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Past year paper : September 2018
for the question 2 (a): with regards to the legal claim,
can’t we also say adverse opinion be issued ? The reason i say adverse opinion is because pervasiveness arises because this legal claim is fundamentally important to the users of financial statement.
Therefore shouldn’t it be adverse opinion ? not qualified opinion
No – see page 122 of the notes – “pervasive” means it affects the financial statements as a whole (i.e. lots of assertions/line items). It is not a degree of importance about just one assertion/line item which can be “pinpointed” with an “except for” qualification.
i’m currently using kaplan textbook and it says that a matter is considered ‘pervasive’ if in the auditor’s judgement, in relation to disclosures, are fundamental to users’ understanding of the financial statements
and in the question, this disclosure is fundamental to users’ understanding of the financial statement isn’t ?
The statement in the text is correct – but I would say – note the use of the plural. So if – taking an extreme example – a company prepare prepared accounts with only an accounting policy note (yes I have seen such accounts purporting to have been prepared in accordance with IFRS) that would be pretty fundamental.
But only one (or even just a few) specific omissions could rarely be pervasive and so would not be judged fundamental. An exception to this might be, for example, if the financial statements were prepared on a basis other than going concern and the notes did not disclose the basis of preparation. That would be fundamental to users’ understanding of the financial statements.
however the amount is material which represents over 50% in the materiality calculation and you are saying that if a firm fail to disclose such matter, it’s not fundamentally important to the users of financial statement ?
At the risk of repeating myself and what is clearly conveyed in the notes and the reporting ISAs – “pervasive” is not a degree of materiality, it does not mean “very material”.
The “Basis for Qualified Opinion” section will state what would be the effect(s) on the financial statements (in monetary amounts). This will inform the users what they need to know.
Consider this – the lack of provision has no bearing on non-current assets, current assets or current liabilities – or any of the notes related to these. An adverse opinion would therefore be wrong because it is simply not true that the financial statements AS A WHOLE do not present fairly (show a true and fair view).
Then how about if the legal claim is over 2 million and it represents significant portion of profit bfore tax and the director has not recognized. Then it is still qualified opinion ?
Yes
If, however, the matter is one that would “break” the company an adverse opinion would be appropriate – this is illustrated on page 124 of the notes.
Look – don’t get too hung up about this. You should appreciate that in the real world the vast majority of audit opinions are unmodified and the vast majority of modified opinions are qualified. Adverse/disclaimer are extremely rare and far more likely to be encountered in theory (e.g. in exams) rather than in practice – I’m not saying they don’t arise – they do – but it’s actually quite hard to find them!
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