AUDI6211 Workbook

IIE Module Workbook AUDI6211
AUDITING 2A
AUDI6211
WORKBOOK 2024
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Table of Contents
Using this Workbook ....................................................................................................5

Introduction ..................................................................................................................6
1 What is an auditor? ...........................................................................................16
1.1 Different types of auditors .................................................................................17
1.2 The stakeholders involved in an audit...............................................................21
1.2. Assurance and non-assurance engagements ..................................................27
1. Introduction .......................................................................................................32
1.1 Duties and responsibilities of management and auditors..................................33
1.2. ISQM 1 - International Standard on Quality Control..........................................35
1.3 ISA220 - Quality Control for an Audit of Financial Statements .........................39
1.4 The Auditing Profession Act ..............................................................................40
1. Introduction .......................................................................................................82
2 Pre-engagement activities ................................................................................83
1 Definition and purpose of internal controls ......................................................110
2 Components of internal control .......................................................................113
3 Limitations of internal controls ........................................................................117
4 External auditor’s interest in internal controls .................................................118
1 Revenue and receipts cycle ............................................................................122
2 Purchases and payments cycle ......................................................................139
3 Inventory and production cycle .......................................................................153
4 The Human Resources cycle ..........................................................................169
5 The finance and investment cycle...................................................................184

Using this Workbook
This workbook has been developed to support your use of the prescribed material for
this module. There may be occasions when the prescribed material does not provide
sufficient detail regarding a particular idea or principle. In such instances, additional
detail may be included in the guide. This guide should not, however, be used as a
stand-alone textbook, as the bulk of the information that you will need to engage with
will be covered in the prescribed material. You will not pass this module if you only
use the module guide to study from.
Various activities and revision questions are included in the learning units of this
guide. These are designed to help you to engage with the subject matter as well as
to help you prepare for your assessments.

Introduction
Auditing 2A is the first time that you will encounter the subject of
auditing. The purpose of this module is to introduce you to the basic
principles of auditing theory and the audit process. We will examine
a range of business cycles as well as ethics relating to the auditing
profession.
Auditing is a very important aspect of your studying and working

career and is one of the four subjects that you will need to pass in
CTA in order to graduate and commence your articles. This entails
completing a learnership programme, which is known as a training
contract and is entered into with a registered training office.
Therefore, you should probably start thinking about which training
office you wish to serve your articles at. The accreditation of a
training office can either be in Commerce and Industry or in Public
Practice - there are rare cases where the training office is
accredited for both Training in Commerce and Industry and in
Public Practice. The most common of the two, is training in public
practice. This entails working at an audit firm and conducting audits,
hence the subject of auditing.
Auditing 2A consists of five learning units which will be completed

over the course of the semester.
Learning Unit 1 considers the need for an audit in today’s global

environment and the objectives of the auditor and an audit. The
difference between an Assurance and a Non-Assurance
engagement is explained and the concept of a Financial Statement
audit engagement is also discussed.
Learning Unit 2 moves on to discuss some of the ways in which the
auditing profession of today is regulated. Students are introduced to
some of the key sections of:
• The APA of 2005;
• The Codes of Professional Conduct and
• ISQM 1 and ISA220
Learning Unit 3 is fundamental. It discusses each stage of the

audit process in detail and lays the foundation which will be further
built on in your future auditing studies.
Learning Unit 4 explains the theory of internal control and
highlights the fact that it is a very important aspect of corporate
governance. The following areas are studied in this topic:
• The definition of internal control and internal control objectives;
• The inherent limitations of any system of internal control;

• The five components of any system of internal control, namely

the control environment, the risk assessment process, the
information system, control activities and the process of
monitoring the controls;
• Controls in a computerised environment, namely general and
application controls; and finally
• Internal control from the perspective of the external auditor.
Learning Unit 5 focuses on one of management’s objectives which

is to ensure that their company’s financial reporting is reliable,
which is achieved by the accounting system, together with internal
controls.
You will be introduced to the ideal accounting system which
consists of various business cycles, namely:
• The revenue and receipts cycle;
• The acquisitions and payments cycle;
• The inventory and production cycle;
• The payroll and personnel cycle; and
• The finance and investment cycle.
Auditing is like a puzzle which we need to piece together, this is the

start of your journey in piecing together that puzzle.

Module Resources
Prescribed Book for Auditing Fundamentals in a South African context, von
this Module Wielligh & Prinsloo. Second edition. Oxford University
Press Southern Africa. (PM1)
ISBN: 9780190749040
and
Auditing Fundamentals in a South African context,
Graded Questions, Hamel & Kunz. Third edition.
Oxford University Press Southern Africa. (PM2)
ISBN: 9780190738587
Please note that this module workbook is intended to

support your learning – the content of this module
should be sourced from the prescribed material. You
will not succeed in this module if you focus on this
module guide only.
Recommended Auditing Profession Act (2005)
Additional Reading SAICA Code of Professional
Conduct
Module Purpose
The purpose of this module is to introduce you to the basic principles of auditing
theory and the audit process. You will examine a range of business cycles as well
as ethics relating to the auditing profession.
Module Outcomes
MO1 Demonstrate knowledge and understanding of the principles of the
auditing profession.
MO2 Demonstrate an understanding of the regulatory processes and
professional ethics in the profession and the role of the auditor within this
environment in the South African context.
MO3 Demonstrate and apply an understanding of the principles of the audit
process.
MO4 Demonstrate knowledge and understanding of the internal control
environment in a business.
MO5 Apply the principles of sound internal controls within the five business
cycles of an organisation.

