Choice "C" is correct. The auditor should withdraw from the engagement if the client refuses to accept the auditor's modified report. The auditor should also notify in writing those charged with governance.
Choice "a" is incorrect. If the noncompliance has a material effect on the financial statements, and has not been adequately reflected in the financial statements, a qualified opinion or adverse opinion should be issued.
Choice "b" is incorrect. If the auditor is unable to obtain sufficient appropriate audit evidence about the noncompliance, a qualified opinion or a disclaimer of opinion should be expressed.
Choice "d" is incorrect. Whether or not there is a fine is not a determining factor in whether the auditor withdraws.