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CA Intermediate · Auditing and Ethics · Ethics and Terms of Audit Engagements

During planning of the audit of Orchid Pharma Ltd, the auditor finds that the company's Chief Financial Officer has asked the auditor to restrict the audit scope so that inventory held at a remote warehouse will not be counted or otherwise verified. Management says the amount is material. No alternative procedures are possible. Which is the correct response?

The auditor should not accept a management-imposed scope limitation that would lead to a disclaimer of opinion. The matter should be raised with those charged with governance, and if it persists the auditor considers withdrawing or disclaiming. Issuing a clean opinion with an emphasis paragraph is not acceptable.

  1. AAccept the restriction and issue an unmodified report with an Emphasis of Matter paragraph
  2. BAccept the engagement and ignore the warehouse, since scope is decided by management
  3. CAccept the restriction but state it in the engagement letter and give a clean opinion
  4. DNot accept such a limitation as a statutory auditor where it is likely to result in a disclaimer of opinion; and if imposed, communicate with those charged with governance and consider withdrawing or disclaimingCorrect

Explanation

Under SA 210, if management imposes a limitation on scope in the terms that the auditor believes will result in a disclaimer of opinion, the auditor should not accept such an engagement unless required by law. For a statutory audit, the auditor cannot simply accept it, and a clean opinion would be wrong. An Emphasis of Matter cannot substitute for a modification.

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