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

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In what situation would an auditor typically decide between a qualified opinion and an adverse opinion?

The financial statements have substantial doubts about going concern
Limited access to financial records during the audit
Management refuses to provide physical inventory counts
The financial statements fail to disclose required information according to GAAP

The correct answer is: The financial statements fail to disclose required information according to GAAP

An auditor would typically decide between a qualified opinion and an adverse opinion in the scenario where the financial statements fail to disclose required information according to Generally Accepted Accounting Principles (GAAP). This situation is significant because it indicates that the lack of disclosure could mislead users of the financial statements. A qualified opinion is issued when there are specific areas of disagreement or limitation that do not affect the overall financial statements, meaning the statements are fairly presented except for the identified issue. In contrast, an adverse opinion signals that the financial statements are not presented fairly in all material respects due to significant misstatements or omissions. Therefore, if the omission of essential disclosures is so pervasive that it affects the overall reliability of the financial statements, an adverse opinion would be warranted, as it reflects a severe departure from GAAP. In contrasting situations, substantial doubts about going concern may lead to a modified opinion as well, but it does not directly correlate to the misrepresentation of financial statement disclosures. Limited access to financial records often results in a qualified opinion due to scope limitations but does not inherently suggest that the statements themselves are misleading. Similarly, management's refusal to provide physical inventory counts typically results in a qualified opinion regarding the inventory valuation, rather than a clear-cut adverse opinion.