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The definition says:-
A matter is considered “Pervasive” if, in auditors Judgement:-
1. Effects of that misstatement are not “confined” to specific elements, accounts or items of FS.
OR
2. If confined, the misstatement represent or could represent a substantial proportion of the financial statements.For concluding that a matter is material, we use 5% of PBT, 0.5-1% of sales and 1-2% of total assets.
For the 2nd point, what % of PBT/TA/Sales should be considered as guide to conclude that the matter is material and pervasive.
There are no guidelines on this but “substantial” would have to be a lot more than material. So if for example, the misstatement is confined to PPE and PPE makes up 90% of the total assets of the financial statements, misstatements in PPE might merit an adverse opinion rather than qualified.
So in this case, can I consider items that are more than 50% of PBT (For SOPL items) and more than 50% of Total Assets (For SOFP) to be substantial?
If an item is above materiality % and below 50%, will writing the following would be correct?
If this misstatement is not corrected, the auditor’s report should include a qualified ‘except for’ opinion paragraph at the start of report.
This paragraph should be followed immediately by a basis for qualified opinion paragraph which should explain the reasons for the qualified auditor’s opinion and which should quantify the impact of the matters identified on the financial statements.If in auditor’s professional judgement, $0.3m, 14% of PBT represents a Substantial portion of SOPL, then the misstatement would be considered as material and pervasive, in which case an adverse opinion would be given on FS. With a statement that FS do not give a true and fair view in “Opinion para” and a “Basis for Qualified Opinion para” explaining the relevant misstatement and its effects.
I cannot put a % on it – it would be a matter of professional judgment whether “except for” is sufficient to convey to the primary users of the financial statements/readers of the auditor’s report what is “wrong” with the financial statements and it’s importance. In particular, a % of profit may be meaningless in suggesting importance because IFRS takes a “balance sheet” approach to financial reporting in which “profit” is just a residual. Some would argue that a misstatement that would turn a reported profit into a reported loss merits an adverse opinion – but this, per se, is not pervasive. The auditor’s report can make it clear to the reader that if such and such an adjustment was made, the reported profit would be $ loss.
I cannot comment on sentences/phrases/paras of answer in terms of correctness/mark worthiness because I don’t have time/resource and everyone would ask for the same.
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