Question

Your firm has been appointed as the new auditor for Muscat Repair Services, a small company which
has been operating for only a year and half. Your team was assigned to do the company’s very first
audit examination. As the audit progresses, your team found it very difficult, as the client did not
maintain appropriate financial records. The financial records were not updated for the first 9 months
of the year because Muscat Repair Services has on and off bookkeepers during this period. You were
told that they cannot find a permanent bookkeeper at that time, so only part-time bookkeepers were
recording for the company. A permanent bookkeeper, who was employed only nearing the end of the
year, tried to reconstruct records from the details of incomplete receipts and payments available. The
bookkeeper was not able to reconcile the bank accounts, and your team is not satisfied that all
transactions that occurred during the year are included in the financial statements. Moreover, some
assets like furnitures, fixtures, equipment were not included in the records. The operating income recorded by Muscat Repair Services in the current year is OMR 10,250, far from the expected
amount reconstructed by the auditors which is OMR 20,000.
Required: Explain your answer to the following questions:
1. Based on the given situation, write your reasons if the auditor can form his opinion on the financial
statements? Formulate your answer based on ISA 200 and ISA 700 concepts.
2. What are the key decision points that could be obtained by the auditor from the case in forming his
opinion? Determine the appropriate auditor’s opinion to be included in the auditor’s report whether
Unmodified Opinion or Modified Opinion. Justify your decision.

Answer 1

I. ISA 200 deals with Overall Objective of Independent Auditor & Conduct Of Audit in Accordance with applicable ISA:-

• The Objective of Audit of Financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects as per applicable financial reporting framework.
• The Overall objective of an independent Auditor is to obtain reasonable assurance about whether the financial statements are free from material misstatements whether due to fraud or errors.
• Where the overall objective of the auditor cannot be achieved, the ISA requires the auditor to modify his opinion accordingly or withdraw from the engagement.

ISA 700 deals with Forming an Opinion and reporting on financial statements:-

• Based on the evaluation of the conclusion drawn from the audit evidence obtained.
• & To express clearly that opinion through a written report.

In order to form an opinion, the auditor shall conclude as to whether the auditor has obtained reasonable assurance about whether financial statements as a whole are free from material misstatements whether due to fraud or error & this conclusion shall take into account:-

• The Auditor's conclusion in accordance with ISA 330, whether sufficient appropriate audit evidence has been obtained.
• The Auditor's conclusion in accordance with ISA 450, whether uncorrected misstatements are material, individually or in aggregate.

Forming of Opinion:-

• The auditor shall express an unmodified opinion when the auditor concludes that financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
• If the Auditor:-

(a) Concludes that, based on the audit evidence obtained, financial statements as a whole are not free from material misstatements, or

(b) Is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatements,

then the auditor shall Modify his opinion in the auditor's report in accordance with ISA 705(Revised).

So. from the above explanation we can say that Auditor can form his opinion on the financial statements.

II. Here Auditor Found following key audit evidences:-

• Financial records were not updated for the first 9 months of the year.
• Bank reconciliation statement is not reconciled and the audit team is not satisfied that all transactions are included in financial statements.
• Some Assets like furniture & fixtures were omitted to be recorded in the financial statement.
• Operating income has been understated by OMR 9,750/-

All the above audit evidence obtained by the audit team indicates that the financial statements are not free from material misstatements & not in tune with the applicable financial reporting framework.

So, therefore the Auditor shall Modify the opinion in the auditor's report.