The Audit Experience AS/2

Performance SupportWhat Should You Do with

Misstatements Found
The information in this performance support is provided to help you identify what a misstatement is, what you
should do when you find a misstatement (i.e., how to determine the exact misstatement and how to document the
misstatement), and what happens when misstatements are found on an audit (e.g., how all misstatements are
accumulated).
This performance support will cover the following topics (click on a link to go to the topic):

WHAT IS A MISSTATEMENT?

WHAT SHOULD YOU DO WHEN YOU FIND A MISSTATEMENT?

Step 1: Identify the misstatement

Step 2: Assess the misstatement

Step 3: Accumulate the misstatements

WHAT HAPPENS TO THE MISSTATEMENTS ONCE THEY HAVE BEEN ACCUMULATED?

WHAT IS A MISSTATEMENT?
During an audit, we often find misstatements. A misstatement is a difference between the amount, classification,
presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or
disclosure that is required for the item to be in accordance with the applicable financial reporting framework.
Misstatements can arise from error or fraud.
During the course of our audit work, we often find misstatements due to error. An error is an unintentional
misstatement in the financial statements, including the omission of an amount or disclosure. Examples of
misstatements are posting errors (e.g., recording a prepayment into intercompany accounts receivable), transposition
errors (e.g., inputting 6,900 instead of 9,600), or deliberate errors, which is fraud.
These misstatements may be trivial or material; few, or many. The trivial misstatements are matters that are clearly
inconsequential, whether taken individually or in aggregate and whether judged by any criteria of size, nature or
circumstances. We need to be satisfied that our audit work has been planned and performed so that we address the
risks of material misstatement and that any material errors will be found, thus reducing the risk that a DTTL member
firm issues the wrong audit opinion.
This performance support covers what you should do when you find a misstatement during your audit work.

WHAT SHOULD YOU DO WHEN YOU FIND A MISSTATEMENT?

Step 1: Identify the misstatement
First, identify any misstatements in the audit testing you are performing.
For example: the entity bank reconciliation shows the cash balance in the general ledger balance as 100,000, but

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the general ledger balance per the trial balance is 1,000,000. One of these entries is a misstatement and you would
need to bring this to the entitys attention and ask them for audit evidence as to which entry is correct.
There are four types of misstatements that you may come across.

1) Factual Misstatements
2) Judgmental Misstatements
3) Projected Misstatements
4) Substantive Analytical Procedures (SAP) Misstatements

Factual misstatements are misstatements about which there is no doubt.

o

Judgmental misstatements are differences arising from the judgments of management concerning
accounting estimates that the auditor considers unreasonable, or the selection or application of accounting
policies that the auditor considers inappropriate.
o

Continuing with the inventory example, the factual misstatement of 5,000 would be projected across
the inventory population to determine the projected misstatement if audit sampling was used.

SAP Misstatements are differences detected using SAP for which the auditor is unable to or has elected
not to obtain, corroborate, and quantify explanations for the difference between the auditors expectation
and the recorded amount that exceeds the threshold amount.
o

For example, in addressing the risk of material misstatement regarding impairment for fixed assets,
management has made a presumption regarding the future that we find unreasonable, thus resulting in
a judgmental misstatement in the impairment provision.

Projected misstatements are the auditors 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.
o

For example, in addressing the risk of material misstatement for inventory for the accuracy assertion
by performing audit procedures, you find that a recent purchase of inventory should have been
recorded as 15,000 but, in fact, was recorded as 10,000. Consequently, there is a factual misstatement
of 5,000.

For example, when addressing the risk of material misstatements regarding depreciation of fixed assets
the auditor has calculated an expected value of the depreciation for the year. The difference is above
the threshold and the auditor is unable to obtain sufficient audit evidence to explain the difference, thus
resulting in a SAP misstatement.

As soon as you find a misstatement, you should bring it to the field seniors attention, either directly or by
highlighting it in the working paper. Every field senior will have a different preference and, therefore,
should be asked for guidance on this at the start of the audit.

For further information, refer to the Audit Approach Manual (AAM) Topic G145 Understand the Nature and Cause
of Deviations and Misstatements, G155 Accumulation of Identified Misstatements.

Step 2: Assess the misstatement

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Once you have identified the misstatement, you then need to investigate the nature and cause of any deviations or
misstatements identified and evaluate their possible effect on the purpose of the audit procedure and on other areas
of audit.

The misstatement is evaluated individually to assess why it occurred or how it occurred.

For example, a misstatement of 5,000 was identified while addressing risk of material misstatement for
inventory since a purchase of inventory was recorded as 10,000 instead of 15,000, as per the purchase
invoice. You would speak to entity personnel about it to find out why it was recorded for only 10,000.
Perhaps it was a typing error, perhaps something happened with the system, perhaps it was intentionally
done (which may not be known to the entity personnel you are speaking with).

The assessment of the misstatements nature and cause helps you to ascertain the effect or implication of
the misstatement on the audit procedures you are performing and on the audit.
For example, if the 5,000 misstatement in inventory was a typing error, then we may not be as concerned
(depending on the business of the entity and whether other typing errors were found). Whereas, if the
misstatement was due to a system crash, then we would wonder if there are other misstatements we have
not yet found and what other account balances, classes of transactions or disclosures were affected by the
crash. Does this cause us to question the controls in place and perhaps our initial risk assessment that
may result in additional risks that need to be addressed?

As stated earlier, when you find a misstatement speak to your field senior about it to determine who best to
speak with about it and on the results of your discussion, so that the field senior can assess the impact of the
misstatement on the audit.

