a term that means widespread. Pervasive is also an auditing term that refers to errors or misstatements that could have an overall effect on the financial statement.
How Pervasive Works
When something is pervasive, you can say it is widespread or felt throughout a thing or place. In Auditing, the term pervasive refers to any misstatements that can affect a financial statement or the effect of misstatements on financial statements. It takes the judgment of an auditor to fish out pervasive effects on a financial statement. There are material and pervasive misstatements, so for you to tag the impacts of a misstatement on a financial statement as pervasive, the results must meet the following criteria:
- Effects are not confined to individual accounts, elements, or items of the financial statements.
- If the effects are limited to any specific aspect or item, does it represent or could represent a reasonable proportion of the financial statements.
- The effects concerning disclosures are crucial to users’ understanding of the financial statements.
Pervasive misstatement does not always imply that it is also material. You can say the same for material misstatement, as it does not compulsorily have a pervasive effect; pervasive misstatement, on the other hand, may lead to material misstatement. Cash embezzlement by a cashier, for example, is discovered in your organization. This fraud may be material, but it is unlikely to have a widespread effect, whereas if you find the same embezzlement concerning key management staff, it is almost certain to have a pervasive impact as several other claims will likely be incorrect or misstated.
Example of Pervasive
For example, you own a company named ABC Cement Factory, and your auditor notices a misstatement in the ABC Cement Factory’s financial statement. We also want to assume that this misstatement results from fraudulent activities by your company’s manager. Now, the auditor has to find the reason for the misstatement and how it affects your company’s financial statement to know if it’s pervasive. This is the point where the auditor will consider three essential items to measure for pervasive effects.
Your auditor will check if the misstatement affects several elements or only a particular item in the account statement. He will also check if the misstatement only affects one specific item or if the incorrect claim represents a significant part of ABC Cement Factory’s account statement. Finally, your company’s auditor will check if the misstatement will impact the understanding of a specific user.
From the findings of your auditor, if it becomes apparent that the misstatement has a widespread effect on the cement factory’s financial statement, then what you have is a pervasive misstatement. This is because the auditor will find other false or incorrect claims in your books while investigating the initial misstatement. From this imaginary case, you can see that when a single wrong claim leads to other inaccurate claims in an attempt to hide a nefarious activity in your account, its effect is widespread. Such a false or incorrect claim has a pervasive impact.