Question

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 (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?
d. Assume that Brady performs one or more of the alternative procedures in (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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  • CreatedOctober 27, 2014
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