Module Pacer and

Assessments
Week Theme Textbook
reference
Week 1
Sessions: 1 – 3
Learning Unit 1 Introduction to auditing
Related LO1: Describe the auditing profession; Chapter 1

Outcomes: MO1 LO2: Describe the stakeholders;
involved in an audit of financial
statements;
LO3: Describe the roles of an auditor;
LO4: Describe the different types of
auditors;
LO5: Describe the professional
accounting bodies in South
Africa;
LO6: Describe the distinction between
assurance and non-assurance
engagements
LO7: Identify the users of audited
financial statements
LO8: Identify the uses of audited
LO9: Describe the overall objectives of
the Independent Auditor in terms
of their conduct of an Audit in
Accordance with International
Standards on Auditing.
LO10: Describe the
management assertions;
LO11: Apply the use of
management assertions to
classes of transactions;
LO12: Apply the use of
management assertions to
account balances.

Week 2
Sessions: 4 – 6
Learning Unit 2 Regulation of the auditor
Related LO1: Discuss the duties and Chapter 2 and

Outcomes: MO2 responsibilities of Chapter 3
management and the auditor.
LO2: Apply the principles of quality
control at the firm level in terms
of ISQM 1 - International
Standard on
Quality Control
Week 3
Sessions: 7 – 9
Related LO3: Apply the principles of quality Chapter 2 and

Outcomes: MO2 control on an audit in terms of Chapter 3
ISA 220 - Quality Control for an
Audit of Financial Statements;
LO4: Apply the principles from
the introduction of the
Auditing Profession Act;
Chapter I (including definitions)
of the Auditing Profession Act;
Chapter III, section 22 and 37-
40 of the Auditing Profession
Act;
Chapter IV, sections 41, 44, 45,
46 of the Auditing Profession
Act.
Week 4
Sessions: 10 – 12
Related LO8: Apply the principles of the Chapter 2 and

Outcomes: MO2 SAICA Code of Professional Chapter 3
Conduct: Part 1 – 4;
LO9: Apply the principles of the IRBA
Code of Professional
Conduct: Part 1 – 4.

Week 5
Sessions: 13 – 16
Learning Unit 3 The audit process
Related LO1: Discuss the stages and flow of Chapter 11 and

Outcomes: MO3 an audit; Chapter 12
LO2: Apply to a given scenario
the principles of preliminary
engagement activities;
LO3: Identify the contents of an
engagement letter in terms of
ISA 210- Agreeing the Terms of
Audit Engagements.
Test 1 Learning Unit 1
and 2
Week Theme Textbook
reference
Week 6
Sessions: 17 – 19
Learning Unit 3 The audit process
Related LO4: Discuss planning in the context Chapter 11 and

Outcomes: MO3 of an audit; Chapter 12
LO5: Discuss responding in the
context of an audit;
LO6: Discuss concluding in the context
of an audit.
Week 7
Sessions: 20 – 22
Learning Unit 4 Internal control concepts
Related LO1: Describe the definition of Chapter 4

Outcomes: MO4 internal controls;
LO2: Describe the purpose of
internal controls;
LO3: Describe the five components
of internal control;
LO4: Describe the limitations of
internal control;
LO5: Discuss the external auditor’s
interest in internal controls.

Week 8
Sessions: 23 – 25
Learning Unit 5 Business cycles – Revenue and
Receipts Cycle
Related Chapter 6
Outcomes: MO5 LO1: Explain the revenue and
receipts cycle;
LO2: Describe weaknesses in a
given scenario relating to the
revenue and receipts cycle;
LO3: Describe the risks in a given
scenario relating to the
LO4: Describe recommendations in
a given scenario relating to
the revenue and receipts
cycle.
Week 9
Sessions: 26 – 28
Learning Unit 5 Business cycles - Acquisition and
Payments Cycle
Related Chapter 7
Outcomes: MO5 LO5: Explain the acquisition
and payments cycle;
acquisition and payments cycle;
scenario relating to the
LO8: Describe recommendations in a
acquisition and payments
cycle.
Test 2 Learning Units 1
–4

Textbook
Week Theme
reference
Week 10
Sessions: 29 – 31
Learning Unit 5 Business cycles – Inventory and Chapter 8
Production Cycle
Related Outcomes:
MO5 LO9: Explain the inventory
and production cycle;
inventory and production
cycle;
scenario relating to the inventory
and production cycle;
inventory and production cycle.
Week 11 – 12
Sessions: 32 – 34
Learning Unit 5 Business cycles – Payroll and
Personnel Cycle, Finance and
Related Investment Cycle Chapter 9 and
Outcomes: MO5 Chapter 10
LO13: Explain the payroll and personnel

cycle;
LO14: Describe weaknesses in a given
scenario relating to the payroll
and personnel cycle;
scenario relating to the payroll
and personnel cycle;
payroll and personnel cycle;
LO17: Explain the finance and
investment cycle;
LO18: Describe weaknesses in a given
scenario relating to the finance
and investment cycle;
scenario relating to the finance
and investment cycle;


given scenario relating to
the finance and investment
cycle.
Week 13
Sessions: 3
Learning Units 1 – 5 Revision of all learning units All of the above
Study leave

Assessments
Integrated Curriculum Engagement (ICE)
Minimum number of ICE activities to complete 4
Weighting towards the final module mark 10%
Formatives Test 1 Test 2

Weighting 20% 20%
Duration 1 hour 1 hour
Write/Submit after After session 14 After session 28
Learning Units covered LU1 – 2 LU1 – 4
Resources required None None
Summative Examination
Weighting 50%
Duration 3 hours
Total marks 180
Open/Closed book Closed book
Resources required None
Learning Units covered LU1 – 5

Learning Unit 1: Introduction to auditing

Learning Objectives: My notes
LO1: Describe the auditing profession;
LO2: Describe the stakeholders involved in an audit of
financial statements;
LO3: Describe the roles of an auditor;
LO4: Describe the different types of auditors;
LO5: Describe the professional accounting bodies in
South Africa;
LO6: Describe the distinction between assurance and
non-assurance engagements;
LO7: Identify the users of audited financial statements;
LO8: Identify the uses of audited financial statements;
LO9: Describe the overall objectives of the Independent
Auditor in terms of their conduct of an Audit in
Accordance with International Standards on Auditing;
LO10: Describe the management assertions;
LO11: Apply the use of management assertions to classes of
transactions;
LO12: Apply the use of management assertions to account
balances.
Material used for this learning unit:
Auditing fundamentals in a South African context, Chapter1
SAICA (www.saica.co.za) and IRBA (www.irba.co.za)
Prescribed material used for this learning unit:
Auditing fundamentals in a South African context, Chapter1
1 What is an auditor?
I am sure you are all aware of the big four audit firms;
PricewaterhouseCoopers, Ernst and Young, Deloitte and KPMG.
You may even already be aspiring to do your articles at one of
these. But what do they (specifically the auditors) actually do?
Is the main job of an auditor to uncover fraud and put these criminals
behind bars? Do auditors only verify the results of competitions? Do
auditors merely prepare and sign financial statements? Or do they
sit in company’s board rooms and tick and bash hundreds of
invoices and payments everyday all day?

