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

What reporting option does an auditor have if a client refuses to capitalize major leases that significantly distort the financial statements?

1. Unmodified opinion

2. Adverse opinion

3. Qualified opinion

4. Disclaimer opinion

The correct answer is: Adverse opinion

An auditor is required to provide an opinion on the fairness of the financial statements presented by a client. When a client refuses to capitalize major leases, which is a requirement according to the applicable accounting standards, it results in a significant distortion of the financial statements. This scenario indicates that the financial statements do not adequately reflect the company's financial position and results of operations due to the omission of material obligations that should be recorded. An adverse opinion is appropriate in this situation because it communicates that the financial statements, as a whole, are not presented fairly in accordance with the relevant accounting framework. By issuing an adverse opinion, the auditor emphasizes the serious nature of the misstatement and lack of compliance with accounting standards, indicating to users of the financial statements that they should not rely on the financial statements as they misrepresent the company's true financial position. An auditor’s choice of reporting option is crucial, especially regarding the seriousness of misstatements; an adverse opinion serves to firmly alert stakeholders to the misrepresentation in the financial reports caused by the failure to capitalize the leases.