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:
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