## Learning Outcomes

After reading this article, you will be able to:

- Explain the identification and treatment of misstatements in an audit.
- Understand the purpose and limitations of written representations as audit evidence.
- Describe the auditor’s communication requirements with those charged with governance (TCWG) under ISA 260.
- Apply procedures for reporting misstatements, uncorrected errors, and the use of written representations in practical scenarios.
- Recognise the reporting implications for the ACCA Audit and Assurance exam where misstatements are identified or representations are refused.

## ACCA Audit and Assurance (AA) Syllabus

For ACCA Audit and Assurance (AA), you are required to understand the auditor’s responsibilities for detecting, evaluating, and communicating misstatements, the use of written representations, and effective reporting to those charged with governance:

- The definition and types of misstatements (factual, judgmental, projected) in an audit.
- Evaluation of uncorrected misstatements and their impact on the audit opinion.
- The purpose, procedure, and reliability of written representations (ISA 580).
- The required auditor communications with TCWG, including the content and timing (ISA 260).
- Reporting implications when management refuses adjustments or to provide written representations.
- The role of those charged with governance in reviewing misstatements, deficiencies, and audit findings.
- Practical application in ACCA exam questions involving errors, representations, and governance communication.

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. Which of the following is NOT a valid type of misstatement according to ISA 450?
   a) Factual misstatement
   b) Judgmental misstatement
   c) Projected misstatement
   d) Anticipated misstatement

2. Management refuses to correct a material misstatement identified by the auditor. What is the appropriate first step?
   a) Ignore the misstatement
   b) Request a written representation
   c) Communicate the uncorrected misstatement to those charged with governance
   d) Immediately qualify the audit opinion

3. True or false? Written representations are sufficient audit evidence on their own for all audit assertions.

4. Who is typically responsible for reviewing a summary of uncorrected misstatements at the end of an audit?

## Introduction

Auditors may discover errors or misjudgements in the financial statements during the audit. International Standards on Auditing (ISAs) require errors (misstatements) to be assessed, evaluated, and, if material, communicated and corrected. Where sufficient evidence from other sources cannot be obtained, auditors may request written confirmations (written representations) from management regarding specific matters. In all cases, the auditor must communicate significant findings and outstanding issues—including material misstatements and reliance on written representations—to those charged with governance (TCWG).

> **Key Term: Misstatement**
> A difference between an amount, classification, disclosure, or presentation in the financial statements and what is required by the applicable framework. Misstatements may arise from error or fraud.

### Types of misstatements

Misstatements are classified as:

- **Factual misstatements**: Clear, specific errors with no judgement involved.
- **Judgmental misstatements**: Differences arising from management's estimates or accounting policies, where the auditor and management hold different reasonable views.
- **Projected misstatements**: The auditor's best estimate of likely misstatements extrapolated from errors found in a sample to the whole population.

> **Key Term: Uncorrected misstatement**
> A misstatement identified by the auditor that has not been corrected or adjusted by management before the audit report is finalised.

### Evaluating and Communicating Misstatements

![Audit misstatement evaluation from detection and documentation through management discussion, aggregate materiality reassessment, governance communication, financial statement amendment, and opinion modification decisions.](https://static.pastpaperhero.com/images/acca-aa-misstatements-and-written-representations-communication-with-those-charged-with-governance-isa-260_00.png)

_Misstatement resolution process showing communication with management and those charged with governance, correction outcomes, and implications for the auditor's opinion._

### Identifying and accumulating misstatements

All misstatements, except those that are clearly trivial, must be accumulated by the auditor throughout the audit. The auditor must:

- Document each misstatement detected, with supporting evidence.
- Discuss misstatements with management, requesting correction.

If management refuses, uncorrected misstatements are reassessed individually and in aggregate for materiality. The total impact is considered, not just individual errors.

> **Key Term: Materiality**
> Information is material if its omission or misstatement could reasonably be expected to influence decisions of users taken on the basis of the financial statements.

### Communicating misstatements

Auditors must:

- Promptly communicate all uncorrected misstatements to management.
- Summarise all uncorrected misstatements (factual, judgmental, projected) at the end of the audit.
- Present these to those charged with governance (usually the audit committee).
- Explain potential consequences and the impact on the draft financial statements and possible audit opinion.

> **Key Term: Those charged with governance (TCWG)**
> The person(s) or organisation responsible for overseeing the strategic direction of, and accountability for, the entity (e.g., the board of directors or audit committee).

### Worked Example 1.1

**Scenario:** The auditor found several errors in expense classification and a calculation issue in inventory valuation, together totalling 3% of profit before tax. Management argues the errors are not individually material and refuses to adjust them.

