Which of the following is the most likely reason for an auditor to issue an adverse opinion?

• A. The auditor was unable to obtain sufficient appropriate audit evidence.
• B. There is a lack of consistency in the application of accounting principles, but the misstatements are not pervasive.
• C. The financial statements are free from material misstatement.
• D. The financial statements contain material misstatements that are both pervasive and not confined to specific accounts.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of an adverse opinion. An adverse opinion is issued by an auditor when the financial statements contain material misstatements that are pervasive and significantly affect the overall reliability of the financial statements.
2. Step 2: Analyze the options provided in the problem. Each option represents a different scenario that could influence the auditor's opinion.
3. Step 3: Evaluate the first option: 'The auditor was unable to obtain sufficient appropriate audit evidence.' This situation typically leads to a disclaimer of opinion, not an adverse opinion, because the auditor cannot form a conclusion due to lack of evidence.
4. Step 4: Evaluate the second option: 'There is a lack of consistency in the application of accounting principles, but the misstatements are not pervasive.' This situation might lead to a qualified opinion, as the misstatements are not pervasive and confined to specific areas.
5. Step 5: Evaluate the fourth option: 'The financial statements contain material misstatements that are both pervasive and not confined to specific accounts.' This is the correct scenario for issuing an adverse opinion, as the misstatements are significant and affect the overall reliability of the financial statements.