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

What is a common reason for an auditor to issue a disclaimer of opinion?

1. Inadequate disclosure of material information.

2. A material departure from GAAP.

3. Management's refusal to furnish a client representation letter.

4. An inconsistent application of accounting principles.

The correct answer is: Management's refusal to furnish a client representation letter.

A disclaimer of opinion is issued by an auditor when they are unable to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. This often occurs in situations where management does not cooperate with the audit process. One common scenario for a disclaimer of opinion is when management refuses to furnish a client representation letter. This letter is crucial as it provides the auditor with confirmations regarding significant matters relevant to the financial statements, such as the completeness of information provided and adherence to accounting policies. Without this representation from management, the auditor cannot fulfill their responsibility to obtain adequate evidence that supports their opinion on the financial statements. As a result, the auditor may issue a disclaimer of opinion, indicating that they do not express an opinion on the financial statements due to the lack of evidence, not necessarily implying that there are material misstatements present. In contrast, inadequate disclosure of material information, material departures from GAAP, and inconsistent applications of accounting principles may lead to qualified opinions or adverse opinions, rather than a disclaimer, because these issues typically involve identifiable misstatements or areas of concern that the auditor can evaluate, even if they create a basis for expressing concern or disapproval.