a) Unqualified Opinion:
An unqualified opinion, also known as a clean opinion, is issued when the financial statements are free from material misstatements and are presented fairly in accordance with the applicable accounting framework.
In this scenario, an unqualified opinion would not be appropriate due to the significant proportion of inventory in relation to total assets. The reason for this is that the high percentage of inventory can potentially lead to material misstatements in the financial statements.
For instance, if the inventory is overvalued or if there are issues with inventory obsolescence, it could result in a distortion of the company’s financial position. Given this material factor, the auditor cannot assert that the financial statements present a true and fair view without a thorough examination of the inventory.
b) Qualified Opinion:
A qualified opinion is issued when the auditor believes that there is a specific issue or limitation in the financial statements, but it does not affect the entirety of the statements.
In this case, the issue with the proportion of inventory relative to total assets is considered a material one, affecting the overall financial statements. Therefore, a qualified opinion would not be appropriate.
A qualified opinion might be considered if, for example, there were uncertainties regarding the valuation of a specific class of assets or a particular transaction.
In such cases, the auditor might issue a qualified opinion addressing only that specific issue, while still providing an unqualified opinion on the rest of the financial statements.
d) Adverse Opinion:
An adverse opinion is issued when the financial statements are so materially misstated or misleading that they do not fairly represent the financial position, results of operations, or cash flows of the company.
While the issue with the proportion of inventory is significant, it might not necessarily mean that the financial statements are completely inaccurate or misleading in this case.
An adverse opinion is typically reserved for situations where there are pervasive, fundamental issues throughout the financial statements, making them highly unreliable for decision-making. This might involve instances of intentional fraud, extensive accounting errors, or severe violations of accounting principles.
In summary, the specific scenario described in the question (where inventory constitutes about ten percent of total assets) is a material factor that significantly impacts the audit. It introduces the potential for material misstatements in the financial statements, rendering options a) unqualified opinion and b) qualified opinion inappropriate.
Additionally, the situation does not reach the severity required for an adverse opinion (option d). Therefore, the most suitable response is a disclaimer of opinion.