- This topic has 8 replies, 7 voices, and was last updated 13 years ago by
.
- Posts
- Topics: 1
- Replies: 11
- ☆
How to determine if amounts are extreamily material and pervasive?????? What should I look for?? I understand the precentage for material amounts
There’s no right answer to that. Auditing is inseparable from the judgement of the auditor and two competent auditors could come to two different valid opinions.
A material misstatement is defined as a misstatement which would alter the decisions of a user of the accounts. The percentages you mention are only guidance in respect of that and materiality can have both quantitative and qualitative dimensions.
However, there is no guidance given as to when a misstatement changes from being merely material to being pervasive (and the audit report changes from, say, ‘…except for..’ to ‘…do not show a true and fair view.’
Don’t worry about it: you’re not an experienced partner in a firm of accountants and the examiner will not expect your judgement to be sound. You need to be aware of the percentages as guidance, be aware that they are guidance only, and to be able to discuss the options available.
- Topics: 1
- Replies: 11
- ☆
Thanks. I now realized that it truly depends on the given circumstance/transaction and just applying judgement
- Topics: 0
- Replies: 53
- ☆☆
I understood it as material was a large amount (using the %).
Pervasive means it affects ALL (or a lot) of the financial data. Meaning it’s all wrong. Material could affect one area only. Pervasive means it’s all practically useless.
But as gromit says, it’s all down to the situation and reasoning you can give to reinforce your point of view.
Material and pervasive means that the financial statement when taken as a whole does not give a true and fair representation.
Let’s say that the major debtor of company A is declared bankrupt one week after the year end and the receivables has a figure of $1M of which $600K is owed by this debtor. The liquidator of the debtor estimates that only 30% of this figure will be recoverable (i.e. $180), however the directors of company A do no reduce the receivables balance by $420K, nor do they readjust the allowance for doubtful debts but instead quote the unadjusted figures and even decide to pay out dividends when they know that with the adjustment a loss would have to be reported. The auditors have asked for the adjustments to be made, but the company refuses since they don’t want to cause panic among the shareholders.
Here there is a disagreement the result of which affects
1. The Statement of Comprehensive Income – Profit reported instead of a loss
2. The Statement of Changes in Equity – Increase in retained earnings instead of a decrease
3. The Statement of financial position – Receivables (overstated), Retained earnings (overstated)
4. The Notes to the financial statement
5. The director’s assertions – since they are willing to ignore GAAP and IASs, what else are they willing to ignore.Note that the Clarity project (relevant for June 2010) has changed some of the terminology relating to qualification.
‘Disagreement’ has been replaced by stating that the financial statements contain a material misstatement (+ explanation of the nature of the problem).
‘Limitation of scope’ has been replaced by stating that the auditor has been unable to find sufficient appropriate audit evidence (plus an explanation of the problem).
The concept of ‘performance materiality’ has also been introduced. This is defined as: “The amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.” This means that if you thought that $100,000 was material to the financial statements as a whole (though that needs care because there is also the idea of qualitative materiality), performance materiality (relevant to the more junior members of the audit team when carrying out the audit) might be set at, say, £50,000 – in case there were two errors which in aggregate came to £100,000.
that performance materiality is also called tolerable error
there are very good explainations of pervasive but i want 2 add a li’l more
material means substantial that means any error up the materiality level
pervasive could be fraud ,although if it is not material but report would b qualified bcz this event is pervasive in nature
hope this helps
plz let me know if my explaination helped u- Topics: 0
- Replies: 4
- ☆
Where can i get more info on clarity project, anyone?
- Topics: 0
- Replies: 4
- ☆
the real prob is to how to identify that the matter is material or material + pervasive.
because once we identified it will never be a problem for us respond respectively,
Lets take a example to identify that matter is just material or material + pervasive, we need to concentrate on the wording of that paragraph if anywhere in the paragraph mentioning that due to that particular matter the financial stat effects.
Sales :100
COGS :(50)
G.P :50
Dep exp:(25)
N.P : 25Material amount: 20
Auditor get to known that dep exp increasing by 25, now directors are not agreeing with auditor nor giving disclosure, and the matter is already a material as adjusting figure is more that material amount which is 20. So, no doubt that this is mater is material, but because director not making adjustment auditor will make adjustment by themselves and check how much this matter effecting whole F/SAdjustment
Sales :100
COGS :(50)
G.P :50
Dep exp:(25)
adjust (25)
N.P : 0
being a share holder previous N.P is satisfactory but when current N.P they know director will be in trouble, auditor now know that by adjusting this more 25 company profit transfer into loss, now matter is material and pervasive
- You must be logged in to reply to this topic.