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

Audit of Muscat Repair Service

As per ISA 200 on Overall Objectives of the Independent Auditor and the Conduct of Audi In Accordance with Standards on Auditing, audit is required to assess the risk of material misstatement whether due to fraud or error, obtain sufficient and appropriate audit evidence and form an opinion based on the audit evidence obtained. It states that the audit evidence obtained should be both sufficient which speaks about the quantity of evidence and appropriateness which states the quality and relevance of the evidence obtained.

As per ISA 700 on Forming An Opinion and Reporting on Financial Statements clearly states that auditor is required to draw an audit opinion based on evaluation of audit evidence obtained and express it clearly in a written audit report with basis for the given opinion.

In the given case, auditor is unable to obtain sufficient audit evidence to conclude that the financials are free from material misstatements whether due to fraud or error. Hence, auditor can issue a audit report with 'disclaimer of opinion' with a basis clearly stating the fact that the books of accounts for the first nine months of the period under audit were not properly maintained.

Auditor can further state that the disclaimer of opinion was due to reason that books have not recorded all transactions during the period with following observations

• the evidence obtained suggesting income to the tune of OMR 20,000; only OMR 10,250 is recorded by Muscat Repair Services.
• some assets like furniture, fixtures, equipment were not included in the records
• bank accounts are not reconciled

Hence, opinion on overall financial position for the period under audit as depicted by the financials cannot be formed.