> **Answer:**
> The auditor accumulates these uncorrected misstatements and presents them to those charged with governance. If the total exceeds the auditor’s determined materiality level, the auditor requests that the financial statements be corrected. If not corrected and material, the auditor considers modification of the audit report.

### Written Representations (ISA 580)

When the auditor is unable to obtain sufficient appropriate audit evidence regarding certain matters (for example, estimates or where information resides only with management), they will request a written representation.

> **Key Term: Written representation**
> A written statement by management provided to the auditor to confirm certain matters or to support other audit evidence.

### Key purposes of written representations

- To confirm management’s responsibility for the financial statements.
- To support other audit evidence—especially where evidence is otherwise unavailable.
- To confirm disclosures and management’s assessments (such as going concern, litigation, or internal controls).

> **Key Term: Sufficiency and appropriateness of audit evidence**
> Sufficiency is the quantity of evidence; appropriateness refers to its quality—relevance and reliability.
> **Key Term: Reliability of written representation**
> Written representations are low-quality audit evidence as they are generated internally by management and may be affected by bias. They are used to support—never replace—other available evidence.

### Procedures and requirements for written representations

- Auditor drafts the wording and requests management signature before the audit report is signed.
- Must be signed by the most senior responsible management, usually the CEO and finance director.
- Dated as at (or just before) the date of auditor’s report.
- Failure to obtain a required written representation is a scope limitation and may result in qualification or a disclaimer of opinion.

### Worked Example 1.2

**Scenario:** The auditor cannot obtain sufficient evidence for a complex legal claim’s outcome and requests a written representation from management confirming their view that no liability exists.

> **Answer:**
> The written representation helps support the auditor’s opinion on the adequacy of management’s assessment and disclosures. However, if the auditor still cannot obtain sufficient evidence—or if the representation contradicts other evidence—the auditor may need to modify the opinion.

### Communicating with Those Charged with Governance (ISA 260)

ISA 260 requires the auditor to communicate significant findings and issues on a timely basis to those charged with governance (TCWG). These matters include:

- Significant audit findings (e.g., qualitative aspects of accounting practices, difficulties, uncorrected misstatements).
- Auditor’s independence (including any threats and safeguards).
- The planned scope and timing of the audit.
- Expected modifications to the auditor’s opinion.

> **Key Term: Communication with those charged with governance**
> Two-way dialogue between the auditor and TCWG to improve transparency, address audit risks, and ensure oversight of financial reporting.

### Worked Example 1.3

**Scenario:** At the end of the audit, management refuses to provide a required written representation and will not correct a material error.

> **Answer:**
> The auditor reports these issues to TCWG, explaining that a disclaimer or qualified opinion is likely if unresolved. The auditor documents all communications and may request TCWG’s intervention with management.
>
> **Exam Warning:**
> Know that written representations do not provide sufficient audit evidence on their own for material account balances or disclosures. If management refuses to sign, or if content contradicts other evidence, the auditor is required to consider qualification or disclaimer of opinion.

### Limitations and Reporting Implications

- If uncorrected misstatements are material, the auditor must consider qualifying or modifying the audit opinion. The reason for modification must be clearly explained in the Basis for Qualified (or Adverse) Opinion section of the audit report.
- If a required written representation is not provided, or is unreliable, and alternative evidence cannot be obtained, the auditor may be unable to form an opinion and may need to issue a disclaimer.

> **Revision Tip:**
> Always summarise misstatements (individually and in aggregate), communicate clearly with management and TCWG, and document all correspondence for your audit file.

## Summary

Auditors must identify, accumulate, and evaluate misstatements in an audit, communicating all uncorrected misstatements to management and those charged with governance. Written representations can provide limited supporting evidence, but are never a replacement for external documentation. Transparent and timely communication with TCWG is essential, particularly regarding material uncorrected misstatements and the use of written representations. Failure by management to correct errors or provide representations has direct implications for the auditor’s opinion and may lead to report modification.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- Define and explain misstatements, including factual, judgmental, and projected types.
- Understand the process for accumulating and evaluating misstatements.
- Describe the proper handling and reporting of uncorrected misstatements.
- Explain the purpose, procedure, and reliability limits of written representations.
- Understand the requirements of ISA 260 on auditor communication with those charged with governance.
- Identify the auditor’s responsibilities if management refuses to correct errors or sign written representations.
- Recognise the implications for the audit opinion when uncorrected misstatements or evidential limitations occur.

## Key Terms and Concepts

- Misstatement
- Uncorrected misstatement
- Materiality
- Those charged with governance (TCWG)
- Written representation
- Sufficiency and appropriateness of audit evidence
- Reliability of written representation
- Communication with those charged with governance


Misstatements and written representations - Communication with those charged with governance (ISA 260)