Question

You are the auditor of Ounass Company and have started work on the current year audit. Ounass is a distributor of high-end designer clothing doing business in the last three years. Your firm has handled the audit of Ounass eversince. Recently, the Ounass business has suffered as a result of low-consumer spending and increased competition in the past two years. Later, as you were discussing with Ounass personnel, it was revealed that the counting of inventory was performed a few days ago at the warehouse without prior notice to you (being the auditor). No documentation or feedback from that counting of inventory was given to the audit team, except for OMR 10,000 inventory adjustment in the books, no reason was given on the adjustment. You have discussed the issue with senior management, and they are aware that audit evidence is missing regarding the OMR 100,000 amount of inventory. Inventory list provided was incomplete and cost data was inaccurate. There is no other available alternative method to validate the balance of inventory at this time. Total assets of Ounass is OMR 500,000 and the balance of inventory is considered significant.
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.
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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(I need more details please)

Answer 1

1) The objective for the auditor is to express a true and fair opinion on the financial statements of the Company. While forming an opinion on the financial statements, auditor is required to performed audit in accordance with the international standards on auditing.

In the given case, Inventory balance is significant and auditor is not able to perform substantive procedures to confirm the balance in this accounting cycle. Additionally upon inquiry, the management is also not able to provide satisfactory performance. So the auditor needs to give a disclaimer of opinion in accordance with ISA 705 by modifying the audit report.

2) key points for making the decision-:

(i) Auditor is Required to be present at the time of inventory count and in this case auditor was not present.

(ii) No other alternate audit procedures can be performed by the auditor in current scenario.

(iii) Chances of material misstatements is high in the current circumstances. As the list of inventory items are not complete and accurate.

On the basis of above factors, auditor's of the company is not able to draw conclusion about the inventory balance. ISA 705 states that when auditor is not able to perform audit procedures then the auditor should issue disclaimer of opinion. Due to non-performance of audit procedures auditor are not sure whether inventory is misstated due to error or fraud. Hence auditor of the company should modify the audit report and give a disclaimer in the audit report specifying the fact that no audit procedures was performed on inventory balance. And they are not able to give opinion about the inventory balance as stated in the financial statement.