CPA Exam — AUDForming Conclusions and ReportingEasy
A client's financial statements contain a material misstatement due to an inappropriate accounting method. The auditor concludes that the misstatement is both material and pervasive to the financial statements. In this situation, the auditor should express which of the following opinions?
- ADisclaimer of opinion
- BQualified opinion
- CAdverse opinion
- DUnmodified opinion
Show answer & explanationAnswer & explanation
Correct answer: C. Adverse opinion
When an auditor determines that financial statements are materially misstated and the misstatement is also pervasive, an adverse opinion is appropriate. This indicates that the financial statements as a whole are not presented fairly.
Why the other options are wrong
- A. A disclaimer of opinion is issued when the auditor cannot obtain sufficient appropriate audit evidence, not for pervasive misstatements.
- B. A qualified opinion is issued when a material misstatement is not pervasive.
- D. An unmodified opinion is issued when financial statements are presented fairly in all material respects.
Adverse Opinion Condition
An adverse opinion is issued when financial statements are materially misstated and the misstatements are also pervasive to the financial statements.
- Misstatement is material
- Misstatement is pervasive
- F/S are not presented fairly
Memory trick: Pervasive is Adverse, Material but not Pervasive is Qualified.