Image source: http://quotesgram.com/img/auditor-funny-quotes-about-

it/10135038/ - Last visited 05/12/2022
An auditor is an individual or individuals who conduct an audit, they

obtain reasonable assurance that the financial statements of a
company are free from material misstatement. What does this all
mean? We will explore this throughout Auditing 2A (AUDI6211).
1.1 Different types of auditors
When we hear the word “auditor” we automatically think of an

individual that evaluates the validity of financial records of a
business, however there are other types of auditors.
Read Auditing
Read and
Fundamentals in a
answer South African Context
(page 20) and jot down
some facts about these
types of auditors.
Internal auditor:
Government auditor:

Forensic auditor:
External auditor:
Research if there are

Research any other types of
auditors in addition to
the identified auditors
above. Share your list
and descriptions with
your classmates.
Note: We will be focussing on external auditors and external

auditing in this module …Why?
1.1) The auditing profession

Some of the accounting bodies in South Africa that you may come
across in your studies are as follows:
• The South African Institute of Chartered Accountants (SAICA)
• Independent Regulatory Board of Auditors (IRBA)
• Chartered Institute of Management Accountants (CIMA)
• Association of Chartered Certified Accountants (ACCA)
• South African Institute of Professional Accountants (SAIPA)
We will pay special attention and focus on two of these bodies,

namely SAICA and IRBA.

What is SAICA’s mission? According to the South African Institute

of Chartered Accountants (2020),
“Purpose: Developing responsible leaders for a changing future
Main objectives:
• Promote the interests of SAICA members;
• Support the development of the South African economy and
society.
SAICA’s strategy supports the achievement of its purpose and has

six pillars:
1. Continued relevance of the accountancy profession
2. Delivering better member value and offerings that will see our
members remain relevant and in high demand in the
marketplace
3. Growth and transformation of the accountancy profession in
terms of race and gender and in line with the overarching
national agenda
4. Growing the Institute’s thought leadership standing, both
locally and internationally, through technical excellence and a
more robust stakeholder engagement focus
5. Making a quantifiable social contribution through nation
building initiatives, thereby contributing to the global
Sustainable Development Goals (SDGs)
6. Sustainability of the profession through the attraction and
retention of new members”
How do you become a SAICA member?

• Complete your three-year undergrad Bachelor of Accounting degree
• Complete your CTA (certificate in the theory of accounting)
• Complete three years of traineeship with a registered office
• Write and pass the ITC (initial test of competence)
• Write and pass the APC (Assessment of professional competence)
• You may then register with SAICA to use the designation of CA(SA)
What is IRBA’s mission? According to the Independent Regulatory

Board for Auditors (2019)
“Our mission is to endeavour to protect the financial interest of the
South African public and international investors in South Africa
through the effective regulation of assurance conducted by
registered assurance providers in accordance with internationally
recognised standards and processes.”

What does IRBA do? According to the Independent Regulatory

Board for Auditors (2019),
“The function of the IRBA is to help create an ethical, value-driven
financial sector that encourages investment, creates confidence in
the financial markets and promotes sound practices by:
• Developing and maintaining auditing and ethics standards that
are internationally comparable.
• Providing an appropriate framework for the education and
training of properly qualified auditors and their on-going
competence.
• Registration of auditors who meet the registration requirements.
• Monitoring registered auditors’ compliance with professional standards.
• Investigating and taking appropriate action against registered
auditors in respect of improper conduct.
• Developing and maintaining stakeholder relationships to
enhance performance, accountability and public confidence.”
How do you become an IRBA member?

• After qualifying as a CA(SA) you will need to participate in the
Audit Development Programme (ADP)
• The ADP is a specialisation period, and it takes a minimum of
18 months. You must undergo this period at an auditing firm
that is registered with the IRBA. This means that you become
a specialist as an auditor.
• You will be allowed to sign audit opinions only once you have
successfully completed this ADP and registered with the
IRBA.

Read Auditing Fundamentals

in a South African
Context pp.26 – 29
1.2 The stakeholders involved in an audit
Read Auditing Fundamentals

Read and
in a South African Context
answer
(pp.5 – 13) and complete the
roles of the various parties
involved in an audit:
The practitioner/Auditor:
The Shareholders:
Directors:
Answer:
• The practitioner/Auditor – Obtaining audit evidence to give
reasonable assurance to the shareholders regarding the fair
presentation of the financial statements. They issue the audit
opinion.
• The Shareholders – They are the owners of the business and
provide the finance for the business and receive the audit
report.
• Directors – Appointed by the shareholders and are
responsible for running the company and preparing the
financial statements that the auditor audits and the
shareholders receive.
1.2) Purpose and objectives of the auditor and the audit

A question posed at the beginning of the module guide was, what
do auditors actually do? Put in another way, what is the purpose of
an auditor and therefore an audit?

