Question

1-What do you understand by material misstatements?

2- Give some introduction on the functions of external auditor?

Answer 1

1. Answer :

MATERIAL MISSTATEMENT is intentional or unintentional untrue financial statement information that influences a companys value, Profit, Sales Market Price of Shares / Stock.

Material Vs. Immaterial Misstatements

Although any incorrect information on a financial statement can be considered a misstatement, not all misstatements are serious enough to be considered material. In addition, there’s no published standard that establishes a dividing line between material and insignificant or immaterial errors. International Accounting Standards and the Financial Accounting Standards Board do, however, provide a broad definition, generally considering an error to be material “if the judgment of a reasonable person would have been changed or influenced by the inclusion or correction of the item.” This is a main reason why external audit teams take time before beginning any external audit to first gain an understanding of the business and its internal control procedures. In addition to helping the audit team identify internal control weaknesses, the process also helps auditors establish materiality.

Material Misstatements can arise from fraud or error.' In other words, a material misstatement arises where there is a difference between the reported figures, and what is expected to be reported in order for the financial statements to be fairly presented (or show a true and fair view). Materail Misstatements can be factual, in the case of a clear breach of a requirement of a financial reporting standard, or could be judgmental, arising from unsuitable estimation techniques or the selection of inappropriate accounting policies.

For Example

Material Misstatement due to error such as things like accounting estimates or accounting policies, which the auditor considers unreasonable. Estimation techniques /methods used in accounts receivable and inventory valuation, accrued revenue as well as depreciation intended to allocate the cost of fixed assets over their estimated useful lives.

Material Misstatement due to fraud such as Increasing the sales by makeing bogus sales entry so as to project better performance of company. Inflating the expenses so as to reduce tax liability etc.

2. Answer: function of External Auditor

Providing an Opinion on Financial Statements

Some managers assume external audit firms will create their financial statements, when that actually is the job of company managers. External audit firms are responsible for providing reasonable assurance that the financial statements are free from material misstatements and prepared according to an accounting framework. External auditors are not there to fix the problems, although many will issue recommendations to management. External audit firms also are not responsible for providing absolute assurance of perfect financial statements; they only test enough data to provide reasonable assurance.

Understanding the Entity and Its Environment

. External auditors are charged with obtaining a through understanding of their client's environment, operations and internal controls. To do this, auditors will perform an initial risk assessment of the company. External auditors will often examine the electronic accounting information system to ensure that the data aren't being compromised. They'll compare the company to others in the industry to identify any irregularities that could stem from incorrect financial reporting.

Obtaining Sufficient Evidence to Form an Opinion

External auditors provides their opinion on the evidence they examine during the audit. To ensure they've collected the sufficient amount of evidence, auditors should rate the riskiness of the client. The higher risk the client is, the more evidence they should collect before issuing an opinion. The quality of the evidence is also crucial. Some evidence must be obtained from reliable third-party sources, such as banks and lenders, to corroborate the client's financial information

Independence

The audit firm is responsible for maintaining an independent attitude and an appearance of independence from the client. A lack of independence means that the auditor might fail to address audit problems, which lowers the credibility and assurance of an external audit. The auditor should not serve as an officer for the client or participate in management of the client's company. Audit firms also shouldn't have any sort of financial interest in the client. Audit firm partners should ensure that none of their auditors have joint ventures or significant investments in the client before auditing the client.