Misstatement is a situation that arises when a transaction or event has not been recorded or treated correctly in an entity’s financial statements. This can impact the application of a conceptual framework (CFW) according to which an entity prepares and issues its financial statements to its users. A misstatement, if material individually or as part of a wider set of misstatements, results in a situation where the financial statements are not presented fairly in conformity with the applicable financial reporting framework.

A misstatement constitutes a difference between the amount, classification, presentation, or disclosure of a reported item (in the financial statements) and the amount, classification, presentation, or disclosure of the same item that should be reported in conformity with the applicable reporting framework.

Misstatement may come in varying degrees, including mainly material misstatement and immaterial misstatement. Material misstatement arises from the financial statements presented by a reporting entity that are not in conformity with applicable standards or framework, in all material respects. For audited financials, this reflects the auditor’s belief that the financial statements, perceived as a whole, are materially misstated.

Misstatements can arise due to error (i.e., unintentional misstatement) or fraud (i.e., intentional misstatement). Examples include 1) recognition of an incorrect amount – for example, an asset is not valued using the relevant measurement base in accordance with the applicable framework requirements. 2) incorrect classification of an item – such as finance cost, as part of cost of sales in the statement of income. 3) misstatements that are caused by inappropriate presentation of certain items such as fair value gains or losses that should have been separately presented. 4) incorrect disclosures, or lack of disclosures that arise due to management’s overlook (e.g., a disclosure for onerous commitments are missing or inadequately described in the notes to the financial statements.