Defintion _and_quot;Material Misstatement_and_quot; 626

  • Hi.
    I’m currently trying to become familiar with SOA …
    Up to now I’ve read a lot of articles, have visited several websites (SEC, COSO, AICPA …) but unfortunately I still don’t know how a ‘MATERIAL MISTATEMENT’ is defined.?
    (I know that for example an external auditor has to differentiate between a significant deficiency and a material weakness of a control system but I would like to know what a material misstatement in the financial statements means.?)

  • Additionally I have to mention that I’m not from an English-Speaking country … Perhaps this contributes to my lack of understanding.?

  • Try looking to the PCAOB definitions - see PCAOB Release No. 2004-001.

  • I don’t know if this will help as it’s pretty obvious but, for what it’s worth…%0AThe first link is to the actual act which doesn’t really give much implementation information but you should read section 404 at minimum. The second is to the PCAOB Auditing Standard 2. See Paragraphs 8 through 10 for Control Deficiency, Significant Deficiency and Material Weakness. SD and MW both have both quantitative and qualitative perspectives. From a quantitative view a Material Weakness is essentially equal to the company’s financial statement materiality and a Significant Deficiency is agreed to be (in Canada at least) either 20% of financial statement materiality. Be sure to read the qualitative aspects as they are more difficult to

  • Ok.
    But there seems to be no explicit definition of a ‘material misstatement’.?
    So I have to assess a certain fraud risk more or less indirectly by having a look at the PCAOB-Standard and its definitions of control definicies/weaknesses?
    Hmmm …

  • Fraud… hmm, that’s different as all fraud identified must be reported to the audit committee regardless of value.%0AThe pure ‘quantative’ assessment of material weakness is a misstatement could occur that will affect the financials materially… materially defined as equal to that assigned for the financial statement audit (in Canada rule of thumb is 5% pre tax earnings / 10% after tax earnings assuming earnings are consistent) which is indicated in the PCAOB’s AS2.%0AThe issue becomes defining the qualitative. On that, I’ve no guidance except the document produced by 9 of the big acctg firms called ‘a framework for evaluating control exceptions and deficiencies’. You can find it on the web.%0ABe warned, this is not prescriptive. From everything I’ve seen a HUGE amount of professional judgement is required to evaluate any deficiency. Our solution is to develop an assessment/decision process which we will follow to rate each deficiency. We will then have a ‘leg to stand on’ if we disagree with our ext auditors. %0AIf you cannot find that document, let me know and I’ll send it to you.

  • Thanks …
    Although I’m not sure whether I’m willing to understand this 😉

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