Assume that an auditor finds a material misstatement regarding the financial statements while performing substantive tests of the account balance. More important, the auditor concludes that the misstatement involved the misapplication of an accounting principle to achieve a desired financial result and that the misstatement was intentional.
a. What actions should the auditor take upon detecting an intentional misstatement in the financial statements? To whom must the misstatement be reported?
b. If the company agrees to correct the misstatement, is there a need to communicate the nature of the misstatement to important stakeholders of the company? If yes, explain the avenues the auditor has available to report the misstatement.
c. What are the implications of detecting an intentional misstatement in terms of evaluating the control environment and the effectiveness of internal controls in general?