Learner Workbook (LW)

UFH Learner Workbook – Evaluating, Concluding and Reporting
FACULTY OF MANAGEMENT & COMMERCE
SCHOOL / PROGRAMME: Business & Enterprise
LEARNER WORKBOOK (LW)

YEAR: 2020
Course Title: Auditing and Governance (ADA)

Course Code: AAU301E
NB: THIS LW DOES NOT COVER ALL THE TOPICS IN THE CURRENT ACADEMIC YEAR. PLEASE
REFER TO PAGE 3 OF THIS LW FOR THE TOPICS COVERED IN THIS LW.
Sections included in this LW: A. Overview

B. Where are we in the audit process?
C. Learning outcomes and assessment
criteria
D. Study areas (including practical
application considerations and examples)
E. Summary
F. Glossary of key terms and related
examples
Name of Lecturer responsible for the topics: Ms Rebone Boikanyo
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©2020: Nkuhlu Department of Accounting
Table of Contents
A. Overview .................................................................................................................................................... 3
B. Where are we in the audit process? ........................................................................................................... 4
C. Learning outcomes and assessment criteria ........................................................................................... 5
D. Study areas............................................................................................................................................. 9
1. Evaluation of misstatements ................................................................................................................. 10
1.1. Audit principles and requirements .................................................................................................. 10
1.2. Practical application considerations ............................................................................................... 12
2. Audit conclusion, opinion and reporting ................................................................................................. 34
2.1. Audit principles and requirements .................................................................................................. 34
2.2. Practical application considerations ............................................................................................... 35
E. Summary .................................................................................................................................................. 44
F. Glossary of key terms and related examples ............................................................................................ 45
<<<< Click here to access the learning material on Blackboard >>>>
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A. Overview
<<<< Click here for the slides >>>>
Below is an overview of the topics covered in the Learner Workbook (LW) as well as the references to the sources used and all relevant additional
resources for further information. [Click on each item with a link to access the content directly].
Additional resources (with the estimated duration of Practical
Practice question
No. Topic ISA Textbook in minutes and seconds in brackets, where application Tutorial
and / or quiz
applicable) considerations
Activity 5.1
Slides: Evaluation of misstatements PPS 1 (44:13)
Example 5.1 GQ 6.16 –
Example 5.2 Inside Out (Pty) Pop-quiz 5.1
Evaluation of ISA 320 Chapter 6 Video: Evaluation of misstatements – Example 5.6
1 Example 5.3 Ltd (Manual or
misstatements ISA 450 &7 WPs 2 (39:33)
Example 5.4 Blackboard)
Example 5.5 GQ 6.17
Video: Evaluation of misstatements – Tut Explanation
Example 5.6
ISA 700 Slides: Audit conclusion and reporting PPS Activity 6.1 Pop-quiz 6.1
ISA 701 Example 6.1 (Manual or
GQ 15.5 – Blackboard)
Audit conclusion, ISA 705 Chapter Video: Audit opinions (12:07) Example 6.2
2 Cordon (Pty)
opinion and reporting ISA 706 18 Example 6.3
Limited
ISA 710 Video: Audit conclusion and reporting – Tut Example 6.4 GQ 15.4
ISA 720 Explanation Example 6.5
1 PPS is abbreviation for PowerPoint Show format

2 WPs is abbreviation for Working Papers
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B. Where are we in the audit process?

We always need to pause and ask ourselves where we are in the audit process and how the audit topic we are
studying fits into the bigger picture. It is only when we are able to comfortably answer this question can we
continue to delve deeper into the audit topic at hand. We should probably do this with every audit topic we cover
throughout our studies.
Let’s do a quick brain exercise to see whether we are all on the same understanding
regarding where all the topics covered in this LW fit in the audit process. Plot the topics
listed in the overview above into the relevant audit process block, a topic may be plotted
in more than one block where appropriate:
Understanding the entity and its

BLOCK 1 Pre-engagement understanding BLOCK 2
environment (including internal controls)
Click or tap here to enter text. Click or tap here to enter text.
Click or tap here to enter text. Click or tap here to enter text.
BLOCK 4 BLOCK 3
Evaluation, concluding and reporting Risk assessment and response
It is important to also think about how the auditor’s overall objectives are achieved from the above audit
processes and how this links to all the topics covered in our auditing modules. Keep in mind that what the auditor
is trying to achieve at the end is to obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatements in all material respects, in accordance with an applicable financial
reporting framework, and to report on the financial statements and communicate as required by the ISAs, in
accordance with the findings identified during the audit.
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C. Learning outcomes and assessment criteria

We use the South African Institute of Chartered Accountants’ (SAICA’s) Competency Framework 3 as guidance
to determine the learning outcomes and the level of competency required.
After completion of the topics covered in this LW, you should be able to:
Competency
Competency
and
Topic Learning outcome and assessment criteria framework
knowledge
reference
level
1. Evaluate the evidence and draw conclusions through the following:

a. Evaluating the sufficiency and significance of the evidence and / or results of
analysis,
b. Drawing a conclusion as to whether each procedure performed meets its
Evaluation of misstatements
objective,
c. Identifying and evaluating inconsistencies, unexpected circumstances or
findings, or findings that indicate possible fraud, error or illegal acts and
assessing the impact on the report,
d. Analysing and deciding on the reasonableness of the conclusions on the
I at 2 except
subject matter, based on an understanding of the nature of the business and
IV-2.9 for 9.f. which
its operations for the period and on the outcome of assurance procedures,
is at 3
e. Determining whether the subject matter conforms to the set criteria used for
evaluation,
f. Evaluating the reasonableness / fair presentation of the subject matter as a
whole,
g. Analysing the impact of unresolved uncorrected misstatements / scope
limitation in the context of materiality, and deciding on the need to gather
additional evidence or to extend the scope of procedures; and
h. Assessing the need to make corrections to the subject matter or other
remediation.
2. Draft the audit report upon completion of the engagement through the following:
Audit conclusion,
a. Outlining the legal prerequisites to audit reporting on financial statements,

