4.6 Evaluating Misstatements, Summary of Audit Differences & Escalation

Evaluating Misstatements, Summary of Audit Differences & Escalation

1. Accumulating Identified Misstatements (ISA 450)

Under ISA 450 (Evaluation of Misstatements Identified During the Audit), the auditor has a responsibility to accumulate all misstatements identified during the audit engagement, other than those that are clearly trivial.

The "Clearly Trivial" Threshold

Items that are clearly trivial are matters that are wholly inconsequential, whether taken individually or in aggregate, and whether judged by criteria of size, nature, or circumstances. The auditor designates a specific numerical threshold (typically 3% to 5% of overall materiality) below which misstatements are deemed clearly trivial and do not need to be accumulated on the schedule of unadjusted errors.

Three Categories of Misstatements (ISA 450.A3)

1. Factual Misstatements: Misstatements about which there is no doubt (e.g., an arithmetic error on a supplier invoice, incorrect tax rate application, or recorded cash that does not exist).
2. Judgmental Misstatements: Differences arising from the judgments of management including concerning accounting estimates that the auditor considers unreasonable, or the selection or application of accounting policies that the auditor considers inappropriate.
3. Projected Misstatements: The auditor's best estimate of misstatements in populations, involving the projection of misstatements identified in audit samples to the entire population from which the samples were drawn (under ISA 530).

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2. Summary of Audit Differences (SAD) / Schedule of Unadjusted Errors

The auditor maintains a cumulative working paper known as the Summary of Audit Differences (SAD) or Schedule of Unadjusted Misstatements. This document aggregates all uncorrected misstatements (excluding clearly trivial items) across all account balances and transaction streams.

Evaluating Aggregate Uncorrected Misstatements

Before concluding the audit, the auditor must re-evaluate performance materiality and determine whether uncorrected misstatements, individually or in aggregate, are material to the financial statements as a whole.

Total Uncorrected Misstatements = Factual + Judgmental + Projected Misstatements + Prior Period Uncorrected Misstatements

If the aggregate of uncorrected misstatements approaches or exceeds overall materiality, the auditor must:

1. Request management to examine transaction streams and correct the misstatements.
2. Perform additional audit procedures to reduce remaining audit risk.
3. Re-assess the overall audit strategy and risk evaluation.

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3. Communication with TCWG (ISA 260 & ISA 450)

Under ISA 260 (Communication with Those Charged with Governance) and ISA 450, the auditor must communicate all uncorrected misstatements accumulated during the audit to Those Charged with Governance (such as the Board Audit Committee) and request that they be corrected.

The auditor must also request a written representation from management and TCWG (under ISA 580) confirming whether they believe the effects of uncorrected misstatements are immaterial, individually and in aggregate, to the financial statements as a whole. A summary of uncorrected items must be attached to the representation letter.

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4. Audit Opinion Decision Matrix (ISA 700 / 705)

When uncorrected misstatements remain in the financial statements, the auditor evaluates their financial magnitude and pervasiveness to determine the appropriate audit opinion modification under ISA 705 (Modifications to the Opinion in the Independent Auditor's Report).

Pervasive effects are those that are not confined to specific elements, represent a substantial proportion of financial statements, or are fundamental to user understanding.

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5. Escalation Responsibilities & Statutory Reporting in Bangladesh

In Bangladesh, an auditor's duties extend beyond communicating with company management. When encountering material misstatements, fraud, or non-compliance with laws, auditors must navigate strict statutory escalation mechanisms:

1. Escalation to the Audit Committee / Board

Under the BSEC Corporate Governance Code 2018, auditors of listed entities must report any material internal control breakdown, suspect financial irregularity, or corporate governance breach directly to the Audit Committee and Board of Directors.

2. Statutory Reporting to the Financial Reporting Council (FRC)

Under the Financial Reporting Act, 2015 (FRA), statutory auditors of Public Interest Entities (PIEs) must be enlisted with the FRC and fall within its monitoring, audit practice review and enforcement jurisdiction, which carries an obligation to report material financial irregularities, fraudulent accounting practices, or non-compliance with Financial Reporting Standards directly to the Financial Reporting Council (FRC).

3. Statutory Provisions under Companies Act 1994 & Banking Regulators

• Under section 213 of the Companies Act 1994, statutory auditors must report to the members on the accounts examined, including whether the balance sheet gives a true and fair view of the state of the company's affairs.
• For banking companies, under the Bank Company Act, 1991, auditors must directly report material capital deficiencies, fraudulent loan classification, or statutory violations to Bangladesh Bank.

Confidentiality vs. Public Interest Duty

While the ICAB Code of Ethics mandates strict professional confidentiality, it explicitly specifies that statutory reporting obligations mandated by law (such as the FRA 2015 or Anti-Money Laundering legislation) override professional confidentiality rules. Reporting true statutory violations to regulatory authorities in good faith does not constitute a breach of ethics.