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Hi Kim
I am really confused about the definition of ‘pervasive’ in AA. Could please explain the meaning of the word in AA.
As per my understanding, pervasive means errors or misstatements that could have an overall effect on the financial statement.
But while solving the below question, the amount seems to be pervasive, but the same has not being considered.
Q) You are the audit manager of Chestnut & Co and are reviewing the key issues identified in the files of two audit clients. The first audit client is Palm Industries Co (Palm), a listed company. Palm’s year end was 31 March 20X5 and the
draft financial statements show revenue of $28.2m, receivables of $5.6m and profit before tax of $4.8m. Thefieldwork stage for this audit has been completed.
A customer of Palm owed an amount of $350,000 at the year end. Testing of receivables in April highlighted that no amounts had been paid to Palm from this customer as they were disputing the quality of certain goods received from Palm. The finance director is confident the issue will be resolved and no allowance for receivables was made with regards to this balance.The auditor’s report for Palm is due to be signed in the next week or so. You have concluded that the disputed balance is likely to be irrecoverable, but the directors have not made any changes to the financial statements in respect of this.
Which of the following options correctly summarises the impact on the auditor’s report for Palm if the issue remains unresolved?
A) Unmodified with key audit matters section
B) Disclaimer of opinion
C) Qualified ‘except for’
D) Adverse opinionThe amount is material, but its not pervasive as per the answer given in BPP, hence the report will be Qualified ‘except for’
If going as per the definition of pervasive, shouldnt it be Adverse opinion?
Thank you in advance!
Please see this explanation https://opentuition.com/topic/dec-2016-cbe-auditors-report-how-is-tp-not-pervasive – if still not clear come back to me on this your post here.
Hi Kim
I went through the link, I still am not clear on pervasive nature of things
Pervasive means that the financial statements “as a whole” are not fairly presented – in the case of “adverse” opinion – or – in the case of a disclaimer of opinion, the auditor gives no opinion.
But take your problem with receivables – all the auditor wants is for the directors to Dr expense and Cr receivables – and – “except for” this misstatement, the financial statements can be said to “fairly present”. The misstatement does not affect PPE, inventory, cash, current liability, no-current liabilities, etc, etc. So your scenario cannot possibly be “adverse”.
You say “the AMOUNT seems to be pervasive”. “Amount” is what makes a misstatement material. Pervasive is not a “degree” of amount – it is how many account balances, classes of transactions and disclosure are affected.
Now do you see the distinction?
So, if along with receivables, say if payments also were misstated, would we then classify that material and pervasive?
Short answer – NO
As I wrote on the post that I gave you the link for:
“You may be interested to know that in practice (you wouldn’t get this in AA exam) you could have multiple matters on which to give an “except for” opinion and even combining them (“except for this and except for that and except for the other”) the opinion is still only qualified – not adverse”
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