Misstatements in the financial statements can result from errors or fraud and may consist of any of the following:An inaccuracy in gathering or processing data from which financial statements are prepared.A difference between the amount, classification, or presentation of a reported financial statement element, account, or item and the way that it should have been reflected under GAAP.The omission of a financial statement element, account, or item.A financial statement disclosure that is not presented in conformity with GAAP.The omission of information required to be disclosed in conformity with GAAP.An incorrect accounting estimate due to oversight, misrepresentation of facts, or fraud.Management’s judgments concerning an accounting estimate or the selection or application of accounting policies that the auditor may consider unreasonable or inappropriate. What steps would you take if you discover 1 of the above issues in a routine audit?Would you take the same steps if you discover all 7 issues above in a routine audit?

EXPLANATION:- A misstatement causes the financial statements to be not in accordance with the applicable financial reporting framework. The auditor should determine a materiality level for the financial statements as a whole for the purpose of:- determining the extent & nature of risk assessment procedures, identifying & assessing the risks of material misstatement; and determining the nature, timing and extent of further audit procedures. Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement. There is a possibility that some misstatements, of lesser amounts than the materiality level, could, in the aggregate, result in a material misstatement of the financial statements. Management is expected to correct the misstatements which are brought to their attention by the auditor. The auditor is required to determine whether uncorrected misstatements are material, individually or in aggregate. The auditor may discuss with those charged with governance the reasons for, and the implications of, a failure to correct misstatements, and possible implications in relation to future financial statements. ANSWER:- 1. If you discover 1 of the above issues in a routine audit all the above procedures are required to be incorporated into the audit routine. Should clearly fix the materiality level, verify if the effect of misstatement are trivial or tolerable, identifying if there is any possibility of hidden fraud ,Communicating the same with those who charged with governance to rectify the misstatement.2. If you discover all 7 issues above in a routine audit:- the auditor should revise the materiality levels in the event of becoming aware of information during the audit. If the auditor concludes that, based on new information, a lower materiality level than that initially determined is appropriate, the auditor may reconsiders the levels of tolerable error and suitability of the nature, timing and extent of audit procedures. The auditor cannot assume that a misstatement is an isolated occurrence. The auditor also considers whether misstatements reflect on the adequacy of the financial records maintained by the entity, are indicative of internal control weaknesses. The auditor should advise the management to correct all the misstatements, other than those that the auditor believes are clearly trivial. The auditor may also requests management to take action to reduce the estimated amount of likely misstatements.

Answered: Misstatements in the financial…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Misstatements in the financial statements can result from errors or fraud and may consist of any of the following:

An inaccuracy in gathering or processing data from which financial statements are prepared.
A difference between the amount, classification, or presentation of a reported financial statement element, account, or item and the way that it should have been reflected under GAAP.
The omission of a financial statement element, account, or item.
A financial statement disclosure that is not presented in conformity with GAAP.
The omission of information required to be disclosed in conformity with GAAP.
An incorrect accounting estimate due to oversight, misrepresentation of facts, or fraud.
Management’s judgments concerning an accounting estimate or the selection or application of accounting policies that the auditor may consider unreasonable or inappropriate.
What steps would you take if you discover 1 of the above issues in a routine audit?
Would you take the same steps if you discover all 7 issues above in a routine audit?

Process of recording, summarizing, and analyzing financial information to prepare financial statements, and making them available to stakeholders, thereby enabling them to make an informed decision about the company. Financial reporting is an extension of financial accounting that deals with the presentation of financial information in accordance with the requirements of prescribed accounting standards.

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