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

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Prepare for the CPA Auditing and Attestation Exam. Leverage comprehensive materials, flashcards, and detailed explanations for each question. Master essential auditing concepts and techniques with confidence!

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What is the consequence of a client deciding not to make an auditor's proposed adjustments that are immaterial?

The financial statements do not conform with generally accepted accounting principles (GAAP).
The financial statements contain unadjusted misstatements that should result in a qualified opinion.
The financial statements are free from material misstatement, and no disclosure is required in the notes.
The financial statements are free from material misstatement, but disclosure is required in the notes.

The correct answer is: The financial statements are free from material misstatement, and no disclosure is required in the notes.

The correct answer highlights that when a client opts not to incorporate an auditor's proposed adjustments deemed immaterial, the financial statements remain free from material misstatement. This means that even though there are some unadjusted misstatements, their size and nature are such that they do not affect the users' decision-making regarding the financial statements. In this context, the auditor's responsibility is to assess the overall financial statements for material misstatements, and if the unapproved adjustments are immaterial, it does not necessitate disclosure. Therefore, the conclusion is that the financial statements, as presented, still adequately conform to the requirements set forth by generally accepted accounting principles (GAAP), as materiality levels are a crucial component in evaluating financial reporting and auditing practices. Since the other options suggest either a lack of conformity with GAAP or the necessity for disclosure in the notes due to immaterial misstatements, they do not align with the principles governing materiality in this scenario. This understanding reinforces the concept that not all misstatements, particularly those considered immaterial, warrant adjustments or disclosure in financial statements.