ACCA Advanced Audit and Assurance (AAA) Practice Exam

What is a key characteristic of an adverse opinion?

1. Minor issues are noted

2. Material misstatements are pervasive

3. Insufficient evidence supports the audit

4. It confirms all disclosures are adequate

The correct answer is: Material misstatements are pervasive

An adverse opinion is issued by auditors when they determine that the financial statements, taken as a whole, are not presented fairly in accordance with the applicable financial reporting framework. This situation typically arises when there are material misstatements that are pervasive, meaning they affect a significant portion of the financial statements or the disclosures. In this context, the term "material" refers to misstatements that are significant enough that their correction would influence the decision-making of users relying on the financial statements. When misstatements are described as pervasive, it indicates that they are not limited to a specific area but affect multiple aspects of the statements, thereby undermining the reliability of the financial reporting overall. The other options do not accurately characterize an adverse opinion. For instance, minor issues would typically not warrant such a serious opinion, as they could be addressed with a less severe type of opinion. Insufficient evidence supporting the audit leads to a different type of opinion, often a disclaimer of opinion, rather than an adverse opinion. Lastly, confirming that all disclosures are adequate would contradict the nature of an adverse opinion, as the latter suggests significant concerns about the fairness and accuracy of the financial statements.