Definition
AU-C 450 requires the auditor to accumulate misstatements other than clearly trivial ones, communicate them to management on a timely basis and ask for correction. Those left uncorrected are listed individually, often on a Summary of Uncorrected Misstatements, also called the schedule of passed adjustments. The list includes factual, judgmental and projected misstatements, and shows the effect on income, assets and liabilities.
Why it matters in an audit or review
The total, and its effect on each line, is judged against materiality, both quantitatively and qualitatively, before the opinion is finalized. The auditor also communicates uncorrected misstatements to those charged with governance and asks management to confirm in the representation letter that the effects are immaterial.
Example
Pretax income is $2.0 million and materiality is $100,000 (illustrative). The SUM lists a $35,000 overstatement of revenue, a $22,000 understatement of accrued bonus expense and an $18,000 projected overstatement of receivables (understated bad debt expense). Each overstates income, so the net effect is an overstatement of $75,000 (35,000 + 22,000 + 18,000). That is below materiality but close, and the team considers whether it needs further work.
Common mistakes
- Netting overstatements and understatements without considering each statement line.
- Ignoring prior-year uncorrected items still affecting the opening balance.
FAQ
Is a passed adjustment the same thing?
Yes. It is an older name for a misstatement the client declined to book.
Sources
- AICPA, AU-C Section 450, Evaluation of Misstatements Identified During the Audit
- AICPA, AU-C Section 260, The Auditor's Communication With Those Charged With Governance
- AICPA, AU-C Section 580, Written Representations
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error