During an audit, a client's management refuses to allow the auditor to send confirmations to several major customers, citing concerns about disturbing client relationships. The accounts receivable balance is material. Which of the following is the most appropriate auditor response?
- AIssue an adverse opinion if the auditor believes the accounts receivable balance is materially misstated.
- BAccept management's reasoning and perform alternative procedures to substantiate the accounts receivable balance.
- CIssue a qualified opinion due to a scope limitation if alternative procedures cannot provide sufficient appropriate audit evidence.
- DWithdraw from the engagement, as the scope limitation is too significant to overcome.
Show answer & explanationAnswer & explanation
Correct answer: C. Issue a qualified opinion due to a scope limitation if alternative procedures cannot provide sufficient appropriate audit evidence.
Management's refusal to allow confirmations constitutes a scope limitation. If the auditor cannot obtain sufficient appropriate audit evidence through alternative procedures, a qualified opinion is appropriate. An adverse opinion is for material and pervasive misstatements, not scope limitations unless the misstatement is also pervasive. Withdrawal is an extreme measure.
Why the other options are wrong
- A. An adverse opinion is typically for material and pervasive misstatements, not for scope limitations where the auditor cannot determine if a misstatement exists.
- B. Accepting management's reason is not sufficient; the auditor must still obtain sufficient appropriate evidence. If alternative procedures are effective, the opinion might not be modified, but this option implies blind acceptance.
- D. Withdrawal is an option only if the scope limitation is so significant that it prevents the auditor from forming an opinion on the financial statements as a whole, or if management's refusal indicates a lack of integrity, which is not explicitly stated here.
Scope Limitation Impact
A scope limitation occurs when the auditor is unable to obtain sufficient appropriate audit evidence. The impact on the audit opinion depends on the pervasiveness of the limitation.
- If alternative procedures reduce the limitation to an immaterial level, an unmodified opinion may be issued.
- If the limitation is material but not pervasive, a qualified opinion is appropriate.
- If the limitation is material and pervasive, a disclaimer of opinion is appropriate.
Memory trick: Limit Scope, Audit Hope: Assess impact, then opine with care.