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Hi Ms. Smith,
Hope you’re alright.
The definition of pervasiveness says that if a misstatement is confined to specific elements then for it to be pervasive it has to represent a substantial portion of the FS.
Now the FS mainly represents the SFP and SPLOCI. So, a professional once told me that a misstatement is pervasive when it represents a substantial portion of both, the SFP and SPLOCI.
For example, around 50% of total assets benchmark and around 50% of PBT/revenue benchmark for SPLOCI .
If the misstatement does not represent a substantial portion of both i.e. SFP and SPLOCI, it won’t be considered pervasive and therefore an adverse or disclaimer of opinion won’t be required
I need you to confirm this to me and its relevance for the exams. Thank you!
There is no “benchmark” for this and there is nothing in the ISAs to suggest what “substantial proportion” means.
Consider: Total assets are $20m of which PPE total $15m and the actual potential/error in PPE is $5m (extreme I know). The auditor might still report “except for … PPE …. impact on total assets/profit” … i.e. pervasiveness is not a “degree” of materiality. But where to draw the line? What if there should be no value assigned to PPE (even more extreme)? I can see where your professional is coming from but I’ve never seen it in exams or real world.
For pervasive in AAA consider that actual/potential misstatement are not confined to just a few line items but “spread” throughout the financial statements.
If the auditor can say “except for this … exept for that … except for the other …” and the reader can understand the implications of the sum of exceptions, there is no need for adverse/disclaimer. Only if “as a whole” the auditor cannot form an opinion (disclaim) or forms a contrary opinion (adverse) will these extreme forms be used.
Adverse/disclaimer are very rare in the real world – even if all accounting records were destroyed, and audit opinion might not be disclaimed (depending on how much could be reconstructed).
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