Thursday, March 31, 2022

ISA (UK) 450: Evaluation of Misstatements Identified During the Audit

 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 compliance with the applicable financial reporting framework is referred to as a misstatement. Errors or fraud can lead to misstatements. When the auditor expresses an opinion on whether the financial statements are presented fairly, in all material respects, or give a true and fair view, misstatements also include any adjustments to amounts, classifications, presentation, or disclosures that the auditor believes are required for the financial statements to be presented fairly, in all material respects, or to give a true and fair view. Except for those that are manifestly inconsequential, the auditor must keep track of any misstatements discovered throughout the audit.

The auditor's goals, according to ISA 450, are to examine the following: The impact of recognized misstatements on the audit, and the impact of uncorrected misstatements, if any, on the financial statements. A misrepresentation happens when anything in the financial accounts is not treated appropriately, implying that the applicable financial reporting framework, particularly IFRS, has not been applied effectively.

The following are some examples of misstatement that can occur as a result of human error or fraud:

§  An inaccurate amount was recognized, such as when an asset was not appraised in compliance with the appropriate IFRS requirement.

§  An item is misclassified - for example, finance costs are included in cost of sales in the profit and loss statement.

§  The presentation is ineffective; for example, the results of discontinued operations are not displayed individually.

§  A contingent liability disclosure is missing or inadequately detailed in the notes to the financial statements, for example a disclosure related to contingent liability is not correct or deceptive disclosure has been added as a result of management bias.

Management is responsible for correcting any errors brought to their attention by the auditor. If management refuses to rectify any or all of the misstatements, ISA 450 requires the auditor to learn about management's reasons for not making the corrections and to include that information when determining whether the financial statements are free of material misrepresentation as a whole.

 

Practice:

According to ISA 450, the auditor must inform those in charge of governance of uncorrected misstatements and the impact they would have on the auditor's report's conclusion, either individually or collectively. The auditor's communication should identify important uncorrected misstatements one by one, and it should request that the misstatements be addressed. The auditor may examine the reasons for, and the ramifications of, a failure to correct misstatements with those in charge of governance, as well as probable repercussions for future financial statements.

 

Reference:      https://bit.ly/3wRCcpe

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