Question

Bahwana Tours is a medium-sized travel agency in Oman. It was established in the year 2015. It has been operating for four years now and business has been doing well. Your firm has been auditing Bahwana Tours since it was established. For this year-end audit, you were assigned by your firm to Bahwana Tours. The audit for the current year is now nearly complete. Though you expect the audit to go smoothly like in the past, this year seem to be different. In the analysis, you noticed some unbelievable trends including a 200% increase in revenue since last year despite the economy being relatively flat. You have also noticed that Bahwana Tours changed their accounting treatment for revenues which was different compared to last year. As it seem unusual for Bahwana, you and the audit partner have spoken to senior management. You told them about the inappropriateness of the new accounting treatment and ask them if they could go back to the old one they were using or find another alternative. However, senior management have refused to change it or make any disclosures relating to these accounting policy changes in the notes to financial statements. They mentioned that this accounting treatment has helped them increase their revenue greatly and it will attract many investors. You estimate that if the accounting policy were to be changed to comply with the appropriate financial reporting framework, the current profit of OMR 1,000,000 would reduce by half.

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

1) ISA 200 requires auditors to give their opinion about the financial statements whether it is free from material error or fraud or not. This objective of the auditor is met by performing different audit procedures during the accounting period. Upon the completion of all audit procedures, auditor needs to evaluate all the supporting audit evidences collected to form an opinion on the financial statements of the Company.

ISA 700 discusses about the auditor's responsibility to form an opinion on the financial statements. Further form and content of audit report is given in this ISA. Adding appropriate disclosure in the audit report increases the value of the audit report and its reliance upon the stakeholders of the company. This ISA helps in promoting comparability as well as consistency in the audit reports which helps in achieving global standard for all the audit reporting. Users of the financial statements can easily relates it to other reports.

In the current case, audit for the current period is near end and there is a significant accounting issue noted by the audit team in one key account cycle. Since this balance is material and auditor is not able to collect sufficient and appropriate audit evidences. Since the amount of misstatement is not pervasive, hence the auditor should issue a qualified audit report.

2) These are the key decisions for forming the opinion of auditor in current case.

(i) Accounting policy of the company is against the financial reporting framework.

(ii) Management has intentionally overstated revenue to show more profits.

(iii) Lack of sufficient and appropriate audit evidences.

Based on key decisions, auditors can form an opinion to issue a qualified report for the current year. As the misstatement is not pervasive so qualified report should be issued instead of adverse report.