APPENDIX A Glossary of Terms

Most of the terms used in the manual are defined in the chapters in which they are first discussed in some detail. This annex defines the key terms that are used throughout the manual.

Analytical procedures. Techniques used by the auditor to: • • Study the relationships among elements of financial and non-financial information to form expectations as to what the recorded amounts should be; and Compare such expectations with the recorded amounts.

The auditor then follows up all unacceptable differences and reaches a conclusion as to the completeness and accuracy of the recorded amount. Audit evidence. Information that supports the auditor's opinions, conclusions or reports. Audit mandate. The auditing responsibilities, powers, functions, discretions and duties conferred on the auditor under the constitution or any other law. Audit objective. See overall audit objective, objective, and specific financial audit objective. Audit opinion. A report issued by the auditor in which he/she concludes as to whether: • The financial statements properly present, in all material respects, the government’s financial position, the results of its operations, its cash flows and its expenditures and receipts by appropriation; and The sums expended have been applied, in all material respects, for the purposes authorised by Parliament and have, in all material respects, been booked to the relevant grants and appropriations.

Audit planning memorandum. A document that summarises the key planning decisions that have been made, with emphasis on the changes that have been made to the previous year’s plan. Audit procedures. The tasks the auditor undertakes for collecting, analysing, interpreting, and documenting information that allows the auditor to conclude against the specific audit objectives, related compliance with authority objectives and error conditions. Audit programme. A document that contains the specific audit procedures that the auditor is to perform during the fieldwork phase. Audit risk. The chance that the auditor is prepared to take that he/she may issue an unqualified opinion on financial statements that are materially misstated.

Audit Manual – Appendix A


Audit report. A document, other than an audit opinion, that is issued by the auditor to individuals outside the entity. These individuals could include, for example, members of the National Assembly, a Provincial Assembly, a District Assembly, a Public Accounts Committee, or the general public. Auditing standards. A framework for the establishment of procedures and practices to be followed in the conduct of an audit. They generally provide the minimum standard of performance that an audit organisation such as DAGP should consider acceptable.

Basic precision. The further possible error that could exist in the population even if no errors are found in a sample. It therefore represents the upper error limit when the most likely error is nil.

Cause. The underlying factor(s) that explain the findings observed during the audit. Generally the audit recommendations are directed towards correcting the cause(s) of the weaknesses identified. Compliance with authority. Conformity and adherence to the laws, rules, regulations, policies, plans, etc. governing the entity. Compliance with authority audit. An examination to determine the extent to which the entity has adhered to the laws, rules, regulations, policies, plans, etc. governing it. A portion of this work is required to be performed as part of a financial audit. (See Related compliance with authority objective.) Compliance with authority objective. A specific purpose or goal used to assess whether the entity’s activities, transactions and events are in conformity and adherence to the laws, rules, regulations, policies, plans, etc. governing the entity. A portion of these objectives is required to be performed as part of a financial audit. (See Related compliance with authority objective.) Component. A distinct unit (or part) of the financial statements being audited. Compliance test. See test of internal control. Conclusion. Statements deduced by the auditor from his/her findings. Control environment. The overall attitude, awareness, commitment and actions of management concerning the importance of internal control and its emphasis in the entity. Control risk. The chance that the entity’s internal controls will not prevent or detect material error. Control systems. The controls established and maintained by management to collect, record and process data and report the resulting information.


Audit Manual – Appendix A

Detection risk. The chance that the auditor’s substantive procedures will fail to detect material error.

Economy. The acquisition of the appropriate quality and quantity of inputs (financial, human and/or physical resources) at the appropriate time and place and at the lowest cost. Effectiveness. The extent to which objectives are achieved – the relationship between the intended impact and the actual impact of an activity. Efficiency. The relationship between the goods or services produced (outputs) and the set of resources used to produce them (inputs). Entity. The organisation, programme, project, activity, theme or function subject to audit. In the case of a financial audit, the entity is often defined by the applicable accounting policies of the government. For the financial statement audit of the Federation, for example, the entity to be audited would be the aggregate of all of the ministries, departments, agencies, etc. that the accounting policies require to be included in the financial statements of the Federation. Error condition. A specific way in which a monetary error can occur in the financial statements or a monetary amount may not be in compliance with a related compliance with authority objective. This would include, for example, specific ways in which an asset, liability, revenue or expenditure item might not be valid, might not be complete, etc. (See specific financial audit objective and related compliance with authority objective for the complete list.)

Financial audit. A type of regularity audit in which the auditor attests to the financial accountability of an entity by examining and evaluating financial records, leading to the expression of an opinion on financial statements. A financial audit includes a significant compliance with authority element. Findings. An observation, or deduction, that the auditor determines worthy of reporting. Fraud. The intentional act by one or more individuals to deceive others. Further possible error. The error in excess of the most likely error that could exist in a population at a given confidence level. It is equal to the difference between the upper error limit and the most likely error. It has two components – basic precision and precision gap widening.

Individually significant transactions and events. Transactions and events that are so large or of such a high risk that the auditor wishes to audit 100% of them.

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Inherent Risk. The chance of material error occurring, assuming that there are no internal controls in place. Internal audit. The functional means by which the managers of an entity receive assurance from internal sources that the processes for which they are accountable are operating in a manner which will minimise the probability of the occurrence of fraud, error, compliance with authority violations, internal control deviations, or inefficient and uneconomic practices. Internal control. A process, established by management and carried out by management and other personnel, to provide reasonable assurance regarding the achievement of objectives in the following categories: • • • Effectiveness and efficiency of operations; Reliability of financial reporting; and Compliance with applicable laws and regulations.

