When issuing unqualified opinion, the auditor who evaluates the audit findings should be satisfied that the

 Options:

a) Amount of known misstatement is documented in working papers b) Estimates of the total likely misstatement is less than materiality level c) Estimate of the total likely misstatement is more than materially level d) Estimates of the total likely misstatement cannot be made

The Correct Answer Is:

b) Estimates of the total likely misstatement is less than materiality level

Correct Answer Explanation: b) Estimates of the total likely misstatement is less than materiality level

The correct answer, “b) Estimates of the total likely misstatement are less than the materiality level,” aligns with the principles of auditing standards. When an auditor issues an unqualified opinion, it means that they believe the financial statements present a true and fair view of the company’s financial position and operations.

Here’s a detailed explanation:

An unqualified opinion indicates that the auditor has conducted a thorough examination and found no significant issues that would materially impact the financial statements. The auditor evaluates the audit findings to ensure that the total likely misstatement in the financial statements is less than the materiality level.

Materiality in auditing refers to the threshold at which errors or misstatements in the financial statements could influence the economic decisions of users. It’s a critical concept because not every error, no matter how small, is considered significant enough to affect decision-making.

Auditors assess materiality based on various factors, including the size and nature of the misstatements, the specific circumstances of the company, and the financial information involved.

If the estimated total likely misstatement falls below the materiality level, it implies that the errors or misstatements found during the audit are not substantial enough to affect the decision-making of users relying on those financial statements.

Now, let’s delve into why the other options are not the correct answer:

a) Amount of known misstatement is documented in working papers:

Documenting known misstatements in working papers is indeed a standard practice in auditing. These records serve as crucial evidence of the auditor’s examination and findings during the audit process. However, the documentation of known misstatements alone doesn’t directly determine the issuance of an unqualified opinion.

The focus of issuing an unqualified opinion is not solely on the existence of known misstatements but rather on the overall assessment of the financial statements’ presentation.

An unqualified opinion signifies that, after thorough scrutiny, the auditor believes the financial statements provide a fair and accurate representation of the company’s financial position and performance.

Therefore, while documenting misstatements is vital for audit documentation, it doesn’t directly determine whether an unqualified opinion should be issued.

c) Estimate of the total likely misstatement is more than the materiality level:

If the estimated total likely misstatement in the financial statements exceeds the materiality level, it poses a significant concern. Materiality is a fundamental concept in auditing, representing the threshold beyond which misstatements could influence users’ economic decisions.

When the total likely misstatement surpasses this threshold, it implies that the errors or misstatements identified during the audit process could potentially impact the decision-making of users.

In such scenarios, issuing an unqualified opinion would be inappropriate because the magnitude of the misstatements is deemed substantial enough to affect the interpretation of the financial statements.

The auditor’s responsibility is to ensure that the financial statements, when taken as a whole, do not contain material misstatements. Therefore, if the estimated total likely misstatement exceeds materiality, an unqualified opinion wouldn’t be warranted.

d) Estimates of the total likely misstatement cannot be made:

In auditing, the inability to estimate the total likely misstatement poses significant challenges. Auditors rely on estimation techniques and professional judgment to assess the potential impact of misstatements on financial statements.

If, for some reason, the auditor cannot reasonably estimate the total likely misstatement, it indicates limitations in their ability to assess the accuracy and reliability of the financial information.

Providing an unqualified opinion necessitates the auditor’s confidence in the fair presentation of the financial statements.

If the auditor cannot estimate the extent of potential misstatements due to insufficient evidence or complexities in assessment, it becomes difficult to assure users that the financial statements are free from material misstatements. Consequently, an unqualified opinion might not be appropriate in such circumstances.

In summary, issuing an unqualified opinion in auditing involves a comprehensive assessment of the overall financial statement presentation, ensuring that the estimated total likely misstatement remains below the materiality level.

Factors such as documentation of misstatements, exceeding materiality thresholds, or an inability to estimate misstatements can impact the auditor’s decision regarding the issuance of an unqualified opinion.

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