Advanced Auditing, Assurance and Professional Ethics · Audit Planning, Strategy and Execution

SA 450: Evaluation of Misstatements Identified During the Audit

Updated 5 October 2026 · Fact-checked

SA 450 tells you how to handle misstatements found during an audit. You accumulate all except clearly trivial ones, ask management to correct them, evaluate whether uncorrected ones are material alone or together, communicate them, obtain a written representation, and then decide the effect on your opinion.

Understand SA 450: Evaluation of Misstatements Identified During the Audit

A misstatement is a difference between the amount, classification, presentation or disclosure reported and what the applicable framework requires. It can arise from error or fraud. SA 450 deals with what you do with misstatements once you find them.

You do not track every small difference. You set a threshold below which items are clearly trivial. This is not the same as materiality. It is an amount so small that the items, alone or together, would clearly not matter on any criteria of size, nature or circumstance. If you are unsure whether an item is trivial, treat it as not trivial.

Misstatements are of three kinds. A factual misstatement is one with no doubt, such as an invoice booked twice. A judgmental misstatement arises from management's or the auditor's different view of an estimate or an accounting policy that you consider unreasonable or inappropriate. A projected misstatement is your best estimate of misstatement in a population, extrapolated from the misstatements found in a sample.

The auditor accumulates misstatements during the audit and reconsiders materiality and the audit strategy if the nature or number of misstatements suggests that the aggregate of undetected ones could be material. You then ask management to correct all accumulated misstatements. If management refuses, you find out why and take that into account when judging whether the financial statements are free from material misstatement.

Before forming the opinion, you reassess materiality to confirm it is still appropriate, and evaluate whether uncorrected misstatements are material, individually or in aggregate. You consider size and nature, and the circumstances in which they arose. You communicate uncorrected misstatements to those charged with governance, request correction, and obtain a written representation that the effects of uncorrected misstatements are immaterial.

Key rules to remember

Clearly trivial: Clearly trivial ≠ Immaterial; threshold is set well below materiality; Items at or below the threshold need not be accumulated. If in doubt, the item is not clearly trivial.
Projected misstatement: Projected misstatement = Misstatement in sample ÷ Sample value × Population value; Simple ratio extrapolation. Use it only when the sample is representative and the population is homogeneous. Any method must suit the audit sampling approach.
Aggregate uncorrected misstatements: Factual + Judgmental + Projected (uncorrected) vs Materiality; Compare the total, and also each item individually, with materiality. Also weigh qualitative factors.
Core requirements: Accumulate → Communicate on a timely basis → Request correction → Evaluate uncorrected → Represent; The auditor requests a written representation from management and, where appropriate, those charged with governance, that the effects of uncorrected misstatements are immaterial. A summary of the uncorrected items is attached or included.
Prior period effect: Evaluate uncorrected misstatements of prior periods that affect the current period; Consider the effect on current period financial statements, as well as the effect of the current period items on aggregate.

How to solve SA 450: Evaluation of Misstatements Identified During the Audit questions

Use this order for any SA 450 case or theory question. It matches the standard and gives the examiner the provision, facts and conclusion format.

1Identify each item from the case and classify it as factual, judgmental or projected. Note whether it is above or below the clearly trivial level.
2Accumulate the items that are not clearly trivial. Mention that you reconsider materiality and the audit strategy if the nature or number suggests undetected misstatements could be material.
3Ask management to correct them. State what you do if management refuses, which is to understand the reasons and consider them in judging if the statements are free of material misstatement.
4Compute the total of uncorrected items, including projected misstatement. Compare each item and the total with materiality.
5Add qualitative factors: effect on compliance with regulatory or loan covenants, trend of profits, segment, management remuneration, related parties, fraud indicators, and effect on ratios.
6Reach a conclusion on whether the uncorrected misstatements are material, alone or in aggregate.
7Communicate the uncorrected items to those charged with governance, request correction, and obtain written representations.
8State the effect on the opinion: unmodified if immaterial; qualified or adverse under SA 705 if material.

Quickest way: Classify, total, compare, conclude

When to use it: Use it in a numerical case with several misstatements and a given materiality, when time is short.

Strike out clearly trivial items first.
Tag each remaining item F, J or P. Compute P by ratio.
Subtract any items management has agreed to correct.
Add the rest and compare with materiality. Check each item and the total.
Scan for qualitative red flags such as covenants, fraud or reversal of a loss into profit.
Write the conclusion, the communication to governance, the representation and the opinion impact.

Common mistakes in SA 450: Evaluation of Misstatements Identified During the Audit

Treating clearly trivial as the same as immaterial or as equal to materiality
Both words suggest small amounts, so they blur together.
Fix: Say the clearly trivial threshold is much lower than materiality and is a different test. Trivial items are of an entirely different order of magnitude.
Ignoring projected misstatements when totalling
Students only add the errors found and forget the extrapolation from sampling.
Fix: Extrapolate the sample error to the population and include it in the aggregate, along with judgmental differences.
Concluding only on the total and ignoring qualitative factors
A numerical question seems to need only arithmetic.
Fix: Even if the total is below materiality, state whether the nature of an item, such as turning a loss into a profit or breaching a covenant, makes it material.
Saying the auditor must correct the misstatement
Confusion between the auditor's and management's responsibilities.
Fix: Management corrects the financial statements. The auditor requests correction and evaluates what remains uncorrected.
Omitting written representation and communication to those charged with governance
Students stop at the opinion.
Fix: Add both steps. Representation links to SA 580, and communication includes the effect of uncorrected items on the opinion.

