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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Audit procedures and obtaining evidence

Harlow plc has a December year end. The auditor was appointed in February and could not attend the 31 December inventory count. Inventory of $6.5m is 40% of total assets and is material and pervasive in effect. Alternative procedures such as roll-back from a later count and testing of subsequent sales cannot provide sufficient appropriate evidence over quantities. What is the appropriate audit opinion under ISA 705?

A disclaimer of opinion is appropriate. The auditor could not obtain sufficient appropriate evidence on opening or closing inventory quantities, and the possible effects are material and pervasive. A qualified opinion would only suit material but not pervasive effects, and an adverse opinion relates to identified misstatements.

  1. AUnmodified opinion with an emphasis of matter paragraph
  2. BQualified opinion, except for the possible effects of inventory
  3. CDisclaimer of opinion, because the possible effects are both material and pervasiveCorrect
  4. DAdverse opinion, because the financial statements are materially misstated

Explanation

The auditor cannot obtain sufficient appropriate evidence on inventory, so there is a limitation of scope. Because the possible effects are material and pervasive, ISA 705 requires a disclaimer. A qualified opinion applies where effects are material but not pervasive. An adverse opinion applies to known misstatement, not inability to obtain evidence, and an emphasis of matter cannot replace modification.

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