An auditor finishes substantive testing and four items surface: a $38,000 cutoff error, a $95,000 disagreement with management's allowance estimate, a sample that projects to $310,000 in likely error, and a clerk who both approves and pays vendors. Three of those go on a schedule. One drives a written letter to the audit committee. The exam tests whether you can sort them.
HIGH-FREQUENCY: AU-C 450 classifies every identified misstatement into one of three buckets. The exam loves answer choices that swap the labels.
A factual misstatement is one about which there is no doubt: the amount is objectively wrong. A $38,000 invoice posted to the wrong period. A duplicate journal entry of $12,500. Once identified, the exact amount is known and can be weighed individually and in the aggregate.
A judgmental misstatement arises from differences between management's judgment and the auditor's judgment about an accounting estimate, an accounting policy, or a disclosure. Management records an allowance for doubtful accounts of $220,000; the auditor's testing supports a range of $280,000 to $340,000.
Common mistakes
- Confusing the misstatement classifications. Factual is objective, judgmental is estimate-based, projected is sample-extrapolated. Candidates often label a sample-based finding as "factual" because the items themselves were objectively wrong. The classification follows the source: sample testing always produces a projected misstatement.
- Treating "clearly trivial" and "immaterial" as synonyms. Immaterial items go on the schedule and are evaluated in aggregate. Clearly trivial items are not accumulated at all. The clearly-trivial threshold is far below materiality, typically 3, 5% of overall materiality.
- Skipping the request to correct. The auditor must request correction of all factual misstatements regardless of size. Trap answers suggest the auditor only asks if the item is material. That is wrong. The request is required; whether management agrees is a separate question.
Bottom line
- Three misstatement types under AU-C 450: factual (objectively incorrect), judgmental (management estimate vs. auditor estimate), projected (sample extrapolation).
- Accumulate every misstatement except those clearly trivial (far below materiality) on a schedule of unadjusted differences.
- Evaluate materiality both individually and in the aggregate, including the carryover effect of prior-period uncorrected items.
- Request management correct all factual misstatements; refusals get communicated as uncorrected misstatements to TCWG in writing before report release.
Exam shortcut
When a stem describes a misstatement and asks for classification, map the cue to the type: objective error in a transaction = factual, estimate disagreement with management = judgmental, extrapolation from sample = projected. The fact pattern usually emphasizes one signal. Read for it.
The full lesson (about 4,765 words, 32 min read) adds 9 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- III.F1
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