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

If Wall, CPA, finds that financial statements prepared for Delta Life Insurance Co. are not suitably titled, what is the auditor's best action?

1. Issue a statutory basis report with no opinion.

2. Disclose reservations and qualify the opinion.

3. Seek an advisory opinion from state insurance commission.

4. Clarify terminology in the notes of the financial statements.

The correct answer is: Disclose reservations and qualify the opinion.

The best action for the auditor when finding that financial statements are not suitably titled is to disclose reservations and qualify the opinion. This is because suitably titled financial statements are essential for clarity and transparency, especially in the context of financial reporting. If the titles do not accurately reflect the nature of the entity or the type of financial statements presented, it can mislead users about the financial position and results of operations. By qualifying the opinion, the auditor acknowledges the issue while still providing the users with the necessary information about the financial statements. This approach maintains the integrity of the audit process and ensures that the stakeholders are aware of the limitation. It provides transparency regarding the potential deficiencies in the financial statements, allowing users to make informed decisions based on the qualifications provided in the audit report. The other options may not effectively address the issue of mislabeling. For example, issuing a statutory basis report with no opinion does not provide clarity about the financial statements' trustworthiness. Seeking an advisory opinion from the state insurance commission may not directly resolve the problem with the titles themselves. Clarifying terminology in the notes does not correct the fundamental issue of title accuracy, which could lead to further confusion about the financial statements.