CPA Exam — AUDForming Conclusions and ReportingHard
An auditor has completed an audit of a non-public entity's financial statements. The auditor found that the client refused to allow the auditor to confirm accounts receivable, which represents 25% of total assets. The auditor was unable to perform alternative procedures to satisfy themselves about the existence of accounts receivable. What type of opinion should the auditor issue?
- AUnmodified opinion with an emphasis-of-matter paragraph
- BDisclaimer of opinion
- CAdverse opinion
- DQualified opinion
Show answer & explanationAnswer & explanation
Correct answer: B. Disclaimer of opinion
A scope limitation that is both material and pervasive, such as being unable to obtain sufficient appropriate evidence for a significant portion of total assets without alternative procedures, leads to a disclaimer of opinion. 25% of total assets is considered material and pervasive in this context.
Why the other options are wrong
- A. An emphasis-of-matter paragraph is for matters appropriately presented, not for a pervasive scope limitation.
- C. An adverse opinion is for material and pervasive misstatements, not scope limitations.
- D. A qualified opinion is for a material but not pervasive scope limitation, or a material but not pervasive misstatement. Here, 25% of total assets is likely pervasive.
Disclaimer of Opinion (Pervasive Scope Limitation)
An audit opinion issued when the auditor cannot obtain sufficient appropriate audit evidence to form an opinion on the financial statements due to a material and pervasive scope limitation.
- Issued when scope limitation is material and pervasive.
- Auditor states they do not express an opinion.
- Can result from client-imposed restrictions or circumstances beyond control.
Memory trick: Scope Limiter: Qualified if just a bit, Disclaimer if the whole picture's hit.