Before we can understand the purpose of an auditor and an audit, let

us go back to the definition of an auditor:
An auditor is an individual or
individuals who conduct an audit, they
Recap
obtain reasonable assurance that the
financial statements of a company are
free from material misstatement.
Therefore, it can be seen that an audit is conducted on a set of

financial statements (which are produced from accounting records).
So surely there cannot be an audit without a set of financial
statements/accounting records to audit.
Read p.6, section

Read and 1.2.1.2 and p.8, section
answer 1.3.1 of Auditing
Fundamentals in a
South African Context
as well as doing your
own research and jot
down some of the
needs/uses of
accounting records.
Who is responsible for the accounting

records and financial statements?
_______________________________
Recap _______________________________
But who are the owners of the company and therefore rely on the
financial statements for the purpose of assessing their investment?
_______________________________________________________

THEREFORE, THERE IS A NEED FOR AN INDEPENDENT

PERSON TO REVIEW THE CREDIBILITY OF THE FINANCIAL
STATEMENTS…THE AUDITOR
According to the International Standard on Auditing 200 (ISA200,
paragraph 11), the objective of an auditor is:
“To obtain reasonable assurance about whether the financial
statements as 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”
In other words:
• Our responsibility is to express an opinion (Audit report)
• About whether or not management have fairly presented the
financial statements in terms of the accounting standards
But how do we express this opinion on whether or not the financial

statements fairly present? (How do the scientists on CSI prove who
murdered the victim?) By obtaining evidence … audit evidence, in
this case.
But what do we obtain audit evidence about to help us formulate an

opinion on the fair presentation of financial statements?
Refer to Auditing
Fundamentals in a South
Class and African Context, p.XXXViii,
group The statement of financial
discussion position of Ntsimbi
Proprietary Limited: how will
you determine if Property,
Plant and Equipment of R43
169 987 is fairly presented in
terms of the financial
reporting framework?
What about revenue on p.XXXiX of R128 320
126?

We need to look at these line items in terms of assertions – assertions are

representations made by management.
According to the International Standard on Auditing 315 (ISA315,

paragraph a (a)), assertions are described as:
Representations by management, explicit or otherwise, that are
embodied in the financial statements, as used by the auditor to
consider the different types of potential misstatements that may
occur.
ASSERTIONS are claims and representations made by the

management responsible for the preparation of financial
statements regarding the appropriateness of the various
elements of financial statements and disclosures.
Basically, when management presents the Property, Plant and
Equipment for an amount of R43 169 987. They are claiming the
following:
• The assets exist (existence);
• The assets belong to the entity (rights);
• The assets have been recognised at the correct amount
(accuracy, valuation and allocation);
• All the assets that should have been recognised, have been
recognised (completeness);
• The assets have been recorded in the proper account (classification);
• The assets have been presented and disclosed in accordance
with the applicable financial reporting framework.
(presentation).
Existence
Rights
The vehicles (assets)
Ntsimbi holds or
exists at the date of the
controls the rights to
financial statements.
the vehicle (asset)
reflected in the
Accuracy, Valuation
and Allocation
Completeness
The vehicles (assets) is
All vehicles (assets) included in the financial
that should have been statements at the correct
recorded and included amount and any
in the financial adjustments to the
statements have been valuation have been
recorded and included. appropriately recorded.
Presentation
Classification
All vehicles (assets) have been appropriately
All vehicles (assets) have been
presented and disclosed in compliance with the
recorded in the correct account.
reporting framework.

Completeness Cut-off
All revenue that should Revenue has been
have been recorded recorded in the correct
and included in the accounting period.
have been recorded
and included.
Occurrence
The revenue that has
Accuracy been recorded in the
Revenue has been
has actually occurred
recorded at the
during the financial
appropriate (correct)
year and relates to
amounts.
Ntsimbi.
Classification Presentation
Revenue has been Revenue has been
recorded in the proper appropriately presented
accounts. and disclosed in
compliance with the
reporting framework.

What is the difference between the vehicle (asset) and revenue?

Why do they have different assertions? This is because assertions
are classified into three categories:
• Assertions relating to classes of transactions and related disclosures.
• Assertions relating to account balances and related disclosures.
• Assertions about other disclosures. (To be covered later in your studies)
List some examples of

Activity classes of transactions
and list some
examples of account
balances. Share these
with your classmate
sitting next to you and
expand your list.
Classes of transactions Account Balances

Study Page 10, Table

1.1 of Auditing
Fundamentals in
a South African
Context
1.2. Assurance and non-assurance engagements
You have now heard about the concept “reasonable assurance”

when we looked at the objective and definition of an auditor. What
does it mean?
Basic definition of assurance: Intended to give/enhance confidence.

Therefore, as an auditor’s objective is to give reasonable
assurance, this therefore means that the auditor’s report enhances
the degree of confidence of the intended users in the financial
statements.
It must be noted however, that we CANNOT give ABSOLUTE

assurance that any set of financial statements are free from
misstatement. Why? Because there are certain inherent limitations
of an external audit.
Read and Refer to Auditing

Fundamentals in a
answer
South African
Context, pp.5 – 16
and describe some
of these inherent
limitations:

Therefore, the highest level of assurance that an auditor can give is

reasonable assurance – and the way an auditor can obtain this
reasonable assurance is by conducting an audit of financial
statements.
The following needs to be present for an assurance engagement to exist:

1) Three party relationship –
o Practitioner (auditor) who is appointed by the shareholders;
o Responsible party (management) that prepare the financial Statements;
o Intended users (shareholders).
2) Appropriate subject matter – For example: financial statements
3) Suitable criteria – For example: International financial
reporting standards (IFRS)
4) Evidence – The auditor needs to obtain sufficient and
appropriate audit evidence to support their opinion on the
5) Assurance report – The written audit report
What happens if one of these elements is missing? Then it is not an

assurance engagement, but rather a non-assurance engagement.
Basic definition of a non-assurance engagement: No opinion is

expressed. Some examples are compiling financial statements,
consulting, agreed upon procedures, etc.
Now that you have

been introduced to
Class auditing, who auditors
discussion are, what they do and
their main objectives,
let us look at some
real-life examples of
auditing and where it
has gone wrong. Refer
to pp.21 – 26 of
Auditing Fundamentals
in a South African
Context

