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Uncorrected Misstatements

Decent Essays
Therefore, just because an auditor considered a misstatement to be immaterial in a prior period does not mean that the misstatement can be ignored when evaluating audit findings in a subsequent period (Craig & Carmichael, 1993). “For example, if revenue has been materially overstated, the financial statements as a whole will be materially misstated, even if the effect of the misstatement on earnings is completely offset by an equivalent overstatement of expenses” (Evaluation of Misstatements Identified during the Audit, 2010, p. 92). Errors in an opening balance sheet may have, dollar-for-dollar, just as much of an impact upon the mismeasurement of current-period results as errors in the closing balance sheet (Craig & Carmichael, 1993). Inflated…show more content…
Here is an excellent example of this type of occurrence. “An auditor is evaluating audit findings at the conclusion of the 1993 audit of ABC Company. The only uncorrected misstatements in ABC’s current and prior period accounts relate to sales cutoff errors, that 1) understate the beginning-of-period receivables by $50,000, and 2) overstate end-of-period receivables by $70,000. Both sales and pretax income would be $120,000 lower in 1993 if 1) revenues from the end-of-period cutoff error were correctly recorded in 1994, and 2) revenues from the beginning-of-period cutoff error were correctly recorded in 1992” (Craig & Carmichael, 1993).
In short, there is possibility that uncorrected misstatements discovered in the previous audit, which were judged to be immaterial, may well become material misstatements in the current period when aggregated with other misstatements. Example: There is a material overstatement of revenue in first year so the financial statements as a whole of first as well as second year will be materially misstated because overstatement in revenue is not appropriate and will result in incorrect reporting of profits, current and differed taxes and retained earnings in first as well as second year's financial
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