Audit Misstatements & Internal Control Deficiencies: Identify, Evaluate, Communicate
Overview: Finding and handling misstatements is at the heart of an audit. This guide covers how auditors identify, evaluate, and communicate misstatements — and how these link to internal control weaknesses and final reporting.
✅ Identifying Misstatements
- Accumulate all misstatements found during the audit except those that are clearly trivial.
- Clearly trivial ≠ immaterial: Trivial means inconsequential by size, nature, or circumstance. If uncertain, it’s not trivial.
- Set a threshold below which errors are trivial and do not require accumulation.
✅ Evaluating Misstatements
- Assess effects individually and in aggregate.
- Consider quantitative and qualitative factors. Small misstatements can be material if they affect trends, debt covenants, management compensation, or hide fraud.
- Include prior period misstatements when relevant.
- Watch for management bias: e.g., selective corrections, offsetting adjustments, or biased estimates.
📌 Communicating and Correcting Misstatements
- Communicate all accumulated misstatements to management timely and request corrections.
- If management refuses to correct, understand why, and assess the effect on the financial statements.
- Inform governance that uncorrected misstatements may impact future periods.
✅ Internal Control Deficiencies
• If a material misstatement would not have been detected by the client’s internal control, it signals a material weakness.
• However, a material weakness doesn’t always mean the FS are misstated.
• Evaluate misstatements for frequency, impact on other areas, and overall implications — adjust the audit risk model if needed.
✅ Sample Adjusting Journal Entries
Example: If AR and Sales are overstated:
Sales $XXX Accounts Receivable $XXX (To reduce overstated sales and AR.)
Example: Inventory omitted under periodic system:
Inventory $20,000 Cost of Goods Sold $20,000 (To correct for off-site inventory omitted at year-end.)
✅ Documentation Requirements
- Clearly record the trivial threshold and all misstatements found.
- Document whether uncorrected misstatements are material and why.
- Summarize effect on ratios, trends, covenants, and future periods.
🔗 Helpful References
👉 Spot, fix, and document your misstatements like a pro!
