For the past five years, Clark CPAs has audited the financial statements of a ma
ID: 2425970 • Letter: F
Question
For the past five years, Clark CPAs has audited the financial statements of a manufacturing company. During this period, the audit scope was limited by the client as to the observation of the annual physical inventory. Because Clark CPAs considers the inventories to be material and was not able to satisfy the audit requirements by using other auditing procedures, the firm was unable to express an unmodified opinion on the financial statements in each of the five years.
The CPA was allowed to observe physical inventories for the current year ended December 31, 2015, because the client’s bank would no longer accept the audit reports. However, to minimize audit fees, the client requested that the CPA not extend audit procedures to the inventory as of the beginning of the year, January 1, 2015. Which type of audit report would you suggest be issued this year and why?
Explanation / Answer
Answer:
In the present case, there are two options available with Clark CPAs which are given below:
1. Firstly, they should discuss the matter with the management of client for not placing restrictions on the audit scope. If the management does not agree, a modified opinion audit report should be issued since restrictions have been placed by the client on scope of audit in regard to extended audit procedures relating to the beginning inventory.
2. Alternatively, they can also withdraw the audit engagement since the client is imposing restriction on scope of audit procedures. Further, they must intimate such reason of withdrawal to the incoming audtor of the client also.