Evaluating Audit Differences
810.6 SAS No. 107 (AU 312.62)
states that the auditor must evaluate whether the financial statements
taken as a whole are free of material misstatement. The auditor must
consider both the individual and aggregate effects of all uncorrected
misstatements (known and likely) to evaluate whether the financial
statements are fairly stated. In making that evaluation, the auditor
should consider both quantitative and qualitative factors. The
summarization and evaluation of audit differences can be complex. It
should include consideration of the following factors:
• Nature. For example, services provided but not billed, accounts payable not recorded, and assets expensed instead of capitalized.
- • Cause.
- For example, arithmetic or mechanical mistake, or inappropriate
- application of an accounting principle because of misunderstanding,
- intentional use of an accounting principle that is not generally
- accepted, and whether misstatements are isolated or related to a common
• Amount. The dollar amount of the difference and whether the difference is an overstatement or understatement.
- • Effect.
- The financial statement components affected by the difference, (for
- example, the excess of revenue over expenses or total liabilities).
- (Also, consider the effect on compliance with loan covenants, such as
- maintaining certain operating ratios, or similar issues.