Question

R10.3 Assume an auditor finds total errors of $25, 300 in a sample of sales invoices. Why is it not appropriate to conclude that sales are misstated by $25, 300?

Answer 1

It would not be appropriate to conclude that the sales are misstated by $ 25,300 for the following reasons :

- Materiality aspect has to be applied before concluding on a particular area or transaction.

- If the Auditor concludes in such circumstances , his audit report will contain material misstatement , which can cause to have Investigated by the Accounting Body of that Country.

- The Auditor has to quantify the risk of material misstatement , where financial statement of an organization are misstated to the extent of a material degree.

- This risk is assessed by the Auditor while taking decision about the state of accounts.

- This risk is further bifurcated into Inherent risk and control risk.

- Inherent risk is there when there is error or omission because of the poor Internal controls , while Control risk can be defined as the probability of getting the financial statements misstated , materially. Generally, it is because inadequate Internal controls.

- This would be called material misstatement and would represent misleading information about the company and which can result into heavy losses to the Company .

- Moreover, the reputation of the Auditing Agency shall also be on stake if the Audit report includes any such misstatement.

- One sample may not be enough to conclude. It may be error in one Invoice or in more Invoices

- If sampling method has been chosen for Auditing , the sample size should be enough to represent the Population. In this case, it seems that the Auditor finding it sufficient to conclude the whole Sales , which doesn’t seems to be correct view.

- If he has found errors in one Invoice, he must check more Invoices to see the materiality aspect before concluding.

- Error in One Invoice , might be repeated in more Invoices and until Auditing is done for a sufficient number of Invoices ( If the sampling method has been adopted ) , it would not be prudent to conclude , based on one Invoice.

- If the Auditing is being done for 100% Transactions, then all Sales Invoices must be audited before concluding on the misstatement.

Hence , as an Auditor , it would not be appropriate to conclude that the sales are misstated by $ 25300.