opinion and
reporting
b. Describing the basic elements of audit reports on financial statements,

c. Describing the circumstances or matters that do not affect the audit opinion
IV-2.10 X at 3
and how these impact on the report,
d. Knowing the theoretical basis for the completion of an audit; and
e. Considering the impact of other information in documents containing
assurance reports on the report.
3 SAICA Competency Framework, Detailed Guidance for the Academic Programme, Version 11, updated June 2018.
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SAICA competency framework – explanation of:
A.Level of proficiency
The degree of expertise an individual is expected to exhibit in a competency. It is stressed that for all three
levels a high degree of contextualisation is required. By requiring a high degree of contextualisation, it is
recognised that competence in the field of accounting is “grounded in the real world” and that teaching, learning
and assessment is most effectively executed through application in “real world” scenarios. This is achieved in
the academic programme through mini case studies and contextualised questions.
A (Awareness) – requires an awareness of the key ideas and principles within the area. Demonstration of
technical expertise or detailed knowledge in this area is not required. The candidate identifies and explains the
significance of the competency, and the types of circumstances in which it would arise to be applied.
I (Initiates the task) – demonstrates an understanding of the requirements of the task and identifies and applies
the required professional skills, including basic quantitative and qualitative analysis, to perform the task on a
preliminary basis (recognising that a review by more senior staff is still necessary). Complex calculations are
not required. Integration with other competencies is straightforward and is of limited complexity. Level I include
level A proficiency.
X (Completes the task) – completes all elements of a specified task successfully. Relevant pervasive skills and
reflective capacity should be demonstrated at an advanced level. Technical skills expected to be demonstrated
at this level include, for example, performing complex calculations and concluding on an appropriate course of
action. Proficiency at level X is demonstrated when the problem is clearly identified and thoroughly analysed, or
when a situation is evaluated and useful recommendations are made. This level of proficiency includes level A
and I proficiencies.
A. Knowledge levels
Level 1 (Basic)
At this level the candidate is required to acquire a knowledge and understanding of the core / essence of the
subject matter which include that the subject matter exists, the significance and relevance thereof, and its
defining attributes.
Consequently, the candidate is required to have a knowledge and understanding –

- of the purpose and objective of the subject matter;
- of the underlying principles / practices / legislation / requirements (hereafter “content”);
- of how the content relates to the discipline as a whole and to other disciplines (how it “fits in”); and
- that is at a broad conceptual level.
At this level, knowledge and understanding of detail, including procedural or numerical aspects specific to the
subject matter, are not required.
At this level the candidate should be equipped with the extent and depth of knowledge and understanding which
enable the candidate to recognise issues when encountered and to seek further depth of knowledge and
understanding.
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Level 2 (Intermediate)
At this level the candidate is required to acquire a detailed knowledge and understanding of the central ideas
and issues that comprise the substance of the subject matter. This level includes the level of knowledge and
understanding required for level 1 (Basic).
Consequently, the candidate is required to have a knowledge and understanding –

- of those aspects of the content that are central to the subject matter, so as to achieve a sound conceptual
understanding; and
- of the detail, including procedural and numerical aspects specific to the subject matter, where appropriate.
Knowledge and understanding of complexities and unusual / exceptional aspects are, however, not required.
At this level the candidate should be equipped with a sound knowledge and understanding of the substance of
the subject matter to enable him/her to deal with issues and solve problems that are central to the topic. The
candidate has a sound conceptual knowledge which enables him/her to further explore and understand
complexities, if necessary.
Level 3 (Advanced)
At this level the candidate is required to acquire a thorough knowledge and rigorous understanding of the subject
matter. This level of knowledge and understanding extends beyond a sound understanding of central issues, to
include complexities and unusual / exceptional aspects associated with the subject matter.
Consequently, the candidate is required to have a knowledge and understanding of –

- all content that is required to develop a thorough and rigorous understanding of the subject matter;
- complexities; and
- sufficient depth to clearly locate content in the general field of accountancy (as described by competencies
II–VII) and to identify implications and relationships.
At this level the candidate should be equipped with a level of knowledge and understanding of the substance of
the subject matter that enables him/her to perform tasks and solve problems with a high degree of rigour,
exercising sound judgement.
This level includes the level of knowledge and understanding required for level 1 (Basic) and level 2
(Intermediate).
Level of proficiency: Level X – Completes the task
Level I – Initiates the task
Level A – Awareness
• Key ideas and principles • Perform task on preliminary basis • Completes all elements of task
• Technical expertise or detailed • Understands requirements of the • Problem is clearly identified & thoroughly
knowledge not required task analysed, or situation is evaluated &
• Identifies & explains significance • Identifies & applies the required useful recommendations are made
and relevance professional skills • Relevant pervasive skills & reflective
• Intermediate understanding capacity demonstrated at advanced level
• Advanced understanding
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• Basic quantitative & qualitative • Technical skills include complex

