The crack is VISIBLE. No need to magnaflux. Its obvious even in the blurry picture posted.
This is totally bogus. The customer is not the expert, the machine shop is. Any machinist that would look at the crack in that block and not tell the customer about it is a HACK. Seriously. If that's how you do business, then you don't deserve to do business, PERIOD.
It doesn't even make sense for the shop, because they're wasting their time on a cracked block that the customer will blame them for later, whether its reasonable or not. When the block leaks, the customer will blame the machine shop (even in cases where its NOT their fault) and the machine shop will lose business. Its a lose-lose for the machinist to do any work on that block. Any time spent on the block is a waste, and time wasted = money wasted. And that doesn't even take into account the headache of dealing with the unhappy customer.
If I brought that block to my machinist and told him to bore it, he'd tell me it was cracked before I even got it out of my truck, and I'd feel dumb. On the off chance he was having a bad day, he would call me the second it came out of the hot tank and tell me it was junk. It would never even get close to being bored, let alone finished and sent back out.
The only reason to continue doing business with that shop is to see if they'll try to make it right. Unfortunately, its a bad spot to be in. The shop is either incompetent, because they didn't see the damn crack, or they're completely unscrupulous because they saw the crack and did the work anyway without telling anyone. Either way, I wouldn't be taking any more business to them in the future.