Annual Audit Manual

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8034 Material inconsistencies identified
Jun-2020

In This Section

Material inconsistencies identified

Overview

This topic explains the following situations:

  • Material insonsistencies
Material inconsistencies identified

CAS Requirement

If the auditor identifies that a material inconsistency appears to exist (or becomes aware that the other information appears to be materially misstated), the auditor shall discuss the matter with management and, if necessary, perform other procedures to conclude whether (CAS 720.16):

(a) A material misstatement of the other information exists;

(b) A material misstatement of the financial statements exists; or

(c) The auditor’s understanding of the entity and its environment needs to be updated.

CAS Guidance

The auditor’s discussion with management about a material inconsistency (or other information that appears to be materially misstated) may include requesting management to provide support for the basis of management’s statements in the other information. Based on management’s further information or explanations, the auditor may be satisfied that the other information is not materially misstated. For example, management explanations may indicate reasonable and sufficient grounds for valid differences of judgment (CAS 720.A39).

Conversely, the discussion with management may provide further information that supports the auditor’s conclusion that a material misstatement of the other information exists (CAS 720.A40).

It may be more difficult for the auditor to challenge management on matters of judgment than on those of a more factual nature. However, there may be circumstances where the auditor concludes that the other information contains a statement that is not consistent with the financial statements or the auditor’s knowledge obtained in the audit. These circumstances may raise doubt about the other information, the financial statements, or the auditor’s knowledge obtained in the audit (CAS 720.A41).

As there is a wide range of possible material misstatements of the other information, the nature and extent of other procedures the auditor may perform to conclude whether a material misstatement of the other information exists are matters of the auditor’s professional judgment in the circumstances (CAS 720.A42).

When a matter is unrelated to the financial statements or the auditor’s knowledge obtained in the audit, the auditor may not be able to fully assess management’s responses to the auditor’s inquiries. Nevertheless, based on management’s further information or explanations, or following changes made by management to the other information, the auditor may be satisfied that a material inconsistency no longer appears to exist or that the other information no longer appears to be materially misstated. When the auditor is unable to conclude that a material inconsistency no longer appears to exist or that the other information no longer appears to be materially misstated, the auditor may request management to consult with a qualified third party (for example, a management’s expert or legal counsel). In certain cases, after considering the responses from management’s consultation, the auditor may not be able to conclude whether or not a material misstatement of the other information exists. Actions the auditor may then take include one or more of the following (CAS 720.A43):

  • Obtaining advice from the auditor’s legal counsel;

  • Considering the implications for the auditor’s report for example, whether to describe the circumstances when there is a limitation imposed by management; or

  • Withdrawing from the audit, where withdrawal is possible under applicable law or regulation.

OAG Policy

Consult with Audit Services in accordance with OAG Audit 3081 as appropriate, if revision of the other information is necessary and the entity refuses to make the revision. [Jun-2020]

Consultation with Audit Services and Legal Services in accordance with OAG Audit 3081 as appropriate, if the audit team has a material disagreement with those charged with governance because our report is to be included in a document that contains materially misstated information. [Jun-2020]

OAG Guidance

Where material inconsistencies appear to exist, we need to discuss these with management and consider if further procedures may be necessary to determine whether a material misstatement exists, or our understanding of the entity may need to be updated. The nature and extent of further procedures is a matter of judgment and depends on the results of our risk assessment and other engagement circumstances. Our procedures need to be sufficient for us to conclude whether a material inconsistency or misstatement of the other information exists. Consider consulting with Audit Services when unable to conclude whether a material inconsistency or misstatement of the other information exists.

Examples of further procedures that may be necessary include:

  • Evaluating management’s explanations (e.g., considering whether management’s explanations are reasonable and consistent with our understanding of the entity)

  • Reviewing support for the basis of management’s statements in the other information (e.g., reviewing supporting calculations and reconciling them to the financial statements, as appropriate)

  • If we have identified a material difference between a recent media report about the entity’s greenhouse gas emissions and what we read in the other information, we may decide to inspect documents supporting management’s statements in the other information (e.g., inspecting reports on greenhouse gas emissions supporting the related amounts included in the other information).