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

What opinion should an auditor issue when unable to observe physical inventories that represent a significant percentage of assets?

1. Qualified opinion with a basis for modification

2. Unmodified opinion with an explanation

3. Disclaimer of opinion

4. Except for qualified opinion

The correct answer is: Disclaimer of opinion

In the context of auditing, the auditor's ability to observe physical inventories is crucial when those inventories represent a significant portion of a company's assets. When an auditor is unable to perform this observation, it raises concerns about the reliability of the inventory amounts presented in the financial statements. Issuing a disclaimer of opinion indicates that the auditor cannot express an opinion on the financial statements due to a significant scope limitation. This typically occurs when the auditor is unable to obtain sufficient appropriate audit evidence to form a basis for an opinion. In this scenario, the inability to observe physical inventory impedes the auditor's ability to verify the existence and condition of the inventory. Given that inventories make up a significant percentage of the assets, this limitation is important enough that it leads to a disclaimer rather than a modified opinion. A qualified opinion, which indicates that except for certain issues, the financial statements are presented fairly, would not be appropriate in this case due to the extent of the limitation. An unmodified opinion with an explanation would suggest that there are no issues with the financial statements, which contradicts the significant concerns raised by the lack of observable inventory. Overall, the severity of the scope limitation regarding physical inventory justifies the issuance of a disclaimer of opinion.