Evaluating misstatements under AU-C 450: clearly trivial, the summary and the conclusion

• Set and document the clearly trivial amount under AU-C 450.05 and .12
• Classify misstatements as factual, judgmental or projected
• Evaluate uncorrected misstatements individually and in aggregate
• Identify the communications and representations that follow from the summary

Accumulating what you find

AU-C 450.05 requires you to accumulate misstatements identified during the audit other than those that are clearly trivial. Clearly trivial is a different, much smaller amount than materiality: matters that are clearly inconsequential, individually or in aggregate, by size, nature or circumstances. If you are unsure whether an item is clearly trivial, it is not. AU-C 450.12a requires you to document the amount.

AU-C 450.04 defines a misstatement broadly: a difference in amount, classification, presentation or disclosure. Misclassifications and disclosure errors belong on the summary too.

AU-C 450 application material describes three kinds:

• Factual: no doubt about them.
• Judgmental: differences from management's judgments about estimates that you consider unreasonable, or from accounting policies you consider inappropriate.
• Projected: your best estimate of misstatement in a population, projected from a sample.

As the audit progresses

AU-C 450.06 requires you to decide whether to revise the audit strategy and plan when the nature of a misstatement suggests others exist, or when the aggregate approaches materiality. A summary near materiality means your remaining margin for undetected error is thin, and more work follows.

AU-C 450.07 requires you to communicate all accumulated misstatements to the appropriate level of management on a timely basis and request correction. If management corrects an account after examining it at your request, AU-C 450.08 requires further procedures to see whether misstatements remain. If management refuses, AU-C 450.09 requires you to understand why and take that into account in evaluating whether the statements as a whole are free from material misstatement.

The evaluation

Before you evaluate, AU-C 450.10 requires you to reassess materiality against actual results. A planning benchmark based on budgeted income that came in 40% lower needs to be redone before you compare anything to it.

AU-C 450.11 then requires you to determine whether uncorrected misstatements are material, individually or in the aggregate, considering:

• Size and nature, both for the affected line item or disclosure and for the statements as a whole, and the circumstances of occurrence.
• The effect of uncorrected prior-period misstatements on the current period.

Size is not the whole answer. A small misstatement can be material when it turns a loss into a profit, breaches a covenant, involves a related party, or hides fraud. Offsetting deserves care: AU-C 450 application material warns that a material revenue overstatement is not made immaterial by an equal expense overstatement, though offsetting within the same account may be appropriate.

The SUM schedule guide shows how to present current and prior-period effects, and the uncorrected misstatements evaluator runs the totals.

What follows the summary

• Governance (AU-C 260.13). Communicate uncorrected misstatements and their effect on the opinion, identify material ones individually, request correction, and note that they could cause future periods to be materially misstated.
• Representations (AU-C 580.14). Management represents that the uncorrected items are immaterial, with the summary attached.
• Documentation (AU-C 450.12). The clearly trivial amount, all accumulated misstatements and whether they were corrected, and your conclusion with its basis.
• Opinion (AU-C 700.13b and AU-C 705). If uncorrected misstatements are material, the opinion is modified.

Where files go wrong

• The clearly trivial amount is set, but items above it were waived in workpapers without reaching the summary.
• Projected misstatements are left off because "it is only an estimate".
• Materiality is not reassessed after a large audit adjustment changes the benchmark.
• The conclusion is a total with no discussion of qualitative factors.

Bayview Outdoor Gear, Inc.: the final summary