Internal control structure. The entire system of financial and other controls, including the organisational structure, methods, procedures and internal audit, established by management within its corporate goals, to assist in conducting the business of the entity in a regular economic, efficient and effective manner; ensuring adherence to management policies and applicable authorities; safeguarding assets and resources; securing the accuracy and completeness of accounting records; and producing timely and reliable financial and management information. International Organisation of Supreme Audit Institutions (INTOSAI). An international and independent body that aims to promote the exchange of ideas and experience between Supreme Audit Institutions.

Known error. An error that the auditor has actually found during an audit.

Materiality. An error (or the sum of the errors) is material if the error (or the sum of the errors) is big enough to influence the users of the financial statements. Material error. A single error which exceeds the materiality amount, or the sum of multiple smaller errors that exceeds the materiality amount. Most likely error. The auditor’s best estimate of the error in the population.

Objective. A purpose or a goal. Other substantive procedures risk. The chance that the auditor’s analytical procedures, and substantive tests of details will fail to detect material error.


Audit Manual – Appendix A

Overall audit objective. The overall purpose or goal to be achieved by performing a particular audit. The objective will be affected by the type of audit to be performed. For example, the overall audit objective for a financial audit is to express an opinion on financial statements (See also audit opinion.)

Planned precision. The auditor’s planned allowance for further possible errors. It represents materiality less the expected aggregate error in the financial statements. Population. The total set of items from which a sample of items is to be taken. Performance audit. An audit of the economy, efficiency and effectiveness with which the audited entity uses its resources in carrying out its responsibilities. Precision gap widening. The further possible error that results from finding errors in a sample.

Recommendations. Actions that the auditor proposes the entity take in the belief that they will address compliance with authority violations and internal control weaknesses and deviations, and/or their underlying causes. Regularity audit. An examination involving one or more of the following activities: • • • • • • A financial audit; Attestation of financial accountability of the government administration as a whole; An audit of financial systems and transactions, including an audit of compliance with authority. An audit of internal control and internal audit functions; An audit of the probity and propriety of administrative decisions taken within the audited entity; and/or The reporting of any other matters arising from or relating to the audit that the SAI considers should be disclosed.

Related compliance with authority objective. Those compliance with authority objectives that are applicable to (related to) a financial audit. Normally the following compliance with authority objectives are considered to be applicable: Spend – • • The services were actually performed or the goods were actually received; The expenditure is consistent with the nature of the appropriation to which it was charged;

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• •

The expenditure is in accordance with the applicable legislation, and the rules and/or regulations issued by such legislation; and The expenditure does not result in the total approved expenditure being exceeded.

Borrow – • The amount and debt terms (period, interest rates, repayment schedule, etc.) were in accordance with the applicable legislation, and the rules and/or regulations issued by such legislation.

Raise revenue – • • The cash received was for an approved tax or other approved revenue source; and The cash received is in accordance with the applicable legislation and the rules and/or regulations issued by such legislation.

Sampling. The selection of a sub-set of a population. Sampling unit. The specific item of which the population is assumed to be composed for sampling purposes. Specific financial audit objective. A specific purpose or goal used to determine whether a component properly presents. For a financial audit, these purposes or goals are determining if: • • • • • The component is valid (the asset or liability exists or the revenue or expenditure has occurred); The asset, liability, revenue or expenditure is complete; The asset is owned by the entity, or the liability is owed by the entity; The asset or liability is properly valued and properly classified, or the revenue or expenditure is properly measured and properly classified; and The financial statement presentation is proper.

Statistical sampling. The selection of a sample in such a way that each sampling unit has an equal and known chance of selection. Substantive tests. Procedures used to gain direct assurance as to the completeness and accuracy of the data produced by the accounting systems. They are often divided between analytical procedures and substantive tests of details. Substantive tests of details. Substantive tests such as physically inspecting an asset, checking transactions recorded in the books and records to supporting documentation, and confirming amounts with third parties.


Audit Manual – Appendix A

Substantive test of details risk. The chance that one key substantive test of details will fail to detect material error.

Test of internal control. A procedure used to gain an understanding of the entity’s internal control structure. By performing these tests, the auditor can gain assurance that the internal controls are helping to reduce the chance of material error existing in the accounting information, or a material compliance with authority violation occurring. Tests of internal control include: • • • • Inquiries of appropriate entity personnel; Observation of policies and procedures in use; Walk-through procedures; and Selecting a sample of transactions and verifying that the appropriate control procedures were followed.

Transaction. A single accounting event, such as the purchase of a good, the receipt of a sales tax amount, or the making of a disbursement. Transaction cycle. The flow of transactions through the accounting system. An example is the purchase/payables/payments cycle whereby a service or good is acquired, recorded and paid for.

Upper error limit. The maximum possible error that could exist in the population at a given confidence level.

Walk-through procedure. A test of internal control that involves selecting one or two transactions from the relevant transaction cycle and “walking” them through the cycle. The auditor begins with the initiation of the transaction, and then follows it through the various processing stages until the transactions are ultimately summarised and included in the general ledger.

Audit Manual – Appendix A


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