Audit
ISA 450 – Evalua on of Misstatements Iden fied during the Audit
How to answer Evalua on ques ons
Basic Structure for Evalua on ques ons – In red as the example in how to answer the ques on.
The blue parts is what is means, an explana on,
For every single misstatement, individually:
1. What’s the misstatement?
• What does IFRS say they should do.
• What have they done
• What is overstated / understated / disclosed incorrectly?
1.1 Let’s look at provisions, IFRS requires the en ty account for provisions if it is likely that it will
result in an ou low of benefits.
1.2 The lawyer indicated that there is a 60% chance that tell lose the court case.
1.3 A provision should be raised, but the en ty did not account for a provision.
1.4 Liabili es (Specifically provisions) are understated by R3Million.
(For this type of ques on, let the scenario guide you. Make sure you know where the transac on is
disclosed. Like is it an Asset, Liability, Equity, Income or Expense. What will be affected.)
2. What type of misstatement is it?
• Factual? Misstatements where there is no doubt and where suppor ng documenta on is available.
• Judgemental? Differences arising from the judgements of management concerning accoun ng
entries.
• Projected? The auditors best es mate of misstatements in popula ons, usually derived from
sampling.
o Actual
o Extrapolated
2.1 Factual? The invoice states that R10K is payable, while the company has only raised R2K. This the
evidence suppor ng the misstatement is factual.
2.2 Judgemental? We es mated that the Allowance for credit loss should be R140K, while
management have only raised R30K. This is a judgemental misstatement as the accurate amount will
not be known un l the future happens. No one can perfectly correctly es mate this amount.
2.3 When a ended the stock count, our test counts indicated that inventory was overstated by R40K.
The R40k is a factual misstatement because we tested this inventory ourselves. We only tested 10%
of the inventory on hand, thus we believe that if the
other 90% of inventory has the same issues, the rest of the inventory would
,be misstated by R360k (This is an extrapolated misstatement)
(Projected errors have two types of misstatements. The stuff you tested in
your sample, which you have proper evidence about. And then the stuff you didn’t
test. The rest of the popula on. You didn’t actually check the rest of it, so the level of
‘evidence’ you have for that is lower)
3. Is it material?
• Quanta vely? The misstatement of R400k is above the materiality that was set at R300k thus
this is quan ta vely material.
• Qualita vely? The misstatement relates to a legal requirement laid down in the Companies Act,
thus it’s material by nature. Regardless of the amount, users would be influenced
by legal non-compliance
• Pervasive? The misstatement relates to the Rental Paid account. This doesn’t change the
impression of the financial posi on or the financial performance as a whole, thus
the misstatement may be material, but it is not pervasive or The misstatement relates to the net
profit a er tax, and impacts the overall
impression of the financial performance of the company, thus the misstatement
is material and pervasive
• Not material?
o Add to schedule of overs-and-unders
The misstatement of R40k is below materiality of R200k and is thus immaterial.
• This should be added to our schedule of overs and unders, and considering
in combina on with the other misstatements as the audit progresses
4. Do you need more evidence?
• Bigger sample? The extrapolated error indicates that supplier invoices that weren’t tested are
misstated by R50k. In order to obtain sufficient evidence, we should expand
our sample and test more invoices to ensure that our projec on of the
misstatement is accurate
• More persuasive evidence?
Our assessment of the allowance for credit losses is based on our es mates. As
a material misstatement, we need to perform more tests to obtain more
persuasive evidence to assess the misstatement
,5. Ask management to adjust
• (Unless already asked)
Management should be requested to adjust these errors to correct their records
6. If management won’t adjust, what’s the impact on your opinion?
• Material, but not pervasive = Except for If management won’t adjust, we may issue a qualified
opinion, since the misstatement is material, but not pervasive
• Material and pervasive = Adverse
• Material, pervasive, no evidence or scope limita on = Disclaimer
• Emphasis of ma er?
In aggregate / accumulated / total misstatements:
1. Is there an underlying trend?
• IFRS non-compliance? Two of the three misstatements arise as a result of IFRS non-compliance.
This seems to indicate that management is not comfortable with the
requirements of IFRS. This needs to be noted for further audit procedures
• Legal issues?
• Incompetence?
• Fraud?
2. Cumula ve effect?
• Quan ta vely material?
o Add up the overs-and-unders
The misstatements have a cumula ve effect as follows:
• Assets: R40k overstated – 10k understated +60k overstated
• Liabili es:
• Equity:
• Profit:
Although the individual misstatements weren’t material, the cumula ve effect of
the misstatements equates to a R90k misstatement, which is above materiality of
R70K, thus assets are materially misstated
• Management needs to be requested to adjust these
• Pervasive? Although the cumula ve misstatements are material, they do not impact the
overall understanding of the financial posi on of the company, thus the
misstatements are not pervasive
, • Mul ple misstatements affec ng the same account / line item on the AFS, or element
of the AFS?
3. Impact on opinion if management won’t adjust
• Material, but not pervasive = Except for
• Material and pervasive = Adverse
• Material, pervasive, no evidence or scope limita on = Disclaimer
• Emphasis of ma er?
