. I would issue an adverse financial statement audit opinion. But not sure if it

Question

. I would issue an adverse financial statement audit opinion. But not sure if it is correct.

You are auditing Diverse Carbon, a manufacturer of nerve gas for the military, for the year ended September 30. On September 1, one of its manufacturing plants caught fire, releasing nerve gas into the surrounding area. Two thousand people were killed and numerous others paralyzed. The companys legal counsel indicates that the company is liable and that the amount of the liability can be reasonably estimated, but the company refuses to disclose this information in the financial statements.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Your answer (Adverse Opinion) is correct.

Explanation:

The auditor should issues a negative report (Adverse Opinion) in the given case. Adverse opinion can be issued where the auditor is not satisfied as to the accounting methods/policies selected/followed by the company or disclosures are inappropriate, as a result of which the he/she is of the opinion that the financial statements will not present a true and fair view to the user of financial statements.

In the given case, the liability arising from the leakage of nerve gas and subsequent loss is not provided in the financial statements, even when it can be reasonably estimated. Absence of such information can provide misleading details to the users/investors which may impact their investment decisions. Therefore, auditor is fully justified in issuing an Adverse Opinion.

Thanks.

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