Exam type questions

Question 1
ABC Limited is a shoe manufacturer; they supply shoes to all the
large retail shops around South Africa. Its year-end is 31
December 2023. Management of ABC Limited has approached
KPC Auditors Inc to conduct its 2023 audit of their annual
financial statements. The shareholders of ABC Limited require
the audit report by 30 March 2024.
Required:
Is this an assurance or non-assurance engagement? Justify your answer. (13)
Question 2
The following line item appeared on the statement of financial
position of ABC Limited for the year ended 31 December 2023:
Accounts Receivable: R56 700 890
The audit partner has requested that you test the following assertions for this line item:
Occurrence – Ensure that the Accounts Receivable exists as at 31
December 2023
Completeness – Ensure that all Accounts Receivable that should
have been recorded and included in the financial statements have
been recorded and included
Accuracy – Ensure that Accounts Receivable is recorded at the correct amount

Required:
Do you agree with your partner’s request? Justify your answer. (10)
Question 3
Smart Ltd is a listed company and is required to be audited as part
of the JSE Regulations. Mr C Sithole is the company’s CEO and is
interested in complying with these JSE regulations and would like
assistance with understanding the following:
• Why is there a need for the company to be audited?
• Which kind of auditor would the company need to get?
• Would this be an assurance or non-assurance engagement?
State and explain criteria.
Required:
Write an email to Mr C Sithole addressing his queries listed above. (10)

Homework
Ensure you can answer the assessment questions on pp.29 – 30 of Auditing
Fundamentals in a South African Context.
Auditing Fundamentals in a South African Context, graded questions Chapter 1,
Question 1

Learning Unit 2: Regulation of the auditor

LO1: Discuss the duties and responsibilities of management
and the auditor;
LO2: Apply the principles of quality control at the firm level in
terms of ISQC 1 - International Standard on Quality
Control;
LO3: Apply the principles of quality control on an audit in terms
of ISA 220 - Quality Control for an Audit of Financial
Statements;
LO4: Apply the principles from the introduction of the Auditing
Profession Act;
LO5: Apply the principles from Chapter I (including definitions)
of the Auditing Profession Act;
LO6: Apply the principles from Chapter III, section 22 and 37-
40 of the Auditing Profession Act;
LO7: Apply the principles from Chapter IV, sections 41, 44, 45,
46 of the Auditing Profession Act;
LO8: Apply the principles of the SAICA Code of Professional
Conduct: Part 1 – 4;
LO9: Apply the principles of the IRBA Code of Professional
Conduct: Part 1 – 4.
Auditing fundamentals in a South African context, Chapter 2
and 3 SAICA Student Handbook 2018/2019, Volume 2A(1),
2B, 2C
and 3
1. Introduction
What you should be familiar with by now is the fact that auditors are
appointed by the owners of the entity to enhance the confidence in
the financial statements that are produced by the management of an
entity. Therefore, auditors are in a position of trust and for the benefit
of public interest. Due to the level of responsibility and public interest
in an auditor’s work, auditors and audit firms need to be regulated
to ensure high standards are met and maintained.
In this learning unit, we will start to look at some of the regulations
in place to govern the auditing profession.

Let us have a look at

Class Auditing Fundamentals
discussion regulations are in a
South African Context,
p.32 to illustrate how
serious these
1.1 Duties and responsibilities of management and auditors
To explain this section, we are going to look at the paragraphs

contained in the audit report from International Standards on
Auditing, ISA700 (revised), (2017) – Appendix
– Illustration 1.
“Responsibilities of Management and Those Charged with

Governance for the Financial Statements”
Management is responsible for the preparation and fair presentation
of the financial statements in accordance with the IFRSs, and for
such internal control as management determines is necessary to
enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible
for assessing the Company’s ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and
using the going concern basis of accounting unless management
either intends to liquidate the Company or to cease operations, or
has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the
Company’s financial reporting process.”
“Auditor’s Responsibilities for the Audit of the Financial Statements”

Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor’s report that includes our opinion. Reasonable assurance is a
high level of assurance but is not a guarantee that an audit
conducted in accordance with ISAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with ISAs, we exercise
professional judgment and maintain professional scepticism
throughout the audit. We also:
• Identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, design and
perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to

provide a basis for our opinion. The risk of not detecting a

material misstatement resulting from fraud is higher than for
one resulting from error, as fraud may involve collusion,
forgery, intentional omissions, misrepresentations, or the
override of internal control.
• Obtain an understanding of internal control relevant to the audit
in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control.
• Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimates and related
disclosures made by management.
• Conclude on the appropriateness of management’s use of the
going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt
on the Company’s ability to continue as a going concern. If we
conclude that a material uncertainty exists, we are required to
draw attention in our auditor’s report to the related disclosures
in the financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based
on the audit evidence obtained up to the date of our auditor’s
report. However, future events or conditions may cause the
Company to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the
financial statements, including the disclosures, and whether
the financial statements represent the underlying transactions
and events in a manner that achieves fair presentation.
• We communicate with those charged with governance
regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any
significant deficiencies in internal control that we identify during
our audit.
• We also provide those charged with governance with a
statement that we have complied with relevant ethical
requirements regarding independence, and to communicate
with them all relationships and other matters that may
reasonably be thought to bear on our independence, and
where applicable, related safeguards.
• From the matters communicated with those charged with
governance, we determine those matters that were of most
significance in the audit of the financial statements of the
current period and are therefore the key audit matters. We
describe these matters in our auditor’s report unless law or
regulation precludes public disclosure about the matter or
when, in extremely rare circumstances, we determine that a
matter should not be communicated in our report because the

adverse consequences of doing so would reasonably be

expected to outweigh the public interest benefits of such
communication.”
From the above

Activity extracts of the audit
report and from further
research of ISA200,
summarise the
responsibilities of
management and those
of the auditor
Responsibilities of management
Responsibilities of the auditor
1.2. ISQM 1 - International Standard on Quality Management
As mentioned previously, the theme of this learning unit is the

regulation of the auditor to ensure that professional and ethical
standards are upheld due to the office of trust that auditors hold.
ISQm 1 is a standard that deals with the firm’s responsibilities for its
system of quality control for audits, reviews and other assurance
engagements.

