Question

You are a newly appointed partner in the audit firm where you have been working from the past ten
years. This year, the audit firm was engaged to audit the year-end accounts and tax returns of
Younous Company, a relatively new company located in Nizwa. Younous Company is engaged in
online shopping business that sells all sorts of women products – clothes, shoes, make-up and
accessories. They also design and produce their own clothes line but outsource the other products
like shoes, make-up and accessories from third parties. During the course of the audit, your team
became aware of an unusual practice being observed by the employees. You discovered that when
end of year is near, production staff will produce more products than usual but sales of these
products will not be recorded in the accounting system. This practice is authorized by production and
sales managers to avoid taxation problems. As you call the management attention about this practice,
they argued that proceeds from these sales don’t go to their own pockets but are used for marketing expenses of the directors when they travel to other countries to find new suppliers and customers and
attend fashion shows to get new designs for their products.
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 Yonus Company

1. i. As per ISA 200 on Overall Objectives of the Independent Auditor and the Conduct of Audit in Accordance with Standards on Auditing, an 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.

ii. 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 the basis for the given opinion.

2.

i. In the given case, the 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, the auditor can issue an 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.

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

· · the evidence obtained suggesting the transactions are not getting recorded in books of Yonus which is authorized by the production department and Sales Department to avoid Ta laws.

· · some assets like furniture, fixtures, equipment were not included in the records

· · bank accounts are not reconciled

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

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