Clearly trivial thresholds and accumulating misstatements (AU-C 450)

In this lesson you will

Set a clearly trivial threshold consistent with AU-C 450.A2-.A3.
Classify misstatements as factual, judgmental or projected.
Determine when AU-C 450.06 requires revising the strategy and plan.
Document accumulated misstatements as AU-C 450.12 requires.

Accumulate everything above clearly trivial

AU-C 450.05 requires you to accumulate misstatements identified during the audit, other than those that are clearly trivial. AU-C 450.04 defines a misstatement as a difference between the reported amount, classification, presentation or disclosure of an item and what the framework requires. Misstatements also include adjustments you judge necessary for fair presentation in all material respects.

What clearly trivial means

AU-C 450.A2 is precise:

Clearly trivial is not another expression for "not material."
Clearly trivial misstatements are of a wholly different, smaller order of magnitude, or of a wholly different nature, than material ones.
They are clearly inconsequential, individually or in aggregate, by any criteria of size, nature or circumstances.
If there is any uncertainty about whether an item is clearly trivial, it is not.

AU-C 450.A3 allows you to designate an amount below which misstatements of amounts are clearly trivial and need not be accumulated, because accumulating them clearly would not have a material effect. Misstatements below that amount can still fail the test because of their nature, such as a small fraud or an illegal payment.

The standard gives no percentage. Firm methodologies commonly set it as a small fraction of overall materiality. AU-C 450.12(a) requires you to document the amount.

Three categories

AU-C 450.A6 says you may find it useful to distinguish:

Factual misstatements: no doubt about them. A duplicated invoice.
Judgmental misstatements: differences in management's judgments, including estimates and policy choices, that you consider unreasonable or inappropriate. The difference between management's warranty estimate and the nearest point of your reasonable range.
Projected misstatements: your best estimate of misstatement in a population based on a sample. Covered in projecting and evaluating sample results.

The categories help when you request corrections and talk with governance. Management can fix a factual misstatement exactly; a projected one may call for management to investigate the population.

When the plan must change

AU-C 450.06 requires you to determine whether the overall strategy and plan need revision if:

(a) the nature of identified misstatements and the circumstances of their occurrence indicate other misstatements may exist that, together with those accumulated, could be material. AU-C 450.A7 gives examples: a breakdown in internal control, or inappropriate assumptions or valuation methods applied widely; or
(b) the aggregate of accumulated misstatements approaches materiality. AU-C 450.A8 explains that undetected misstatements from sampling and nonsampling risk could then push the total past materiality.

Communication and correction

AU-C 450.07 requires you to communicate all accumulated misstatements on a timely basis to the appropriate level of management and request correction. If management examined a class or balance at your request and corrected misstatements, AU-C 450.08 requires additional procedures to determine whether misstatements remain. If management refuses, AU-C 450.09 requires you to understand the reasons and consider them when evaluating whether the statements are free from material misstatement.

Documentation

AU-C 450.12 requires documentation of the clearly trivial amount, all accumulated misstatements and whether they were corrected, and your conclusion on whether uncorrected misstatements are material and the basis. The summary of uncorrected misstatements and its calculator handle the arithmetic.

Common findings

Clearly trivial set at a large fraction of materiality, so real misstatements are never accumulated.
Small misstatements with a fraud or compliance nature dropped as trivial.
Corrected misstatements missing from the file.
No reassessment when the aggregate neared materiality.

Worked example

Accumulating and reacting

Larkspur Property Management, LLC has materiality of $120,000, performance materiality of $84,000 and a clearly trivial threshold of $6,000 under the firm's methodology.

Misstatements found by mid-fieldwork:

Duplicate vendor payment recorded as expense: $14,500 (factual).
Prepaid insurance not amortized for December: $4,200. Below $6,000 and routine in nature, so not accumulated.
Bad debt reserve: management $40,000; the team's range is $65,000 to $90,000. Judgmental misstatement to the nearest point: $25,000.
Projected misstatement from a sample of tenant deposits: $31,000.
A $2,800 payment to a city inspector recorded as consulting expense. Below the threshold, but the nature suggests a possible illegal payment. Accumulated and evaluated under AU-C 250 and AU-C 240.

Accumulated: $14,500 + $25,000 + $31,000 + $2,800 = $73,300, which is 61% of materiality and approaching performance materiality.

Under AU-C 450.06(b) the team revisits the plan. It expands the tenant deposit sample to reduce sampling risk and asks management to correct items 1 and 3. Management corrects both, leaving $31,000 + $2,800 = $33,800 uncorrected, with item 5 reported to the managing member.

Self-check

Answer each question before you open the answer.

Is "clearly trivial" another way of saying "not material"?
Show answer
No. AU-C 450.A2 says clearly trivial items are of a wholly different, smaller order of magnitude or nature than material ones, and any uncertainty means the item is not clearly trivial.
Define a judgmental misstatement.
Show answer
A difference arising from management judgments, including estimates and policy choices, that the auditor considers unreasonable or inappropriate (AU-C 450.A6).
Accumulated misstatements approach materiality halfway through fieldwork. What does AU-C 450.06 require?
Show answer
Determine whether the overall strategy and plan need revision, because undetected misstatements could push the total over materiality.
A $900 misstatement falls below a $5,000 clearly trivial threshold but involves a kickback. Do you accumulate it?
Show answer
Yes. AU-C 450.A3 notes misstatements below the designated amount may not be clearly trivial because of their nature or circumstances, and a kickback also triggers AU-C 240 and AU-C 250 considerations.

Sources

AICPA Statements on Auditing Standards, currently effective (AU-C sections)

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error