analysis (Excl complex calcs) calculations & concluding on an
• Integration straightforward appropriate course of action
Knowledge level: Level 3 – Advanced
Level 2 – Intermediate
Level 1 – Basic
• Summary: Core/essence of the • Summary: Central ideas and issues • Summary: Thorough knowledge &
subject matter that comprise the substance of the rigorous understanding
• Includes: Significance, relevance, subject matter (sound conceptual • Includes: Complexities & unusual /
defining attributes understanding) exceptional aspects; Sufficient depth to
• Excludes: Detail, including • Includes: Detail, including clearly locate content in the broader
procedural or numerical aspects procedural and numerical aspects discipline & to identify implications and
• Objective: Candidate able to specific to the subject matter relationships
recognise issues when • Excludes: Complexities and unusual • Objective: Enable candidate to perform
encountered and to seek further / exceptional aspects tasks and solve problems with a high
depth • Objective: Enable candidate to deal degree of rigour, exercising sound
with issues and solve problems judgement
central to the topic
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D. Study areas
This section outlines the details of the audit principles we need to have knowledge of, understand and apply.
The content that follows will help us in ensuring that we achieve our learning outcomes and thereby be able to
succeed in our studies.
Before we get into the details of our study areas let us first consider the following questions relating to the
concepts and key terms we will be learning in this section of the Learner Workbook (LW). See if you are able to
answer the questions or define the key terms before continuing to the next parts of the LW. This will assist you
with flagging the study areas you might need to spend a bit more time on. All key items are in bold font the first
time they appear in a study area text.
Questions Key terms

1. Why does the auditor evaluate 1. Misstatement
uncorrected misstatements? 2. Uncorrected misstatement
Click or tap here to enter text. 3. Unmodified opinion
4. Key Audit Matter (KAM)
<<<< Click here to provide answer on 5. Pervasive
Blackboard >>>> 6. Modified opinion
7. Emphasis of Matter paragraph
2. What must the auditor take into 8. Other Matter paragraph
account when concluding on whether
the auditor has obtained reasonable
assurance about whether the financial
statements as a whole are free from
material misstatement?
Click or tap here to enter text.
<<<< Click here to provide answer on

Blackboard >>>>
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1. Evaluation of misstatements
1.1. Audit principles and requirements

There are two auditor’s responsibilities regarding misstatements:
1. The responsibility to evaluate the effect of identified misstatements on an audit; and
2. The responsibility to evaluate the effect of uncorrected misstatements on the financial statements.
Pop-quiz 5.1
<<<< Click on the Pop-quiz heading to complete on Blackboard >>>>
Based on the content contained in the lecture and prescribed readings, indicate the auditor’s objectives regarding
evaluation of misstatements identified during the audit in the grey blocks below:
Objective
Auditor’s objective
number
1. Click or tap here to enter text.
In order to achieve the auditor’s objectives, we are required to do the following:

1. Accumulate misstatements identified during the audit.
2. Consider identified misstatements as the audit progresses.
3. Communicate misstatements accumulated during the audit and request management to make such
corrections.
4. Evaluate the effect of uncorrected misstatements.
5. Request written representations from management.
6. Ensure audit documentation complies with the ISA requirements.
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1.2. Practical application considerations
Activity 5.1 GR
Using the information from the lecture and the prescribed readings, complete the grey blocks below for each audit requirements’
heading by indicating examples based on your understanding of what’s contained in the learning material content.
Click or tap here to enter Click or tap here to enter text. Click or tap here to enter text.
text.
Click or tap here to enter Click or tap here to enter text. Click or tap here to enter text.
text.
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We will be using the annual financial statements for Pick n Pay to illustrate the principles for this topic.
Link: Pick n Pay Audited Annual Financial Statements 2020
Below are the extracts from annual financial statements for the financial statements line items we have audited.
Revenue
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Trade and other receivables
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We have audited the financial statement line items under revenue and trade and other receivables and have
identified misstatements in the following financial statement line items:
1. Operating lease income
2. Finance Income
3. Other receivables
4. Trade receivables from contracts with customers
5. Allowance for impairment losses.
The next pages contain examples of the accumulated misstatements for each financial statement line item that
we have documented in our working papers (WPs). Below is the link to the actual working papers for you to work
through the examples.
Link: Accumulation WPs
Once you have gone through the examples of accumulating misstatements, the next step is to go through an
example of how the uncorrected misstatements are evaluated and the conclusion reached for these. Below is a
link to the Evaluation of uncorrected misstatements – Overs and unders WP.
Link: Evaluation WP
Do not be intimidated by the extent of detail in this working paper. A detailed video is included in your resources
to explain everything in the example.
It is important to remind ourselves of the purpose of the above working papers at this point.
Purpose of working
Outcome of working paper
paper
Regardless of which working paper, audit documentation is key!!!
Accumulate all
Final accumulation of all the uncorrected misstatements. These are the
misstatements,
misstatements that are transferred to the schedule of overs and unders working
communicate and
paper (i.e. Evaluation of uncorrected misstatements WP).
request corrections.
Evaluate all the
uncorrected
misstatements,
determine whether they
are material or not. If
material, then
determine whether they
are material but NOT Audit conclusion that will be used for the auditor’s report. We expand on audit
pervasive OR material conclusion and reporting in topic 9 of the learner workbook.
AND pervasive taking
into account all the
misstatements as well
as your understanding
of the client. Lastly,
conclude on the audit
opinion.
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Example 5.1
Accumulation of misstatements identified during the audit
Financial statement line item Revenue - Operating lease income

Reported R-value amount R 140 700 000
Materiality figures
Materiality Planning Final For the purposes of this example,
Overall R 13 947 000 R 11 947 000 planning materiality figure should
Perfromance R 10 460 250 R 8 960 250 be taken as initial planning
Trivial R 27 894 R 23 894 materiality.
Misstatements identified that are NOT clearly trivial (AFS amounts)

