Annual Audit Manual

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9011 Introduction
Apr-2018

In This Section

Definitions

Overview

This topic explains:

  • Auditor's objectives in relation to evaluating identified misstatements.
  • Definitions.

CAS Objective

The objective of the auditor is to evaluate (CAS 450.3):

(a) The effect of identified misstatements on the audit; and

(b) The effect of uncorrected misstatements, if any, on the financial statements.

Definitions

CAS Guidance

Definition of Misstatement

For purposes of the CASs, the following terms have the meanings attributed below (CAS 450.4):

(a) Misstatement - 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 accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud.

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 those adjustments of amounts, classifications, presentation, or disclosures that, in the auditor's judgment, are necessary for the financial statements to be presented fairly, in all material respects, or to give a true and fair view.

(b) Uncorrected misstatements - Misstatements that the auditor has accumulated during the audit and that have not been corrected.

Examples

Misstatements may result from (CAS 450.A1):

(a) An inaccuracy in gathering or processing data from which the financial statements are prepared;

(b) An omission of an amount or disclosure, including inadequate or incomplete disclosures, and those disclosures required to meet disclosure objectives of certain financial reporting frameworks as applicable;

(c) An incorrect accounting estimate arising from overlooking, or clear misinterpretation of, facts;

(d) Judgments of management concerning accounting estimates that the auditor considers unreasonable or the selection and application of accounting policies that the auditor considers inappropriate;

(e) An inappropriate classification, aggregation or disaggregation, of information; and

(f) For financial statements prepared in accordance with a fair presentation framework, the omission of a disclosure necessary for the financial statements to achieve fair presentation beyond disclosures specifically required by the framework.

Examples of misstatements arising from fraud are provided in CAS 240.

OAG Guidance

As explained in OAG Audit 9012, identified misstatements are accumulated using the Summary of Uncorrected Misstatements which is embedded in procedure ‘Evaluating misstatements’ within the program ‘Completion and Reporting Activities.’ The words 'difference' and 'misstatement' are, in the context of CAS 450 (and as indicated by the CAS definition), virtually interchangeable and are intended to have the same meaning. The term 'audit difference' has been replaced with 'identified misstatement' in OAG Audit to align our guidance with CAS 450.

When applying OAG Audit and when communicating to management and those charged with governance, in order to align with the language of the CAS ordinarily use the word misstatement. Refer to the guidance on communications below as regards explaining to clients the use of the word misstatement.

Misstatements may result from fraud or error. Misstatements resulting from fraud are discussed in OAG Audit 5500.