...1. The professional standards urge auditors to be cautious when they are considering “uncorrected misstatements” in a client’s financial statements. AU Section 312 discusses such items at length. Following is an excerpt from that discussion. If the auditor concludes that the effects of uncorrected misstatements, individually or in the aggregate, do not cause the financial statements to be materially misstated, they could still be materially misstated because of further misstatements remaining undetected. As the aggregate misstatements approach materiality, the risk that the financial statements may be materially misstated also increases; consequently, the auditor should also consider the effect of undetected misstatements in concluding whether the financial statements are fairly stated. [AU 312.65] AU Section 312 notes that if the auditor concludes that the client’s financial statements are materially misstated, then “the auditor should request management to make the necessary corrections” (312.64). This section goes on to discuss the documentation standards for “uncorrected misstatements” (see paragraphs 69-70). For example, auditors must document in their workpapers “whether uncorrected misstatements, individually or in the aggregate, do or do not cause the financial statements to be materially misstated, and the basis for that conclusion.” In summary, auditors’ lives would be considerably less complicated if clients would prepare an adjusting entry for each...
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