Scope Limitations. D. Brady has been engaged as the auditor of Patriot Company andis currently planning the year-end physical inventory counts. Patriot is a retailer that holdssignificant inventories in its warehouses and stores in six regions across the United States.Because of timing and logistics, Brady is able to observe the physical inventory at only oneof Patriot’s warehouses, which accounts for 20 percent of Patriot’s inventories.In Brady’s professional judgment, the fact that inventories held at only one warehousecan be observed does not provide sufficient evidence with respect to Patriot’s inventorybalances at the date of the financial statements. Although physical inventory counts couldbe delayed at the remaining warehouses for Brady to observe the counts, the flow of goodsin and out of the warehouses would result in a discrepancy between the inventory quantitieson hand at year-end and the inventory quantities on hand at the date of the count.Required:a. Assume that Brady observes physical inventory at only the one warehouse and does notperform alternative procedures related to inventories held at the other warehouses. Doesthis cause a scope limitation? If so, is this a client-imposed or circumstance-imposedscope limitation?b. What type of opinion would Brady likely issue for the situation in part (a)? How wouldthe wording in the standard (unmodified) report be modified to reflect this opinion?c. What alternative procedures might be available to Brady with respect to this scope limitation? (Hint: You may wish to refer to Chapter 9 to identify alternative procedures forinventory.)d. Assume that Brady performs one or more of the alternative procedures in part (c) andis able to gather evidence to support the recorded balance in inventory. What type ofopinion would Brady issue on Patriot’s financial statements (assuming that no otherissues were identified in the audit examination)?
Scope Limitations. D. Brady has been engaged as the auditor of Patriot Company and
is currently planning the year-end physical inventory counts. Patriot is a retailer that holds
significant inventories in its warehouses and stores in six regions across the United States.
Because of timing and logistics, Brady is able to observe the physical inventory at only one
of Patriot’s warehouses, which accounts for 20 percent of Patriot’s inventories.
In Brady’s professional judgment, the fact that inventories held at only one warehouse
can be observed does not provide sufficient evidence with respect to Patriot’s inventory
balances at the date of the financial statements. Although physical inventory counts could
be delayed at the remaining warehouses for Brady to observe the counts, the flow of goods
in and out of the warehouses would result in a discrepancy between the inventory quantities
on hand at year-end and the inventory quantities on hand at the date of the count.
Required:
a. Assume that Brady observes physical inventory at only the one warehouse and does not
perform alternative procedures related to inventories held at the other warehouses. Does
this cause a scope limitation? If so, is this a client-imposed or circumstance-imposed
scope limitation?
b. What type of opinion would Brady likely issue for the situation in part (a)? How would
the wording in the standard (unmodified) report be modified to reflect this opinion?
c. What alternative procedures might be available to Brady with respect to this scope limitation? (Hint: You may wish to refer to Chapter 9 to identify alternative procedures for
inventory.)
d. Assume that Brady performs one or more of the alternative procedures in part (c) and
is able to gather evidence to support the recorded balance in inventory. What type of
opinion would Brady issue on Patriot’s financial statements (assuming that no other
issues were identified in the audit examination)?
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