maintained by the service organization
14 AU-C 450 Evaluation of Misstatements Identified during the Audit
The Nature and Causes of Misstatements
Communication and Correction of Misstatements to Management
Evaluating the Effect of Uncorrected Misstatements
The Qualitative Characteristics of Misstatements
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.
