Evaluating the Effect of Uncorrected MisEvaluating the Effect of Uncorrected Misstatements

Evaluating the Effect of Uncorrected Misstatements

27 In evaluating the fair presentation of the financial report in accordance with an applicable financial reporting framework, the auditor shall assess whether the uncorrected misstatements that have been identified during the audit are material individually or in aggregate.

Individual Misstatements

28 Under paragraph 27 of this Auditing Standard, the auditor, when reviewing individual misstatements, needs to assess quantitative and qualitative materiality. The auditor ordinarily considers, for example, whether the item:

• is capable of precise measurement or whether it arises from an estimate and if so, the degree of imprecision inherent in the estimate;
• masks a change in earnings or other trends;
• concerns a segment or other portion of the entity’s business that has been identified as playing a significant role in the entity’s operations or profitability;
• affects compliance with regulatory requirements;
• affects compliance with loan covenants or other contractual requirements;
• has the effect of increasing management remuneration, for example, to satisfy the requirements for the award of bonuses or other incentives;
• involves concealment of an unlawful transaction;
• raises any other issues relating to the entity’s business or industry; and
• may affect the decisions of users in response to certain types of disclosures.

29 Before aggregating the quantitative amounts of remaining uncorrected misstatements, under paragraph 27 of this Auditing Standard, the auditor needs to consider each misstatement separately:

(a) in relation to individual line item amounts, subtotals or totals in the financial report to assess whether a material misstatement in any of these items results in a material misstatement in the financial report taken as a whole;

(b) to assess whether it is appropriate to offset certain items. For example, the auditor considers whether it is appropriate to aggregate a misstatement relating to an estimated amount with an item capable of precise measurement, and the impact of the misstatements on disclosures in the financial report; and

(c) to assess the impact of a misstatement from prior periods and any cumulative effect becoming material in the current or subsequent reporting period. These types of misstatements may reflect on the adequacy of the financial records maintained by the entity, or may be indicative of internal control weaknesses.

30 In relation to individual uncorrected misstatements, under paragraph 27 of this Auditing Standard, the auditor needs to:

(a) assess whether the qualitative factors are not material and the individual item can be aggregated with other misstatements with no further action regarding the individual misstatement; or