According to the International Standard on Quality Control (ISQM1)

(2020), its objective is the following:
The firm must design, implement and operate a system of quality

management for audits or reviews of financial statements, or other
assurance or related services engagements performed by the firm,
that provides the firm with reasonable assurance that:
• The firm and its personnel fulfil their responsibilities in
accordance with professional standards and applicable legal
and regulatory requirements, and conduct engagements in
accordance with such standards; and
• Engagement reports issued by the firm or engagement
partners are appropriate in the circumstances.
The next question we need to ask is, what must this system contain?
According to the International Standard on Quality Control (ISQM 1)

(2020), this system must address the following eight components:
Component Description
A firm’s risk assessment process • The firm shall design and
implement a risk assessment
process to establish quality
objectives, identify and assess
quality risks and design and
implement responses to address
quality risks.
Governance and leadership • The firm shall demonstrate a
commitment to quality through its
culture.
• Recognising and reinforcing the
firm’s role in serving the public
interest and the importance of
quality in the firm’s strategic
actions and decisions.
• Recognising and reinforcing the
roles, responsibility and
accountability of leadership.
Relevant ethical requirements • The firm shall establish the following
quality control objectives that
address the fulfilment of
responsibilities including with
relevant ethical requirements,
including those related to
independence.
o The firm and its personnel
and others understand the

relevant ethical requirements

and fulfil their responsibilities
in relation to the relevant
ethical requirements.
Acceptance and continuance of clients • The firm shall establish quality
relationships and specific engagements control objectives that address the
acceptance and continuance of
client relationships and specific
engagements.
Engagement performance • The firm shall establish quality
control objectives that address the
performance of quality
engagements.
Resources • The firm shall establish quality
objectives that address
appropriately obtaining,
developing, using, maintaining,
allocating and assigning resources
in a timely manner to enable the
design, implementation and
operation of the system of quality
management:
Information and communication • The firm shall establish the
following quality objectives that
address obtaining, generating or
using information regarding the
system of quality management,
and communicating information
within the firm and to external
parties on a timely basis to enable
the design, implementation and
operation of the system of quality
management
The monitoring and remediation • The firm shall establish a
process monitoring and remediation
process to:
o Provide relevant, reliable
and timely information
about the design,
implementation and
operation of the system of
quality management.
o Take appropriate actions to
respond to identified
deficiencies such that
deficiencies are remediated
on a timely basis.

Obtain and research

Research ISQM 1 and add any
further notes you
deem necessary to the
above summary.

1.3 ISA220 - Quality Control for an

Audit of Financial Statements
While ISQM 1 deals with the firm’s responsibilities for its system of
quality control, ISA220 deals with specific responsibilities of the
auditor regarding quality control procedures for an audit of financial
statements.
According to the International Standard on Auditing 220 (ISA 220)

(2019), its objective is the following:
Implement quality control procedures at the engagement level that
provide the auditor with reasonable assurance that:
• Audit complies with professional standards and applicable
legal and regulatory requirements; and
• Report issued is appropriate in the circumstances.
According to the International Standard on Auditing 220 (ISA 220)

(2019), the requirements for the system of quality control are as
follows:
Element/Requirement Description
Leadership responsibilities for quality on • Engagement partner takes
audits responsibility for the overall quality
of the audit they are assigned to
Relevant ethical requirements Independence
• Obtain info on the firm and network
firms to identify and evaluate
relationships.
• Evaluate information on identified
breaches.
• Take appropriate action to eliminate
the threat or reduce to an
acceptable level – safeguards.
Acceptance and continuance of client • Partner shall determine that
relationships and audit engagements appropriate procedures have been
formed and an appropriate
conclusion reached.
• If information is obtained later that
would have prevented us from
accepting the client – this needs to
be communicated to the firm so
appropriate action can be taken.

Assignment of engagement teams • Partner to determine that the team

has the appropriate competencies
and capabilities to:
o Perform the audit in terms of the
standards and laws;
o Enable to report appropriately in
circumstances
Engagement performance • Direction, supervision, performance
– engagement partner’s
responsibility.
• Reviews – Partner to do this to
ensure sufficient appropriate audit
evidence to support the opinion.
• Consultation – Consult when
needed and ensure satisfied with
conclusions
• Engagement quality control review
– Second review of file if needed
(Listed, risky)
Monitoring • To ensure the policies and
procedures are relevant, adequate
and operating effectively.
Research Obtain and research

ISA220 and add any
further notes you deem
necessary to the above
summary.
1.4 The Auditing Profession Act
Towards the end of Learning Unit 1, we looked at some real-life

examples of where auditors did not fulfil their responsibilities and
therefore, we were able to see the loss and devastation that ensued
thereafter. These types of contraventions reduce the credibility of
the work of auditors, and this could have disastrous effects.
Therefore, it is crucial that auditors are regulated and that there are
consequences for non-compliance with these regulations. This is
where the Auditing Profession Act has an important role to play.
Chapter I – Interpretations and
objects of the Act Section 2 –
Objects of the Act
To start this section, it is important that you understand the objects

of the Act, why it is in existence. According to the Auditing
Profession Act (2005):
• To project the public by regulating audits

• It provides for the establishment of an Independent

Regulatory Board for Auditors (IRBA – Where did you learn
about them before?)
• To improve the development and maintenance of
internationally comparable ethical standards and auditing
standards
• To set out measures for the implementation of these standards and ethics
• To provide for procedures for disciplinary procedures for any misconduct
Section 1 – Definitions
Obtain a copy of the

Research Auditing Profession Act
and answer (2005) and look up the
following definitions.
Then write down these
definitions in your own
words to ensure you
understand them.
Improper conduct:
Management board:
Professional body:
Public Accountant:
Registered Auditor (RA):

