Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

If a company's financial statements contain a material departure from GAAP but are misleading if prepared in conformity with GAAP, the auditor should render what type of opinion?

1. Unmodified opinion with no additional paragraphs of explanation.

2. Unmodified opinion with a separate paragraph explaining the unusual situation.

3. Qualified opinion with an added paragraph explaining the reason for the qualification.

4. Disclaimer of opinion based on lack of sufficient appropriate audit evidence.

The correct answer is: Unmodified opinion with a separate paragraph explaining the unusual situation.

When a company's financial statements exhibit a material departure from Generally Accepted Accounting Principles (GAAP) but are misleading if prepared following GAAP, the auditor faces a unique situation. The appropriate response in such cases is to issue an unmodified opinion with a separate explanatory paragraph. This approach communicates that, although the financial statements do not conform to GAAP due to the material departure, the overall financial statements still present a true and fair view when considering the unusual circumstances. The inclusion of a separate explanatory paragraph is crucial as it provides clarity to the users of the financial statements about the nature of the departure from GAAP. This transparency helps stakeholders understand why the auditor has arrived at this conclusion and ensures they are aware of the specific reasons behind the unusual accounting practices. This response strikes a balance between acknowledging the material discrepancy and maintaining that the financial statements, as presented, are not misleading under the specific context given. Therefore, the auditor supports the integrity of the financial reporting while also providing essential contextual information to mitigate any confusion among users of the financial statements.