A misapplication of the lower of cost or market principle by management, with no willingness to adjust recorded amounts or disclosures to satisfy the auditor, most likely requires which type of audit report?

A misapplication of the lower of cost or market principle by management, with no willingness to adjust recorded amounts or disclosures to satisfy the auditor, most likely requires which type of audit report?

• A. Qualified or Adverse
• B. Disclaimer
• C. Unqualified
• D. Negative Assurance

Answer: (A)

When a misstatement of financial statements arises from management’s misapplication of GAAP and management refuses to correct or disclose it to satisfy the auditor, the opinion cannot be unmodified. The auditor must issue a modified opinion. The degree of modification depends on how pervasive the misstatement is: if it is material but not pervasive, a qualified opinion is appropriate; if it is pervasive, the opinion would be adverse. Since the scenario could fall on either end depending on how widespread the misapplication is, the option that covers both possibilities is “Qualified or Adverse.” A disclaimer would be used if the auditor could not obtain sufficient evidence, which isn’t indicated here. A negative assurance or an unmodified opinion would not be appropriate given the misstatement.

When a misstatement of financial statements arises from management’s misapplication of GAAP and management refuses to correct or disclose it to satisfy the auditor, the opinion cannot be unmodified. The auditor must issue a modified opinion. The degree of modification depends on how pervasive the misstatement is: if it is material but not pervasive, a qualified opinion is appropriate; if it is pervasive, the opinion would be adverse. Since the scenario could fall on either end depending on how widespread the misapplication is, the option that covers both possibilities is “Qualified or Adverse.” A disclaimer would be used if the auditor could not obtain sufficient evidence, which isn’t indicated here. A negative assurance or an unmodified opinion would not be appropriate given the misstatement.