Annual Audit Manual
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9013 Consideration of identified misstatements as the audit progresses
Apr-2018
Overview
This topic explains:
- Revisions to audit strategy and plan as a result of identified misstatements.
- Requesting management to examine financial statements in order to understand the cause of a misstatement.
CAS Requirement
The auditor shall determine whether the overall audit strategy and audit plan need to be revised if (CAS 450.6):
(a) The nature of identified misstatements and the circumstances of their occurrence indicate that other misstatements may exist that, when aggregated with misstatements accumulated during the audit, could be material; or
(b) The aggregate of misstatements accumulated during the audit approaches materiality determined in accordance with CAS 320.
CAS Guidance
A misstatement may not be an isolated occurrence. Evidence that other misstatements may exist include, for example, where the auditor identifies that a misstatement arose from a breakdown in internal control or from inappropriate assumptions or valuation methods that have been widely applied by the entity (CAS 450.A7).
If the aggregate of misstatements accumulated during the audit approaches materiality determined in accordance with CAS 320, there may be a greater than acceptably low level of risk that possible undetected misstatements, when taken with the aggregate of misstatements accumulated during the audit, could exceed materiality. Undetected misstatements could exist because of the presence of sampling risk and non-sampling risk (CAS 450.A8).
OAG Guidance
Consider misstatements corrected by the entity together with the uncorrected misstatements in evaluating the nature, timing and extent of our testing for sufficiency. Take account of misstatements identified when considering if there are additional risks in an FSLI and/or when assessing if there is an internal control deficiency.
Determine that we have considered all risks relating to corrected and uncorrected misstatements when determining the audit evidence required for an FSLI. This process generally involves:
- Reassessing the effectiveness of the audit plan, particularly materiality and risk, based on the information obtained during the audit and the financial statements we are examining.
- Considering whether there are any inconsistencies in audit evidence obtained or conclusions drawn for individual FSLIs, including consideration of whether our reliance on internal control was appropriate; if inconsistencies are present, investigate and resolve them.
- Comparing the accumulation of misstatements with our various materiality judgments and proposing adjustments, when appropriate.
- Forming our overall audit conclusion and considering our audit report.
For guidance on evaluating uncorrected misstatements, refer to OAG Audit 9015.
CAS Requirement
If, at the auditor’s request, management has examined a class of transactions, account balance or disclosure and corrected misstatements that were detected, the auditor shall perform additional audit procedures to determine whether misstatements remain (CAS 450.7).
CAS Guidance
The auditor may request management to examine a class of transactions, account balance or disclosure in order for management to understand the cause of a misstatement identified by the auditor, perform procedures to determine the amount of the actual misstatement in the class of transactions, account balance or disclosure, and to make appropriate adjustments to the financial statements. Such a request may be made, for example, based on the auditor's projection of misstatements identified in an audit sample to the entire population from which it was drawn (CAS 450.A9).