# SA 450: Evaluation of Misstatements Identified During the Audit

## Objectives of the Auditor

To evaluate:

1. The effect of identified misstatements on the audit

2. The effect of uncorrected misstatements on the financial statements

> Foundational rule: The auditor shall accumulate all misstatements identified during the audit, except those that are clearly trivial.

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## Considering Misstatements As the Audit Progresses

The auditor must determine whether to revise the overall audit strategy and audit plan when:

Trigger	Reason
Nature and circumstances of identified misstatements suggest other misstatements may exist	Aggregate could be material
Aggregate of accumulated misstatements is approaching materiality (per SA 320)	Risk that FS are materially misstated

### Requesting Management to Examine

The auditor may request management to examine a class of transactions, account balance, or disclosure to understand the cause of a misstatement and make appropriate adjustments
If management corrects misstatements following the auditor's request → auditor must perform additional audit procedures to determine whether misstatements remain

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## Evaluating Uncorrected Misstatements

The auditor determines whether uncorrected misstatements are material, individually or in aggregate.

Factors to consider:

1. Size and nature of the misstatements — in relation to:

Particular classes of transactions, account balances, or disclosures
The FS as a whole

2. Particular circumstances of their occurrence

> (Note: This topic continues beyond the available extract — further evaluation criteria and communication requirements for uncorrected misstatements are covered in the full SA 450 text.)

Worked example

### Example 1

Example 1 — When to revise the audit plan due to accumulated misstatements:

Scenario: The auditor set overall materiality at ₹10 lakh. During fieldwork, the following misstatements are accumulated:

Overstatement in debtors: ₹2 lakh
Understatement in accrued expenses: ₹3.5 lakh
Overstatement in inventory: ₹3 lakh

Total accumulated misstatements = ₹8.5 lakh → approaching ₹10 lakh materiality threshold.

→ The auditor must consider revising the audit strategy and audit plan — extending procedures in areas most likely to contain additional misstatements, since further misstatements of even ₹1.5 lakh would push aggregate past materiality.

### Example 2

Example 2 — Additional procedures after management corrects misstatements:

Scenario: Auditor identifies that trade receivables include ₹4 lakh of debts outstanding for over 3 years with no provision. The auditor requests management to review the debtors ledger and make appropriate provisions. Management creates a ₹4 lakh provision.

→ The auditor cannot simply accept the correction. The auditor must perform additional audit procedures — e.g., reviewing the revised aged debtors list, checking whether other long-outstanding balances exist that also warrant provisioning, and confirming the provision calculation is appropriate.

⚠️ Common exam mistakes

Including 'clearly trivial' misstatements in the accumulation schedule — only misstatements that are NOT clearly trivial need to be accumulated; including trivial items inflates the apparent risk
Accepting management's corrections of misstatements without performing additional audit procedures — SA 450 explicitly requires additional procedures to confirm no residual misstatements remain after management-initiated corrections
Evaluating misstatements only individually and not in aggregate — individually immaterial misstatements can collectively be material; the aggregate test is mandatory
Waiting until the end of the audit to consider whether accumulated misstatements require revision of the audit plan — SA 450 requires this assessment to be ongoing throughout the audit

Bare-Act text Objectives and Accumulation of Misstatements · SA 450 issued by ICAI · click to expand

The objectives of the auditor are to evaluate: (a) the effect of identified misstatements on the audit; and (b) the effect of uncorrected misstatements, if any, on the financial statements. The auditor shall accumulate misstatements identified during the audit, other than those that are clearly trivial.

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SA 450 – Evaluation of Misstatements Identified During the Audit

Worked example

⚠️ Common exam mistakes