Guide to Using International Standards on Auditing in - IFAC

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<strong>Guide</strong> <strong>to</strong> <strong>Using</strong> <strong>International</strong> <strong>Standards</strong> on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts
7.3 Nature of Misstatements
Misstatements may arise from a number of causes and can be based on the following:
• Size—the monetary amount involved (quantitative);
• Nature of the item (qualitative); and
• Circumstances surrounding the occurrence.
Exhibit 7.3-1
Typical
Misstatements
• Errors and fraud identified in the preparation of the financial statements;
• Departures from the applicable financial reporting framework;
• Fraud perpetrated by employees or management;
• Management error;
• Preparation of inaccurate or inappropriate estimates; or
• Inappropriate or incomplete descriptions of accounting policies or note
disclosures.
Materiality is not an absolute number. It represents a grey area between what is very likely not material and
what is very likely material. Consequently, the assessment of what is material is always a matter of professional
judgment.
In some situations, a matter well below the quantitative materiality level may be determined as material
based on the nature of the item or the circumstances related <strong>to</strong> the misstatement. For example, the
information that there are a number of transactions with related parties may be very significant <strong>to</strong> a person
making a decision based on the financial statements. Finally, a series of immaterial items may well become
material when aggregated <strong>to</strong>gether.
Exhibit 7.3-2
Extent of Misstatements
(Quantitative and qualitative)
The Subject
Matter Information
Reasonable
User
Misstatements
are
material
Decision would
be changed
or influenced
Materiality
threshold
Misstatements
are
immaterial
Decision would
not be changed
or influenced