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

In which case would an unmodified opinion not be appropriate?

1. A material related party transaction was not adequately disclosed.

2. There is an unjustified departure from GAAP with no material effect.

3. A change in accounting principle materially affects the current year.

4. There is a justified departure from GAAP.

The correct answer is: A material related party transaction was not adequately disclosed.

An unmodified opinion is provided in an audit report to indicate that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework, such as Generally Accepted Accounting Principles (GAAP). In situations where there are significant issues that impact the overall fairness or reliability of the financial statements, an unmodified opinion would not be appropriate. In the case where a material related party transaction was not adequately disclosed, this represents a significant issue because it can mislead users of the financial statements regarding the true nature of the company’s financial position and performance. Related party transactions have inherent risks of bias and can have a substantial impact on the financial statements, making adequate disclosure critical. Failure to disclose such transactions appropriately undermines the transparency and reliability of the financial reports, which is a primary concern for an auditor issuing an opinion. In other scenarios—such as unjustified departures from GAAP, changes in accounting principles with material effects, or justified departures—all might be conditions where an unmodified opinion could potentially still be issued depending on the specifics of those situations. However, the presence of a material omission like failure to disclose is more egregious, requiring a different type of opinion to accurately reflect the financial reporting issues at hand.