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

If an auditor discovers that a client's illegal act has not been properly disclosed in the financial statements, what opinions should they consider expressing?

1. Unmodified opinion with an emphasis-of-matter.

2. Qualified opinion or an adverse opinion.

3. Disclaimer of opinion or an unmodified opinion.

4. Adverse opinion or a disclaimer of opinion.

The correct answer is: Qualified opinion or an adverse opinion.

When an auditor discovers that a client's illegal act has not been properly disclosed in the financial statements, the auditor faces a significant issue regarding the financial statements' reliability and compliance with applicable accounting frameworks. In this context, expressing a qualified opinion or an adverse opinion is warranted based on the significance of the matter. A qualified opinion may be issued when the financial statements are materially misstated but not pervasive. If the illegal act affects a limited portion of the financial statements, it would result in a qualified opinion due to the lack of proper disclosure, indicating that, except for the issue at hand, the financial statements are presented fairly in all material respects. On the other hand, an adverse opinion is appropriate when the misstatement is both material and pervasive to the financial statements. If the illegal act fundamentally undermines the trustworthiness of the financial statements' overall presentation, an adverse opinion is necessary to highlight these serious deficiencies. Thus, the auditor should consider either a qualified opinion or an adverse opinion based on the severity of the undisclosed illegal act’s impact on the financial statements, making this the appropriate choice in this scenario.