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CA Intermediate · Auditing and Ethics · Nature, Objective and Scope of Audit

Vikram Seth, a practising CA, is asked by the management of Orion Steels Ltd to carry out an audit but to restrict the scope so that inventory at one godown is not examined, to save cost. The financial statements are to be certified as audited. Which is the correct audit response?

The auditor should not accept a management-imposed scope restriction that stops sufficient appropriate evidence from being obtained. If material and pervasive it would force a disclaimer of opinion, so the engagement should ordinarily not be accepted as a statutory audit. A general disclaimer or unmodified opinion would be improper.

  1. AAccept, since management knows its business and the scope can be agreed freely
  2. BAccept, and make a general disclaimer in the report that the godown was not examined
  3. CRecognise that the auditor cannot accept a restriction that prevents obtaining sufficient appropriate evidence; if it is imposed and material and pervasive, a disclaimer of opinion would arise, so the auditor should ordinarily not accept such an engagement as a statutory auditCorrect
  4. DAccept, and issue an unmodified opinion because inventory is a management assertion

Explanation

Under SA 210 and SA 705, a scope limitation imposed by management before acceptance, such that a disclaimer would result, should lead the auditor not to accept it as a statutory audit. A general disclaimer cannot cure the lack of evidence, and an unmodified opinion would be wrong without evidence.

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