Annual Audit Manual
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9016 Written representation and documentation
Jun-2020
Overview
This topic explains:
- requesting written representation about uncorrected misstatements, and
- documentation of uncorrected misstatements.
CAS Requirement
The auditor shall request a written representation from management and, where appropriate, those charged with governance whether they believe the effects of uncorrected misstatements are immaterial, individually and in aggregate, to the financial statements as a whole. A summary of such items shall be included in or attached to the written representation (CAS 450.14).
CAS Guidance
Because the preparation of the financial statements requires management and, where appropriate, those charged with governance to adjust the financial statements to correct material misstatements, the auditor is required to request them to provide a written representation about uncorrected misstatements. In some circumstances, management and, where appropriate, those charged with governance may not believe that certain uncorrected misstatements are misstatements. For that reason, they may want to add to their written representation words such as: “We do not agree that items … and … constitute misstatements because [description of reasons].” Obtaining this representation does not, however, relieve the auditor of the need to form a conclusion on the effect of uncorrected misstatements (CAS 450.A29).
OAG Guidance
See OAG Audit 9050 for guidance on management representations.
CAS Requirement
The auditor shall include in the audit documentation (CAS 450.15):
(a) The amount below which misstatements would be regarded as clearly trivial (paragraph 5);
(b) All misstatements accumulated during the audit and whether they have been corrected (paragraphs 5, 8 and 12);
(c) The auditor’s conclusion as to whether uncorrected misstatements are material, individually or in aggregate, and the basis for that conclusion (paragraph 11).
OAG Policy
Summary of Uncorrected Misstatements (SUM) shall be documented as a significant matter. [Oct-2012]
CAS Guidance
The auditor’s documentation of uncorrected misstatements may take into account (CAS 450.A30):
(a) The consideration of the aggregate effect of uncorrected misstatements;
(b) The evaluation of whether the materiality level or levels for particular classes of transactions, account balances or disclosures, if any, have been exceeded;
(c) The evaluation of the effect of uncorrected misstatements on key ratios or trends, and compliance with legal, regulatory and contractual requirements (for example, debt covenants).
OAG Guidance
Use the tabs ‘SUM-Uncorrected’ and ‘SUM-Corrected’ within procedure ‘Evaluating misstatements’ to record misstatements, whether corrected, or expected to be corrected, or not by the entity, that arise during the course of the audit. “Misstatements” include our qualitative findings, including inadequate or improper description of an accounting policy and incomplete, inaccurate or omitted disclosures. Use tab ‘SUM-Disclosures’ within procedure ‘Evaluating misstatements’ to summarize presentation and disclosure misstatements.
Adjustments identified and corrected as a result of the entity’s own procedures are not considered as corrected misstatements and hence, do not have to be posted to the SUM.
Check any further corrections subsequently made to the entity’s records, where applicable, and annotate the SUM accordingly.
Where a materiality level has been determined for particular classes of transactions, account balances or disclosures, the evaluation of misstatements for those classes of transactions, account balances or disclosures is judged in relation to the particular materiality established for them, and not to the overall materiality for the financial statements as a whole.
It is helpful to categorize separately factual, judgmental and projected misstatements, so that their effect can be separately considered.
Also record in the workpapers the discussion with management and those charged with governance relating to any uncorrected misstatements, the entity’s reasons for not adjusting and our conclusion, as necessary.
Engagement leader sign-off of uncorrected misstatements
Individual items on the SUM do not need to be treated as individual significant matters. However, if the underlying events involve significant judgment and warrant this level of engagement leader attention, a separate significant matter can be created for a SUM item. For example, a SUM item may relate to a misapplication of an accounting principle. This would generally be important enough to treat as a significant matter.
The engagement leader, by signing off the Completion sign-off procedure step, indicates his or her belief that there is an adequate allowance for undetected misstatements, and that the overall audit risk is at an acceptably low level.
Note that if a quality reviewer is assigned to the engagement, he or she would concur in the assessment of uncorrected misstatements, including qualitative findings.