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

If management refuses to capitalize leases and this is a GAAP violation, what should the CPA do?

1. Restrict the distribution of the report

2. Describe the GAAP departure in the report

3. Issue a qualified opinion

4. Express limited assurance on the financials

The correct answer is: Describe the GAAP departure in the report

When management refuses to capitalize leases, which is a clear violation of Generally Accepted Accounting Principles (GAAP), it is essential for the CPA to address the situation appropriately in their report. By describing the GAAP departure in the report, the CPA is acknowledging the significance of the issue to the financial statements and is providing transparency to the users of the financial statements. Describing the GAAP departure allows stakeholders, such as investors and creditors, to understand the implications of the non-compliance on the financial statements. This approach ensures that the users are fully informed about how the financial position and performance of the company may be misstated or misrepresented due to the non-capitalization of leases. This action is crucial because it preserves the integrity and transparency of financial reporting, allowing users to make informed decisions while taking into consideration the implications of the departure from GAAP. The other options suggest actions like restricting the report's distribution or issuing a qualified opinion, which may not adequately communicate the importance of the GAAP violation. Expressing limited assurance doesn't directly address the key issue of the departure from GAAP either, which is why describing the GAAP departure in the report is the most effective response from the CPA in this scenario.