CPA Exam — AUDForming Conclusions and ReportingHard
An auditor has completed an audit of a publicly traded company. The audit revealed that the company has prepared its financial statements in accordance with U.S. GAAP, and there are no material misstatements or scope limitations. However, the auditor noted a significant uncertainty regarding the outcome of a major lawsuit that is adequately disclosed in the financial statements. What opinion should the auditor issue?
- AAdverse opinion due to the uncertainty.
- BUnmodified opinion with an emphasis-of-matter paragraph.
- CQualified opinion due to the uncertainty.
- DDisclaimer of opinion due to the uncertainty.
Show answer & explanationAnswer & explanation
Correct answer: B. Unmodified opinion with an emphasis-of-matter paragraph.
When a significant uncertainty (like a major lawsuit) is adequately disclosed in the financial statements and does not prevent the auditor from forming an opinion on fair presentation, an unmodified opinion is issued, but an Emphasis-of-Matter paragraph is added to draw users' attention to this fundamental matter.
Why the other options are wrong
- A. An adverse opinion is for material and pervasive misstatements, not for adequately disclosed uncertainties.
- C. A qualified opinion is for material misstatements or scope limitations, not for adequately disclosed uncertainties.
- D. A disclaimer of opinion is for pervasive scope limitations or pervasive uncertainties where the auditor cannot form an opinion, which is not the case here as disclosure is adequate.
Unmodified Opinion with Emphasis-of-Matter (Uncertainty)
An auditor issues an unmodified opinion but includes an Emphasis-of-Matter paragraph when there is a significant uncertainty (e.g., going concern, major lawsuit) that is adequately disclosed in the financial statements and does not result in a material misstatement.
- Opinion remains unmodified.
- Highlights a matter fundamental to users' understanding.
- Applies when uncertainty is adequately disclosed and does not cause a misstatement.
Memory trick: Uncertainty: Disclosed? EOM. Not disclosed? Modify Opinion.