Auditing 2 Module 1

Diploma in Accounting; Diploma in Management Accounting and National

Diploma: Taxation

AUDI201; AUDA201; AUDT212

 Chapter 1 : Introduction to Auditing

The Financial Statement Audit

Engagement - Continued
Auditing Notes for South African Students 11th Edition
Authors: A Adams, T Diale, G Richard
Publisher: LexisNexis
 Introduction and Public Interest Score

A model of the Independent audit of the AFS arising

out of the requirements of the Companies Act 2008

The role of the various parties (shareholders,

directors, auditors)

The role of the Companies Act 2008 & Companies

Regulations 2011
 The role of the Auditing Professions Act 2005

The role of the International Standards on Auditing (ISA’S)

The role of assertions

The role of professional skepticism

The role of professional judgement

The role of the Companies Act 2008 AND
Companies Regulations 2011
• Makes it compulsory for all public companies to be audited

• Provides the Minister with the power to make regulations which require private companies to be
audited.

• Regulates the appointment of auditors and directors, including disqualifying individuals from filling
this role

• Places an obligation on directors to prepare the annual financial statements, stipulates some content

• Provide the auditor with right of access to the company records

• Requires public companies to appoint an audit committee and lays down the functions of the audit
committee
The role of the Auditing Profession Act 2005
• Prohibits anyone who is not a registered auditor from performing the audit
of an entity’s financial statements

• The individual who is responsible for the audit must be identified and
named the “designated auditor”

• Prescribes conditions for conducting an audit. An auditor cannot issue an

unqualified opinion unless the 8 requirements in Section 44 are met.

• The auditor has a duty to report a reportable irregularity to IRBA

APA Act – Section 44
• Free of restriction • All information, vouchers &

• Compliance with auditing documents necessary for proper

pronouncements performance of auditors duties were

• Existence of assets & liabilities on the obtained.

FS • Auditor complied with laws relating to
• Accounting records – official language the entity.
• No reportable irregularity • Auditor satisfied as to the fairness of
the financial statements
The role of the ISA’s
• Professional standards issued by the International Federation of Accountants
(IFAC) through the International Auditing and Assurance Standards Board
(IAASB). The ISA’s provides guidance and direction to the auditor to add value
to the audit engagement thereby building confidence of investors.

• The standards cover the audit process: Preliminary Engagement; Planning;

Gathering sufficient appropriate evidence; Evaluating, concluding and
Reporting
The role of the assertions

• When a person asserts something it means they are making a

statement which they strongly believe is true.

• The directors prepare the FS for the shareholders.

• The directors are asserting to the shareholders.

• The auditors responsibility is then to examine the directors assertions

to determine if they are true or misstated.
 • According to ISA 200, the overall objectives of the auditor are to:

• * obtain reasonable assurance about whether the financial statements as

AUDITORS a whole, are free from material misstatement, whether due to fraud or
error, thereby enabling the auditor to express an opinion on whether the
financial statements are prepared, in all material respects, in accordance
with an applicable financial reporting framework (e.g. IFRS) and

• * to report on the financial statements and communicate as required by

Perform audit
on assertions the ISAs, in accordance with the auditor’s findings.
(Annual Issue
• The auditor’s opinion is not an assurance of the future viability of the
Financial Audit
entity, nor the efficiency with which management has conducted the
Statements) Report
affairs of the entity.

• It is not an objective of the audit to discover or prevent fraud or to ensure

compliance with the law. These areas are the responsibility of
management.
Report: AFS (make
assertions) • The auditor's responsibility is to carry out his audit in such a way that
there is a reasonable expectation of detecting such instances if they affect
DIRECTORS SHAREHOLDERS
Appoint fair presentation, i.e. the financial statements contain material
misstatement arising from fraud or error.
Assertions

• What the directors are representing / claiming / asserting to the

shareholders is set out in the International Standards on Auditing – ISA 315
– Identifying and Assessing the risks of Material Misstatements through
understanding the Entity.

• There are two category of assertions. Assertions regarding:

• Classes of transactions and Events

• Account balances and related disclosures

 Assertions – Classes of Transactions : ISA
Description
Occurrence: transactions and events which have been recorded or disclosed, have occurred and pertain to the entity,

Completeness: all transactions and events, which should have been recorded, have been recorded, and all related
disclosures that should have been included in the financial statements have been included,

Cut off: transactions and events have been recorded in the correct accounting period,

Accuracy: amounts and other data relating to recorded transactions and events have been recorded appropriately, and
related disclosures have been appropriately measured and described,

Classification: transactions and events have been recorded in the proper accounts,

Presentation: transactions and events are appropriately aggregated or disaggregated and clearly described, and related
disclosures are relevant and understandable in the context of the applicable financial reporting framework.
 Assertions – Account Balances : ISA Description
• Existence: assets, liabilities and equity interests exist.

• Rights and Obligations: the entity holds or controls the rights to assets, and liabilities are the obligations of the entity,

• Completeness: all assets, liabilities and equity interests that should have been recorded, have been recorded, and all related

disclosures that should have been included in the financial statements, have been included.

• Accuracy, valuation and allocation: assets, liabilities and equity interests have been included in the financial statements at

appropriate amounts and any resulting valuation or allocation adjustments (e.g. depreciation, obsolescence) are appropriately

recorded, and related disclosures have been appropriately measured and described.

• Classification: assets, liabilities and equity interests have been recorded in the proper accounts.

• Presentation: assets, liabilities and equity interests are appropriately aggregated or disaggregated and clearly described, and related

disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.
 Classes of Transactions Account Balances
• Occurrence • Existence

• Completeness • Rights and Obligations

• Cut – off • Completeness

• Accuracy • Accuracy, Valuation and

• Classification Allocation

• Presentation • Classification

• Presentation
• Occurrence – Actually happened. Not fictitious

• Existence – Real. Physically present. Not fictitious

• Completeness – Nothing left out. No omissions. Everything included

• Cut – Off – Correct accounting period.

• Accuracy – Amounts are correct.

• Classification – Proper account. Account categories correct

• Presentation – According to IFRS

• Rights – Belong. Ownership

• Obligations – Responsibility to pay

• Valuation – Amounts correct. Correct assumptions used for estimates eg PPE

• Allocation – Example depreciation to accumulated depreciation, provision for doubtful debts, obsolete inventory
 The role of professional skepticism
• An attitude to be adopted by all members of the audit team.

• Requires that work be approached with a questioning mind, alert to conditions which indicate
possible misstatement due to fraud and error and that audit evidence is critically assessed.

• Auditor should remain unconvinced of the truth until suitable evidence is provided.

• Be alert to:
• Audit evidence that contradicts other audit evidence obtained
• Information that brings into question the reliability of documents and responses to inquiries used as evidence
• Conditions that indicate possible fraud

• Does not mean auditor must be rude and dismissive. Auditor must still be polite, dignified and
professional.
 The role of professional judgement
• To apply the auditing, accounting and other relevant training knowledge and experience to make
informed decisions and choices that are appropriate in the circumstances of the audit engagement.

• In terms of ISA 200, the auditor is required to exercise professional judgement in planning and performing
an audit of financial statements.

• Virtually all decisions that must be made on an audit contain an element of professional judgement. For
example, professional judgement will be required in such diverse decisions as
• determining if the source of information is reliable

• Considering the integrity of management

• evaluating is evidence is sufficient