Final answer:
An adverse opinion is a highly negative audit report indicating that the financial statements significantly misrepresent the entity's financial status and do not comply with GAAP. Auditors issue adverse opinions when there are material misstatements due to error or fraud, even though they are less common since public companies are expected to follow GAAP.
Step-by-step explanation:
An adverse opinion is a type of audit report that indicates significant issues with the financial statements of a company. When an auditor issues an adverse opinion, it means that the financial statements do not accurately represent the company's financial position, results of operations, or cash flows and are not in accordance with Generally Accepted Accounting Principles (GAAP). This type of opinion is indeed the most negative report an auditor can issue. An adverse opinion may also be issued if an auditor concludes that the financial statements contain material misstatements due to error or fraud. As for the rarity of adverse opinions, it is true that they are less common because public companies must adhere to GAAP; however, when there are severe discrepancies, auditors must report them regardless of this requirement.