Sub-population (based on Type of Understatement Overstatement Net
assertions) misstatement amount amount misstatement
Completeness sampling testing Projected R 24 000 R - R 24 000
Presentation testing Judgemental R 16 000 245 R - R 16 000 245
All other assertions sampling testing Projected R 98 626 -R 13 122 580 -R 13 023 954
Testing specific items Factual R - -R 8 946 215 -R 8 946 215
Total net misstatements R 16 122 871 -R 22 068 795 -R 5 945 924
Misstatements identified that are NOT clearly trivial (Disclosure items)

Not applicable
Communication with management and TCwG
Communicate accumulated misstatements <<Finding ref>>
Management's corrections (AFS amounts)

assertions) misstatement amount amount corrections
Completeness sampling testing Projected -R 24 000 R - -R 24 000
Presentation testing Judgemental -R 16 000 245 R - -R 16 000 245
All other assertions sampling testing Projected R - R - R -
Testing specific items Factual R - R - R -
Total net corrections -R 16 024 245 R - -R 16 024 245
Uncorrected misstatements (AFS amounts)

assertions) misstatement amount amount misstatements
Completeness sampling testing Projected R - R - R -
Presentation testing Judgemental R - R - R -
All other assertions sampling testing Projected R 98 626 -R 13 122 580 -R 13 023 954
Testing specific items Factual R - -R 8 946 215 -R 8 946 215
Total net corrections R 98 626 -R 22 068 795 -R 21 970 169

<<Working
Transfer uncorrected misstatements to the Evaluation of uncorrected misstatement working paper
paper ref>>
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Example 5.2
Financial statement line item Revenue - Finance Income

Materiality figures

Testing all items Factual R - -R 6 458 126 -R 6 458 126
R - R - R -
R - R - R -
R - R - R -
Total net misstatements R - -R 6 458 126 -R 6 458 126

Not applicable


R - R - R -
R - R - R -
R - R - R -
R - R - R -
Total net corrections R - R - R -

R - R - R -
R - R - R -
R - R - R -
Total net corrections R - -R 6 458 126 -R 6 458 126

<<Working
paper ref>>
17
Example 5.3
Financial statement line item Other receivables (VAT receivables)

Materiality figures

R - R - R -
R - R - R -
R - R - R -

Not applicable

R - R - R -
R - R - R -
R - R - R -
R - R - R -

R - R - R -
R - R - R -
R - R - R -

<<Working
paper ref>>
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Example 5.4
Financial statement line item Trade receivables from contracts with customers
Reported R-value amount R 3 928 200 000
Materiality figures

Presentation from specific testing R - -R 12 369 870 -R 12 369 870
R - R - R -
R - R - R -
R - R - R -

Not applicable


R - R - R -
R - R - R -
R - R - R -
R - R - R -

Presentation from specific testing R - -R 12 369 870 -R 12 369 870
R - R - R -
R - R - R -
R - R - R -

<<Working
paper ref>>
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Example 5.5
Financial statement line item Allowance for impairment losses

Materiality figures
Overall R 13 947 000 R 11 947 000 planning materiality figure should be
Performance R 10 460 250 R 8 960 250 taken as initial planning materiality.
Trivial R 27 894 R 23 894

Sub-population (based on Type of Understatement Overstatement Net misstatement
assertions) misstatement amount amount
Presentation from specific testing Judgemental R 16 985 480 R - R 16 985 480
R - R - R -
R - R - R -
R - R - R -
Total net misstatements R 16 985 480 R - R 16 985 480

Sub-population (based on Type of Understatement Overstatement Net misstatement
Not applicable


Sub-population (based on Type of Understatement Overstatement Net corrections
R - R - R -
R - R - R -
R - R - R -
R - R - R -

Presentation from specific testing Judgemental R 16 985 480 R - R 16 985 480
R - R - R -
R - R - R -
R - R - R -
Total net corrections R 16 985 480 R - R 16 985 480

<<Working paper
ref>>
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Example 5.6
Evaluation of uncorrected misstatements - Overs and unders Correcting journal:

