AUE3761/AUE3702

ISA 450 EVALUATION OF

MISSTATEMENTS IDENTIFIED
DURING THE AUDIT

Lecturer contact details:

AUE3761@unisa.ac.za
AUE3702@unisa.ac.za
Well done! You the auditor have now completed your audit tests
of detail and are now in the final stage of the audit process.

1. Preliminary Engagement Activities

2. Planning

2.1 Establish the

overall audit
2.2 Develop an
strategy audit plan

3. Obtain audit evidence

3.1 Tests of control 3.2 Substantive procedures

4. Evaluation, Conclusion and

Reporting
Stage 4 of the audit process

This lesson relates to

evaluating misstatements
identified during the audit.
ISA450 deals with the
auditor’s responsibility to
evaluate the effect of
identified misstatements
and any uncorrected
misstatements on the
financial statements
Learning outcomes
Evaluating identified misstatements and
uncorrected misstatements on the audit
• It is the auditors responsibility to evaluate
the effect of misstatements identified on
the audit and any uncorrected
misstatements on the financial statements.
• What do we mean by ‘misstatements’ and
uncorrected misstatements?
 MISSTATEMENTS

A difference between the amount, classification, presentation, or disclosure of a

reported 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.

UNCORRECTED MISSTATEMENTS
Misstatements that the auditor has accumulated during the audit and that have not been
corrected.
 Corrected v uncorrected
misstatements
• In this module it important to differentiate between
misstatements that are uncorrected and those that are
subsequently corrected by management.
• An auditor expresses an opinion on whether financial
statements are presented fairly, in all material respects.
• Therefore the audit opinion if affected by material
uncorrected misstatements whereas corrected
misstatements have no impact on the audit opinion.
• Thus take note that we measure misstatements against
final materiality.
 Requirements to follow regarding
misstatements:
• Accumulation of identified misstatements
1

• Consideration of identified misstatements as the

2 audit progresses
• Communication and correction of
3 misstatements
• Evaluating the effect of uncorrected
4 misstatements
• Written representations
5
 Accumulation of identified
misstatements
• NB! Not all misstatements will have an effect on the audit report.
• The auditor should designate an amount below which
misstatements are considered clearly trivial and thus not having a
material effect on the financial statements.

Communication and correction of

misstatements
• Management should be informed of any misstatements identified
during the progress of the audit and the auditor should request
management to effect such corrections.
• Should management refuse to correct, the auditor needs to
consider such effect on the financial statements being free from
material misstatements.
 Evaluating the effect of uncorrected
misstatements
• STEP 1: Reassess materiality and set final
materiality. Also designate an amount that is
regarded as clearly trivial.
• STEP 2: Assess whether uncorrected
misstatements related to amounts and
disclosures are material, individually or in
aggregate. Distinguish misstatements as factual,
judgemental or projected.
• STEP 3: Determine the impact on the audit
opinion.
 Written representation
Management should provide written representations that state; that
management believe that the effects of uncorrected misstatements are
immaterial, individually and in aggregate, to the financial statements as
a whole.

Documentation
The auditor should document within working papers:
• Amount which stipulates misstatements that are clearly trivial.
• All misstatements accumulated and if they were corrected.
• Conclusion and basis for conclusion regarding uncorrected
misstatements ito materiality individually and in aggregate.
 Can you see that misstatements not corrected by management have
an impact on the final audit opinion
Financial statements fairly presented
in all material respect

No
Yes

Modified audit opinion Unmodified audit opinion

Misstatement material
Misstatement material but NOT AND pervasive
pervasive

Limitation of Disagreement with Limitation of

Disagreement with
scope management scope
management

Qualified audit opinion Adverse opinion Disclaimer of opinion

12
In summarising the above lesson, students should remember the following audit procedures when
dealing with misstatements.

Audit procedures to follow when dealing with corrected and uncorrected misstatements

STEP 1: Communicate all misstatements to management in writing.

If corrected, perform further procedures on any adjusting journals management have
processed on identified misstatements.
If management disagree or refuse to correct communicated misstatements-
document them in a schedule of uncorrected misstatements unless they are clearly
trivial.
STEP 2: Determine if the uncorrected misstatement is material individually by comparing that
one uncorrected misstatement to materiality, then
STEP 3: If there is more than one misstatement, determine if uncorrected misstatements are
material in aggregate by adding up all the material misstatements and comparing
that aggregated amount to final materiality
STEP 4: Distinguish misstatements as factual, judgmental or projected.
STEP 5: Consider the possibility of undetected misstatements.
STEP 6: If management disagree or refuse to correct the communicated misstatements; consider
the impact on the audit opinion and the possibility of any reportable irregularities.
 Examples:
Attempt the question below and record your responses on the discussion group on myUnisa:

Question
• Prior period error
This issue is the error mentioned in the “Email from the CEO” about the “Always OnnLine” printers
value. The property, plant and equipment note of the 2018 financial year was understated by an
amount of R6 million due to the missing printers. A prior period error note has been disclosed in terms
of IAS 8 and all printers have been accounted for in terms of IFRS 16.

• Trade creditors
Power Printing’s trade creditors balance was understated by R6 million. The auditors have
communicated this understatement to management, and they have has refused to correct the
understatement.

Final materiality was set at R5 million

Discuss the effect of the issues mentioned on the audit opinion for the year ended 30 September
2019.

Source: AUE3702 UNISA exam 2019

 Questions?

Please document any

applicable questions regarding
this lesson on myUnisa under
the discussion forum topic
Lesson: Evaluation of
misstatements during the audit.