Asking management to correct misstatements
When and how to send management the misstatements found in an audit, ask for them to be corrected, and deal with any that are left uncorrected.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
On many audits the list of misstatements lives in a senior's spreadsheet until the last week. Then it arrives in the client's inbox all at once, the day before the board meets, with a request to "post these please". Management is annoyed, some items get argued away under time pressure, and the firm ends up with uncorrected differences it could have cleared a month earlier.
ISA 450 asks for something better: misstatements communicated as the audit goes, to the right person, with a clear request to correct them. This article covers when to communicate, who to send them to in an owner-managed company, what to do when management will not correct, and how to word and track the request so it gets acted on.
The duty: timely, complete and with a request
As ACCA quotes it, ISA 450 requires the auditor to communicate on a timely basis all misstatements accumulated during the audit to the appropriate level of management, unless law or regulation prohibits it, and to request management to correct them.
Three words in that requirement do a lot of work:
- Timely. Not at the end. A misstatement found in debtors during interim work can go to management then, while the people who posted it still remember why.
- All. Every accumulated misstatement, not only those above a threshold that management might care about. The team's clearly trivial threshold decides what is accumulated in the first place; above it, everything goes.
- Request. The auditor asks for correction. Communication alone is not enough.
Projected misstatements are different
Not everything on the list is a specific error. ACCA explains that ISA 450 describes projected misstatements as the auditor's best estimate of misstatements in a population, extrapolated from errors found in a sample. ACCA notes that it is normally not appropriate to ask management to correct a projected misstatement. Instead, the auditor considers whether further testing is appropriate, often by asking management to examine the population and correct the actual errors it finds.
Keep the two categories apart on the schedule you send, so management is not asked to post an estimate as if it were a fact.
Who counts as the appropriate level of management
In a listed group, the appropriate level is usually the finance director or the person with authority to correct the books. In an owner-managed company in Pretoria, Port Harcourt or Kisumu, the person who keeps the books may not be the person who decides. Ask:
- Who has authority to approve journals to the general ledger?
- Who approves the financial statements, and will they want to see the list?
- Is the bookkeeper's manager the owner, and is the owner also the only director?
Send the list to the person who can say yes. Copy the bookkeeper so the entries can be posted, but do not leave the decision to someone who cannot make it.
When management will not correct
Sometimes management declines. Common reasons are disagreement about the facts, a view that the amount is immaterial, or reluctance to reopen a closed period. Respond in steps:
- Ask for the reasons in writing. They matter when you evaluate whether the uncorrected misstatements, alone or together, are material.
- Re-examine the misstatement if management produces new evidence. You may have been wrong.
- Evaluate the total of uncorrected items, including their effect on key figures such as profit and covenants.
- Escalate to those charged with governance where the matter warrants it.
ACCA notes that an audit clearance meeting, though not required by the ISAs, is often used to make sure there are no misunderstandings about the statements and the report, and proposed adjustments are a usual item on its agenda. It is a natural place to settle what remains.
The written representation on uncorrected misstatements
ACCA explains that ISA 450 requires the auditor to request a written representation from management on whether it believes the effects of uncorrected misstatements are immaterial, individually and in aggregate, with a summary of those items included in or attached to the representation.
That summary should be the same schedule you sent and discussed, updated for anything corrected since. Our article on written representations covers the rest of the letter.
Raising and tracking the request in Achekam
In Achekam, lead schedules are built from the engagement's trial balance with every figure traceable to its lines. Staff can record an audit adjustment on a line with a reason, and raise findings from a working paper that are later closed or withdrawn. That gives the team one list of what it has found, against the lines it affects.
To send the list, staff can create a request to the client in the RFI console, for documents, answers or confirmations, and track it there. A request can be raised from a work item, the document console or an assurance review room, with the same form, so the misstatement schedule can go out from the paper where it was found. When the report is near final, the partner can also send the client a read-and-comment preview link to the audit report, which helps where an uncorrected item affects the wording.
Achekam records the adjustment and the request. Whether the client posts the entry in its own books, and whether the team agrees the corrected trial balance afterwards, is the team's follow-up to evidence. See year-end adjusting entries for checking that corrections land where they should.
Wording the request so the client acts on it
A request that gets acted on is specific and easy to say yes to. For each item, give:
- the account and amount, and whether it is a factual, judgemental or projected item;
- one sentence on what was found and the evidence;
- the proposed journal, with both sides;
- the effect on profit and on net assets;
- a reply date, set well before the board meeting.
End the request with a plain line: "Please confirm which of these you will correct. For any you will not, please tell us why." That sentence gives the client a clear choice and gives the file the reasons ISA 450 needs.
ACCA's technical article on misstatements explains the ISA 450 requirements in more depth, including how to evaluate uncorrected items.
On your current audit, send the first schedule of misstatements as soon as interim or early fieldwork produces one, rather than holding it for completion. The year-end conversation is far easier when most of the list is already settled.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
