Question

Different ways to find tolerable misstatement. Strengths and weaknesses of each different way.

Answer 1

Tolerable misstatement refers to an amount reflected in the financial statements by which a particular line item differs from its actual amount but does not affect the entire or consolidated financial statements being made fair.

To determine a tolerable misstatement, it can be seen that where there is high level of perceived risk, there we see that this tolerable misstatement is in small proportion to the planning materiality that is 10 to 20 percent of total planning materiality.

On the other hand, where there perceived risk is low, there the percentage is about 70 to 90 percent of the planning materiality.

Tolerable misstatement are found in two ways :

First where different financial statements are misstated such that all are in one direction and do not cancel each other effects on the entire financial statements.

The strength of this are :

• Management is capable of manipulating statements as they want
• Costs can be shown or reflected less and profits can be reflected more in the financial statements.
• Company has option to make statements as per their convenience.

The weakness of these are :

• It is a fraud and is not ethical to commit.
• If found companies could have to bear huge loss and pay penalties for doing such fraud.
• People and shareholders are misleaded thus way by presenting wrong financial statements containing huge manipulations.

The second way in which financial statements are misstated is such that one statement cancels the affect of other statement and thus there is no effect on the entire or consolidated financial statements.

The strength of this are :

• The statement finally presented are accurate in total.
• This does not have wrong impact on financial statements.
• Shareholders are being provided with the accurate financial status of a company.

The weakness of these are :

• Companies are not able to manipulate the statements.
• It is hard to escape any type of loss incurred by the company from presenting it to outsiders.

This we can say that this tolerable misstatement are used by companies but it should be aasurred that they are not making it in use for creating frauds.

Here we saw how these statements are prepared and what are their strengths and weaknesses and how can they be managed.