Auditor's Interactive Guide
Evaluating Misstatements & Internal Control Deficiencies
Impact Analysis of Uncorrected Misstatements
This section allows you to interactively see how individual misstatements aggregate and affect key financial statement areas. The auditor must evaluate the effect of all uncorrected misstatements, both individually and in aggregate, to determine if the financial statements as a whole are materially misstated. Toggle the checkboxes to see the cumulative impact.
Toggle Misstatements:
Considering Qualitative Factors
A misstatement that is not quantitatively material may still be material due to its nature. Professional judgment is critical. Misstatements are more likely to be considered material if they exhibit certain qualitative characteristics. Click on each card below to learn more about these important considerations.
Communication with Management
The auditor must communicate all accumulated misstatements to the appropriate level of management on a timely basis and request correction. Management's response is a key part of the audit evidence and must be documented carefully. Below is a sample summary and a simulation of the auditor's required documentation based on management's decision.
Summary of Possible Misstatements
| Type of Misstatement | Amount |
|---|---|
| Unrecorded Liabilities | $80,000 |
| Overstated Allowance for Uncollectible Accounts | ($45,000) |
| Difference between Inventory Count and Ledger | $60,000 |
| Net Effect on Pre-Tax Income | $95,000 |
Scenario & Documentation
Scenario: You present this summary to management. They agree to correct the inventory difference but refuse to correct the other two items, arguing they are individually immaterial.
Auditor's Documentation Requirement:
Workpaper C-5: Summary of Uncorrected Misstatements
The following misstatements remain uncorrected:
- Unrecorded Liabilities: $80,000
- Overstated Allowance: ($45,000)
Conclusion: Management has declined to correct the above items. We have evaluated the aggregate effect of these uncorrected misstatements ($35,000 impact on pre-tax income) and considered relevant qualitative factors. We conclude the uncorrected misstatements, in aggregate, do not cause the financial statements to be materially misstated. This conclusion was formed after considering management's reasoning and the risk of additional undetected misstatements.
Adjusting Journal Entry Challenge
Correcting misstatements often requires proposing adjusting journal entries. Test your knowledge with the following scenarios based on common audit findings. This exercise will help you practice identifying the correct accounts and the direction of the adjustment (debit or credit).
