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CA Intermediate · Auditing and Ethics · Completion and Review

During the audit of Nilgiri Pharma Ltd, the auditor identifies uncorrected misstatements: an overstatement of inventory of Rs 4 lakh, and an understatement of expenses of Rs 3 lakh. Overall materiality is Rs 10 lakh and the clearly trivial threshold is Rs 50,000. Under SA 450, what should the auditor do first with these misstatements?

The auditor should accumulate all identified misstatements except those clearly trivial and communicate them on a timely basis to the appropriate level of management, asking for correction. Individual items below materiality cannot be ignored because their combined effect must also be evaluated.

  1. ATreat them as immaterial and discard them as they are individually below materiality
  2. BAccumulate all misstatements other than clearly trivial ones and communicate them on a timely basis to the appropriate level of managementCorrect
  3. CRequest management to correct only the misstatement that is larger
  4. DReport them directly to the Registrar of Companies

Explanation

SA 450 requires the auditor to accumulate misstatements identified during the audit, other than those clearly trivial, and communicate them on a timely basis to the appropriate level of management, requesting correction. Both items exceed Rs 50,000, so both are accumulated; their aggregate effect (Rs 7 lakh) must also be evaluated. Discarding them because each is below materiality ignores aggregation.

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