MISSTATEMENTS AS THE AUDIT
Commented [PVNN3R2]: To assist the auditor in
PROGRESSES evaluating the effect of misstatements accumulated during
the audit, auditor needs to distinguish between factual,
6. The auditor shall determine whether the overall audit strategy and audit plan need judgment, and projected misstatements.
to be revised if: Commented [PVNN4R2]: Factual - misstatements about
which there is no doubt.
• Identified misstatements indicate that other misstatements may exist, that Judgemental - differences arising from the judgement of
when aggregated with accumulated misstatements during the audit, could be management and auditor on how they estimated an
uncertain amount.
material. (A7) Projected - auditor's best estimate of misstatements in
• Aggregate of misstatements accumulated approaches materiality. (A8) populations
7. If, management has examined a class of transaction, account balance or
disclosure and corrected misstatements that were detected, the auditor shall perform
additional audit procedures to determine whether the misstatements remain.
COMMUNICATION AND CORRECTION OF MISSTATEMENTS
8. The auditor shall communicate, unless prohibited by law on a timely basis all
misstatements accumulated during the audit with management. The auditor shall
request management to correct those misstatements. (A10 -A12)
9. If management refuses to correct misstatements, auditor shall obtain an
understanding of management’s refusal. (A13)
EVALUATING THE EFFECT OF UNCORRECTED MISSTATEMENTS
10. Prior to evaluating the effect of uncorrected misstatements, the auditor shall
reassess materiality to confirm whether it remains appropriate in the context of the
entity’s actual financial results. (A14 – A15)
11. The auditor shall determine whether uncorrected misstatements are material
individually or in aggregate, in making this determination the auditor should consider:
(a) the size and nature of misstatements. (A16 – A22) (A24 – A25)
(b) the effect of uncorrected misstatements related to prior periods on the relevant
classes of transactions, account balances, or disclosure and FS. (A23)
Communication with Those Charged with Governance
12. The auditor shall communicate with those charged with governance uncorrected
misstatements and request that the uncorrected misstatements be corrected. (A26 –
A28)
13. The auditor shall also communicate with those charged with governance the
effect of uncorrected misstatements related to prior periods.
WRITTEN REPRESENTATION
14. The auditor shall request a written representation from management and those
charged with governance whether they believe the effects of uncorrected
misstatements are immaterial. (A29)
DOCUMENTATION
15. The auditor shall include in the audit documentation (A30)
• Amount below which misstatements would be regarded as clearly trivial. (Par
5)
• All misstatements accumulated during the audit and whether they have been
corrected. (Par 5,8,12); and
• The auditor’s conclusion as to whether uncorrected misstatements are
material. (Par 11)
