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

When the auditor finds that the management has not properly disclosed a loss contingency, what is the likely outcome?

1. Unmodified opinion.

2. Qualified opinion for lack of disclosure.

3. Adverse opinion.

4. No opinion issued.

The correct answer is: Qualified opinion for lack of disclosure.

When an auditor discovers that management has not properly disclosed a loss contingency, a qualified opinion for lack of disclosure is warranted. This outcome reflects the auditor's assessment that the financial statements, taken as a whole, are materially misstated due to this omission. In financial reporting, loss contingencies must be disclosed in accordance with generally accepted accounting principles (GAAP). These disclosures are essential for providing users of the financial statements with a complete and accurate understanding of the organization's financial position and risks. If the loss contingency is significant enough that its absence could influence the economic decisions of users, the auditor must indicate that there is a limitation in the presentation of the financials. Hence, a qualified opinion serves to inform that the financial statements are generally presented fairly except for the specific issue related to the lack of disclosure regarding the loss contingency. An unmodified opinion would imply that the financial statements are free from material misstatements and adequately disclose all necessary information, which is not the case here. An adverse opinion would be used when the financial statements are misstated in a way that is so materially pervasive that the entire presentation is misleading, which would typically not be the case solely from a lack of disclosure unless it significantly alters the understanding of the financials. No opinion