- July 23, 2023 at 1:47 pm #688766MycomebackParticipant
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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!July 24, 2023 at 5:23 pm #688825Kim SmithKeymaster
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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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