Auditor's opinion on the basis of a restricted examination;

              Statements on Auditing
Procedure
•
Issued by the Committee on Auditing Procedure, American Institute of Accountants, 13 East 41st Street, New York, N. Y.
Copyright 1941 by American Institute of Accountants
No. 2
December 1939
The Auditor's Opinion on the Basis of a Restricted Examination
THERE has been submitted to the special committee on auditing procedure a question involving the propriety or otherwise of the independent certified public accountant's expressing an opinion re-garding the financial statements on the basis of a restricted examina-tion. The committee believes that the question is of sufficient interest that the substance of its views should be made available to the mem-bership.
The circumstances surrounding the particular engagement, as furnished to the committee, are as follows: Approximately 50 per cent of a client's assets are represented by current assets. Inventories ac-count for 55 per cent of the current assets, and receivables an addi-tional 13 per cent. Over 90 per cent of the receivables are maintained at branch offices and approximately 60 per cent of the inventories are located at branches. Approximately 90 per cent of sales (and thus presumably 90 per cent of the income) originate at the branches. The cash and fixed-asset accounts, investments and other asset accounts can be satisfactorily examined at the head office. Most of the liabilities originate at the branches. The branch accounts are examined by the client's internal auditing staff.
The committee is also informed that the company is well managed, its accounts are conservatively stated and there is no reason, from the work done at head office, to question the completeness and accuracy of the reports of the traveling auditors.
It is proposed that the examination by the independent certified public accountants be limited to the head-office records and that, as to the several important branches located throughout the country, they should rely entirely on reports of the client's internal auditing staff. The independent certified public accountants are not afforded an opportunity to confirm receivables by communication with debtors or to make physical tests of inventory quantities.
The situation with regard to receivables and inventories, in the opinion of the committee, comes clearly within the scope of the recom-mendations contained in the report, "Extensions of Auditing Pro-
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