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

In the absence of sufficient evidence regarding a new client's opening inventory balances, what opinion can an auditor issue on the current year's financial statements?

1. Unmodified opinion on the income statement

2. Unmodified opinion on the balance sheet

3. Adverse opinion on the statements of cash flows

4. Qualified opinion on shareholders' equity

The correct answer is: Unmodified opinion on the balance sheet

In the context of auditing, when an auditor encounters insufficient evidence regarding a new client’s opening inventory balances, they face a challenge in assessing the overall financial statements. It's important to understand that an unmodified opinion signifies that the auditor believes the financial statements are free from material misstatement and are fairly presented in accordance with the applicable financial reporting framework. However, the opening inventory balance carries implications for both the income statement and the balance sheet. Specifically, the opening inventory is critical because it is used to determine the cost of goods sold, which directly affects net income, and consequently, retained earnings in the equity section of the balance sheet. If the auditor cannot obtain sufficient appropriate evidence to support the opening inventory, this could lead to a material misstatement in the income statement that impacts the current year’s reported earnings. Issuing an unmodified opinion on the balance sheet can be possible if the auditor believes that, notwithstanding the uncertainty surrounding the opening balances, the current year's transactions and the resulting balances can still be reliably audited. The inventory issue may not affect the balance sheet assertion as of year-end if the auditor can verify the purchases and sales that occurred during the current period. Therefore, the balance sheet may still present fairly, as evidence regarding current period transactions is sufficient—