ISA 450 Evaluation of Misstatements Identified during the Audit

1. The effect of identified misstatements on audit

2. The effect of uncorrected misstatement on the financial statement

ISA 450 defines a misstatement as:

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. Misstatements can arise from error or fraud.

- Misstatements also include those adjustments of amounts classifications, presentation, or disclosures that, in the auditor’s judgement, are necessary for the financial statements to be presented fairly, in all material respects, or to give a true and fair view.

b) Uncorrected misstatements - Misstatements which have been identified by the auditor during the course of audit which have not been corrected.

Auditor shall keeps note of all misstatements (other than those which are clearly trivial), raises them with management and asks for the misstatements to be corrected in the financial statements.

Auditor required to accumulate misstatements identified during the audit.

“Clearly trivial” is not another expression for “not material.” Misstatements that are clearly trivial will be of a wholly different (smaller) order of magnitude, or of a wholly different nature than those that would be determined to be material, and will be misstatements that are clearly inconsequential, whether taken individually or in aggregate and whether judged by any criteria of size, nature or circumstances. When there is any uncertainty about whether one or more items are clearly trivial, the misstatement is considered not to be clearly trivial.

Auditor shall communicate all the misstatements accumulated during the audit with management and request management to correct those misstatements.

If management refuses to correct, auditor shall obtain an understanding of management’s reasons for not making the corrections and shall take that understanding into account when evaluating whether the financial statements as a whole are free from material misstatement.

Evaluating the Effect of Uncorrected Misstatements

Auditor is required to determine whether uncorrected misstatements are material, individually or in aggregate. At this point the auditor should also reassess materiality, there may have been many changes made from planning until completion to the financial statements.

Some misstatements may be evaluated as material, individually or when considered together with other misstatements accumulated during the audit, even if they are lower than materiality for the financial statements as a whole:

i) Misstatements which affect compliance with regulatory requirements

ii) Misstatements which impact on debt covenants or other financing or contractual arrangements

iii) Misstatements which obscure a change in earnings or other trends

iv) Misstatements which affect ratios used to evaluate the entity’s financial position, results of operations or cash flows

v) Misstatements which increase management compensation

vi) Misstatements which relate to misapplication of an accounting policy where the impact is immaterial in the context of the current period financial statements, but may become material in future periods

Communication with Those Charged with Governance

Auditor require to communicate uncorrected misstatements to those charged with governance and the effect that they, individually or in aggregate. The auditor may discuss with those charged with governance the reasons and the implications of a failure to correct misstatements, and possible implications in relation to future financial statements. Auditor shall request that uncorrected misstatements be corrected.

Written Representations

Auditor shall request a written representation from management and those charged with governance whether they believe the effects of uncorrected misstatements are immaterial, individually and in aggregate, to the financial statements as a whole. A summary of such items shall be included in or attached to the written representation.