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

In a situation where a loss contingency is probable but not able to be estimated, what is the appropriate audit opinion?

1. Unmodified opinion with an explanation.

2. Qualified opinion due to insufficient evidence.

3. Adverse opinion if not disclosed.

4. Unmodified opinion as long as the matter is disclosed.

The correct answer is: Unmodified opinion as long as the matter is disclosed.

When a loss contingency is probable but cannot be reasonably estimated, the appropriate course of action is to disclose this uncertainty in the financial statements. The key characteristic of this scenario is that while the likelihood of the loss occurring is high, the inability to quantify the potential impact does not necessarily dictate a negative audit outcome. Choosing an unmodified opinion with disclosure indicates that while there is a significant uncertainty related to the loss contingency, the financial statements overall are still faithfully represented and free from material misstatement. This kind of opinion affirms that the financials provide a true and fair view of the entity’s situation, provided that the loss contingency is appropriately disclosed in the notes to the financial statements. This transparency ensures user awareness of potential risks without requiring a detrimental view of the overall financial health. In contrast, an opinion that suggests there might be insufficient evidence, like a qualified opinion, would imply there was a more serious concern regarding the financial statements, which is not warranted in this case as long as proper disclosure is made. An adverse opinion would only come into play if the failure to disclose led to a material misstatement of the financial statements, which is not applicable here. Hence, if disclosed adequately, the auditor can issue an unmodified opinion, affirming that the financial