Question

You are the auditor in-charge of the annual audit of Muscat Insurance Company (or MIC) for the
year ended December 31, 2019. MIC is the leading insurance company in Oman and enjoys a good
reputation in the business community. As this is the first time your audit firm will be auditing the
company, you communicated with the previous auditor as part of understanding the business. Your
communication with previous auditors revealed something that you didn’t expect to discover. The
previous auditors revealed that the company has an unpaid tax amounting to OMR 3 million. Though
it was disclosed in the books as tax in arrears, there is no indication that the company has attempted
to pay it. You have also found out in your initial review that MIC has recently purchased a new
software that will enable the customers to access their insurance accounts through the internet.
Because the directors are eager to use the software to attract more customers, the software has been
rolled out already for use by the customers even though it was not tested by the company’s
information technology (IT) department yet for security purposes. As surprise discoveries seem not
to stop, you have also heard from your friends, who were customers of MIC, that there were
insurance claims from customers which have not been paid by the company. Some of the claims
were as old as five years ago. The management expects to receive a report on the weaknesses on the
design and implementation of internal controls and some business consultative advice on top of the
usual audit of financial statements.
Required: Discuss matters that you would consider in developing the audit strategy for Muscat
Insurance Company.

Answer 1

Matters that would be considered in developing the audit strategy for Muscat
Insurance Company

Knowledge of the Business

· General economic factors and industry conditions affecting the entity’s business.

· Important characteristics of the entity, its business, its financial performance and its reporting requirements including changes since the date of the prior audit

.The general level of competence of management.

Understanding the Accounting and Internal Control Systems

· The accounting policies adopted by the entity and changes in those policies.

· The effect of new accounting or auditing pronouncements.

.The auditor’s cumulative knowledge of the accounting and internal control systems and the relative emphasis expected to be placed on tests of control and substantive procedures

Risk and Materiality

· The expected assessments of inherent and control risks and the identification of significant audit areas.

· The setting of materiality levels for audit purposes.

· The possibility of material misstatement, including the experience of past periods, or fraud.

· The identification of complex accounting areas including those involving accounting estimates.

Nature, Timing and Extent of Procedures

· Possible change of emphasis on specific audit areas.

· The effect of information technology on the audit.

· The work of internal auditing and its expected effect on external audit procedures.

Coordination, Direction, Supervision and Review

· The involvement of other auditors in the audit of components, for example, subsidiaries, branches and divisions.

· The involvement of experts.

· The number of locations.

· Staffing requirements.

Other Matters

· The possibility that the going concern assumption may be subject to question.

· Conditions requiring special attention, such as the existence of related parties.

· The terms of the engagement and any statutory responsibilities.

· The nature and timing of reports or other communication with the entity that are expected under the engagement.