Advanced Audit and Assurance (International) · Completion and final review

Final Analytical Review and Evaluating Misstatements (ISA 450, ISA 520)

Updated 11 October 2026 · Fact-checked

Final analytical review is an overall check, required by ISA 520, that the financial statements agree with your understanding of the entity. Under ISA 450 you accumulate misstatements, ask management to correct them, then judge whether uncorrected ones, alone or together, are material before choosing the opinion.

Understand Final Analytical Review and Evaluating Misstatements

At completion you step back. You have tested individual balances. Now you ask whether the whole set of financial statements makes sense. That is the purpose of the overall review using analytical procedures under ISA 520. It is required near the end of the audit. You compare results with what you expect, using your knowledge of the business, prior years, budgets and industry data. If the review shows an unexpected relationship, you investigate it and may find a risk you missed.

This review is different from planning analytics. At planning you look for risk areas. At completion you test whether your conclusions fit together. For example, if revenue is up 20% but cost of sales is flat and receivables days are unchanged, something does not add up. You must follow up with further audit work, not accept management's explanation alone.

ISA 450 deals with misstatements found during the audit. You accumulate all misstatements except those that are clearly trivial. You do this using a threshold set at planning. You then ask management to correct all the accumulated misstatements. Management's refusal is itself important and you must understand the reasons. You communicate uncorrected misstatements (and, where relevant, material corrected ones) to those charged with governance (TCWG) on a timely basis.

Before you evaluate, you reassess materiality. If the nature of the misstatements found, or changes in the entity's circumstances, suggest that your overall or performance materiality was wrong, you revise it. You also consider whether your audit procedures remain adequate. If the total of misstatements is close to materiality, the risk that undetected misstatements push the total over is higher. You may need to do more work.

Then you judge materiality of uncorrected misstatements individually and in aggregate. Look at size and nature. A small misstatement can be material if it hides a trend, turns a profit into a loss, breaches a loan covenant, affects management bonuses, or involves fraud or illegal acts. Misstatements can be factual, judgemental or projected. You also consider the effect of uncorrected misstatements from prior periods. Finally, you request a written representation from management on whether it believes the effects of uncorrected misstatements are immaterial, individually and in aggregate. The result feeds into the audit opinion: if material and uncorrected, you modify the opinion under ISA 705.

Key rules to remember

Accumulation threshold: Accumulate all misstatements > clearly trivial threshold; Clearly trivial is not the same as immaterial. It is set well below materiality at planning, and you must not treat it as a free allowance.
Aggregate of uncorrected misstatements: Total = factual + judgemental + projected misstatements (uncorrected); Compare the total, and each item, with materiality, and with performance materiality when judging whether more work is needed. Effects on profit and on net assets are looked at separately.
Adjusted profit after correcting misstatements: Adjusted profit = reported profit + profit understatements − profit overstatements; Always state the direction. Correcting an understated expense reduces profit.
Overall analytical review requirement: ISA 520: overall review near the end must help form a conclusion that the financial statements are consistent with the auditor's understanding of the entity; If it finds unusual relationships, investigate them.
Misstatement size test: Uncorrected total ≥ materiality → material; close to materiality → consider extra work; Qualitative factors can make a smaller item material.

How to solve Final Analytical Review and Evaluating Misstatements questions

Use this method for any question on final analytical review or on evaluating misstatements. Link each point to the scenario figures.

1Read the requirement and note whether it asks you to calculate, evaluate, or recommend action. Underline the materiality figures given.
2Calculate the effect of each misstatement on profit and on net assets. Show direction (overstated or understated) and state whether it is factual, judgemental or projected.
3Total the uncorrected misstatements and compare with overall materiality and performance materiality. Show the percentage of materiality where you can.
4Assess the nature of each item: covenants, trends, profit to loss, bonuses, related parties, fraud or non-compliance, and disclosure effect.
5Consider whether materiality needs revising and whether further audit procedures are needed, especially if the total is close to materiality.
6Recommend what to do: ask management to correct, communicate to TCWG, and obtain a written representation.
7State the effect on the audit opinion, using ISA 705 where uncorrected misstatements are material, and say whether the effect is material or pervasive.
8For analytical review, identify the unexpected relationships, give plausible causes, and name the follow-up procedure for each.

Quickest way: Table-free aggregate and judge

When to use it: Use this when a scenario gives a list of misstatements and you have limited time.

Write overall materiality and performance materiality at the top of your answer.
List each item with one line: amount, direction, effect on profit.
Total the profit effect and compare with materiality, giving a percentage.
Add one qualitative comment per item that matters, such as covenant, trend or bonus.
End with a clear recommendation: correct, communicate to TCWG, and the opinion effect.

Common mistakes in Final Analytical Review and Evaluating Misstatements

Treating 'clearly trivial' as meaning 'below materiality' and ignoring items between the two.
The two terms sound similar and students merge them.
Fix: Remember that clearly trivial is a much lower threshold. Items above it must be accumulated and considered in aggregate.
Judging each misstatement on its own and never adding them up.
Students compare each item with materiality, find it below the line, and stop.
Fix: Always total the uncorrected items and compare the total with materiality. Then consider nature as well as size.
Looking only at the amount and ignoring qualitative factors.
Calculation feels safer than judgement.
Fix: For each item ask whether it affects covenants, trends, bonuses, profit versus loss, or legal compliance. Say so in your answer.
Getting the direction of the profit effect wrong.
Students rush and confuse overstated expenses with overstated profit.
Fix: Write 'profit overstated' or 'profit understated' beside every item before totalling.
Describing final analytical review as the same as planning analytics.
Both use ISA 520 and similar ratios.
Fix: State that at completion the main purpose is to form an overall conclusion that the financial statements are consistent with your understanding of the entity. The review may also reveal risks of material misstatement you had not identified before. If it does, you must address them with further work.
Accepting management's explanation for an unusual relationship without corroboration.
Time pressure and a wish to finish the audit.
Fix: Say you would obtain evidence for the explanation, such as contracts, correspondence or recalculations, and show scepticism.

