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Dear Professor
Would like some clearance regarding pervasiveness that changes an audit opinion from being qualified to adverse or disclaimed.
An item is deemed to be pervasive if :
1) It is not confined to specific items elements or amounts in the financial statements
2) It is confined to specific elements items or amounts in the financial statements and it consists of a substantial portion of the financial statements.
3) It relates to disclosures which are fundamental for the users understanding of the financial statements.Would the above mean the following:
1) When misstatements relate to different parts in the financial statements ex a misstatement in receivables, a misstatement in payables and also a misstatement in inventory. That is there is more than one misstatement which affect different parts of the financial statements.
2) When a misstatement is substantial example relates to receivables only but the misstatement represents an amount equal to say 70% of receivables.
3) When a misstatement occurs in a disclosure say going concern assumption is incorrectly disclosed.Am I reasoning these three statements correctly or not?
Finally with regards to going concern disclosure if the going concern assumption is correctly stated but material uncertainty incorrectly disclosed:
Have read that this would either require a qualified opinion or adverse opinion depending on the effect of the matter.Same can be said to when management does not want to extend the going concern assumption or decides not to disclose any going concern disclosures which would either require a disclaimer of opinion or qualified opinion.
However how shall we decide that an item is of sufficient importance to change an opinion from being qualified to being adverse or disclaimed?
Thank you in advance for your time in answering our questions .
Regards
Johann
1 Really isn’t really referring to several separate misstatements it is where one misstatement that has multiple effects that can’t really be separated. For example not presenting the FS on a break-up basis if company failure is virtually certain.
2 No. Receivables could be really small and a 100% error might not be important. You need to look at the FS as a whole. So if receivables represented 80% of the assets and they were 50% overstated, the effect on the FS is likely to be so severe as to be pervasive.
3 Correct.
If it is appropriate to produce the FS on a going concern basis but there is a material uncertainty about going concern that hasn’t been disclosed then, yes, the opinion would have to be modified.
For your last query ‘pervasive’ is the test. This is very subjective and different audit partners can come to different conclusions. Just be prepared to discuss the issues and come to a reasonable conclusion based on your arguments. Remember an adverse or disclaimer of opinion really says that the FS are a waste of paper – which isn’t much use to shareholders. ‘Except for’ qualifications are more useful as they isolate problems.
1 Really isn’t really referring to several separate misstatements it is where one misstatement that has multiple effects that can’t really be separated. For example not presenting the FS on a break-up basis if company failure is virtually certain.
2 No. Receivables could be really small and a 100% error might not be important. You need to look at the FS as a whole. So if receivables represented 80% of the assets and they were 50% overstated, the effect on the FS is likely to be so severe as to be pervasive.
3 Correct.
If it is appropriate to produce the FS on a going concern basis but there is a material uncertainty about going concern that hasn’t been disclosed then, yes, the opinion would have to be modified.
For your last query ‘pervasive’ is the test. This is very subjective and different audit partners can come to different conclusions. Just be prepared to discuss the issues and come to a reasonable conclusion based on your arguments. Remember an adverse or disclaimer of opinion really says that the FS are a waste of paper – which isn’t much use to shareholders. ‘Except for’ qualifications are more useful as they isolate problems.
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