Acca aaa s21 Notes



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ACCA-AAA-S21-Notes

3. Management bias
‘Management bias’ (a lack of neutrality) may represent a risk of fraudulent reporting. Factors that may 
produce bias include:

Bonuses dependent on hitting a profit target.

Jobs dependent on a level of performance.

The business is going to be floated on the stock exchange so higher profits increase the 
flotation price.

The business is targeted for a takeover and the purchase price be will be influenced by 
performance.
In these situations auditors should be wary of managers being more optimistic than is warranted so 
that the value of inventory, recoverability of receivables, profit budgets and construction contract 
profitability are overstated and potential liabilities are understated.
September 2021 to June 2022 exams
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At some point optimism and wishful thinking will become more like deliberate misstatement and 
fraud: making demonstrably undue claims about company performance and the deliberate omission 
of liabilities.
Management bias is a common element of AAA questions: many describe bonus schemes or buy-outs 
and you must respond to these by recognising the increased audit risk that inevitably arises.
4. Evaluation of misstatements identified
ISA 450 
Evaluation of Misstatements Identified during the Audit
requires auditors to accumulate 
identified misstatements other than those which are clearly trivial. The triviality threshold will 
generally be much lower than the materiality threshold.

All misstatements accumulated during the audit should be communicated to the appropriate 
level of management on a timely basis.

Management should correct them or explain why not. Often the audit committee will be 
involved in these discussions. Misstatements can be categorised as:

Factual (definitely incorrect, like a mistake when adding up the stock-take sheets).

Judgmental (where the auditor and client have different opinions, such as the valuation of 
inventory or recoverability of debts).

Projected. The auditors best estimate of the error of a population based on the errors in the 
audit sample.

The categorisations affect how much negotiation or compromise is acceptable when it comes to 
amending the financial statements:

no room for compromise with factual misstatements

discussion of judgmental errors may reach a compromise

extended testing to find actual errors rather than make adjustments for projected errors.

Obtain written representations from management that they believe uncorrected misstatements 
are not material or their reasons for believing that certain uncorrected misstatements are not 
misstatements.

Assess materiality of uncorrected misstatements individually and in aggregate. Note that 
materiality levels may have been revised as the audit progressed (ISA 320 
Materiality in Planning 
and Performing an Audit
).
If management refuses to correct a misstatement which the auditor thinks is material then the auditor 
will have to issue a qualified opinion (or adverse if the matter is pervasive). 
Note it is management’s responsibility to correct errors in the financial statements. Auditors cannot 
unilaterally adjust the financial statements that have been prepared by management.

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