What is meant by Anomalous misstatement?

Lingual meaning (general meanings in English language) of the word anomaly or anomalous is of something that is irregular i.e. something that is not expected to happen frequently or does not follow a certain expected pattern or simply it is not what was expected!

In auditing the terms anomaly and anomalous has the almost the same meaning and usage what is described above. But surely the term has some technical aspects attached to it and for a misstatement be categorized as an anomaly, certain conditions has to be satisfied.

International Auditing Standard (IAS) 530: Audit Sampling defines anomaly as following:

A misstatement or deviation that is demonstrably not representative of misstatements or deviations in a population.

Misstatements can be found in the financial information of an entity. Mostly, misstatements recur over a period of time and occur due to such events which are interconnected and have their effect spread over to different items of financial statements. But sometimes misstatements may occur due to such events which are non-recurring and happened only once and the effect of such misstatements is confined and therefore do not represent other misstatements in the financial information. Such misstatements which occur due to isolated events and are expected to be non-recurring are called anomalous misstatements.

Anomaly or anomalous misstatement becomes important when auditor applies sampling techniques to judge population. The reason is that in sampling auditor selects few items (sample) out of the whole lot (population) and then applies audit procedures on the sample (i.e. to only few selected out of the whole population) and based on the results gathered from such procedures applied on sample, auditor make judgments about whole population.

Now, in such sampling situations, if a sample contains such misstatement which has no connection to the other misstatements indicated by the sample then such isolated  misstatement which has no effect on other items and transactions in the financial information should be kept separate from other misstatements  while analysing the misstatements especially from such misstatements which have penetration as expectation in financial information.

We keep such misstatements separate because they do not represent the whole population as they are expected to be happening only once so they must be studied in isolation and only those misstatements should be projected to the whole population which are expected to representative of whole population i.e. they help us better understand population.

For example, auditor is checking sales records for the week just ended. Auditor sample selected a single day from the whole population i.e. transactions of seven days. Unfortunately, on the same day (which has been selected for testing by the auditor) because of a power failure sales record was not updated. Such breakdowns are not frequent and after inquiring relevant personnel it was found that such breakdowns occur once in a blue moon. Therefore, incomplete records because of such breakdowns is an anomaly and in such case auditor has to be cautious about two things:

  • Auditor must not derive an expectation on the basis of incomplete records of such day that sales records are expected to be incomplete. Because, auditor is wrongly projecting such event to the whole population which is not representative of the actual situation as in reality for the rest of the six days no such break down occurred.
  • If there are other instances of incomplete records, then auditor has to see what were the reasons other than power failure which has already been examined separately. If frequent instances are found to be incomplete then auditor inquire for reasons and apply audit procedures by taking additional items to be sure whether misstatement is normal or an anomaly.

Lastly, but keeping things simple, misstatements in the financial statements can happen because of errors or frauds. Previously, anomaly was considered to be only happening because of errors. But since the updation of auditing standards it is realised and accepted that anomalies in the financial information may occur both due to errors and frauds as even fraudulent activity might have taken place only once on a specifically identifiable occasions and not repeatedly. Therefore, now it is anomalous misstatements instead of anomalous errors.


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