What does scope limitation mean on the CPA exam?
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Scope limitation. Anything that stops the auditor obtaining evidence they judged necessary, whether imposed by the client or by circumstance. It leads to a qualified opinion, or a disclaimer when the possible effect is pervasive.
Defined against AU-C 705.08, .10.
Worked example
A flood closed one of a wholesaler's warehouses on the day of the year-end physical count and destroyed its stock records, so nobody observed the count there and no alternative procedure gives enough evidence about the quantities held. The same firm audited the prior year. That inventory is material and equals 8% of total assets; even at its largest possible error, net income would stay well positive. The rest of the engagement is finished, with no misstatements found.
What opinion does the auditor give, and what changes if the warehouse held 60% of total assets?
- The auditor could not obtain sufficient appropriate evidence about one balance. That is a scope limitation, not a known misstatement, so an adverse opinion is never the answer here.
- At 8% of total assets the possible effect is material but confined to one balance that leaves the financial statements, taken together, still reliable, so the effect is not pervasive. The auditor qualifies the opinion.
- At 60% of total assets the unaudited quantities reach most of the balance sheet and flow through cost of sales, so the possible effect is pervasive. The auditor disclaims an opinion.
Answer: A qualified opinion, with a basis paragraph explaining the limitation. If the warehouse held 60% of total assets, a disclaimer of opinion.
The trap: Choosing an adverse opinion for the larger warehouse. Adverse is for misstatements that are material and pervasive. When the problem is missing evidence, the auditor does not know whether the statements are misstated, so a pervasive limitation leads to a disclaimer instead.
Based on AU-C 705.08; AU-C 705.10.
Which CPA exam sections use scope limitation?
Scope limitation appears in the AUD section of the CPA exam.
Other terms defined against AU-C 705
- adverse opinion: The opinion given when misstatements are both material and pervasive, so the statements are not fair at all.
- disclaimer of opinion: The auditor states that no opinion is expressed, because they could not get evidence and the possible effect is pervasive.
- qualified opinion: The opinion given when a misstatement is material but not pervasive, or when evidence the auditor could not obtain would have been.
- qualified or adverse: The two modified opinions used when the auditor has the evidence but disagrees with the statements: qualified when the effect is material, adverse when it is also pervasive.
Related terms
- written representations: Statements the auditor requires from management to confirm matters or support other evidence.
- valuation allowance: The contra account reducing a deferred tax asset to the portion more likely than not to be realized, meaning a likelihood above 50%.
- audit evidence: Everything the auditor uses to reach a conclusion, including the accounting records and anything corroborating them.
- audit committee: A subcommittee of the board of directors that oversees financial reporting and the external audit.