ISA 450 – Evalua on of Misstatements Iden fied during the Audit
How to answer Evalua on ques ons
Basic Structure for Evalua on ques ons – In red as the example in how to answer the ques on.
The blue parts is what is means, an explana on,
For every single misstatement, individually:
1. What’s the misstatement?
• What does IFRS say they should do.
• What have they done
• What is overstated / understated / disclosed incorrectly?
1.1 Let’s look at provisions, IFRS requires the en ty account for provisions if it is likely that it will
result in an ou low of benefits.
1.2 The lawyer indicated that there is a 60% chance that tell lose the court case.
1.3 A provision should be raised, but the en ty did not account for a provision.
1.4 Liabili es (Specifically provisions) are understated by R3Million.
(For this type of ques on, let the scenario guide you. Make sure you know where the transac on is
disclosed. Like is it an Asset, Liability, Equity, Income or Expense. What will be affected.)
2. What type of misstatement is it?
• Factual? Misstatements where there is no doubt and where suppor ng documenta on is available.
• Judgemental? Differences arising from the judgements of management concerning accoun ng
entries.
• Projected? The auditors best es mate of misstatements in popula ons, usually derived from
sampling.
o Actual
o Extrapolated
2.1 Factual? The invoice states that R10K is payable, while the company has only raised R2K. This the
evidence suppor ng the misstatement is factual.
2.2 Judgemental? We es mated that the Allowance for credit loss should be R140K, while
management have only raised R30K. This is a judgemental misstatement as the accurate amount will
not be known un l the future happens. No one can perfectly correctly es mate this amount.
2.3 When a ended the stock count, our test counts indicated that inventory was overstated by R40K.
The R40k is a factual misstatement because we tested this inventory ourselves. We only tested 10%
of the inventory on hand, thus we believe that if the
other 90% of inventory has the same issues, the rest of the inventory would
,be misstated by R360k (This is an extrapolated misstatement)
(Projected errors have two types of misstatements. The stuff you tested in
your sample, which you have proper evidence about. And then the stuff you didn’t
test. The rest of the popula on. You didn’t actually check the rest of it, so the level of
‘evidence’ you have for that is lower)
3. Is it material?
• Quanta vely? The misstatement of R400k is above the materiality that was set at R300k thus
this is quan ta vely material.
• Qualita vely? The misstatement relates to a legal requirement laid down in the Companies Act,
thus it’s material by nature. Regardless of the amount, users would be influenced
by legal non-compliance
• Pervasive? The misstatement relates to the Rental Paid account. This doesn’t change the
impression of the financial posi on or the financial performance as a whole, thus
the misstatement may be material, but it is not pervasive or The misstatement relates to the net
profit a er tax, and impacts the overall
impression of the financial performance of the company, thus the misstatement
is material and pervasive
• Not material?
o Add to schedule of overs-and-unders
The misstatement of R40k is below materiality of R200k and is thus immaterial.
• This should be added to our schedule of overs and unders, and considering
in combina on with the other misstatements as the audit progresses
4. Do you need more evidence?
• Bigger sample? The extrapolated error indicates that supplier invoices that weren’t tested are
misstated by R50k. In order to obtain sufficient evidence, we should expand
our sample and test more invoices to ensure that our projec on of the
misstatement is accurate
• More persuasive evidence?
Our assessment of the allowance for credit losses is based on our es mates. As
a material misstatement, we need to perform more tests to obtain more
persuasive evidence to assess the misstatement
,5. Ask management to adjust
• (Unless already asked)
Management should be requested to adjust these errors to correct their records
6. If management won’t adjust, what’s the impact on your opinion?
• Material, but not pervasive = Except for If management won’t adjust, we may issue a qualified
opinion, since the misstatement is material, but not pervasive
• Material and pervasive = Adverse
• Material, pervasive, no evidence or scope limita on = Disclaimer
• Emphasis of ma er?
In aggregate / accumulated / total misstatements:
1. Is there an underlying trend?
• IFRS non-compliance? Two of the three misstatements arise as a result of IFRS non-compliance.
This seems to indicate that management is not comfortable with the
requirements of IFRS. This needs to be noted for further audit procedures
• Legal issues?
• Incompetence?
• Fraud?
2. Cumula ve effect?
• Quan ta vely material?
o Add up the overs-and-unders
The misstatements have a cumula ve effect as follows:
• Assets: R40k overstated – 10k understated +60k overstated
• Liabili es:
• Equity:
• Profit:
Although the individual misstatements weren’t material, the cumula ve effect of
the misstatements equates to a R90k misstatement, which is above materiality of
R70K, thus assets are materially misstated
• Management needs to be requested to adjust these
• Pervasive? Although the cumula ve misstatements are material, they do not impact the
overall understanding of the financial posi on of the company, thus the
misstatements are not pervasive
, • Mul ple misstatements affec ng the same account / line item on the AFS, or element
of the AFS?
3. Impact on opinion if management won’t adjust
• Material, but not pervasive = Except for
• Material and pervasive = Adverse
• Material, pervasive, no evidence or scope limita on = Disclaimer
• Emphasis of ma er?
