Question

An auditor finds three misstatements.For each misstatement, categorize it as factual, judgmental, projected, error, or fraudulent.The misstatements may or may not belong to more than one category. Include only the categories supported by the description of the misstatement. Misstatement 1:An auditor samples accounts receivable and finds a total of $3,000 overstatements in the sample. Based on the sample in misstatement 1, the auditor believes that accounts receivable is overstated by a total of $30,000. A client records bad debt at 2% of sales, the same as last year. The auditor thinks it should be recorded at 4% because of changed economic conditions.

Answer 1

• An auditor samples accounts receivable and finds a total of $3,000 overstatements in the sample.

This is a Factual Misstatement, as $3,000 of excess Accounts receivables have been found on sample audit.

• Based on the sample in misstatement 1, the auditor believes that accounts receivable is overstated by a total of $30,000.

This is a judgemental statement. The auditor, basing his assumptions and judgement of the Misstatement #1 concludes that total Receivables are overstated by $ 30,000.

• A client records bad debt at 2% of sales, the same as last year. The auditor thinks it should be recorded at 4% because of changed economic conditions.

This comes under “Projected” Misstatement. Based on past data, Client projected that Bad Debt would be 2% of sales. However, auditor projects that since economic conditions are changed, the bad debt should be recorded at 4% .