## SA 450: Evaluation of Misstatements Identified During Audit

### Objective of the Auditor (SA 450)

To evaluate:

1. The effect of identified misstatements on the audit.

2. The effect of uncorrected misstatements on the financial statements.

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### Step 1 — Accumulation of Misstatements

Type	Description	Action
Clearly Trivial	Very small; obviously immaterial in any context	Ignore — do not accumulate
Not Clearly Trivial	Everything else — even if individually small	Accumulate as audit progresses

> The auditor sets a threshold below which misstatements are considered clearly trivial. This must be documented.

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### Step 2 — Consideration as Audit Progresses

As misstatements accumulate, the auditor assesses whether the audit plan and audit strategy need revision, based on:

i) Nature and Circumstances of Misstatements

Do they indicate that other misstatements may exist?
Could they, when aggregated with other misstatements, become material?

ii) Aggregate of Accumulated Misstatements

If approaching materiality → auditor must re-examine and ask management to correct misstatements (based on identified or projected errors).
After corrections → verify no material misstatement remains.

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### Step 3 — Communication and Correction of Misstatements

Communicate misstatements to management on a timely basis.
Request correction of all identified misstatements.
If management refuses to correct → auditor must understand the reasons.

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### Step 4 — Evaluating Uncorrected Misstatements

Before evaluating, reconsider whether materiality is still appropriate for the engagement.

The auditor determines whether uncorrected misstatements are material, considering:

Factor	Description
Size	Quantitative amount of the misstatement
Nature	Qualitative character (e.g., intentional, fraud-related, related to an estimate)
Circumstances of Occurrence	Context in which the misstatement arose
Prior Period Effect	Effect of uncorrected misstatements from prior periods carrying forward

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### Step 5 — Communication with TCWG

Mandatory: Communicate all uncorrected misstatements and their potential impact on the Auditor's Opinion.
Request TCWG to ensure correction.
Communicate the effect of uncorrected misstatements of prior periods.

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### Step 6 — Written Representation (WIR) from Management and TCWG

The auditor obtains a Written Representation confirming that management (and TCWG) believe the effect of uncorrected misstatements is immaterial.

The summary of uncorrected misstatements is included in or attached to the WIR.

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### Documentation Requirements

The auditor must document:

1. The amount below which misstatements are considered clearly trivial.

2. All accumulated misstatements — and whether each was corrected or not.

3. The auditor's conclusion on whether uncorrected misstatements are material, and the basis for that conclusion.

Worked example

### Example 1

Example 1 — Clearly Trivial vs. Not Clearly Trivial:

The auditor of PQR Ltd sets a clearly trivial threshold of ₹10,000. During audit, the following errors are found: (a) ₹8,000 overstatement of petty cash, (b) ₹45,000 understatement of receivables, (c) ₹6,000 misclassification between expense heads.

Answer:

(a) ₹8,000 < ₹10,000 threshold → Clearly trivial → Ignore.
(b) ₹45,000 > ₹10,000 → Not clearly trivial → Accumulate.
(c) ₹6,000 < ₹10,000 → Clearly trivial → Ignore.

The auditor accumulates only (b) and requests management to correct it.

### Example 2

Example 2 — Aggregate Approaching Materiality:

Materiality for LMN Ltd is ₹5 lakhs. The auditor accumulates three uncorrected misstatements: ₹1.5L, ₹2L, and ₹1.8L. Management refuses to correct any of them.

Answer: Aggregate = ₹5.3 lakhs, which exceeds materiality. The auditor must:

1. Re-examine whether the audit plan needs revision.

2. Again request management to make corrections.

3. If management still refuses, evaluate whether uncorrected misstatements are material considering size, nature, and circumstances.

4. Communicate to TCWG (mandatory) — including that the potential impact could affect the Auditor's Opinion (possible qualification).

5. Obtain a WIR from management stating they believe the ₹5.3L is immaterial (auditor may disagree and modify the opinion).

### Example 3

Example 3 — Prior Period Uncorrected Misstatements:

During the audit of FY 2025-26, the auditor finds that an uncorrected misstatement of ₹80,000 from FY 2024-25 (understated depreciation) is still present and has now also affected the opening balance of FY 2025-26.

Answer: The auditor must:

Consider the cumulative effect (prior period + current period impact) when evaluating whether the aggregate is material.
Communicate the effect of prior period uncorrected misstatements to TCWG as a mandatory requirement under SA 450.
Include this in the WIR obtained from management.

### Example 4

Example 4 — Documentation:

List the three items an auditor must document under SA 450.

Answer:

1. The amount (threshold) below which misstatements would be clearly trivial.

2. All accumulated misstatements and whether each was corrected by management.

3. The auditor's conclusion on whether uncorrected misstatements are material, and the basis for that conclusion.

⚠️ Common exam mistakes

Thinking 'clearly trivial' means the same as 'immaterial' — clearly trivial is a much smaller threshold; immaterial items still need evaluation, but clearly trivial items are so small they can be ignored entirely.
Forgetting to reconsider materiality before evaluating uncorrected misstatements — materiality must be reassessed at the evaluation stage, not just at planning.
Missing the mandatory WIR requirement — obtaining written representation from management (and TCWG) about uncorrected misstatements being immaterial is mandatory, not optional.
Skipping communication with TCWG for uncorrected misstatements — communication to TCWG (not just management) is mandatory under SA 450, including the potential impact on the Auditor's Opinion.
Forgetting all three documentation requirements — exam questions frequently test all three: (1) clearly trivial threshold, (2) all accumulated misstatements and corrections, (3) conclusion on materiality with basis.
Ignoring prior period uncorrected misstatements — these must be separately communicated to TCWG and factored into the current year's aggregate evaluation.
Not revising the audit plan when aggregate misstatements are significant — if accumulated misstatements suggest the audit strategy is insufficient, revision is required, not just noting the misstatements.

Reference: SA 450 — SA 450 – Evaluation of Misstatements Identified During the Audit (ICAI)

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SA 450 - Evaluation of Misstatements Identified During Audit

Worked example

⚠️ Common exam mistakes