Certified Government Auditing Professional (CGAP) Practice Exam

If an auditor expresses an adverse opinion, what does it signify?

1. The statements are materially misstated

2. The statements do not fairly present the financial position and results of operation

3. The audited entity did not follow GAAP

4. The auditor found serious weaknesses in internal controls

The correct answer is: The statements do not fairly present the financial position and results of operation

An adverse opinion signifies that the auditor has determined the financial statements do not fairly present the financial position and results of operation of the entity in accordance with the applicable financial reporting framework. This is a strong disapproval that highlights that the financial statements are not only misrepresented but also could mislead users who rely on them for decision-making. This opinion is a conclusion drawn from evaluating the comprehensive evidence gathered during the audit, confirming that significant misstatements exist that could affect the users' perception and understanding of the financial data presented. While material misstatements might inform the conditions under which this opinion is provided, the emphasis in an adverse opinion is specifically on the overall lack of fair presentation of the financial statements as a whole. In contrast, while it is true that material misstatements can lead to an adverse opinion, the definition of an adverse opinion goes beyond merely identifying those errors; it underscores the overall unreliability of the financial statements. Similarly, although it may reflect violations of GAAP or weaknesses in internal controls, these factors alone do not encapsulate the depth of the failure represented in an adverse opinion, which captures a broader assessment of fairness in representation.