Dr Furniture, fittings, equipment and vehicles (since overstated)R8 326 987
Correcting journal:
Cr VAT receivable (since no VAT was charged for such) R8 326 987
STEP 1: Final overall materiality R 11 947 000 Dr Revenue (since overstated) Rxxx
Could there be qualitative considerations? Particularly for VAT input claim and SARS
Cr Bank (since no such money came in) Rxxx
compliance matters?
Here the projected amount is not certain, as misstatements
STEP 2: Evaluate uncorrected misstatements, if any include projected and judgemental misstatements. Therefore we
do not know with certainty what the amount should be...
STEP 2A: Financial Statements as a whole (AFS amounts) Statement of Financial Position Statement of Comprehensive Income
Type of Nature of Total Assets Total Liabilities Total Income Total Expenses
Uncorrected misstatement in financial statement line
misstatement missstatment Current Assets Non-current Current Liabilities Revenue from Other income Trading
item
Class 1 Trade and other receivables Class 3 Assets contracts expenses
Cash and cash Trade receivables Other receivables Line item 4 Line item 5 Line item 6 Furniture, fittings, Allowance for Operating lease Finance Income Operations
Source equivalents from contracts with equipment and impairment losses income
customers vehicles
Accumulation - Revenue_Rent Projected Disagreement R 13 023 954 -R 13 023 954
Accumulation - Revenue_Rent Factual Disagreement R 8 946 215 -R 8 946 215
Accumulation - Revenue_Interest Factual Disagreement R 6 458 126 -R 6 458 126
Accumulation - VAT receivable Factual Disagreement -R 8 326 987 R 8 326 987
Accumulation - Trade debtors Possible Limitation -R 12 369 870 R 12 369 870
Accumulation - Provision 4 DB Judgemental Disagreement R 16 985 480 -R 16 985 480
Correcting journal:
Dr Bad debts (since understated) R12 369 870
Cr Trade and receivables from contract with customers (since impairment understated) R12 369 870
Correcting journal: In this instance we did not obtain evidence to support the existence of the trade debtor. Therefore, we were
Dr Finance income (since overstated) R6 458 126 unable to obtain sufficient appropriate audit evidence.
Cr Trade receivables from contracts with customers (since no such income is receivable) R6 458 126 Correcting journal:
Dr Bad debts (since understated provisions) R16 985 480
Cr Allowance for impairment losses (since understated) R16 985 480
Below is an extract of the last two steps in the evaluation working paper.
STEP 3: Formulate a conclusion if material misstatement(s) identified
Based on all your understanding of the audit, what is the extent of
misstatements identified?
Select between material but not pervasive and material and pervasive from the
drop-down menu.
Click here for the video
Motivate your conclusion made above in the space below: explaining the working
papers and practical
application considerations
STEP 4: Document your audit conclusion

Unqualified audit opinion or Qualified audit opinion or Adverse audit opinion or
Disclaimer of opinion?
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Tutorial 5.1
GQ 6.16 – Inside (Pty) Ltd

This is the worked tutorial for this topic. Please read, attempt, mark and go through the explanatory material for
this tutorial.
QUESTION
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23
24
25
26
SUGGESTED SOLUTION TO EXERCISE 6.16
Audit Client: Inside Out (Pty) Ltd Date Prepared: 27 April 2020
Audit year end: 28 February 2020 Prepared by: Luiz Beuthin
SECTION: UNCORRECTED MISSTATEMENTS Reviewed by:
Difference Known or likely Materiality guideline considerations Other factors to consider and recommendation
1. Known (factual) 1. This amounts to an overstatement of net income (R165 079) and an 1. This amounts to a contravention of IFRS which requires
understatement of liabilities of the same amount. that the exchange loss be recognized at 28 February 2020
2. In relation to the net profit guideline (R272 943), the amount is as it is a cost related to that financial year.
immaterial. 2. Syd Spade’s contention that adjustment is not required as
3. In relation to the current liabilities guideline (R192 421), the amount is the amount was paid on due date, is of no consequence, it
also immaterial. is invalid.
3. The loss can be precisely calculated and correction is
straightforward. It should be made.
2. Known (factual) 1. The failure to adjust for the decrease in value of the property amounts 1. The revaluation policy has been in operation for some years
to an overstatement of R115 000 of property, plant and equipment and to now abandon it would amount to a change in
and an overstatement of R115 000 of net profit. (As there is no accounting policy.
revaluation surplus to absorb the decrease it must be taken to profit 1.1 to be valid, a change in accounting policy must, inter
and loss.) alia, result in more appropriate presentation in the
2. No specific materiality guideline for fixed assets or total assets is financial statements.
provided; in relation to the current assets guideline, the 2. The revaluation have been carried out (each year) by a
overstatement (R115 000) is immaterial and would also be immaterial reputable firm of valuers. It appears that Syd Spade’s
in relation to total assets. decision is prompted by a desire to keep profit (which has
3. In relation to the net income before tax guidelines, the decrease in the declined since the previous year) from being further
value of the vacant land is also immaterial in itself. reduced, and not the pursuit of fair presentation.
3. This matter also has implications for the accounting policy
note which in all likelihood reflects the adoption of the
revaluation model by the company.
4. Again the necessary adjustment can be precisely computed
and is straightforward. The adjustment should be made
which in turn, will satisfy the accounting policy disclosures.
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3. Known 1. As this is primarily a (qualitative) disclosure matter, quantitative 1. Despite the fact that the correct authority for the security
(factual) guidelines are not specifically relevant. was obtained, disclosure of the details of the security
(contingent liability) is still required in terms of
1.1 Section 30 of the Companies Act 2008 which requires
disclosure of security (financial assistance in any form)
provided to directors.
1.2 IAS37 which requires that a brief description of the
nature of the contingent liability, an estimate of its
financial affect and any uncertainties relating to the
contingent liability, be disclosed.
2. Contrary to the Board’s reasoning, disclosure is required to
inform users of the existence of a potential liability
dependent on some future event. The Board cannot control
this future event.
3. Again this amendment to the financial statements is
straightforward, simply requiring additional disclosure in the
notes. It should be made.
4. Likely 1. In relation to the current assets guideline even the maximum 1. Although this is a judgemental misstatement, there is strong
(judgemental) suggested understatement of the allowance of R320 000 would fall evidence (contrary to Syd Spade’s contention that it is
below the materiality limit. unfounded) to suggest that there has been understatement
2. Similarly in relation to the net income before tax guideline (R272 943) of the allowance. The allowance for bad debts has been
the likely overstatement is immaterial. reduced as a percentage of debtors from 8,25% to 3,38%
without any apparent justifiable reason.
1.1 credit sales both in amount and as a percentage of total
sales, have increased
1.2 the collection period has worsened from 65 days in
2019 to 89 days in 2020.
1.3 if Carly Singh’s lowest estimate of the understatement
(R250 000) was used to increase the allowance, the
percentage for 2020 would rise to 8,7% which looks
historically fair.
Hence we would be in a strong position to insist upon
correction to the financial statements. The above strongly
suggests that Syd Spade is intent on minimizing the
reported decline in profits.
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5. Known 1. This amounts to an understatement of creditors and purchases as well 1. Syd Spade’s comparison of the misstatement to the year’s
(factual) as an overstatement of net profit before taxation of R211 613. purchases figure is meaningless in the context of fair
presentation.
2.In terms of the materiality guidelines, this R192 421 is material in terms 2. This misstatement of creditors combined with difference 1,
of the current liabilities guideline but (considered in isolation) is not results in an understatement of current liabilities (a
material in relation to the net profit before tax guideline (R272 943). common way of manipulating the balance sheet) of R376
692 or 9,8% by ignoring easily correctable known
misstatements.
3. Although the goods relating to this purchase were correctly
included in inventory at the financial year-end, net profit
before tax will still be overstated by R213 613 because this
amount has been excluded from purchases.
4. This misstatement combined with differences 1, 2 and 4
results in an understatement of net income before tax of
R530 079 (9.7%) which is double the relevant materiality
guideline.
5. This misstatement is a factual misstatement and is easily
correctable. It should be corrected.
CONCLUSION
1. Due to the declining performance of the company, Syd Spade is under pressure from the shareholders. It appears that his unwillingness to
make corrections is to avoid further reduction of profits.
2. The more significant cumulative effects of the above differences are that (see workings)
2.1 net income before tax will be overstated by R743 692 (13,62%)
2.2 current liabilities are understated by R376 692 (9,7%).
Even if only the quantitative factual misstatements are adjusted (ignoring the allowance), both net income before tax and current liabilities will
be fairly presented. Failing this, the audit report should be qualified.
3. If the necessary corrections for the revaluation of the land are not made, the accounting policy note as stated in the financial statements will
not have been complied with, and the audit report would have to be qualified.
4. In addition, failure to disclose the contingent liabilities in respect of the security for directors (known qualitative misstatement) would also result
in qualification of the audit report.
29
Quantitative summary – Workings
Net profit before tax 5 458 868

