Annual Audit Manual
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9012 Accumulation of identified misstatements
Apr-2018
Overview
This topic explains:
- Accumulating misstatements during the audit.
- Distinguishing between different types of misstatements.
CAS Requirement
The auditor shall accumulate misstatements identified during the audit, other than those that are clearly trivial (CAS 450.5).
OAG Policy
Misstatements, whether corrected, or expected to be corrected, or not by the entity, shall be recorded during the course of the audit, and posted to a Summary of Uncorrected Misstatements (SUM). For this purpose, “misstatements” include our qualitative findings, including inadequate or improper description of an accounting policy and incomplete, inaccurate or omitted disclosures. [Oct-2012]
OAG Guidance
Summary of uncorrected misstatements
We accumulate misstatements during the audit in a summary schedule i.e., the Summary of Uncorrected Misstatements (SUM) that accumulates:
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adjustments identified that are corrected as a result of the entity’s own procedures and are not considered as adjusted differences and, hence, do not have to be posted to the SUM;
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all uncorrected misstatements identified by the auditor and not corrected by management, aggregating the combined effect of the differences identified; and
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all adjusted differences for misstatements identified by the auditor and corrected by management.
CAS Guidance
Paragraph 5 requires the auditor to accumulate misstatements identified during the audit other than those that are clearly trivial. “Clearly trivial” is not another expression for “not material.” Misstatements that are clearly trivial will be of a wholly different (smaller) order of magnitude or of a wholly different nature than those that would be determined to be material, and will be misstatements that are clearly inconsequential, whether taken individually or in aggregate and whether judged by any criteria of size, nature or circumstances. When there is any uncertainty about whether one or more items are clearly trivial, the misstatement is considered not to be clearly trivial (CAS 450.A2).
The auditor may designate an amount below which misstatements of amounts in the individual statements would be clearly trivial, and would not need to be accumulated because the auditor expects that the accumulation of such amounts clearly would not have a material effect on the financial statements. However, misstatements of amounts that are above the designated amount are accumulated as required by paragraph 5. In addition, misstatements relating to amounts may not be clearly trivial when judged on criteria of nature or circumstances, and, if not, are accumulated as required by paragraph 5 (CAS 450.A3).
Misstatements in disclosures may also be clearly trivial whether taken individually or in aggregate, and whether judged by any criteria of size, nature or circumstances. Misstatements in disclosures that are not clearly trivial are therefore also accumulated to assist the auditor in evaluating the effect of such misstatements on the relevant disclosures and the financial statements as a whole. Paragraph A17 provides examples of where misstatements in qualitative disclosures may be material (CAS 450.A4).
Misstatements by nature or circumstances, accumulated as described in paragraphs A3-A4, cannot be added together as is possible in the case of misstatements of amounts. Nevertheless, the auditor is required by paragraph 11 to evaluate those misstatements individually and in aggregate (i.e., collectively with other misstatements) to determine whether they are material (CAS 450.A5).
OAG Guidance
We will ordinarily designate a de minimis Summary of Uncorrected Misstatements (SUM) posting level below which misstatements are considered to be clearly trivial and therefore need not be accumulated and posted to the Summary of Uncorrected Misstatements (SUM). For guidance on the de minimis SUM posting level determination see OAG Audit 2105. For guidance on the evaluation of misstatements in the SUM, see OAG Audit 9015.
CAS Guidance
To assist the auditor in evaluating the effect of misstatements accumulated during the audit and in communicating misstatements to management and those charged with governance, it may be useful to distinguish between factual misstatements, judgmental misstatements and projected misstatements (CAS 450.A6).
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Factual misstatements are misstatements about which there is no doubt;
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Judgmental misstatements are differences arising from the judgments of management including those concerning recognition, measurement, presentation and disclosure in the financial statements (including the selection or application of accounting policies) that the auditor considers unreasonable or inappropriate;
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Projected misstatements are the auditor’s best estimate of misstatements in populations, involving the projection of misstatements identified in audit samples to the entire populations from which the samples were drawn. Guidance on the determination of projected misstatements and evaluation of the results is set out in CAS 530.
OAG Guidance
Factual misstatements
In the case of factual misstatements, we will be satisfied that there is evidence.
Judgmental misstatements
When transactions and account balances involve estimates or the use of judgment and are not susceptible to precise measurement, our audit evidence can be used to determine the range of amounts that appear reasonable. As no single estimate can be considered accurate with certainty, the entity’s estimate would normally be acceptable if it falls within this range. A difference between our best estimate and the client’s estimate would not necessarily be considered an error. However, if we believe that the entity’s estimate is unreasonable, treat the difference between that estimate and the closest reasonable estimate as an estimated misstatement.
Also consider whether the difference between estimates best supported by the audit evidence and the estimates included in the financial statements, which are individually reasonable, indicate a possible bias on the part of the entity’s management. For example, if each accounting estimate included in the financial statements was individually reasonable, but the effect of the difference between each estimate and the estimate best supported by the audit evidence was to increase income, reconsider the estimates taken as a whole.
For detailed guidance on auditing accounting estimates, including how management made the estimates, see OAG Audit 7070.
Also consider verifying the appropriateness of disclosure notes related to significant accounting policies as such notes may include some judgmental misstatements (see also OAG Audit 9032).
Projected misstatements
Because conclusions based on sample results apply only to the population from which the sample items were selected, defining the population is an important part of sampling. For guidance on projecting misstatements identified in the sample to the population, see OAG Audit 7044.2.
Uncorrected misstatements related to prior periods
These are misstatements discovered in the previous period which were not corrected in that period and may reverse in the current period. Certain other misstatements, such as not recording a liability for annual holiday pay earned, have a continuing, but probably offsetting, effect in future periods. Note that errors which are initially insignificant may become material in subsequent years. For guidance on evaluation of prior period uncorrected misstatements, see OAG Audit 9015.