Misstatement in Audit
Definition
In an audit, misstatement is a difference between actual financial statement items prepared by the client and those required by applicable accounting standards. In this case, misstatement arises from the transactions or balances of the company’s accounts which is not in accordance with applicable accounting standards.
Likewise, the misstatement makes the financial statements not present fairly. Misstatement can be the result of error or fraud.
Auditors usually accumulate the misstatements during their audit work and evaluate the materiality and severity of those misstatements in order to make proposed audit adjustments to the client’s management and audit committee. Auditors need to evaluate whether small errors or omissions adding up exceed the materiality level.
Material misstatement is usually required adjustments before auditors can give a clean opinion in the audit report. On the other hand, misstatements that are trivial, individually and aggregate, are usually ignored as they do not have a material impact on the financial statements as a whole.
Material Misstatement in Audit
Material misstatement is the misstatement that could affect the economic decision making of the users of financial statements. The main purpose of the financial audit by the independent auditors is to evaluate whether the financial statements contain any material misstatement that may prevent them from a fair presentation.
In the case that material misstatement is not rectified by the client’s management, auditors are unlikely to give an unqualified audit opinion in the report. As a result, auditors may need to modify their opinion based on the severity of the material misstatement found in the client’s account. Modified audit opinion that auditors may give in this case can be qualified opinion, adverse opinion, or disclaimer of opinion.
3 Types of Misstatement in Audit
Three types of misstatement include factual misstatement, judgmental misstatements, and projected misstatements.
| Types of Misstatement | |
|---|---|
| Factual misstatement | Factual misstatement is a misstatement that occurs on the client’s accounts balances or transactions of which there is no doubt. In general, supporting documents are usually available for auditors to review for factual misstatements.
Examples of typical factual misstatements include wrong debit or credit entry, incorrect amount of transactions or balances posted into the client’s accounting system, wrong classification of accounts and missing of disclosure, etc. |
| Judgmental misstatement | Judgmental misstatement is a misstatement that occurs in an audit due to the differences between the client’s judgment and auditor’s judgment. These include the accounting estimate and accounting policies on judgmental areas, where auditors consider inappropriate.
Examples of judgmental misstatements include unreasonable depreciation rate and inappropriate revaluation amount of fixed assets, etc. |
| Projected misstatement | Projected misstatements are the auditors’ best estimate of misstatements in populations that arise from the misstatements that auditors have identified in audit samples and make a projection to the entire populations which the samples were drawn from.
Auditors usually make an evaluation of projected misstatements to consider whether further audit testing is appropriate. |