Less: Foreign exchange loss 165 079
Property decrease 115 000
Allowance (say) 250 000
Cut off 213 613 743 692
4 715 176
Current assets 9 197 740

Less: Allowance (likely understatement) 250 000
8 947 740
Current liabilities 3 848 425

Add: Foreign exchange 165 079
Cut-off 211 613 376 692
3 471 733
Assets: Property 895 000

Less: Devaluation 115 000
790 000
Explanatory material
Link: GQ 6.16 – Inside (Pty) Ltd explanation
30
Tutorial 5.2
GQ 6.17
This is the worked tutorial for this topic. Please read, attempt and mark this tutorial.
QUESTION
31
1. The distinguishing factor is whether the underlying action that results in the misstatement of the financial
statements is intentional or unintentional.
2.
2.1. The auditor is interested because the fraud may lead to material misstatement in the financial statements
on which the auditor is reporting.
2.2. Fraud discovered on the audit may also give rise to a reportable irregularity which will result in a duty for
the auditor to report in terms of the Auditing Profession Act 2005.
3. No, the auditor does not have a duty to report fraud to the police, in fact the auditor would be in breach of
the Code of Professional conduct if he did so, (the auditor reports to the management or those charged with
governance or to the IRBA, depending on the circumstances.)
4. As the terms suggest, management fraud is fraud committed by management or those charged with
governance, whilst employee fraud is fraud involving employees of the company. The distinction is made
because the manner in which the auditor proceeds will differ, e.g. with management fraud, an external body
(IRBA) may be contacted by the auditor, but with employee fraud the auditor deals with management.
5. Fraudulent financial reporting

