Misstatements are inappropriate data in the books of accounts or entirely wrong information. Hence it is an error.
Example: Recording personal expenditure in company books of accounts. That’s a Misstatement in the books, and it is improper recording of the transaction in the accounting.
Types of Misstatements
There are two types of Misstatements
- Detected Misstatements
- Undetected Misstatements
Table of contents
I) Detected Misstatements
Detected Misstatements can be of 2 types.
- Corrected Misstatements
- Uncorrected Misstatements
1) Corrected Misstatements
Misstatement is called Corrected Misstatements if its
- Brought to the notice of management by the auditor and
- Management corrects
Examples:
- Missing payment
- Wrong date of payment
- Payment posting in another vendor rather than the right vendor.
Also Read: Financial Frauds in US
2) Uncorrected Misstatements
These are quite opposite of the first one. If Management is unwilling to correct some or all of the misstatements, then those are uncorrected misstatements.
This scenario is not necessarily an indication of departure of applicable accounting standards or applicable laws. It can be due to immaterial nature of the amounts involved.
In that case, the auditor wants to know the Management’s reason for not changing the modifications and shall also analyze if financial statements are affected due to the uncorrected misstatements.
II) Undetected Misstatements
When auditors cannot find all the Misstatements (either Error or Omission), there might be some undetected ones. These are known as undetected misstatements.
Causes for Misstatements
Misstatements result in deviation of the financial statements from the applicable financial reporting framework. Those can be elevated from error or fraud and may comprise of
- Personnel Problems
- Insufficient knowledge of accounting
- Judgment Errors
- Cut-off or accrual errors
- Mechanical errors
- Inadequate control
- Follow-up
- Review Procedures
We will understand all these topics in detail:
Personnel Problems
Auditors should be conscious that personnel reasons can affect the reliability of financial statements. The auditor should consider, for example, reviewing the knowledge of accounting personnel in light of their existing responsibilities, the rate of income between accounting personnel, and the necessity for swapping terminated or vacationing employees. They might look at personnel factors as part of their systematic assessment of a client’s internal controls.
If they note significant personnel problems, it may require more testing of the exaggerated audit areas and procedures focused on specific transactions handled by new or inexpert personnel.
Insufficient Knowledge of Accounting
Hiring incompetent employees results in the inexperience of new employees, poorly-trained employees and too much time pressure on employees. This type of problem results in several errors in the accounts books, leading to many adjustments in an audit.
For example, appointing a fresher graduate as entity’s accountant for handling all book keeping, tax return and regulatory compliances. Then, audit team need to revisit the extent of testing of work performed such new accountant so that they can reduce the audit risk to acceptable level.
Judgment Errors
A lack of knowledge of accounting concepts and principles may cause errors. Auditors shall consider this issue while designing audit procedures.
Cut-off and Accrual Errors
The additional vital reason for the cause of errors was improper cut-off and accrual of accounts. Thus, the results specify that the traditional prominence placed on validating year-end balances by inspecting transaction cut-offs and accruals is correct.
Subsequently, many of these errors happened in small companies; auditors may want to conduct a balance sheet audit on these companies to make a point of substantive tests on year-end balances rather than analyses of ongoing controls. Audit team follows this type of approach in small companies.
Mechanical Errors
This type of error includes posting, coding support, and other errors. The audit course of action exactly intended to identify the presence of a subcategory of these mechanical errors, support, and other errors. Auditors may suggest that less time shall be dedicated to finding these relatively minor mechanical errors, mainly in large companies, whereas material errors of this type are infrequent.
Inadequate control
Inadequate controls are a result of unauthorized Payments for executives. They contributed to the unsuccessful detection of improper and unauthorized payments, which did not exactly record in the books of accounts.
Follow-up
Failing to follow up with the customer on reconciliation differences or failing to collect the overdue payments from the customers.
Conclusion
Following Auditing procedures results in the financial statements accurate and reliable. However, there might be some errors and misstatements detected during the auditing process.
Misstatements can be intentional or unintentional, and can include errors in calculations, omissions, misinterpretations of financial data, or even fraud. Auditors must be vigilant in their examination of financial records in order to identify any potential errors, and must take appropriate measures to correct them. Failure to identify and correct those errors can result in significant financial losses for the company being audited, as well as damage the reputation of the auditor. Thus, it is critical for auditors to be meticulous and thorough in their work to minimize any potential errors or misstatements that could impact the accuracy of financial statements.