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

What is the auditor's responsibility when management provides misleading financial information?

1. Issue an unmodified opinion.

2. Modify the opinion based on the severity of the misinformation.

3. Disclaim any responsibility in the audit report.

4. Report the issue to external authorities.

The correct answer is: Modify the opinion based on the severity of the misinformation.

When management provides misleading financial information, the auditor's responsibility is to modify the opinion based on the severity of the misinformation. This is because the accuracy and integrity of financial statements are paramount to an audit's purpose. If the auditor identifies that the financial statements are not presented fairly due to misleading information from management, it directly affects the reliability of the audit opinion. In such cases, the auditor assesses the materiality and pervasiveness of the misleading information. If the misinformation is quantitatively or qualitatively significant enough to affect users' decisions, a modification to the audit opinion is necessary to accurately reflect the situation. Depending on the extent of the misleading information, this modification could range from a qualified opinion to an adverse opinion, indicating that the financial statements do not accurately represent the entity's financial position. The emphasis on modifying the opinion underscores the auditor's role in protecting the interests of stakeholders who rely on the integrity of the financial statements. This approach also upholds the professional standards of auditing, which demand transparency when financial disclosures are misleading. The choices involving issuing an unmodified opinion or disclaiming responsibility would fail to acknowledge the misleading nature of the financial information. Reporting the issue to external authorities might be necessary in cases of fraud or illegal actions, but it does