Page 175 - CA Final PARAM Digital Book.

(iii) Limitations imposed by management.
Explain with the help of examples.
Answer ➢ Reasons (R )
The auditor’s inability to obtain sufficient appropriate audit evidence (also referred to as a limitation
on the scope of the audit) may arise from:
R 1 - Circumstances beyond the control of the entity;
R 2 - Circumstances relating to the nature or timing of the auditor’s work; or
R 3 - Limitations imposed by management.

• R1 – Fault of External Factors
Examples of circumstances beyond the control of the entity include when:
• The entity’s accounting records have been destroyed.
• The accounting records of a significant component have been seized indefinitely by
governmental authorities.

• R2 – Fault of Management
Examples of an inability to obtain sufficient appropriate audit evidence arising from a
limitation on the scope of the audit imposed by management include when:
• Management prevents the auditor from observing the counting of the physical
inventory.
• Management prevents the auditor from requesting external confirmation of
specific account balances.

• R3 – No one’s Fault

Examples of circumstances relating to the nature or timing of the auditor’s work include
when:
The entity is required to use the equity method of accounting for an associated entity, and
the auditor is unable to obtain sufficient appropriate audit evidence about the latter’s
financial information to evaluate whether the equity method has been appropriately applied.
• The timing of the auditor’s appointment is such that the auditor is unable to observe
the counting of the physical inventories.
• The auditor determines that performing substantive procedures alone is not
sufficient, but the entity’s controls are not effective.
➢ Solution
An inability to perform a specific procedure does not constitute a limitation on the scope of the audit
if the auditor is able to obtain sufficient appropriate audit evidence by performing alternative
procedures. Limitations imposed by management may have other implications for the audit, such as
for the auditor’s assessment of fraud risks and consideration of engagement continuance.

QNO Audit evidence not consistent with the affirmation in the FST Old Course – (SM21, N22E)
113.030 TITANIUM CNO— SA705.040 New Course – (SM23)
CA Omkar is the statutory auditor of Sabhyata Ltd. for the FY 2020-21. The company is engaged in the
business of manufacture of floor tiles. During the course of audit, CA Omkar obtained certain audit evidence

which were not consistent with the affirmation made in the financial statements. Discuss as to how CA Omkar
should deal with the situation in the auditor’s report
Part I -- Relevant Standards & Laws
▪ SA 705 - “Modifications To The Opinion In The Independent Auditor’s Report.
Part II -- Requirements of Relevant Standards & Laws
➢ SA 705 deals with the auditor’s responsibility to issue an appropriate report in circumstances when, in
forming an opinion in accordance with SA 700 (Revised), the auditor concludes that a modification to the
auditor’s opinion on the financial statements is necessary.
➢ The decision regarding which type of modified opinion is appropriate depends upon:

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