Assessing Whether Misstatements Are Material What additional information might the auditor choose to analyze to determine whether or not the financial statements are misstated by a material amount?

Answer 1

During the course of the audit, most of the time there will be multiple misstatements detected. Once misstatements are detected, the auditor should evaluate each misstatement individually, and the auditor should consider the aggregate effect of all misstatements.
Further, if an individual misstatement causes the financial statement as a whole to be materially misstated, that effect cannot be eliminated by other misstatements that have a different directional effect on the financial statements.
For example, if a company's revenues are materially overstated, the auditor is not allowed to conclude that the effect is immaterial, even if there is an equal and off setting overstatement of expenses. Rather, the auditor would conclude in this case that the financial statements taken as a whole are materially misstated. The rationale is that the trend in revenue growth may be just as important to a user as the effect on net income.
The auditor should inform the audit committee about adjustments arising from the audit that were considered to be material. In addition, the auditor should also provide a list of uncorrected misstatements that were deemed not to be material.
Most auditors request the client to book all known misstatements (unless recording cost is very high) so there are not carryovers from year to year. If the client does not want to book the misstatement, the auditor should assume that the client considers the amount to be material.