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

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When should an auditor modify their opinion on prior year's financial statements?

If the prior year's financial statements are restated to align with GAAP.
If the prior year's opinion was modified.
If there are no significant changes.
If there is a change in key management.

The correct answer is: If the prior year's financial statements are restated to align with GAAP.

An auditor should modify their opinion on prior year's financial statements when those statements are restated to align with Generally Accepted Accounting Principles (GAAP). Restatements indicate that the previous financial statements contained errors or misstatements significant enough to warrant correction. This situation directly affects how the auditor should present their opinion regarding the reliability and accuracy of past financial reporting. When restatements occur, it signals to stakeholders that prior conclusions drawn from the financial statements may no longer hold true. This would necessitate the auditor to either revise their previous opinions on those financial statements or issue an updated report reflecting the new circumstances. Therefore, it is essential for the integrity of financial reporting and the trust of stakeholders that the auditor clearly communicates any changes in opinion related to restated financials. While modifications due to prior year opinions or changes in key management may be relevant, they do not automatically trigger a modification of the prior year’s opinion like a restatement would. A situation where there are no significant changes would not necessitate a modification, as stability in the financial reporting does not warrant an updated opinion.