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Hello sir,
I would like to ask when a misstatement in pervasive in % of materiality. If we are given e.g. total receivables and a materiality of receivables is 7%, is it a material misstatement or not? What is the percentage there for the receivables as a standalone account? And should the guidelines exist altogether or separately? What I mean is that if a misstatement is 2% of revenues but not more 2% of assets or 10% of profit before tax is it material?
Thank you very much in advance.There is also an example in BPP which says:
The draft financial statements show a profit before tax of $2·4 million, revenue of $10·1 million and inventory of $510,000.
Alternative procedures performed as Chestnut & Co was unable to attend the inventory count were unable to provide sufficient appropriate audit evidence regarding the inventory balance in the statement of financial position.
Which of the following options correctly summarises the impact of the inventory issue on the auditor’s report?
Qualified
Basis for qualified opinionDisclaimer
Basis for disclaimer of opinionQualified
Key audit matters sectionDisclaimer
Emphasis of matterAnd the correct answer is according to BPP:
Qualified
Basis for qualified opinionExplanation: The auditor will need to express a modified opinion as they are unable to obtain sufficient appropriate evidence in relation to inventory. The effect of this is material but not pervasive. Therefore a qualified ‘except for’ opinion will be required.
The opinion paragraph will explain that the audit opinion is qualified ‘except for’. A basis for qualified opinion paragraph will be required to explain the limitation in relation to the lack of evidence over inventory.Why inventory/profit before tax=21,25% in not pervasive???
No % guidance is ever given for an error being pervasive. It ia a matter of difficult, partner-in-charge, judgement. Part of pervasive/non-pervasive is whether the error can be isolated so that the rest of the FS can be of some use. ‘Pervasive’ in ordinary English really means ‘everywhere’, ‘affecting everything’.
Giving a disclaimer or and adverse opinion bot are really saying that the FS are a waste of paper, and that is not very useful to members. A qualified opinion, if possible. is of more use.
So, in the example, the problem can be isolated to inventory and the worst case scenario is that profits are about 25% overstated. That can all be explained to shareholders. The profit stays a profit as well.
If the original profit had been only $250,000 the gap in audit evidence could turn it into a loss of about $250,000. In that case it probably would be regarded as pervasive.
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