Wiley Practitioner's Guide to GAAS 2020. Joanne M. Flood

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maintained by the service organization B. List all complementary user organization controls identified in the type 1 or type 2 report that the service auditor assumed were maintained by the entity. Cross-reference this list to the audit work performed to:Understand the design of these complementary user controls and whether they have been placed in operation, andIf applicable, tests of operating effectiveness of these controls. Tests of Operating Effectiveness (if applicable) B. Review the service auditor’s description of the tests of controls and assess their adequacy for your purposes. Consider:The link between the financial statement assertion and the control objectiveThe link between the control objective and the controls testedThe nature, timing, and extent of the tests performed B. Evaluate the results of the tests of controls and determine whether they support assessing control risk below the maximum.

14 AU-C 450 Evaluation of Misstatements Identified during the Audit

       Scope

       Definitions of Terms

       Objective of AU-C Section 450

       The Nature and Causes of Misstatements

       Requirements

       Accumulation of Misstatements

       Communication and Correction of Misstatements to Management

       Evaluating the Effect of Uncorrected Misstatements

       The Qualitative Characteristics of Misstatements

       Prior Period Misstatements

       Misstatement Worksheet

       Documentation Requirements

      SCOPE

      The auditor must evaluate the effect of identified misstatements and uncorrected misstatements. AU-C 450 provides guidance on the evaluation.

      DEFINITIONS OF TERMS

      Source: AU-C 450.04. For definitions related to this standard, see Appendix A, “Definitions of Terms”: Misstatement, Uncorrected misstatements.

      OBJECTIVE OF AU-C SECTION 450

      The objective of the auditor is to evaluate the effect of:

      1 Identified misstatements on the audit and

      2 Uncorrected misstatements, if any, on the financial statements

      (AU-C Section 450.03)

      The Nature and Causes of Misstatements

      A misstatement may consist of:

       An inaccuracy in gathering or processing data from which financial statements are prepared

       An omission of a financial statement element, account, or item, or information required to be disclosed under the applicable financial reporting framework

       Financial statement disclosures that are not in accordance with the applicable financial reporting framework

       An incorrect accounting estimate arising from, for example, an oversight or misinterpretation of facts

       Differences between management’s and the auditor’s judgments concerning accounting estimates, or the selection and application of accounting policies that the auditor considers inappropriate (for example, a departure from GAAP).

      (AU-C 450.A1)

      REQUIREMENTS

      Accumulation of Misstatements

      The auditor must accumulate misstatements identified during the audit, other than those that the auditor believes are clearly trivial, and communicate them on a timely basis to the appropriate level of management. (AU-C 450.05) Clearly trivial is not the same as immaterial. Clearly trivial matters are quantitatively and qualitatively inconsequential, individually or in the aggregate. (AU-C 450.A2)

      When communicating misstatements to management or those charged with governance, the auditor may want to make these distinctions:

      1 Factual misstatements

      2 Projected misstatements from substantive audit samples

      3 Differences between any estimated amounts in the financial statements that the auditor considers unreasonable and the closest reasonable estimates

      (AU-C 450.A3)

      Considerations as the Audit Progresses

      The auditor should not assume that a misstatement is an isolated occurrence. If the nature of the identified misstatements and the circumstances of their occurrence indicate that other misstatements may exist that could be material, or if the aggregate of misstatements approaches materiality, the auditor should consider whether the overall audit strategy and audit plan need to be revised.

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