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

Under which circumstance is an auditor most likely to express an adverse opinion?

1. Internal controls are too poor to rely upon.

2. The financial statements do not conform to GAAP regarding lease capitalization.

3. The CEO refuses auditor access to meeting minutes.

4. There is substantial doubt about the entity's going concern status.

The correct answer is: The financial statements do not conform to GAAP regarding lease capitalization.

An auditor is most likely to express an adverse opinion when the financial statements are materially misstated and do not conform to the generally accepted accounting principles (GAAP). In the context of this question, if the financial statements do not conform to GAAP regarding lease capitalization, this represents a significant departure from the accounting standards, indicating that the financial results presented are misleading to the users of the financial statements. An adverse opinion signifies that the financial statements are so flawed that they cannot be relied upon at all for making decisions. This situation typically arises when there are pervasive issues that impact the overall accuracy and reliability of the financial statements. For example, incorrect lease capitalization could lead to fundamentally misleading representations of assets and liabilities, affecting all stakeholders including investors, creditors, and regulatory bodies. In contrast, while poor internal controls or the refusal to grant access to meeting minutes may pose significant concerns, they do not automatically lead to an adverse opinion. These issues might lead to a disclaimer of opinion or other modifications, but they do not directly equate to a misstatement in the financial statements themselves. Substantial doubt about an entity's going concern status might warrant an emphasis of matter or a qualified opinion, depending on the severity, but it does not inherently lead to an adverse opinion