What is the summary of uncorrected misstatements?
ISA 450.5 requires the auditor to accumulate all misstatements identified during the audit, unless they are clearly trivial. The summary is the working paper where this accumulation happens. It captures three categories: factual misstatements (known errors), projected misstatements (extrapolated from samples), and judgmental misstatements (unreasonable management judgments).
Each category requires different information. Factual misstatements need the exact amount and affected line item. Projected misstatements need the sample parameters and projection calculation. Judgmental misstatements need the auditor's reasoning for why management's position is unreasonable and the measurement from the boundary of the acceptable range.
ISA 450.11 requires the engagement partner to determine whether uncorrected misstatements are material, individually or in aggregate. This evaluation considers both size and nature in the context of particular classes of transactions and the financial statements as a whole. ISA 450.12 requires itemised communication to those charged with governance, not just management.
Key Points
- Must include all three categories: factual, judgmental, and projected misstatements.
- ISA 450.11 requires the engagement partner to evaluate uncorrected misstatements before forming the opinion.
- Failure to include prior-year uncorrected misstatements is one of the most common inspection findings.
- The summary is communicated to those charged with governance, not just management.
Why it matters in practice
The AFM found audit files where prior-year uncorrected misstatements were not carried forward to the current-year summary. ISA 450.A8 requires the auditor to consider whether prior-period uncorrected misstatements that still affect the current financial statements should be included. A provision that was €38,000 too low last year and was not corrected is still €38,000 too low this year unless circumstances changed.
A second common error is netting all misstatements into a single number. ISA 450.11(a) requires evaluation by class of transaction and account balance. Netting an overstatement of receivables against an understatement of provisions hides the individual effects on each line item and can obscure a material misstatement in a single account.
Worked example: Schreiber Industrietechnik GmbH
Client: German subsidiary of listed group, FY2024, revenue €89M, IFRS reporter. Overall materiality €890,000, performance materiality €668,000.
Misstatement 1 (factual): Intercompany receivable €45,000 not eliminated in consolidation adjustments.
Misstatement 2 (factual): Expired prepaid insurance €12,800 still carried as asset at year-end.
Misstatement 3 (projected): MUS testing of trade payables found one error with 25% tainting. Sampling interval €517,000. Projected misstatement: 25% × €517,000 = €129,250.
Misstatement 4 (prior year): Warranty provision €38,000 understated in FY2023, not corrected. Still affects current-year balance sheet.
Evaluation: Aggregate P&L impact: €50,800 expenses understated (insurance €12,800 + provision €38,000). Gross balance sheet impact: €225,050 (all four items). No pattern of management bias detected. Aggregate well below performance materiality. Conclusion: unmodified opinion, misstatements communicated to audit committee with request for written representation acknowledging uncorrected items.
What reviewers get wrong
The AFM found files without prior-year uncorrected misstatements on the current-year summary. ISA 450.A8 requires it. If the misstatement from the prior year still affects the current financial statements, it must be included.
Teams also net all misstatements into a single number rather than evaluating by class and account balance. An overstatement of assets and an understatement of liabilities are not offsetting. Each affects a different line item, and ISA 450.11(a) requires the auditor to evaluate both separately.
Key standard references
- ISA 450.5: Requires accumulating all identified misstatements unless clearly trivial.
- ISA 450.11: Requires the engagement partner to evaluate whether uncorrected misstatements are material.
- ISA 450.12: Requires itemised communication of uncorrected misstatements to those charged with governance.
- ISA 450.A8: Requires consideration of prior-period uncorrected misstatements.
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Frequently asked questions
Should prior-year uncorrected misstatements appear on the current year's summary?
Yes. ISA 450.A8 requires the auditor to consider prior-period uncorrected misstatements that still affect the current period's financial statements.
Can you net misstatements when evaluating the aggregate?
No. ISA 450.11(a) requires evaluation in the context of particular classes of transactions and account balances. Netting an overstatement of receivables against an understatement of provisions obscures individual effects.