Prior Period Errors

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Prior Period Errors Audit Case Example: ABC Manufacturing Company

Context

If ABC Manufacturing Company has identified errors in previously issued financial statements, these errors must be corrected to prevent misleading financial information. The correction process often requires restating prior period financial statements to reflect what they would have been had the error not occurred.

Audit Objective

To obtain reasonable assurance that prior period errors identified by ABC Manufacturing Company are properly corrected and disclosed in accordance with the applicable financial reporting framework, ensuring that the financial statements present a true and fair view of the company’s financial position and performance.

Types of Audit Evidence and Documentation for Prior Period Errors Assertions

1. Accuracy

• Case: Verify the accuracy of the corrections made for prior period errors, including the recalculations of affected items.

• Documentation: Document the examination of recalculations and adjustments made to correct the errors, including the mathematical accuracy and the basis for any estimates or judgments applied.

2. Completeness

• Case: Ensure that all identified prior period errors have been corrected in the restated financial statements.

• Documentation: Outline the procedures for testing the completeness of error corrections, such as reviewing adjustments for all errors identified and ensuring no known errors have been omitted.

3. Presentation and Disclosure

• Case: Review the financial statements to ensure that the corrections of prior period errors are properly presented and disclosed, including the nature of the errors, the periods affected, and the impact of the corrections on the financial statements.

• Documentation: Note the evaluation of the presentation and disclosure related to the correction of prior period errors, verifying compliance with the financial reporting framework and the adequacy of disclosures to enable users to understand the impact of the corrections.

Additional Considerations

• Identification of Prior Period Errors: Document the process and criteria used by ABC Manufacturing Company to identify prior period errors, including any reliance on external experts or consultants.

• Impact on Current Period: Assess and document the impact of correcting prior period errors on the current period’s financial statements, including any changes to opening balances or comparative information.

• Assessment of Internal Controls: Evaluate and document the assessment of internal controls that failed to prevent or detect the prior period errors initially, including any recommendations for improvements to prevent similar errors in the future.

• Communication with Those Charged with Governance: Discuss significant findings related to the correction of prior period errors with management and those charged with governance, especially concerning the nature of the errors, the reasons they occurred, and measures taken to prevent recurrence.

Conclusion

The audit of corrections of prior period errors is critical for ensuring that ABC Manufacturing Company’s financial statements accurately reflect the company’s financial position and performance after accounting for any misstatements from earlier periods. Documenting the audit procedures and findings related to the accuracy, completeness, and presentation and disclosure of these corrections provides a basis for the auditor’s opinion on the restated financial statements, enhancing the credibility of the financial information presented to stakeholders.