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 question

1)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

An unmodified audit opinion means that the auditor opines that the financial statements are prepared in accordance with acceptable standards and present a true and fair position of the financial position of the Company, and are free from any misstatements. On the other hand, a modified audit opinion can mean either of the three sub-categories of modified opinion as under:

1. Qualified opinion : This type of audit opinion is issued when the auditor after obtaining sufficient evidence concludes that misstatements are material (significant) but not pervasive(widespread, not restricted to a single item), or the auditor does not have access to sufficient evidence for opinion but concludes possibility of material but not pervasive misstatements.

2. Adverse opinion : This is the worst type of audit opinion, which means the auditor has sufficient evidence according to which he concludes material and pervasive misstatements in the financials.

3. Disclaimer of opinion: This type of opinion is issued when the auditor is not able to collect sufficient evidence to provide an opinion, and thus issues a disclaimer that the particular item may or may not be misstated.

The key points from the case to be considered in giving the audit opinion would be:

1. Inventory is considered significant in relation to total assets, but the issue is not pervasive(as it is restricted to inventory and not complete financials). So, the misstatement here is material but not pervasive.

2. The physical counting of inventory was conducted without notice to auditor and management too was aware.

3. Incomplete inventory list and incorrect cost data provided by the Company to the auditor.

4. Inability to verify further due to no alternative method available.

So, here the auditor will give modified audit opinion since the financial statements are not free from misstatement. Further, the auditor is likely to give qualified opinion as the auditor does not have access to sufficient evidence for opinion, but is able to conclude possibility of material but not pervasive misstatement.