ISA 450

ISA 450 – Objective

The objective of the auditor is to evaluate:

  1. The effect of identified misstatements on the audit; and
  2. The effect of uncorrected misstatements, if any, on the financial statements (Income statement, Balance sheet, Cash Flow statement etc.).

ISA 450 – Definitions

For purposes of the ISAs, the following terms have the meanings attributed below:

Misstatement:

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.

When the auditor expresses an opinion on whether the financial statements are presented fairly, in all material respects, or give a true and fair view, misstatements also include those adjustments of amounts, classifications, presentation, or disclosures that, in the auditor’s judgment, are necessary for the financial statements to be presented fairly, in all material respects, or to give a true and fair view.

Uncorrected misstatements:

Misstatements that the auditor has accumulated during the audit and that have not been corrected.

ISA 450 – Requirements:

Accumulation of Identified Misstatements:
1. The auditor shall accumulate misstatements identified during the audit, other than those that are clearly trivial.

Consideration of Identified Misstatements as the Audit Progresses

2. The auditor shall determine whether the overall audit strategy and audit plan need to be revised if:

  1. The nature of identified misstatements and the circumstances of their occurrence indicate that other misstatements may exist that, when aggregated with misstatements accumulated during the audit, could be material; or
  2. The aggregate of misstatements accumulated during the audit approaches materiality determined in accordance with ISA 320.

3. If, at the auditor’s request, management has examined a class of transactions, account balance or disclosure and corrected misstatements that were detected, the auditor shall perform additional audit procedures to determine whether misstatements remain.

Communication and Correction of Misstatements

4. The auditor shall communicate on a timely basis all misstatements accumulated during the audit with the appropriate level of management, unless prohibited by law or regulation. The auditor shall request management to correct those misstatements.
5. If management refuses to correct some or all of the misstatements communicated by the auditor, the auditor shall obtain an understanding of management’s reasons for not making the corrections and shall take that understanding into account when evaluating whether the financial statements as a whole are free from material misstatement.
Evaluating the Effect of Uncorrected Misstatements
6. Prior to evaluating the effect of uncorrected misstatements, the auditor shall reassess materiality determined in accordance with ISA 320 to confirm whether it remains appropriate in the context of the entity’s actual financial results.
7. The auditor shall determine whether uncorrected misstatements are material, individually or in aggregate. In making this determination, the auditor shall consider:

  1. The size and nature of the misstatements, both in relation to particular classes of transactions, account balances or disclosures and the financial statements as a whole, and the particular circumstances of their occurrence; and
  2. The effect of uncorrected misstatements related to prior periods on the relevant classes of transactions, account balances or disclosures, and the financial statements as a whole.

Communication with Those Charged with Governance:

8. The auditor shall communicate with those charged with governance uncorrected misstatements and the effect that they, individually or in aggregate, may have on the opinion in the auditor’s report, unless prohibited by law or regulation. The auditor’s communication shall identify material uncorrected misstatements individually. The auditor shall request that uncorrected misstatements be corrected.
9. The auditor shall also communicate with those charged with governance the effect of uncorrected misstatements related to prior periods on the relevant classes of transactions, account balances or disclosures, and the financial statements as a whole.
Written Representations
10. The auditor shall request a written representation from management and, where appropriate, those charged with governance whether they believe the effects of uncorrected misstatements are immaterial, individually and in aggregate, to the financial statements as a whole. A summary of such items shall be included in or attached to the written representation.

ISA 450 – Documentation

The auditor shall include in the audit documentation:

  1. The amount below which misstatements would be regarded as clearly trivial (paragraph 1 in requirements);
  2. All misstatements accumulated during the audit and whether they have been corrected (paragraphs 1, 4 and 8); and
  3. The auditor’s conclusion as to whether uncorrected misstatements are material, individually or in aggregate, and the basis for that conclusion (paragraph 7).

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