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

If management clearly justifies not accounting for a material transaction according to GAAP, how should the auditor report?

1. "Subject to" qualified opinion.

2. Unmodified opinion.

3. "Except for" qualified opinion.

4. Adverse opinion.

The correct answer is: Unmodified opinion.

In the context of auditing and financial reporting, if management provides a clear justification for not accounting for a material transaction in accordance with Generally Accepted Accounting Principles (GAAP), it implies that the auditor believes the financial statements, as presented, are acceptable within the confines of the justification provided. An unmodified opinion suggests that the financial statements present a true and fair view of the company's financial position, and there are no identified areas of material misstatement. If the auditor concludes that the justification from management is reasonable and adequately supports the departure from GAAP, this opinion is appropriate. The financial statements can remain reliable for users, despite the non-compliance with GAAP concerning that specific transaction. Choosing an unmodified opinion communicates that the auditor does not find any significant, pervasive issues with the financial statements overall, even if a specific transaction has not been recorded under GAAP guidelines, provided the reasoning is solid and justifiable. This stance allows users of the financial statements to understand the rationale behind management's decisions while still presenting a positive view of the company’s financial health.