The inventory consists of about one per cent of all assets. The client has imposed restriction on auditor to prohibit observation of stock take. The auditor cannot apply alternate audit procedures.

 Options:

a) unqualified opinion b) qualified opinion c) disclaimer of opinion d) adverse opinion

The Correct Answer Is:

a) unqualified opinion

Correct Answer Explanation: a) unqualified opinion

The correct answer is (a) unqualified opinion. In audit engagements, the auditor’s ultimate goal is to express an opinion on the financial statements.

An unqualified opinion indicates that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity in accordance with the applicable financial reporting framework.

In this scenario, where the client has restricted the auditor from observing the physical stock take and no alternate audit procedures can be applied, an unqualified opinion is still appropriate if the auditor believes that the restriction does not materially affect the financial statements.

The prohibition on the observation of stock take is a limitation imposed by the client, and the auditor is unable to perform alternative procedures. However, if the auditor is satisfied that the inventory is fairly stated in the financial statements despite the restriction, they can issue an unqualified opinion.

It implies that, based on the evidence available, the auditor does not have any significant concerns about the accuracy and completeness of the financial statements, including the inventory valuation.

Now, let’s examine why the other options are not correct:

b) Qualified Opinion:

A qualified opinion is issued when the auditor believes that, except for the effects of a specific matter, the financial statements are presented fairly. In this case, the restriction imposed by the client on observing the stock take does not necessarily imply that there is a specific matter affecting the entire financial statements.

The inability to apply alternative audit procedures is a limitation, but if the auditor can reasonably conclude that this limitation does not materially impact the accuracy of the financial statements, a qualification is not warranted. Therefore, the circumstances described do not align with the conditions for issuing a qualified opinion.

c) Disclaimer of Opinion:

A disclaimer of opinion is appropriate when the auditor is unable to obtain sufficient appropriate audit evidence to form an opinion on the financial statements as a whole. In the scenario presented, the auditor is still able to gather sufficient evidence on other aspects of the financial statements, aside from the stock take.

The limitation imposed by the client specifically pertains to the observation of stock take, and it does not prevent the auditor from forming an opinion on the overall financial statements. As such, the conditions for issuing a disclaimer of opinion are not met.

d) Adverse Opinion:

An adverse opinion is issued when the auditor concludes that the financial statements are not presented fairly. In this case, the restriction on observing the stock take is a limitation, but the auditor cannot apply alternative procedures.

However, an adverse opinion is a severe conclusion, typically reserved for situations where there is pervasive doubt about the fairness of the financial statements. The inability to observe the stock take alone may not necessarily lead to the conclusion that the financial statements are not presented fairly overall.

The auditor needs to consider the materiality of the inventory and its impact on the financial statements as a whole. Given that the question doesn’t provide enough information to support pervasive doubt, an adverse opinion is not the most appropriate response.

In summary, the specific circumstances described in the question, where the restriction on stock take is imposed by the client and no alternative procedures can be applied, align more closely with an unqualified opinion.

The auditor must assess whether the restriction materially affects the financial statements and, if not, an unqualified opinion is the appropriate conclusion. The other options (b, c, and d) involve more extreme conclusions that are not warranted based on the given scenario.

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