The following scenarios relate to possible scope limitations that a CPA might en

Question

The following scenarios relate to possible scope limitations that a CPA might encounter during the audit of clients. In all cases, assume that the balances for the items discussed are material to the financial statements. SCENARIOS THAT MAY INDICATE A SCOPE LIMITATION A CPA MIGHT ENCOUNTER DURING AN AUDIT OF A CLIENT (a) Brazil, Inc. hired the auditors after taking inventory on December 31. The accounting records and other evidence are not reliable enough to enable the auditors to have sufficient evidence about the proper inventory am ount (b) Paraguay Company has a class action lawsuit that has been filed in federal district court. After discussions with the company's attorney, the attorney has indicated that he believes that it is probable that the company will lose the case but the final amount of the settlement cannot be determined at this time. However, the amount will not exceed more than 20% of the company's total assets. (c) Chile Corp. has indicated to the auditor that it will not allow the auditor to confirm accounts receivable balances with their customers. As a result, the auditor will not be able to gather sufficient riate evidence cannot be obtained using altemative ures REQUIRED: (1) Indicate whether the scope limitation is client imposed or circumstance imposed for each situation. 2) Indicate the type of opinion that the auditor should issue based upon the facts provided in each situation. Provide an explanation for your answer

Explanation / Answer

.(a) The limitation is related to the timing of the audit work. It is not client imposed. It can be termed as circumstances imposed. If the client prevents auditor to observe physical inventory, it is client imposed limitation.

.(b) ) The limitation is not client imposed. It can be termed as circumstances imposed.

.(c)The limitation is clearly client imposed ,because the client is not allowing the auditor to confirm account receivable balance with their customers

Scope limitation will result in either a qualified opinion or disclaimer.

. When the limitation is material, but not fundamental, the auditor renders a qualified opinion. If the limitation is very fundamental and it is not possible for the auditor to give opinion, a disclaimer of Opinion is given.

(a)In this case the auditor can give a qualified opinion ,because the limitation is not fundamental

(b) In his case also ,a qualified opinion may be given based on the discussion with the company’s attorney

.(c) In this case, the management has imposed limitation by not cooperating with the audit.

The limitation is fundamental and audit opinion cannot be given.

This situation requires disclaimer of opinion

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