Audit
Audit adjustments
Evaluate misstatements against materiality and see their effect on the statements.
Northgate Components Ltd · audit of the year ended 31 December 2026
Set materiality, then mark which identified misstatements management has agreed to adjust. The rest form the summary of uncorrected misstatements that the engagement team evaluates.
| Misstatement | Type | Profit before tax | Net assets | Adjusted by management |
|---|---|---|---|---|
| Sales cut-offGoods dispatched on 4 January 2027 were invoiced and recorded as December revenue (46,000); their cost (31,000) was taken out of inventory. | Factual | 15,000 | 15,000 | |
| Unrecorded accrualDecember legal fees of 22,500 were invoiced in February and not accrued. | Factual | 22,500 | 22,500 | |
| Inventory above net realisable valueA discontinued sensor line is carried at cost of 64,000; its net realisable value (estimated selling price less the estimated costs necessary to make the sale) is 26,000 (IAS 2.6 and 2.9). | Judgemental | 38,000 | 38,000 | |
| Insurance expensed in advanceA 12-month policy costing 13,200, paid on 1 December, was expensed in full; 11 months (12,100) relate to 2027. | Factual | (12,100) | (12,100) | |
| Depreciation start dateA press brought into use in March was depreciated only from October: depreciation understated by 9,500. | Factual | 9,500 | 9,500 | |
| Receivables — projected misstatementTesting 400,000 of a 2,600,000 receivables balance found 3,200 of balances not recoverable. Projected to the population: 20,800. | Projected | 20,800 | 20,800 | |
| Loan classification80,000 of the bank loan is repayable within 12 months but is presented as non-current (IAS 1.69). | Classification | – | – | |
| Uncorrected misstatements (7) | 93,700 | 93,700 | ||
| Gross overstatements of profit, before offsetting understatements | 105,800 | |||
| Performance materiality | 90,000 | |||
| Overall materiality | 120,000 | |||
Uncorrected misstatements of 93,700 are below overall materiality (120,000) but above performance materiality (90,000). With so little headroom, the risk that these plus undetected misstatements exceed materiality may not be acceptably low: the auditor reconsiders the audit strategy and the extent of further procedures (ISA 450.6) and asks management to correct more of them.
The loan classification misstatement has no effect on profit or net assets but is evaluated qualitatively: misclassifying current liabilities can mask a liquidity shortfall or a covenant breach, so it may be material whatever its size (ISA 450 application material on qualitative factors).
Profit before tax: draft 2,400,000; after management's adjustments 2,400,000; if every misstatement were corrected 2,306,300. Net assets would fall by a further 93,700 if the uncorrected items were adjusted. Figures are before tax effects.
Offsetting understatements against overstatements needs care: an understatement doesn't cancel the risk carried by a material overstatement in another account.
Proposed audit adjustments
| Date | Account | Debit | Credit |
|---|---|---|---|
| 31 Dec | 4000Sales revenue | 46,000.00 | |
| 1200Inventory | 31,000.00 | ||
| 1100Accounts receivable | 46,000.00 | ||
| 5000Cost of sales | 31,000.00 | ||
| AJE 1 — Sales cut-off (uncorrected) | |||
| 31 Dec | 6050Professional fees | 22,500.00 | |
| 2100Accrued expenses | 22,500.00 | ||
| AJE 2 — Unrecorded accrual (uncorrected) | |||
| 31 Dec | 5050Inventory write-downs | 38,000.00 | |
| 1200Inventory | 38,000.00 | ||
| AJE 3 — Inventory above net realisable value (uncorrected) | |||
| 31 Dec | 1300Prepaid insurance | 12,100.00 | |
| 6200Insurance expense | 12,100.00 | ||
| AJE 4 — Insurance expensed in advance (uncorrected) | |||
| 31 Dec | 6500Depreciation expense | 9,500.00 | |
| 1510Accumulated depreciation — equipment | 9,500.00 | ||
| AJE 5 — Depreciation start date (uncorrected) | |||
| 31 Dec | 6700Credit loss expense | 20,800.00 | |
| 1150Allowance for credit losses | 20,800.00 | ||
| AJE 6 — Receivables — projected misstatement (uncorrected) | |||
| 31 Dec | 2500Bank loan | 80,000.00 | |
| 2010Short-term borrowings | 80,000.00 | ||
| AJE 7 — Loan classification (uncorrected) | |||
An evaluation summary for learning, in the style of ISA 450. The auditor's overall conclusion and opinion also depend on matters this tool does not model, including qualitative factors, the sufficiency of evidence and the effect on disclosures.
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- Materiality · Auditing and Internal Controls
- Audit adjustments and deficiencies · Auditing and Internal Controls
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