For further information, refer to the AAM Topic G145 Understand the Nature and Cause of Deviations and
Misstatements.

Step 3: Accumulate the misstatements

Once you have evaluated the nature and cause of the misstatement, then you need to accumulate misstatements
identified, other than those that are clearly trivial. It is useful to distinguish whether misstatements are, factual
misstatements, judgmental misstatements, projected misstatements, or SAP misstatements. Misstatements that
exceed the clearly trivial threshold and / or are considered qualitatively significant will be posted in working paper
2340 Evaluation of Misstatements and Disclosures. The Evaluations of Misstatements and Disclosures working
paper is where the misstatements found during the audit are accumulated so that an assessment can be made by the
field senior or audit manager if enough work was completed to address the risks of material misstatements or to
determine if the financial statements are materially misstated.

Is the misstatement over the clearly trivial threshold?

All misstatements over the clearly trivial threshold are posted in working paper 2340 Evaluation of
Misstatements and Disclosures. The clearly trivial threshold is set by the engagement partner, and is
usually an amount up to five percent of materiality. We however also need to evaluate if the misstatement
is qualitatively significant. If the misstatement is determined to be qualitatively significant, it always needs
to be posted in the above noted working papers, irrespective of the quantitative amount that might be below
the clearly trivial threshold.
For example, if the clearly trivial threshold was 2,000 then the factual misstatement of 5,000 found in

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the inventory audit testing would be posted on the Evaluation of Misstatements and Disclosure
working paper.
If the clearly trivial threshold was 10,000 then the factual misstatement may still be posted on the
Evaluation of Misstatements and Disclosure working paper. Remember, in the projected misstatement
example above, we said that the factual misstatement would be projected across the inventory balance
to determine the projected misstatement if it was found in an audit sample. Since the misstatement was
found as part of an audit sample and doing the projection is part of the same audit procedure, you
would compare the factual misstatement of 5,000 plus the projected misstatement determined from the
projection to the clearly trivial threshold. If the total of these is less than clearly trivial misstatements
and is not considered a qualitative misstatement then it would not be posted on the Evaluation of
Misstatements and Disclosure working paper.

Has the misstatement been corrected?

Misstatements that have not been corrected by the entity are posted to the Evaluation of Misstatements and
Disclosure working paper.

If the misstatement was found by the entity and they brought it to our attention, then it is not posted on the
Evaluation of Misstatements and Disclosures working paper, provided the entity corrected it. If they have
not corrected it, then it is to be posted.

If the misstatement was detected by us, then we post it on the Evaluation of Misstatements and Disclosure
working paper even if it was subsequently corrected by the entity. If it was subsequently corrected, then
this is noted in the Evaluation of Misstatements and Disclosure working paper.

Your field senior will determine what is posted and what is not.

Have you indicated the misstatements found in your working papers?

If you have determined that the misstatement is greater than the clearly trivial threshold and is to be posted
on the Evaluation of Misstatements and Disclosure workbook, you should indicate all misstatements found
and the proposed entries in the related Model Audit Program (MAP). Your field senior will post these
misstatements to the Evaluation of Misstatements and Disclosures working paper, which is typically
located in working paper 2340 of the audit file.

Each misstatement will have a double entry journal proposed to remove the misstatement; this is a
proposed audit adjustment to correct the financial statements. You should think about the double entry the
entity made that resulted in the misstatement, as this will help you to come up with the proposed entry to
correct the misstatement.

For example, the entity recorded the purchase of inventory as 10,000 instead of 15,000. If, after our
discussions with entity and assessment of the misstatement, you determined it should have been recorded at
15,000 then you would propose an entry to correct this misstatement as follows:
o

Debit: Inventory

5,000

Credit: Accounts Payable

5,000

This proposed audit adjustment would be posted by the field senior to working paper 2340 Evaluation of
Misstatements and Disclosures.

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For further information, refer to the AAM Topic G155 Accumulation of Identified Misstatements, 7210
Evaluate the Overall Scope of our Audit, and 7220 Evaluate the Effect of Uncorrected Misstatements on the
Financial Statements.

WHAT HAPPENS TO THE MISSTATEMENTS ONCE THEY HAVE BEEN

ACCUMULATED?

At the end of the audit, the Evaluation of Misstatements and Disclosures (as typically summarized in
working paper 2340) will be reviewed and discussed with the entity to determine whether the overall audit
scope is appropriate given the misstatements identified, and which proposed audit adjustments will be made
to the financial statements.

If a proposed adjustment is agreed to be corrected by the entity then the adjusting entry will be removed
from working paper 2340 as it is now included within the financial statements via the updated trial balance.

The adjustment will flow through the trial balance, and then the leadsheets will be updated for the
adjustments made.

The audit manager or audit engagement partner will conclude on the remaining proposed audit adjustments
on the Evaluation of Misstatements and Disclosures, working paper 2340 and on the scope of the audit.
You will learn more about this as you progress in your career with Deloitte.

For further information, refer to the AAM Topic 7210 Evaluate the Overall Scope of our Audit, 7220
Evaluate the Effect of Uncorrected Misstatements on the Financial Statements, 8340 Communicate with
those Charged with Governance and Global Technical Library Guide- from Identification to Overall
Evaluation- December 2010.

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The Audit Experience AS/2

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The Audit Experience AS/2

Note that this performance support does not replace the AAM. It should be read in conjunction
with the applicable AAM topics, as the manual states the requirements of our audit approach and
provides further guidance.

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