5.1 Manipulation or falsification of accounting records, e.g. including fictitious sales
5.2 Intentional omission of significant information, e.g. leaving out a large contingent liability
5.3 Intentional misapplication of accounting principles – recognizing contract revenue prematurely, by
claiming that the contract is 90% complete, when it is 30% complete
5.4 Engaging in complex transactions that are structured to misrepresent the financial position, e.g. setting
up fictitious joint ventures, associated companies, etc.
Misappropriation of assets
5.5 Embezzling receipts from debtors and writing off the accounts as bad debts
5.6 Stealing physical assets, e.g. inventory
5.7 Stealing intellectual property, e.g. selling company secrets to a competitor
5.8 Getting the company to pay for goods or services not received, e.g. payments to fictitious suppliers
5.9 Using company assets for personal use, e.g. using the company’s trucks to run a private delivery service
at weekends.
6 They have the primary responsibility for the prevention and detection of fraud, with the emphasis on
prevention (reducing opportunities for fraud) and deterrence. They are responsible for creating a culture
of honesty and ethical behaviour which can be reinforced by an active oversight by those charged with
governance.
32
7 The auditors general responsibility is to obtain reasonable assurance that material misstatement is not
present in the financial statements, whether it be as a result of fraud or error. Thus he must plan and
perform the audit in such a manner (with the intention) that all material misstatements will be identified.
There is the unavoidable risk that some material misstatement may not be detected even if the audit is
properly planned and performed. This is due to the inherent limitations of the audit.
8 It is really a little bit of each. In terms of ISA 240, the auditor is required to assume an attitude of
professional skepticism recognizing that circumstances may exist that cause the financial statements to
be materially misstated due to fraud. The auditor does not let himself be “led around by the nose” but at
the same time does not adopt an aggressive “bloodhound” approach. He must be guided by his risk
identification and evaluation which he is required to carry out with an attitude of professional skepticism.
9
9.1 Management override is any instance where a member of the management team overrides a control
which otherwise appears to be operating efficiently, e.g. applying the normal control procedures relating
to creditworthiness of a debtor, reveal that a sale should not be made to a particular debtor. The financial
manager overrides the control by authorizing the sale (usually for unsound reasons for example, the
customer is a friend or family member.)
9.2 Management override is important in relation to fraud, because internal controls are designed (inter alia),
to prevent fraud. If the control can simply be overridden, the risk of fraud occurring, is significantly
increased.
10
10.1 Material misstatements of financial statements due to fraud, often involve manipulation of the financial
reporting process, by the passing of fictitious journal entries, so as to adjust the accounts being
manipulated or to hide the fraud.
10.2 Journal entries are also an easy way of effecting management override, i.e. the system produces figures
which have been subjected to controls, but management simply overrides the controls by passing an
adjusting journal entry to produce a fictitious desired result.
33
2. Audit conclusion, opinion and reporting
2.1. Audit principles and requirements
This section of the Learner Workbook deals with the last parts of the auditing processes. At this point we would
need to have solid knowledge of all the topics covered in all our auditing studies. This part of the audit process
is the last pieces of activities that brings together all we have during an audit and closes off the audit engagement.
It is the point where we now determine whether our overall audit objectives have been achieved.
As indicated in the previous topic, audit conclusion and reporting follow evaluation of misstatements.
Pop-quiz 6.1
<<<< Click on the Pop-quiz heading to complete on Blackboard >>>>
Based on the content contained in the lecture and prescribed readings, indicate the auditor’s objectives regarding
forming an opinion and reporting on financial statements in the grey blocks below:
Objective
Auditor’s objective
number
In order to achieve the auditor’s objectives, we are required to do the following:

1. Form an opinion on whether the financial statements are prepared, in all material respects, in accordance
with the applicable financial reporting framework. What does the auditor have to conclude on to allow for
them to form this opinion? Click or tap here to enter text.
2. Express an unmodified opinion OR modify the opinion in the auditor’s report. When would the auditor
express an unmodified opinion? Click or tap here to enter text. When is the auditor required to modify the
opinion? Click or tap here to enter text.
3. Provide an auditor’s report in writing.
34
4. For supplementary information presented with the financial statements, evaluate whether supplementary
information is or is not an integral part of the financial statements and cover such in the auditor’s opinion
or auditor’s report.
2.2. Practical application considerations
Activity 6.1
GR
Evaluation working paper (WP)
Using the details in the evaluation WP used in the previous topic, conclude and
formulate at opinion of the audit. Below is a snippet of the sections you should complete.
STEP 3: Formulate a conclusion if material misstatement(s) identified
Material but NOT pervasive
Based on all your understanding of the audit, what is the extent of misstatements identified?
Select between material but not pervasive and material and pervasive from the drop-down menu.
Motivate your conclusion made above in the space below:

Click or tap here to enter text.
STEP 4: Document your audit conclusion

Unqualified audit opinion or Qualified audit opinion or Adverse audit opinion or Disclaimer of opinion? Click or tap here to
enter text.
Example 6.1
Example of an Independent Auditor’s Report

Link: Independent Auditor’s Report to the Shareholders of Mr Price Group Limited
Ensure you are able to identify and assess how each of the elements of the auditor’s report are detailed in the
auditor’s report. Refer to the Lecturer’s comments included in the document.
35
Example 6.2
Example of an unmodified audit opinion

Link: Mr Price Annual Integrated Report 2020, page 159.
Below is a snippet of the two key paragraphs contained in the Independent Auditor’s report.
36
Example 6.3
Example of a modified audit opinion

Link: Blue Label Annual Financial Statements 2020, page 10
Below is a snippet of the two key paragraphs contained in the Independent Auditor’s report.
37
Example 6.4

Below is an illustrative example from ISA 705.
38
Example 6.5

Below is an illustrative example from ISA 705.
39
Tutorial 6.1
GQ 15.4
This is the worked tutorial for this topic. Please read, attempt, mark and go through the explanatory material for
this tutorial.
Question
40
No. Nature Material and/or pervasive Opinion
1. Insufficient appropriate evidence – disclaimer
Scope limitation
2. Disagreement (misstatement) Material –
Inappropriate application of standard
3. Disagreement (misstatement) – adverse
Inappropriate selection of standard
4. Added paragraph: Material Uncertainty – unqualified
Related to Going Concern
5. Disagreement (misstatement) Material –
Inappropriate disclosure
6. Disagreement (misstatement) Material and pervasive –
Inappropriate selection of standard
7. Insufficient appropriate evidence Material –
Scope limitation
8. Disagreement (misstatement) – except for
Inadequate disclosure/inappropriate application
Explanatory material
No. Nature Material and/or pervasive Opinion
Nature relates to whether the Material and NOT pervasive OR material AND pervasive has a direct
misstatement is either a influence on the audit opinion concluded on.
disagreement misstatement (i.e.
we have obtained sufficient Therefore, if:
appropriate audit evidence to 1. Material and NOT pervasive then opinion will be a Qualified
conclude) OR scope limitation opinion (i.e. paragraph will include “except for” statement).
(i.e. we have NOT obtained 2. Material AND pervasive then opinion will be either Adverse
sufficient appropriate audit opinion (for disagreement) OR Disclaimer of an opinion (for
evidence to conclude). scope limitation).
41
Tutorial 6.2
GQ 15.5 [Cordon (Pty) Limited]

