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

Disable ads (and more) with a membership for a one time $2.99 payment

Prepare for the CPA Auditing and Attestation Exam. Leverage comprehensive materials, flashcards, and detailed explanations for each question. Master essential auditing concepts and techniques with confidence!

Each practice test/flash card set has 50 randomly selected questions from a bank of over 500. You'll get a new set of questions each time!

Practice this question and more.

If management does not make an accrual for a probable material loss and fully discloses the situation, how should the auditor express their opinion?

Unmodified opinion.
Qualified opinion due to a scope limitation.
Unmodified opinion with an other-matter paragraph.
Qualified opinion due to a material misstatement of the financial statements.

The correct answer is: Unmodified opinion.

When evaluating the situation where management does not make an accrual for a probable material loss but fully discloses the situation, the auditor's opinion should reflect the transparency of management's disclosure. An unmodified opinion indicates that the financial statements present a true and fair view in accordance with the relevant financial reporting framework. In this case, the full disclosure about the probable material loss allows users of the financial statements to understand the potential impact on the entity. Since the financial statements are still in accordance with the framework despite the omission of the accrual, and management has effectively communicated the relevant information, this justifies an unmodified opinion. It is essential to note that an unqualified or unmodified opinion does not imply the absence of issues; rather, it signifies that any issues have been adequately addressed through disclosures. The absence of a material misstatement in the financial statements due to non-accrual—paired with full disclosure—supports the auditor's conclusion to issue an unmodified opinion.