Misstatement in Financial Statements

How to Unearth a Misstatement in Financial Statements? (2017 Update)

Misstatement in Financial Statements
Misstatement in Financial Statements

A misstatement in the financial information can cause havoc, particularly for the ones involved in the preparation phase. The auditor also has to dig down deep to look for possibilities of misstatements in any of the five statements that form part of a set of financial statements. These five statements are; Statement of comprehensive income, statement of financial position, statement of owner’s equity and notes to the financial statements. An irregularity in any of these can result in manipulation in the financial statements. This is where the role of a financial investigator comes into play.

It is not Unchartered Territory

For financial investigations to proceed, the base has to be strong enough. The investigator first needs to identify and evaluate the difference between an omission and fraud. Whether such an omission constitutes fraud, is the next question. A deliberate omission of a statement of fact that significantly affects the financial statements falls under the category of fraud. Hence, it needs to be comprehensively dealt with accordingly. What constitutes significant information is debatable and subjective, yet the financial investigators need to get this one right. A CPA must know that any financial information that is important for the public in terms of their decision to invest in the company is significant. After all, it’s all about getting the investors in, unless of course, you’re specifically referring to the ‘not-for-profit’ businesses.

Narrow Down the Specifics

Investigating the financial statements is a very broad and extensive topic. One needs to narrow down and be sure of the area that needs investigated. It can help save time and effort. Consider the example of an auditor. She or he has the responsibility of investigating the financial statements in entirety. The results only provide reasonable assurance about the presence or absence of any financial statement misstatement. If you are to extract the results to a certain degree of relevance and accuracy, then relying on a particular area for financial investigation can be handy. Especially one which is more susceptible to a misstatement.

Sample Matters

When reviewing a particular piece of financial information, it is important that you choose a sample that is actually a true representative of the population. For instance, if you’re to investigate the receivables balance, then make sure you choose a sample that would cater to all the types of receivables listed with the entity. Any omission in that regard can prove costly. In addition, make sure to keep the sample size moderate. Either too small or too large a sample size is never recommended. Therefore, be very considerate about the sample and its size in relation to the entire population.


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