Worked examples

Example 1

In the audit of Sundar Ltd, overall materiality is ₹10,00,000 and the clearly trivial threshold is ₹50,000. You find: (a) duplicate purchase invoice of ₹3,00,000 booked, (b) an unreasonable provision estimate understated by ₹2,00,000 per your view, (c) an error of ₹30,000 in a prepaid expense. Items (a), (b) and (c) are all outside the inventory population. Separately, in a sample of ₹40,00,000 out of inventory of ₹2,00,00,000, overstatement of ₹60,000 was found. Management corrects nothing. Evaluate.

Show the solution

Item (c) of ₹30,000 is below ₹50,000, so it is clearly trivial and not accumulated.
Item (a) ₹3,00,000 is a factual misstatement. Item (b) ₹2,00,000 is a judgmental misstatement. Both lie outside the sampled inventory population, so they are not part of the projection.
The ₹60,000 found in the sample is a factual misstatement. The unsampled inventory is ₹2,00,00,000 − ₹40,00,000 = ₹1,60,00,000. Extrapolated for the unsampled portion = ₹60,000 ÷ ₹40,00,000 × ₹1,60,00,000 = ₹2,40,000.
Total projected misstatement for inventory = ₹60,000 (factual, found in sample) + ₹2,40,000 (extrapolated) = ₹3,00,000. The same figure results from ₹60,000 ÷ ₹40,00,000 × ₹2,00,00,000. The ₹60,000 is already inside this total, so do not add it again.
Aggregate uncorrected = ₹3,00,000 (a) + ₹2,00,000 (b) + ₹3,00,000 (total projected inventory misstatement, including the ₹60,000 found) = ₹8,00,000.
Compare with materiality of ₹10,00,000: each item and the total are below it. The total is 80% of materiality. That is not a rule or a fixed trigger, but it is close enough that, in your judgment, it raises the risk that undetected misstatements could take the aggregate above ₹10,00,000.
SA 450 requires you to reconsider the audit strategy and plan where the nature and number of misstatements indicate that the aggregate of undetected misstatements could be material. A total this close to materiality increases that risk, so consider whether the pattern of items calls for extended procedures. This is a matter of judgment, not an automatic step triggered by a percentage.
Check qualitative factors such as covenants and profit trend. Communicate the items to those charged with governance, request correction and obtain a written representation.

Answer: Aggregate uncorrected misstatement is ₹8,00,000, below materiality of ₹10,00,000. The ₹3,00,000 for inventory is the total projected misstatement: ₹60,000 found in the sample plus ₹2,40,000 extrapolated to the unsampled portion. It is counted once. The ₹30,000 item is clearly trivial. Because the total is close to materiality, judge whether the risk of undetected misstatement is high enough to reconsider the strategy and extend procedures. If no qualitative factor is present, an unmodified opinion is possible after communication and representation.

Example 2

Meera & Co. audits Vihaan Ltd with materiality of ₹5,00,000. The auditor finds an uncorrected overstatement of revenue of ₹1,50,000 and an uncorrected understatement of expenses of ₹1,00,000. Without these misstatements, the company would show a loss of ₹2,00,000 and would breach a loan covenant. Management declines correction. Evaluate and state the impact on the opinion.

Show the solution

The two items are factual misstatements, and both overstate profit. Their aggregate is ₹1,50,000 + ₹1,00,000 = ₹2,50,000.
Numerically, ₹2,50,000 is below materiality of ₹5,00,000.
Qualitative evaluation: the correct result is a loss of ₹2,00,000. Reported profit is ₹50,000 (−₹2,00,000 + ₹2,50,000). Correcting the misstatements would reverse this profit to the true loss of ₹2,00,000 and breach the covenant.
The misstatements convert a loss into a profit and conceal a covenant breach. They are therefore material by nature even though they are below the quantitative level.
Request management to correct, understand its reasons for refusing, and communicate to those charged with governance.
Obtain a written representation, but note it cannot replace evidence on the misstatement.

Answer: The misstatements are material by nature because they turn a true loss of ₹2,00,000 into a reported profit of ₹50,000 and conceal a covenant breach, despite being below ₹5,00,000. If management still declines correction, express a qualified opinion under SA 705, or an adverse opinion if the effect is pervasive.

Exam tips

Define factual, judgmental and projected misstatements in one line each; this is a frequent short-note question.
In numerical cases, show the projected misstatement calculation and compare both individual and aggregate amounts with materiality.
Always add qualitative factors, even if the numbers fall below materiality. Examiners reward this.
Close with communication to those charged with governance, written representation and the opinion impact under SA 705.
In MCQs, remember that clearly trivial is not the same as immaterial, and that management corrects the statements.

Practice questions from Audit Planning, Strategy and Execution

SA 450: Evaluation of Misstatements Identified During the Audit in other exams

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

CA IntermediateEvaluating Misstatements and Audit Documentation Review

SA 450: Evaluation of Misstatements Identified During the Audit: frequently asked questions

What does clearly trivial mean in SA 450?

It means matters that are clearly inconsequential, whether taken individually or together, on any criteria of size, nature or circumstance. The threshold is set well below materiality. If you are uncertain whether an item is trivial, it is treated as not trivial.

What is the difference between factual, judgmental and projected misstatements?

Factual misstatements are beyond doubt. Judgmental ones arise from differing views on estimates or policies. Projected ones are your best estimate of misstatement in a population, extrapolated from sample findings.

What should I do if management refuses to correct misstatements?

Find out why management refuses and consider that when judging whether the statements are free from material misstatement. Evaluate the uncorrected items individually and in aggregate, and communicate them to those charged with governance.

Do I need to reassess materiality under SA 450?

Yes. Before evaluating uncorrected misstatements, you reassess materiality to confirm that it is still appropriate in light of the actual financial results. You also reconsider the audit strategy if the misstatements suggest undetected ones could be material.