Scope limitation definition
/A scope limitation arises when an auditor cannot obtain enough audit evidence to form an opinion regarding a client’s financial statements. This situation can also arise when a client does not allow the auditor to perform an audit procedure needed to form an opinion.
Scope limitations affect the ability of an auditor to render a clean opinion on the financial statements of a client. This can sometimes be avoided when the auditor uses alternative procedures.
Types of Scope Limitations
There are several types of scope limitations on an audit. They are as follows:
Outside circumstances. There may be issues beyond the control of the client that trigger a scope limitation. For example, several key accounting staff may have been called away to deal with the integration of an acquisition, and are not available to answer auditor questions. Or, a client’s accounting records were destroyed by a flood.
Caused by the client. The client may have imposed a restriction on the audit. For example, a client restricts the auditor’s access to its customers to confirm the existence of accounts receivable.
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Example of a Scope Limitation
As an example of a scope limitation, a company is being audited, and one of its key assets is inventory stored in a remote warehouse. The auditor requests access to perform physical inventory counts to verify its existence and valuation. However, due to a legal dispute with the warehouse operator, the auditor is not allowed access to the facility, and no alternative procedures (such as using video confirmation or obtaining independent records from the warehouse) can adequately verify the inventory's details.
The inability to observe and verify the inventory would be a scope limitation. The auditor may issue a qualified opinion or a disclaimer of opinion, depending on the materiality and pervasiveness of the limitation.