What is the difference between Material Misstatement and Material Inconsistency?

Material misstatement refers to such misstatements if present in the financial statements then the financial statements may affect the economic decisions of the users of financial statements. Material misstatements relates to the information included in the financial statements.

Material inconsistency such inconsistencies that arise due to conflict between the information included in other information and information contained in the financial statements and such consistencies has raised doubts in the mind of auditor about the audit conclusions drawn from audit evidence previously obtained and, possibly, about the basis for the auditor’s opinion on the financial statements.

Other information is basically financial and non-financial information (other than the financial statements and the auditor’s report thereon) which is included, either by law, regulation or custom, in a document containing audited financial statements and the auditor’s report thereon. Other information may comprise, for example; a report by management or those charged with governance on operations,  financial summaries or highlights etc.

In simple words OTHER INFORMATION can be any document which is not part of the full set of financial statements and that is why not being audited BUT it is accompanying the financial statements therefore, auditor should read this document as well to check whether it is consistent with the financial statements or not.

Both terms are basically related to the subject of auditing and are related to the work of auditor. These terms have been given due consideration in International Standards of Auditing as well.

Here are some more points in understanding the difference between these two from conceptual aspect and also from their implications on auditor’s work:

  • Material misstatements relates to information contained in the financial statements whereas material inconsistencies arise when other information and financial statements are in conflict over a certain information.
  • Material misstatements affects the economic decisions of the users of financial statements whereas material inconsistencies affects auditor’s conclusions as a result of doubts.
  • In case of material misstatements financial statements need adjustment(s) whereas if material inconsistency is discovered then auditor will assess whether financial statements require adjustments or other information.
  • In case material misstatement is not rectified by the management then auditor modifies the auditor’s report by modifying his opinion whereas if material inconsistency is found requiring revision of other information then it does not affect auditor’s opinion.

Students are invited to read ISA 720 to learn more about other information, material inconsistency and related matters.

Summary
  • Material misstatements are such omissions and misstatements of financial information included in the financial statements that can affect the economic decisions of the users of financial statements
  • Material inconsistencies arise due to the inconsistency (conflict) between the information disclosed in the financial statements and the information disclosed in other information and such inconsistencies raise doubts that can affect auditor’s conclusions.