Misstatements are difference between what accounting standards and framework want financial statements to be and what financial statements actually are. ISA 450 define misstatement as difference between the amounts, classification, presentation, or disclosure of reported financial statement item and the amount, classification, presentation, or disclosure that is required for for the item to be in accordance with applicable financial reporting framework. Misstatements can arise from error or fraud.
Causes of misstatements in the financial statements include:
- an inaccuracy in gathering or processing data from which the financial statements are prepared.
- An omission of an amount or disclosure;
- an incorrect accounting estimates arising from overlooking, or clear misinterpretation of,facts; and
- judgement of management concerning accounting estimates that the auditor considers unreasonable or the selection and application of accounting policies that the auditor consider inappropriate.