Audit adjustments and deficiencies

During the audit the team accumulates every misstatement it identifies, other than those that are clearly trivial (ISA 450). It helps to separate three types:

• Factual — no doubt about it: an invoice recorded twice, a sale in the wrong period.
• Judgemental — a difference between management's estimate and the auditor's view of a reasonable estimate (or an inappropriate accounting policy choice).
• Projected — the auditor's best estimate of misstatement in a population, projected from a sample.

The auditor communicates accumulated misstatements to the appropriate level of management on a timely basis and asks them to be corrected. Correcting factual misstatements is straightforward. For projected misstatements, management may be asked to examine the population so the actual error can be found and corrected; for judgemental ones, to revisit the estimate.

Before evaluating, the auditor reassesses materiality in the light of actual results. Then uncorrected misstatements are evaluated individually and in aggregate, considering their size and nature, the particular circumstances, and the effect of uncorrected misstatements from prior periods. A total close to materiality is a warning sign: there may also be misstatements the audit didn't detect.

Uncorrected misstatements are communicated to those charged with governance, and the auditor obtains a written representation that management believes their effects are immaterial, individually and in aggregate, with a summary attached (ISA 450.14). If uncorrected misstatements are material, the opinion is modified.

Deficiencies. A misstatement the entity's own controls failed to catch often points to a control deficiency. Under ISA 265 the auditor communicates significant deficiencies in writing to those charged with governance, and other deficiencies of sufficient importance to management.

Audit adjustments are management's entries — the auditor proposes them; management decides and records them. Proposed entries are written exactly like any journal entry, with the profit effect tracked for the evaluation.