Worked examples

Example 1

Overall materiality for Kavya Ltd is $200,000 and performance materiality is $150,000. Profit before tax is $2,500,000. Management has refused to correct these misstatements: (1) inventory overstated by $90,000 (factual); (2) accrued expenses understated by $70,000 (factual); (3) a judgemental overstatement of a provision release of $60,000. Evaluate the effect and advise.

Show the solution

Item 1: inventory overstated means cost of sales understated, so profit is overstated by $90,000.
Item 2: accrued expenses understated means expenses understated, so profit is overstated by $70,000.
Item 3: provision release overstated means profit is overstated by $60,000.
Total effect: 90,000 + 70,000 + 60,000 = $220,000 profit overstated.
Compare with materiality: $220,000 is above overall materiality of $200,000 (110% of it) and above performance materiality of $150,000 (about 147% of it). It is 8.8% of profit before tax (220,000 ÷ 2,500,000).
Even individually, no item exceeds overall or performance materiality. The aggregate exceeds both, so the uncorrected misstatements are material in aggregate.
Because the total exceeds performance materiality, reassess whether the audit procedures were sufficient. Consider whether materiality needs revising and whether more work is needed, as undetected misstatements may add to the total.
All three items overstate profit, which suggests possible management bias. Item 3 is judgemental and should be discussed with TCWG as a possible sign of bias.
Recommend: ask management to correct all three misstatements. Communicate the uncorrected items to TCWG and request correction. Obtain a written representation on any items left uncorrected.
If management still refuses to correct them, the aggregate misstatement is material, so modify the opinion under ISA 705. A qualified opinion is appropriate, because the effect is material but not pervasive.

Answer: Profit is overstated by $220,000 in aggregate. This exceeds overall materiality of $200,000 and performance materiality of $150,000, so the misstatements are material in aggregate. Reassess whether the audit work was sufficient, request correction and report to TCWG. If management refuses to correct them, give a qualified opinion because the effect is material but not pervasive.

Example 2

During final analytical review of Rohan Co, revenue has risen 15% from $8,000,000 to $9,200,000. Gross margin has risen from 30% to 36%. Receivables days are unchanged and inventory is flat. Explain what the review suggests and what you would do.

Show the solution

Compute last year's gross profit: 8,000,000 × 30% = $2,400,000.
Compute this year's gross profit: 9,200,000 × 36% = $3,312,000.
Gross profit has risen by 3,312,000 − 2,400,000 = $912,000, which is 38% of last year's figure (912,000 ÷ 2,400,000).
Compute cost of sales. Last year: 8,000,000 × 70% = $5,600,000. This year: 9,200,000 × 64% = $5,888,000.
Cost of sales has risen by $288,000, about 5.1% (288,000 ÷ 5,600,000), against a 15% rise in revenue. This is the unexpected relationship, unless selling prices or input costs changed.
Possible causes: understated cost of sales, inventory or purchases cut-off errors, overstated revenue, real price rises or lower input costs, or a change in sales mix.
Unchanged receivables days and flat inventory give no explanation for the margin change. They do not rule out cut-off errors.
Follow-up procedures: obtain management's explanation and corroborate it with price lists and supplier invoices. Test revenue and purchases cut-off. Review credit notes after year end. Recheck inventory costing and any year-end journals.
Consider whether this indicates a fraud risk in revenue or cost of sales. Discuss it with the engagement partner, extend audit procedures, and evaluate any misstatement found under ISA 450.

Answer: Revenue rose 15% but cost of sales rose only about 5.1% (from $5,600,000 to $5,888,000). Gross margin rose 6 percentage points and gross profit rose by $912,000. This is unexpected given the audit understanding. Investigate it with cut-off, pricing and costing tests before concluding. Do not accept management's explanation without corroboration.

Exam tips

Show the calculation first, then the judgement. Markers give technical marks for correct totals and direction.
Always say whether the misstatement is material individually, in aggregate, or both, and mention its nature.
Link your recommendation to the opinion: correction, communication to TCWG, written representation, and ISA 705 if uncorrected and material.
In analytical review answers, give a cause and a follow-up procedure for each unusual relationship. A list of ratios alone earns little.
Use professional scepticism wording when management resists correcting items, and say that you would consider whether the pattern shows bias.

Practice questions from Completion and final review

Final Analytical Review and Evaluating Misstatements in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Final Analytical Review and Evaluating Misstatements: frequently asked questions

What is the difference between ISA 450 and ISA 520 at completion?

ISA 520 requires an overall analytical review to check that the financial statements agree with your understanding of the entity. ISA 450 requires you to accumulate, communicate and evaluate misstatements found. One tests overall consistency and the other assesses the impact of errors.

Do I have to report every misstatement to TCWG?

You accumulate all misstatements above the clearly trivial threshold and ask management to correct them all. You communicate uncorrected misstatements (and, where relevant, material corrected ones) to TCWG on a timely basis. You also request a written representation on the uncorrected items.

Can I revise materiality at completion?

Yes. If circumstances change or the misstatements found suggest the original level was too high, you revise it. You then reconsider whether the nature, timing and extent of the further work were enough.

When can a small misstatement be material?

A small misstatement can be material if its nature matters. Examples are items that turn a loss into a profit, breach a covenant, affect bonuses, hide a trend, or involve fraud or illegal acts.