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Refer to page 834 of the textbook.


Refer to pages 836 and 837 of the textbook.


The objective of evaluating misstatements is to determine the effect on the audit

and whether there is a need to perform additional audit procedures. Revisions to
the audit strategy and detailed audit plans may be required when:






The nature of circumstances of identified misstatements indicate that

other misstatement(s) may exist that, when aggregated with known
misstatements, could exceed performance materiality; or

The aggregate of identified and uncorrected misstatements come close

to or exceeds performance materiality.

Omissions or Fraud Some transactions may not be recorded, either by

mistake or deliberately, the latter of which would constitute fraud.
Significant Transactions A lack of business rationale for significant
transactions (unusual or outside the normal course of business) could be
intended to manipulate the financial statements or to conceal
misappropriation of assets.
Journal Entries Inappropriate or unauthorized journal entries may have
occurred throughout the period or at period end. These could be used to
manipulate amounts reported in the financial statements.
Errors in Estimates Management estimates may calculate incorrectly,
overlook or misinterpret certain facts, use faulty assumptions, or contain
some element of bias if the entitys estimate falls outside an acceptable
range. Estimates could also be deliberately misstated to manipulate financial
statement results.
Errors in Fair Values There may be disagreements with managements
judgments with respect to the fair value of certain assets, liabilities, and
components of equity required to be measured or disclosed at fair values in
accordance with the financial framework.
Selection and Application of Accounting Policies There may be
disagreements with management with regard to the selection and use of
certain accounting policies.

20-2 Solutions Manual Public Accountancy Profession







Uncorrected Misstatements in Opening Equity Uncorrected misstatements

from prior periods would be reflected in opening equity. If not adjusted,
they may also cause a misstatement in the current period financial
Revenue Recognition Overstatement or understatement of revenues (e.g.,
premature revenue recognition, recording fictitious revenues, or improperly
shifting revenues to a later period).
Materiality of Misstatements How significant is a misstatement in the
assertion being addressed, and what is the likelihood of it having a material
effect (individually or aggregated with other potential misstatements) on the
financial statements?
Management Responses How responsive is management to audit findings,
and how effective is the internal control in addressing risk factors?
Previous Experience What has been the previous experience in
performing similar procedures, and were any misstatements identified?
Results of Performed Audit Procedures Do the results of performed audit
procedures support the objectives, and is there any indication of fraud or
Quality of Information Are the source and reliability of the available
information appropriate for supporting the audit conclusions?
Persuasiveness How persuasive (convincing) is the audit evidence?
Understanding the Entity Does the evidence obtained support or
contradict the results of the risk assessment procedures (which were
performed to obtain an understanding of the entity and its environment,
including internal control)?

Audit matters that should be communicated by the auditor to those charged with
governance are:

Accounting policies

Prior period communications

Risks of material misstatement

Material uncertainties


Significant difficulties encountered

Comments on entity management

Audit adjustments

Uncorrected misstatements

The auditors report

Agreed-upon matters

Audit Evidence Evaluation

Other matters