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    Material Misstatements Audit

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    During the conduct of an audit, auditors may identify misstatements as a result of the completion of their substantive procedures. An important activity performed in the completion stages of the audit is considering the materiality of misstatements identified during the audit.


    a. What is an uncorrected misstatement? What is the auditors' responsibility for uncorrected misstatements during the completion stage of the audit engagement?

    b. How do auditors use the rollover method and iron curtain method to evaluate uncorrected misstatements?

    c. Assume that auditors have identified misstatements during the current audit that had a net impact of $ 100,000 on expenses and payables (both were understated). If the cumulative effect of prior uncorrected misstatements was $ 120,000 (overstatement of net income and understatement of liabilities) and materiality was $ 150,000, what would the auditors' conclusion be with respect to the misstatements under the rollover method and iron curtain method?

    d. Based on your response to (c), what adjustments (if any) would the auditors propose to the client's financial statements?

    e. What requirements do auditors have for communicating uncorrected misstatements identified during the audit engagement?

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    Solution Preview

    a) Uncorrected misstatements are the misstatements that the auditor has accumulated during the audit and have not been corrected. The misstatements may be between the amount, classification, presentation, or disclosure of financial statement item/amount that is required for the item to be presented fairly in accordance with the applicable financial reporting framework.

    During the completion stage of audit engagement, it is the responsibility of the auditor to communicate the uncorrected misstatements accumulated to the management and ask it to correct those misstatements. If the management does not correct the misstatements, the auditor should get the reasons for not making the corrections. During the completion stage, the auditor should reassess the materiality of to confirm whether it remains appropriate in the context of the entity's actual financial result. Next, the auditor should include the uncorrected misstatements in the audit documentation all the misstatements accumulated, ...

    Solution Summary

    The answer to this problem explains how material misstatement are treated by auditors. The references related to the answer are also included.