The summary of uncorrected misstatements (the SUM, or schedule of passed adjustments) is where the audit's findings meet materiality. Every misstatement the auditor found and management did not correct goes on it, and the partner uses it to decide whether the financial statements are materially misstated. This guide covers the build and the evaluation. The standard is summarized at AU-C 450; the reasoning behind the thresholds is in materiality in auditing.
What goes on the schedule
Accumulate every misstatement identified during the audit other than those that are clearly trivial. The GAO Financial Audit Manual sorts them into three groups, and the same grouping works for private-entity audits:
| Type | What it is | Source |
|---|---|---|
| Factual | No doubt about it | Errors found in test items, unrecorded invoices, cutoff errors |
| Judgmental | Differences from management's judgments the auditor considers unreasonable | Estimates outside the auditor's range, accounting policy departures |
| Projected | The auditor's best estimate of misstatement in a population based on a sample | Sample results projected to the population |
For an accounting estimate, if the audit evidence supports a point estimate different from management's, the difference is a misstatement. If it supports a range that excludes management's point estimate, the difference between management's point estimate and the nearest end of the range goes on the schedule as a judgmental misstatement.
Also include disclosure misstatements and omissions, with a qualitative description.
The clearly trivial threshold
Set the threshold in planning and record it. The clearly trivial amount is the level below which items need not be accumulated because their sum would clearly not matter. The GAO manual sets it well below performance materiality, using 5 percent or less of performance materiality, and asks for a documented reason if a higher percentage is used. An item under the threshold still goes on the schedule if its nature makes it more than trivial: a misstatement that turns a loss into a profit, hides a covenant breach or involves a related party.
Columns of the schedule
A schedule that works for reviewers has these columns:
- Reference number and workpaper index.
- Description and type (factual, judgmental, projected).
- Effect on assets, liabilities, equity and pretax income, signed so that a positive number means the recorded amount is too high.
- Whether it affects the current year, the prior year or both.
- Management's reason for not correcting.
- Status: corrected after discussion, or uncorrected.
Sort by financial statement line. Add a tax effect column if the entity is a taxpayer.
Worked example: four entries
Illustrative figures for a client with overall materiality of $250,000 and performance materiality of $187,500. Positive means the recorded amount is overstated.
| # | Description | Type | Assets | Liabilities | Current-year pretax income |
|---|---|---|---|---|---|
| 1 | Revenue recorded December 30 for goods shipped January 3: receivables overstated 95,000, inventory understated 60,000 | Factual | +35,000 | 0 | +35,000 |
| 2 | Allowance for credit losses below the auditor's range | Judgmental | +70,000 | 0 | +70,000 |
| 3 | Inventory price test sample, projected to the population | Projected | +82,000 | 0 | +82,000 |
| 4 | Prior-year bonus accrual understated by 45,000, paid and expensed in the current year | Factual | 0 | 0 at the current year end | (45,000) |
Item 4 left the prior-year liability understated by $45,000. In the current year the payment ran through expense, so current-year income is understated by $45,000, and the balance sheet is right at the current year end.
The two evaluation methods
Evaluate the schedule two ways. GAO's manual calls them the balance sheet approach and the net cost approach, and notes they are also known as the iron curtain and rollover approaches.
Iron curtain (balance sheet) method. Quantify each misstatement by its effect on the year-end balance sheet, so that the balance sheet is correct at the end of the year, whatever year the error arose in.
Rollover (income statement) method. Quantify each misstatement by its effect on the current year's income statement, including the reversal of prior-year errors.
Why use both: each can hide a material misstatement the other reveals. An error that builds up in the balance sheet over several years, small each year, passes the rollover test and fails the iron curtain test. A prior-year error that reverses in the current year can look small on the balance sheet and large against current-year earnings.
Applying both to the example
| Method | Computation | Result |
|---|---|---|
| Iron curtain | Net assets overstated at year end: 35,000 + 70,000 + 82,000. Item 4 is zero at year end | 187,000 |
| Rollover, gross | Current-year income effects without netting: 35,000 + 70,000 + 82,000 + 45,000 | 232,000 |
| Rollover, net | Overstatements less the understatement: 187,000 less 45,000 | 142,000 |
No measure exceeds overall materiality of $250,000. But the iron curtain result of $187,000 is $500 below performance materiality of $187,500, and the gross rollover result of $232,000 is 93 percent of overall materiality. Netting is not a comfortable answer here: the manual cautions against offsetting a misstatement judged material with others, and allows offsetting within one account only after considering undetected misstatements. The partner needs to document why the statements are not materially misstated or ask management to book the inventory projection first. If the 82,000 is corrected, the iron curtain figure falls to $105,000.
Evaluate qualitatively
Quantity is not enough. Look at the nature of each item: whether it affects a covenant, bonus calculation, regulatory ratio or trend, whether it turns a loss into a profit, whether it involves a related party or management intent, and whether it signals a control deficiency. A small item that was intentional is not small. See management override.
Combine with undetected misstatement
The schedule holds known and projected items. Audit exposure also includes untested amounts and the allowance for sampling risk. The GAO manual treats untested amounts as potentially fully overstated in its exposure template. Compare the sum to materiality when you conclude, not just the known items.
Communicate and ask management to correct
Tell management about every misstatement other than clearly trivial and request correction. Management decides. If it declines, the auditor records why and weighs the reasons in the overall evaluation. The list of uncorrected items goes to management as an attachment to the representation letter, and the aggregate effect goes to those charged with governance. See representation letter drafting and AU-C 260 communications.
Carry forward
Roll the schedule forward every year. Show prior-year items, whether they reversed and the carry-over effect. An uncorrected item that never reverses accumulates against the balance sheet.
Documentation checklist
- Clearly trivial threshold and rationale.
- Schedule with type, effects and management's reason for not correcting.
- Evaluation by both methods, with the numbers.
- Qualitative evaluation.
- Partner conclusion and approval.
- Prior-year schedule and carry-forward.
- Cross-reference to the adjusting entry log and the representation letter.
CORAA prepares ready-to-review audit files for US CPA firms; the firm keeps the client, the review and the signature. See /us.
Sources
- AICPA, AU-C Section 450, Evaluation of Misstatements Identified During the Audit; AU-C Section 320, Materiality in Planning and Performing an Audit
- U.S. Government Accountability Office, Financial Audit Manual, Volume 1 (GAO-26-108577), June 2026, FAM 230, 540 and 545 (clearly trivial threshold, categories of misstatement, balance sheet and net cost approaches, audit exposure): gao.gov
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