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EvaluationofMisstatementsIdentifiedDuringtheAudit

I. ResponsibilitiesunderAICPAProfessionalStandards TherelevantAICPAguidanceisprovidedbyAU450:"EvaluationofMisstatementsIdentifiedDuringthe Audit."Thispronouncementstatesthattheauditor'sobjectivesaretoevaluatetheeffectof(1)identified misstatementsontheauditand(2)uncorrectedmisstatements,ifany,onthefinancialstatements.

Definition Misstatement:Adifferencebetweentheamount,classification,presentation,ordisclosureofa reportedfinancialstatementitemandtheamount,classification,presentation,ordisclosurethat isrequiredfortheitemtobeinaccordancewiththeapplicablereportingframework. (Misstatementsalsoinvolvemattersdeemednecessaryforthefinancialstatementstobe presentedfairly,inallmaterialrespects.)

Definition Uncorrectedmisstatements:Misstatementsthattheauditorhasaccumulatedduringtheaudit andthathavenotbeencorrected

II. ExpectationsRegardingIdentifiedMisstatementsandUncorrectedMisstatements A. AccumulationofidentifiedmisstatementsTheauditorshouldaccumulateall misstatementsidentifiedduringtheaudit(exceptforthosethatareclearlytrivial,whichmeans inconsequential).Theauditormaywishtodistinguishamongthefollowing3typesof misstatements: 1. FactualmisstatementsMisstatementsforwhichthereisnodoubt. 2. JudgmentalmisstatementsDifferencesduetothejudgmentsofmanagementthat theauditorconsidersunreasonableortotheselectionofaccountingpoliciesthattheauditor viewsasinappropriate. 3. ProjectedmisstatementsTheauditor'sbestestimateofmisstatementsinpopulations assuggestedbyauditsampling. B. ConsiderationofidentifiedmisstatementsastheauditprogressesTheauditorshould determinewhethertheoverallauditstrategyandauditplanneedtoberevisedasaresultofthe identifiedmisstatements.Thatwouldbenecessaryiftheaggregateofaccumulatedmisstatements (andothermisstatementsthatmayexist)approacheswhatisconsideredtobematerial. C. CommunicationandthecorrectionofmisstatementsTheauditorshouldcommunicateall misstatementsaccumulatedduringtheauditonatimelybasiswiththeappropriatelevelof managementandrequesttheycorrectthemisstatements.Theappropriatelevelistheonethat hastheauthoritytoevaluatethemisstatementsandtakenecessaryaction. 1. Ifmanagementhasexaminedaclassoftransactionsoraccountbalanceattheauditor's request(forexample,asaresultofanauditsamplethatindicatesamisstatement)andhas madeacorrectionTheauditorshouldperformadditionalprocedurestodetermine whetheranymisstatementsremain. 2. Ifmanagementrefusestocorrectsome(orall)ofthemisstatementsTheauditorshould obtainanunderstandingofmanagement'sreasonsandtakethatintoconsiderationwhen

evaluatingwhetherthefinancialstatementsaremateriallymisstated. D. Evaluatingtheeffectofuncorrectedmisstatements 1. ReassessmaterialityTheauditorshouldreassessmaterialitytoverifythatitis appropriateinviewoftheentity'sactualfinancialresults. 2. DeterminewhetheruncorrectedmisstatementsarematerialTheauditorshould consider(a)thesizeandnatureofthemisstatementsand(b)theeffectofuncorrected misstatementsrelatedtopriorperiods. 3. Other(undetected)misstatementsmayexistwhenamisstatementresultsfromabreak downininternalcontrol,orwheninappropriateassumptionsorvaluationmethodshave beenwidelyused.Theauditorshouldconsiderwhetherthedetectedandundetected misstatementsmightexceedmateriality. 4. Circumstancesaffectingtheevaluationofmaterialityincludethefollowing:(a)compliance andregulatoryrequirements(b)debtcovenants(c)theeffectonfutureperiods'financial statements(d)theeffectsonchangesinearnings(suchaschangingincometoalossor viceversa)orothertrends(e)theimpactonratios(f)theeffectsonsegment information(g)aneffectthatincreasesmanagementcompensation(h)theomissionof informationimportanttousers'understandingand(i)themisclassificationbetween operatingnonoperatingitemsorrecurringnonrecurringitems. E. DocumentationofmisstatementsTheauditorshoulddocumentthefollowing3mattersin theauditdocumentation:(1)theamountbelowwhichmisstatementswouldbeviewedasclearly trivial(2)allmisstatementsaccumulatedduringtheauditandwhethertheyhavebeencorrected and(3)theauditor'sconclusion(andthebasisforthatconclusion)aboutwhethertheuncorrected misstatementsarematerial,individuallyorintheaggregate.

Flashcards
Flashcard#1 (FC7271) Definemisstatement. Adifferencebetweentheamount,classification, presentation,ordisclosureofareportedfinancial statementitemandthatwhichisrequiredforthe itemtobeinaccordancewiththeapplicablereporting framework. Misstatementsforwhichthereisnodoubt. Differencesarisingfromthejudgmentsof managementthattheauditorconsiders unreasonableortheselectionofaccountingpolicies deemedinappropriate. Theauditor'sbestestimateofmisstatementsin populationssuggestedbyauditsampling.(TheAICPA formerlyusedthetermlikelyerrorforthisconcept.) Theauditorshouldaccumulateidentified misstatements,exceptforthosethatareclearly trivial.(Clearlytrivialmeansclearlyinconsequential.) 1. Thethresholdfordeterminingwhatisviewed asclearlytrivial. 2. Allmisstatementsaccumulatedduringthe audit(andwhethertheyhavebeencorrected). 3. Theauditor'sconclusionastowhetherany uncorrectedmisstatementsarematerial (individuallyorintheaggregate),andthebasis forthatconclusion.

Flashcard#2 (FC7272) Whatismeantbythetermfactualmisstatements? Flashcard#3 (FC7273) Whatismeantbythetermjudgmental misstatements?

Flashcard#4 (FC7274) Whatismeantbythetermprojectedmisstatements?

Flashcard#5 (FC7275) Describetheauditor'sresponsibilitytoaccumulate misstatementsidentifiedduringtheaudit. Flashcard#6 (FC7276) Whatmattersmustbedocumentedbytheauditorin connectionwiththeevaluationofmisstatements?