SA 450 Revision Lecture

Introduction

• Focus on SA 450: Evaluation of Misstatements Identified During the Audit
• Important prerequisites: SA 320 (Materiality) and SA 530 (Audit Sampling)

Key Points from SA 450

Identifying Misstatements

• During the audit, you find misstatements (errors).
• Concern with material misstatements, not trivial ones.
• Evaluate misstatements in aggregate, not individually.

Handling Small Errors

• Auditor uses judgment to ignore clearly trivial errors (under a certain percentage threshold).
• Aggregate remaining misstatements for evaluation.

Projected and Accumulated Misstatements

• Two cases:
  1. Case A: Projected misstatements based on nature and cause, added to accumulated errors.
  2. Case B: Only accumulated misstatements considered.
• Materiality of total misstatements evaluated in both cases.

Steps for Evaluating Misstatements

1. Investigate the nature and cause of misstatements.
2. Accumulate misstatements: Evaluate if material when aggregated.
3. Discuss with management to understand reasons and request adjustments.
4. Perform additional audit procedures post-adjustment to ensure no remaining misstatements.

Management Interaction

• Request management to analyze cause of misstatements.
• Calculate actual misstatements and make necessary adjustments.
• Auditor needs to follow up to ensure corrections are made.
• If management doesn't correct misstatements, understand their reasons.
• Uncorrected misstatements may indicate management bias.

Communication with Those Charged with Governance (TCWG)

• Communicate uncorrected material misstatements with TCWG.
• Provide summary of misstatements and potential impact on financial statements.
• Request TCWG for corrections, threaten to modify audit opinion if ignored.
• Obtain written representation from both management and TCWG if misstatements are not material.

Final Steps: Documentation

• Document all misstatements identified and accumulated during the audit.
• Record your conclusions and basis for those conclusions.
• Emphasize the importance of discipline and consistent effort in auditing and studying.

Conclusion

• Keep studying diligently and positively.
• Ensure thorough documentation and communication during the audit process.

SA 450 Revision Complete!