Audit and Assurance Practice Exam

What kind of opinion would be issued for a change in accounting principle from GAAP to non-GAAP?

1. Unqualified opinion

2. Qualified opinion

3. Adverse opinion

4. Disclaimer opinion

The correct answer is: Adverse opinion

When an entity changes an accounting principle from Generally Accepted Accounting Principles (GAAP) to a non-GAAP basis, this typically raises substantial concerns regarding the financial statements' reliability. Non-GAAP measures can result in a significant departure from widely accepted accounting standards, which has implications for the comparability, consistency, and transparency of the financial reports. The issuance of an adverse opinion is warranted in this case because the change in accounting principle can mislead users who rely on the financial statements for decision-making. An adverse opinion indicates that, in the auditor's judgment, the financial statements do not present a true and fair view in accordance with the applicable financial reporting framework. This opinion signals that the financial statements are not in compliance with GAAP and that the departure negatively affects the users' understanding of the company's financial position and results of operations. In contrast, an unqualified opinion would suggest that the financial statements are presented fairly without any significant issues, which is not accurate when non-GAAP principles are used. A qualified opinion would indicate that there is a specific issue affecting the financial statements but that the majority still conforms with GAAP, which is not the case here, as the primary basis of accounting itself has shifted. A disclaimer opinion may occur when the auditor cannot obtain