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Hey, three instances are outlined in ISA 705 highlighting when a material misstatement has a pervasive effect on the FS.
One of which is, ‘Those that are confined to specific elements, accounts or items in the financial statements and represent or could represent a substantial portion of the financial statements’.
My question sir is ‘what constitutes a substantial portion of the financial statements’? Is there a benchmark in the standard? For example, lets just say expense was materially misstated in the FS. How do we know whether or not this represents a substantial portion of exp?
Pervasive concerns the financial statements as a WHOLE – so if an expense and/or inventory and/or trade receivables and/or something else are misstated – if the auditor can say “except for this … and except for that … and except for the other … fairly presents” the matters (collectively) are not pervasive. Only if there are so many material misstatements that a substantial portion of the financial statements are affected would the matter(s) be considered pervasive (which is why the going concern example is such a good one).
The standards do not say how many excepts makes an adverse – but I have seen in practice an auditor’s report with 20 separate qualifications (!) Yes that’s an extreme example, but what it does show is just how extreme in fact an adverse opinion is.
Please do read out notes – there is a one page summary of modified opinions starting on page 38 and examples
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