## SA 450 – Communication, Correction & Documentation of Misstatements

### 1. Communication and Correction of Misstatements

The auditor must communicate all accumulated misstatements to the appropriate level of management on a timely basis, unless prohibited by law or regulation.

Why timely communication matters:

Management can evaluate whether items are true misstatements
Management can inform the auditor if it disagrees and take necessary action
Reduces Risk of Material Misstatement (ROMM) in future FS by preventing cumulative build-up of immaterial uncorrected misstatements from prior periods

If Management Refuses to Correct:

1. Auditor must obtain an understanding of management's reasons for not correcting

2. Use that understanding to evaluate whether the FS as a whole are free from material misstatement

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### 2. Communication with Those Charged with Governance (TCWG)

The auditor shall communicate with TCWG regarding uncorrected misstatements and the effect they may have — individually or in aggregate — on the audit opinion.

Requirement	Detail
Identify material uncorrected misstatements	Must be identified individually
Request correction	Auditor shall request that uncorrected misstatements be corrected
Prior period effect	Communicate effect of prior-period uncorrected misstatements on current FS

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### 3. Written Representation (WR) from Management

The auditor shall request a Written Representation from management and, where appropriate, TCWG, confirming that:

They believe the effects of uncorrected misstatements are immaterial — individually and in aggregate
A summary of all such uncorrected items must be included in the WR

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### 4. Documentation Requirements

The auditor must document all three of the following:

1. The clearly trivial threshold — the amount below which misstatements are regarded as clearly trivial

2. All misstatements accumulated during the audit and whether each has been corrected

3. The auditor's conclusion on whether uncorrected misstatements are material (individually or in aggregate) and the basis for that conclusion

Worked example

### Example 1

Scenario – Management Refusal to Correct: During the audit of XYZ Ltd., the auditor identifies a ₹2,00,000 overstatement in trade receivables. Management acknowledges the error but refuses to correct it, claiming it is immaterial. Required steps: (1) Communicate the misstatement in writing to management timely. (2) Communicate it to TCWG, identifying it as an uncorrected misstatement and its potential effect on the opinion. (3) Obtain a Written Representation from management stating they believe the effect is immaterial. (4) Document: the clearly trivial threshold, the misstatement, management's refusal, and the auditor's conclusion on materiality.

### Example 2

Scenario – Cumulative Prior Period Misstatements: The auditor has set a clearly trivial threshold of ₹10,000. Three uncorrected misstatements from prior years (₹8,000 each) are carried forward. Even though each is below the clearly trivial threshold, the auditor must: (a) document all three and their uncorrected status; (b) evaluate the cumulative effect of ₹24,000 on current period FS; and (c) communicate the aggregate effect to TCWG if it may influence the opinion.

⚠️ Common exam mistakes

Assuming once management refuses to correct a misstatement, the auditor's responsibility ends — the auditor must still evaluate whether FS as a whole are free from material misstatement
Forgetting to communicate uncorrected misstatements to TCWG separately and distinctly from communication with management
Not documenting the clearly trivial threshold amount — all three documentation elements (threshold, list of misstatements, conclusion) are required
Omitting prior period uncorrected misstatements from evaluation of current period FS — cumulative effect must always be assessed
Confusing 'clearly trivial' with 'immaterial' — clearly trivial is a much lower threshold; an item can be immaterial but not clearly trivial

Reference:

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