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Hi sir, for the following questions below, how do we differentiate whether the matter is pervasive ?
Profit before tax $ 10 000
Total assets $2300 000
Overstatement of receivables due to an irrecoverable debt not being written off $15 000
Profit before tax $ 245 000
Total assets $6500 000
Overstatement of inventory due to failure to value at lower of cost & NRV $85 000
In the answer key, it states that for company A the matter is MATERIAL AND PERVASIVE. But for company B the matter is MATERIAL BUT NOT PERVASIVE.
I understand why it’s material. But I don’t understand why for company A its pervasive but for company B, its not pervasive. Could you explain?
The argument would be that changing a profit of 10 into a loss of 5 is a very serious misstatement – so serious that it is pervasive.
I could argue the other way: the misstatement is 15, the assets are 2,300 so whether there is a profit of 10 or a loss of 5 isn’t really important enough to be pervasive.
There is no definite rule about when material turns into material and pervasive.