Material Misstatement Due to Fraud
Definition
A misstatement in the financial statements caused by intentional act (fraud rather than error) that is large enough, individually or collectively, to influence the economic decisions of users. ISA 240 focuses on this level of misstatement, not on all fraud regardless of amount.
- Governing standard
- ISA 240
- Cause
- Intentional act, not error
- Threshold
- Large enough to influence users' economic decisions
- Scope
- Individually or in aggregate with other misstatements
Common questions
Why does the standard focus on material amounts rather than all fraud?+
An audit is designed to give reasonable assurance on the financial statements as a whole, so ISA 240 directs auditor effort toward misstatements large enough to change a user's decision, rather than every instance of dishonesty regardless of size.
How does this differ from an error of the same size?+
The dollar effect on the financial statements can be identical, but intent changes the auditor's required response, since fraud raises questions about management integrity and control override that a similarly sized error does not.
Related terms
- Audit Expectation Gap
- The difference between what auditing standards require auditors to do and what the public, investors, or regulators believe auditors are responsible for....
- Fraudulent Financial Reporting
- One of the two ISA 240 fraud categories. It involves intentional misstatement or omission in financial statements to deceive users: overstating revenues,...
- ISA 240
- International Standard on Auditing 240, 'The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements,' issued by the IAASB. Sets...
- Misappropriation of Assets
- The second ISA 240 fraud category. It involves theft or misuse of an entity's assets by employees or management: cash skimming, expense...
- Professional Skepticism
- An attitude requiring the auditor to question information, remain alert to conditions that may indicate misstatement, and critically assess audit evidence rather...