This is the tutorial you are required to hand-in for this topic.
Question
42
43
E. Summary
In this part of the Learner Workbook (LW) we look at the key principles and concepts that we have covered in
the topics we have studied.
1. Why does the auditor evaluate uncorrected misstatements?
Answer: Refer to ISA 450.3 as well as Chapter 6, page 6/12 of Auditing Notes for South African Students.
2. What must the auditor take into account when concluding on whether the auditor has obtained reasonable
assurance about whether the financial statements as a whole are free from material misstatement?
Answer: Refer to ISA 700.11 to 15 as well as Chapter 18, page 18/4 of Auditing Notes for South African
Students.
44
F. Glossary of key terms and related examples
<<<< Click here to access the glossary of

key terms in Blackboard >>>>
45
Related example (write down your own

Key term ISA definitions 4 examples based on your understanding of
the definition)
Misstatement Refer to ISA 450.4 (a) and Chapter 6, page 6/22 and Click or tap here to enter text.
7/24 of Auditing Notes for South African Students for the
definitions.
<<<< Click here to provide example on

Blackboard >>>>
Uncorrected Refer to ISA 700.7 (c) and Chapter 18, page 18/6 of Click or tap here to enter text.
misstatements Auditing Notes for South African Students for the
definitions.

Blackboard >>>>
Unmodified opinion Refer to ISA 450.4 (b) and Chapter 6, page 6/22 and Click or tap here to enter text.
7/24 of Auditing Notes for South African Students for the
definitions.

Blackboard >>>>
Key Audit Matter (KAM) Refer to ISA 701.8 and Chapter 18, page 18/21 of Click or tap here to enter text.
Auditing Notes for South African Students for the
definitions.

Blackboard >>>>
Pervasive Refer to ISA 705.5(a) and Chapter 18, page 18/12 of Click or tap here to enter text.
definitions.

Blackboard >>>>
Modified opinion Refer to ISA 705.5(b) and Chapter 18, page 18/10 of Click or tap here to enter text.
definitions.

Blackboard >>>>
Emphasis of Matter Refer to ISA 706.7 and Chapter 18, page 18/26 of Click or tap here to enter text.
paragraph Auditing Notes for South African Students for the
definitions.

Blackboard >>>>
Other Matter paragraph Refer to ISA 706.7 and Chapter 18, page 18/28 of Click or tap here to enter text.
definitions.

Blackboard >>>>
46

Learner Workbook (LW) - AUD3 - Evaluating Concluding and Reporting

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UFH Learner Workbook – Evaluating, Concluding and Reporting

FACULTY OF MANAGEMENT & COMMERCE

SCHOOL / PROGRAMME: Business & Enterprise

Course Title: Auditing and Governance (ADA)

Sections included in this LW: A. Overview

Name of Lecturer responsible for the topics: Ms Rebone Boikanyo

<<<< Click here to access the learning material on Blackboard >>>>

1 PPS is abbreviation for PowerPoint Show format

B. Where are we in the audit process?

Understanding the entity and its

C. Learning outcomes and assessment criteria

1. Evaluate the evidence and draw conclusions through the following:

a. Outlining the legal prerequisites to audit reporting on financial statements,

b. Describing the basic elements of audit reports on financial statements,

SAICA competency framework – explanation of:

Consequently, the candidate is required to have a knowledge and understanding –

Consequently, the candidate is required to have a knowledge and understanding –

Consequently, the candidate is required to have a knowledge and understanding of –

Level of proficiency: Level X – Completes the task

Level I – Initiates the task

• Basic quantitative & qualitative • Technical skills include complex

Knowledge level: Level 3 – Advanced

Questions Key terms

<<<< Click here to provide answer on

1.1. Audit principles and requirements

<<<< Click here for the slides >>>>

<<<< Click on the Pop-quiz heading to complete on Blackboard >>>>

2. Click or tap here to enter text.

In order to achieve the auditor’s objectives, we are required to do the following:

2. Consider identified misstatements as the audit progresses.

4. Evaluate the effect of uncorrected misstatements.

5. Request written representations from management.

6. Ensure audit documentation complies with the ISA requirements.

1.2. Practical application considerations

Trade and other receivables

Accumulation of misstatements identified during the audit

Financial statement line item Revenue - Operating lease income

Misstatements identified that are NOT clearly trivial (AFS amounts)

Misstatements identified that are NOT clearly trivial (Disclosure items)

Communication with management and TCwG

Communicate accumulated misstatements <<Finding ref>>

Management's corrections (AFS amounts)

Uncorrected misstatements (AFS amounts)

Uncorrected misstatements (AFS amounts)

Accumulation of misstatements identified during the audit

Financial statement line item Revenue - Finance Income

Misstatements identified that are NOT clearly trivial (AFS amounts)

Misstatements identified that are NOT clearly trivial (Disclosure items)

Communication with management and TCwG

Management's corrections (AFS amounts)

Uncorrected misstatements (AFS amounts)

Uncorrected misstatements (AFS amounts)

Accumulation of misstatements identified during the audit

Financial statement line item Other receivables (VAT receivables)

Misstatements identified that are NOT clearly trivial (AFS amounts)

Misstatements identified that are NOT clearly trivial (Disclosure items)

Communication with management and TCwG

Communicate accumulated misstatements <<Finding ref>>

Management's corrections (AFS amounts)

Uncorrected misstatements (AFS amounts)

Uncorrected misstatements (AFS amounts)

Accumulation of misstatements identified during the audit