Chapter II – Independent Regulatory

Board for Auditors Section 22 –
Committee for auditing standards
According to the Auditing Profession Act (2005), this board must

consist of at least the following members:
• Five registered auditors
• One person with experience of business
• Holder of office of the Auditor General
• Holder of office of the executive officer of the Financial Services Board
• One person with experience in teaching auditing at a university
• One person nominated by any stock exchange
• Commissioner of the South African Revenue Services
• Holder of office of the Registrar of Banks
What does this committee do? According to the Auditing Profession

Act (2005), they assist IRBA:
• To develop, maintain, adopt, issue or prescribe auditing pronouncements
• Monitoring developments and sharing information with other standard setting
boards
• To promote and ensure the relevance of auditing pronouncements
Chapter III – Accreditation and Registration

Section 37 – Registration of individuals as registered auditors
According to the Auditing Profession Act (2005), the following has to

be satisfied before an individual can be registered:
• Complied with the prescribed education, training and competency requirements
• Arranged for continuing professional development if not a
member of an accredited professional body
• Resident in SA
• Fit and proper person
• Met additional requirements under section 6 (IRBA’s conditions for registration)
According to the Auditing Profession Act (2005), the regulatory

board may not register an individual as a RA if that individual:
• Has been removed from an office of trust due to misconduct
• Has been convicted of theft, fraud etc…and has been
sentenced to imprisonment without the option of a fine or a
fine exceeding a prescribed amount
• Declared by the court to be of unsound mind or unable to manage his own affairs
• Disqualified under another sanction of the Auditing Profession Act

Section 38 – Registration of firms as registered auditors

According to the Auditing Profession Act (2005), the only firms that
may become registered auditors are:
• Partnership of which all the partners are RA’s
• Sole proprietors where the proprietor is a RA
• Companies which comply with the following:
o Incorporated and registered as a company
o Only RA’s are shareholders
o Every shareholder is a director and vice versa
o MOI must provide for certain conditions over voting and shares
Shareholders Directors Registered Auditor
Section 39 – Termination of registration of registered auditors
Research Research section 39 of

and answer the Auditing Profession
Act and identified why
registration of RA’s can
be terminated

Section 40 – Renewal of registration and reregistration

According to the Auditing Profession Act (2005):
• A registered auditor must apply in the prescribed manner to the
Regulatory Board for the renewal of his or her registration.
• A registered auditor whose registration was terminated or
cancelled may apply for re-registration in the prescribed
manner to the Regulatory Board.
Chapter IV – Conduct by and liability of

Registered Auditors Section 41 – Practice
According to the Auditing Profession Act (2005):
• Only a Registered Auditor may engage in public practice
• A person who is not registered in terms of this Act may not:
o Perform any audit (Why?)
o Pretend to be registered in terms of this Act
o Use the name of any Registered Auditor
o Perform any act that may lead persons to believe
he/she is registered in terms of this Act
Research How can a student who

and answer has just qualified with
their CTA perform
audits during their
articles? Read section
41 (2)(b).
Section 44 – Duties in relation to audit

According to the Auditing Profession Act (2005), a Registered
Auditor may not express an opinion that a set of financial statements
fairly presents in all material respects and is properly prepared in all
material respects in terms of the financial reporting standards unless
the Registered Auditor is satisfied regarding the following:
• The audit has been carried out free from restriction and as far
as possible in compliance with the auditing pronouncements
• The auditor has satisfied himself as to the existence of all
assets and liabilities shown on the financial statements
• That the accounting records have been kept in at least one of
the official languages
• That the Registered Auditor has obtained all information
deemed necessary for the proper performance of the audit
• That the auditor has not had the opportunity to report a reportable irregularity

• That the registered auditor has complied with all the applicable laws
• That the auditor is satisfied as to the fairness and correctness
of the financial statements
Remember Can you think of

an acronym for the
above duties?
What about
FIREROL?
Section 45 – Duty to report on irregularities
The following definition is very important and very topical in

tests and exams: This definition appears in the Auditing
Profession Act (2005):
Reportable irregularity (RI)
Any unlawful act or omission committed by any person responsible

for the management of an entity, which:
• Has caused/is likely to cause material financial loss, OR
• Fraudulent or amounts to theft, OR
• Represents a material breach of any fiduciary duty
Read Table 3.4 on

Read and p.04 of Auditing
take note Fundamentals in a
South African Context.
Add some of your
notes to the table
below to help you
study for the exam.
Definition Description/Explanation
An unlawful act or omission
Committed by any person responsible
for the management of an entity
Has caused/is likely to cause material
financial loss
Fraudulent or amounts to theft
Represents a material breach of any
fiduciary duty
For all questions relating to RIs, please ensure that you follow the above format –
definition and application.

You are the senior in

charge of the audit of
ABC Limited. While
Activity auditing the VAT
account you discovered
that ABC Limited has
been claiming input
VAT on fictitious
expenses to reduce
their VAT liability. The
financial director is
responsible for
preparing and
submitting these
returns.
Discuss whether or not the above situation would constitute a
reportable irregularity as defined by the Auditing Profession Act,
2005.
HINT: When answering this type of question, state the definition

first and then apply it to the scenario, remember to conclude as to
whether it is a reportable irregularity or not.

Solution:
A reportable irregularity
• is: Any unlawful act or omission – Claiming input VAT on fictitious expenses and
therefore falsifying the VAT returns is illegal as it is in contravention of the VAT
Act.
•
Committed by a person responsible for management of the entity – The financial
• director was preparing and submitting the VAT returns.
Which has caused or is likely to cause financial loss – SARS has suffered a
financial loss as they were paid less VAT and ABC Limited will incur penalties,
• fines and interest, which will cause a financial loss for ABC Limited, Or
• Is fraudulent or amounts to theft – They have stolen money from SARS, Or
Represents a material breach of fiduciary duty – The financial director was not
•
acting in the best interest of the company
Therefore, this is considered to be a reportable irregularity
So, then what is an auditor’s duty?
According to the Auditing Profession Act (2005), the individual registered auditor
who:
• Is satisfied or has reason to believe that
• A RI has taken or is taking place, MUST
• Without delay
• Send a report to IRBA giving the particulars of the RI and MUST
• Within three days, notify the management board of the entity in

writing, that a report has been sent and must give a copy of
the report to the management board
• As soon as reasonably possible (within 30 days of sending the report)
• Take all reasonable measures to discuss the report with the management board
• Afford the management board the opportunity to make
representations in respect of the report
• Send another report to IRBA stating:
o No RI has or is taking place; OR
o The suspected RI is no longer taking place and that
adequate steps have been taken for the prevention or
recovery of any loss; OR
o The RI is continuing.
What happens if the Registered Auditor does not report a reportable
irregularity?
• Civil claim
• Criminal claim (Jail)

