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

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When should an auditor express an adverse opinion?

When misstatements are material and pervasive.
When misstatements are material but not pervasive.
When the financial statements are presented fairly.
When the auditor cannot obtain sufficient appropriate audit evidence.

The correct answer is: When misstatements are material and pervasive.

An auditor expresses an adverse opinion when misstatements in the financial statements are both material and pervasive. This situation indicates that the misstatements significantly distort the overall presentation of the financial statements, leading to the conclusion that the financial statements do not provide a true and fair view of the entity's financial position or results of operations in accordance with the applicable financial reporting framework. Materiality refers to the importance of an amount, transaction, or discrepancy in the context of the financial statements, while pervasiveness pertains to the extent of the misstatements throughout the financial statements. When both conditions are met, it signals that the overall fairness of the financial statements is compromised, hence the need for an adverse opinion, which warns users that the statements should not be relied upon for decision-making purposes. In contrast, when misstatements are material but not pervasive, the auditor would generally issue a qualified opinion, indicating that while there are serious issues, they do not affect the overall reliability of the financial statements. The other situations presented, such as when financial statements are presented fairly or when the auditor cannot obtain sufficient evidence, would lead to opinions of unmodified or disclaimer, respectively, rather than an adverse opinion.