AS 2810, Evaluating Audit Results: Misstatements, Qualitative Factors and Bias in Issuer Audits

AS 2810 sets the final evaluation in an issuer audit. Its objective is to evaluate the results of the audit to determine whether the audit evidence obtained is sufficient and appropriate to support the opinion (paragraph .02). Paragraph .04 lists six things the evaluation covers: the overall review, misstatements accumulated during the audit, the qualitative aspects of accounting practices, conditions relating to fraud risk, the presentation and disclosures, and the sufficiency and appropriateness of the evidence.

AU-C 450 covers the misstatement piece for nonissuers, and AU-C 700 and 240 cover much of the rest. This article follows AS 2810 and then compares it with AU-C 450. For the working schedule, see the uncorrected misstatements summary.

What does the overall review require?

The auditor reads the statements and disclosures and performs analytical procedures to evaluate conclusions on significant accounts and help form an opinion on the statements as a whole (.05). The auditor evaluates whether evidence gathered for unusual or unexpected items is sufficient, and whether such items indicate risks of material misstatement not identified before, in particular fraud risks (.06). Revenue analytics run through the end of the reporting period (.07).

Management's explanations for significant unusual or unexpected items need corroboration. If responses appear implausible, inconsistent with other evidence, imprecise or not detailed enough to be useful, the auditor performs procedures to address the matter (.08). For the AICPA side, see final-stage analytical procedures.

How are misstatements accumulated?

• Clearly trivial. The auditor accumulates misstatements other than those that are clearly trivial. "Clearly trivial" is not another expression for "not material": such matters are of a smaller order of magnitude than materiality and inconsequential individually or in aggregate, and when there is any uncertainty the matter is not trivial (.10). An amount below which items are not accumulated must be set so that anything below it would not be material alone or combined with others, considering undetected misstatement (.11).
• Best estimate. Accumulation includes the best estimate of total misstatement in the accounts and disclosures tested, not just specific items. That covers estimates (.13) and projected misstatements from sampling under AS 2315 (.12).
• Estimates. If an estimate is unreasonable or not in line with the framework, the difference from a reasonable estimate is a misstatement. If supported reasonable estimates form a range and the recorded amount is outside it, the difference from the closest reasonable estimate is a misstatement (.13).
• As the audit progresses. The auditor determines whether the strategy and plan need modifying if the misstatements suggest others might exist that could be material in combination, or if the aggregate approaches planning materiality (.14). Misstatements are communicated to management on a timely basis (.15), and if management examines an account in response, the auditor evaluates its work for proper recording and remaining misstatements (.16).

How is the effect of uncorrected misstatements evaluated?

Paragraph .17 requires the auditor to evaluate whether uncorrected misstatements are material, individually or in combination, in relation to the specific accounts and disclosures and to the statements as a whole, taking into account quantitative and qualitative factors. The notes say small amounts can be material: an illegal payment could be material if it could lead to a material contingent liability or loss of revenue, and an intentional misstatement can be material for qualitative reasons even if small. If reevaluating materiality produces a lower amount, that lower amount is used.

The evaluation includes uncorrected misstatements from prior years and current-year misstatements that relate to prior years (.18). The auditor cannot assume an instance of error or fraud is isolated, so the effect on assessed risks is evaluated (.19).

Qualitative factors in Appendix B

Appendix B (.B2) lists factors to consider, including:

• the effect on trends, especially profitability, and a misstatement that changes a loss into income or the reverse
• the effect on loan covenants and regulatory provisions
• a misstatement that increases management's compensation, for example by satisfying requirements for bonuses
• the sensitivity of the circumstances, such as fraud, possible illegal acts and conflicts of interest
• significance to known user needs, such as earnings and earnings per share to public company investors
• management's motivation, such as a pattern of bias in estimates
• offsetting effects of individually significant but different misstatements

Worked example

An issuer reports pre-tax income of $4,060,000. Materiality for the financial statements is $200,000. The auditor accumulates five misstatements. Management corrected two that understated income ($38,000 and $42,000, total $80,000). It declined to correct three that overstate income: $60,000 (revenue cutoff), $70,000 (an understated bonus accrual) and $45,000 (an estimate difference). The uncorrected total is $175,000.

Quantitatively, $175,000 is below $200,000. Qualitatively, two points change the answer.

• Without the uncorrected items, income would be $4,060,000 less $175,000, or $3,885,000. If an annual incentive plan pays at pre-tax income of $4,000,000, the misstatements turn a missed target into a met one, which is the effect described in Appendix B (.B2f).
• Management corrected the two items that raise income and left uncorrected the three whose correction would lower it. That is the selective correction in paragraph .25a, so the auditor obtains an understanding of why management did not correct.

The auditor cannot conclude on the $200,000 comparison alone. On these factors the $175,000 cannot be dismissed as immaterial, so the auditor asks management to correct it and records the qualitative analysis.

What counts as management bias?

Paragraph .24 requires evaluating the qualitative aspects of accounting practices, including potential bias in judgments. Paragraph .25 gives four forms: selective correction of misstatements brought to management's attention, management-identified adjusting entries that offset misstatements the auditor accumulated, bias in selecting and applying accounting principles, and bias in accounting estimates. For selective correction, the auditor understands why management decided not to correct. For offsetting entries, the auditor determines why the underlying misstatements were not identified earlier and evaluates the effect on management integrity and risk assessments, including fraud risk.

If bias exists, the auditor evaluates whether its effect together with uncorrected misstatements results in material misstatement, and whether risk assessments remain appropriate (.26). For estimates, individually reasonable amounts that all move earnings the same way, or swings from one end of the reasonable range to the other between years, can indicate bias (.27). See estimates, point estimates and management bias.

What about fraud, presentation and sufficiency?

• Fraud. The auditor evaluates whether misstatements might be indicative of fraud (.20). If a misstatement is or might be intentional and its effect could be material or cannot be readily determined, the auditor performs procedures to determine whether fraud has occurred or is likely (.21), considers management integrity, and reevaluates fraud risk (.22). The auditor then determines responsibilities under AS 2401, AS 2405 and Section 10A (.23). The engagement partner determines team communication was appropriate (.29). See when fraud is suspected.
• Presentation. The auditor evaluates whether the statements present fairly in all material respects, including whether they contain the information essential for fair presentation (.30 and .31).
• Sufficiency. Paragraph .34 lists the factors: uncorrected misstatements, results of procedures, risk assessments, results of the ICFR audit in an integrated audit, and the relevance and reliability of the evidence. If evidence is not sufficient, further procedures are required, and if the auditor cannot obtain it, a qualified opinion or disclaimer follows under AS 3105 (.35). The auditor also evaluates whether the risk assessments remain appropriate (.36).

How does AS 2810 compare with AU-C 450?

One worksheet can serve both, as the factor lists are close.

Sources

• PCAOB, AS 2810, Evaluating Audit Results, paragraphs .02 to .36 and Appendix B: https://pcaobus.org/oversight/standards/auditing-standards/details/AS2810
• AICPA, AU-C Section 450, Evaluation of Misstatements Identified During the Audit, paragraphs .05, .06, .09, .10, .12 and application material A2, A6, A15 and A28: https://www.aicpa-cima.com/resources/landing/aicpa-professional-standards

CORAA prepares ready-to-review audit files for US CPA firms from client books; you review and sign. See /us.

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error