CPA Exam — AUDForming Conclusions and ReportingMedium
An auditor concludes that a client's financial statements are materially misstated due to a departure from GAAP, and the effect of the misstatement is pervasive. The auditor should express a(n):
- AAdverse opinion.
- BQualified opinion.
- CUnmodified opinion with an emphasis-of-matter paragraph.
- DDisclaimer of opinion.
Show answer & explanationAnswer & explanation
Correct answer: A. Adverse opinion.
When financial statements are materially misstated and the effect is pervasive, an adverse opinion is appropriate. This indicates that the financial statements as a whole are not presented fairly in accordance with the applicable financial reporting framework.
Why the other options are wrong
- B. A qualified opinion is issued when the financial statements are materially misstated, but the effects are not pervasive.
- C. An unmodified opinion with an emphasis-of-matter paragraph is used when the financial statements are fairly presented, but a matter is disclosed that is fundamental to users' understanding.
- D. A disclaimer of opinion is issued when the auditor is unable to obtain sufficient appropriate audit evidence and the possible effects on the financial statements could be both material and pervasive.
Adverse Opinion
An adverse opinion states that the financial statements as a whole are not presented fairly in accordance with the applicable financial reporting framework, due to material and pervasive misstatements.
- Issued when misstatements are both material and pervasive.
- Indicates statements are not fairly presented.
- Highest level of modification for misstatements.
Memory trick: Opinions on financial statements depend on the 'Pervasive Problem'.