Question

Give a summary about AS 2301, “Auditor’s Response to Material Misstatement”

Answer 1

As per AS 2301, following should be the “Auditor’s response to Material Misstatement”

1. Responses at the Assertion Level

· Changing the Nature, timing and extent of Audit procedures.

· Destroy perception of opportunity i.e. Surprise Audit.

· Review accounting principles and application. For instance, Entity is using Correct US GAAP or not.

2. Response related to Management Override

· Examine Journal Entries and other adjustment/unusual entries for evidence of possible misstatement due to fraud. For Example: - Scrap Management and its accounting entries.

· Review accounting estimates for biases. For Example: - Depreciation accounting while selecting useful life of assets.

· Evaluate the business rational for significant unusual transaction.

3. Overall Responses

· Assign more experience assistant/ personnel to the audit or bring in a fraud specialist that should be CISA qualified.

· More supervision, senior management/Partner involvement.

Update risk assessment process: - The auditor’s assessment of risk of material misstatement due to fraud is ongoing throughout the audit.

The auditors should be alert for the following conditions during the audit: -

· Discrepancies in the accounting records

· Conflicting or missing audit evidence

· Unusual relationship between the auditor and management

· Results from final review stage analytical procedures that indicate a previously unrecognised fraud risk.

· Responses to inquiries made throughout the audit that are vague or that procedure evidence that is inconsistent with other information

· Constant changes of accounting estimates