Section 46 – Limitation of liability
According to the Auditing Profession Act (2005), an auditor

shall, in respect of any opinion expressed or report or
statement made:
• Incur no liability to a client or third party
• Unless it is proved that such opinion, report or statement was made
• Maliciously, fraudulently or pursuant to a negligent
performance of the auditor’s duties
• Where it is proved that the auditor was negligent:
o The auditor will only be liable to third parties if it is
proved that at the time of the negligent performance, the
RA knew or could reasonably be expected to have
known that:
▪ His client would use the opinion to induce a
third party to act or refrain from acting OR
▪ That the third party would rely on the report
etc. for the purpose of acting or refraining
from acting in some way
Can Auditors be liable to their clients? YES!

Breach of contract must be proved.
Now that we have

Read learnt about some of
the important
sections the Auditing
Profession Act, read
pages 99- 106 of
Auditing
Fundamentals in a
1.5 The Code of Professional South African
conduct
Context and add to
our notes above with
any other information
that you think is
necessary to know.
Homework:
Auditing Fundamentals in a South African Context, Chapter 3, Question 3 – Question 6

The Code of Professional conduct
Read the three articles starting

on p.32 and section 2.2.3 on
p.34 of Auditing Fundamentals
in a South African Context and
Read and discuss in groups why you think
discuss these acts are unethical?
What does the word ethics

mean to you?
Do you think it is unethical to

exceed the speed limit when
driving?
After learning what you have
learnt so far, why do you think
ethics is important in our
profession?
Part 1: Complying with the Code, Fundamental Principles

and Conceptual Framework
Fundamental Principles (Pp.44-46 of Auditing Fundamentals in a

South African Context)
Integrity Confidentiality
Objectivity Professional Professional
Behaviour competence
and due care

Publicity, advertising and solicitation
Multiple firms
Signing of reports or certificates
Independence Independence of mind and

(part of objectivity) appearance
Compliance with the fundamental principles supports the exercise of

professional scepticism!!!

Compliance with these fundamental principles are

threatened by the following threats:
Threats (p.47 of Auditing Fundamentals in a South African Context)
Self-interest Self-review Familiarity Advocacy Intimidation

threat threat threat threat threat

Get into four groups.

Each group will be
Group work assigned one of the
and following threats: self-
feedback interest, self-review,
intimidation and
familiarity. (We will do
advocacy as a class)
Refer to table on p.50 of
in a South African
Context and discuss
why the examples
under your threat are in
fact a threat. Each
group will then report
back on their findings.
Notes:

Evaluating and addressing the threats

If a threat to a fundamental principle is identified, the significance of
the threat needs to be determined. If the threat is above an
acceptable level, a safeguard needs to be implemented, if
appropriate.
An acceptable level is measured based on judgement and the
reasonable and informed third party test.
Is the threat at an
acceptable level?
Anything more than

Acceptable level
an acceptable level
1. Eliminate the
circumstances
creating the threat.
2. Apply safeguards Apply
3. Decline or end the safeguards
relationship
Created by the profession, Created in the

legislation or regulation work environment
• Education, training and

• Firm leadership
experience
• Policies and procedures
• Laws and regulations
(APA, Companies Act, • Documented policies
King Code etc) • Other…. (See p.53 of Auditing
• Professional standards Fundamentals in a South
(such as this one) African Context and add some
more)
• Disciplinary processes
(IRBA vs SAICA)
• External reviews

Part 2: Professional Accountants in Business

There are Professional accountants that leave the auditing
profession and work for companies (which are audited by the
auditors) in the role of for example financial managers, financial
directors, CFO’s etc. These Professional Accountants are called
Professional Accountants in business and are also bound by this
code. These Professional Accountants in business are generally
involved in the preparation of the financial statements that the
auditor audits.
The general threats for Professional Accountants in Business are the

same as for Chartered Accounts in Public Practice; Self-interest,
self-review, intimidation, etc.
If a threat is identified and is not at an acceptable level, safeguards

need to be implemented.
However, some of the specific threats and safeguards will be

different as the work done and relationship with the company is
different. That being said, some are the same… Let us consider
and compare holding shares in the Company:
Professional Accountant in Professional Accountant in

Public Practice Business
Threats
Safeguards
Study p.50 of
Study Auditing
Fundamentals in a
South African
Context, table 2.4
and figure 2.9

Section 210 – Conflicts of interest

A Professional Accountant shall not allow a conflict of interest
to compromise professional or business judgement nor allow
the conflict to create threats to the fundamental principles.
Read section 2.6.5.1 on

Read and p.50 of Auditing
jot down Fundamentals in a
South African Context,
and jot down some
conflicts that may arise.
Can you think of any
others?

Step 1 – What are the THREATS?

• Intimidation
• Self-interest
Step 2 – Which FUNDAMENTAL PRINCIPLES would these

threats be threatening?
• Objectivity (Independence)
• Integrity
• Professional competence and due care
Step 3: Assuming the threat is not at an acceptable level, what

SAFEGUARDS could be implemented?
• Get legal advice
• Consult with the audit committee/those charged with governance
• Restructuring or segregating certain responsibilities and duties
• Obtaining appropriate oversight (acting under the supervision
of a director)
Section 220 – Preparation and presentation of information

Refer to Learning Unit 1 and recap on the uses of financial
information. If we consider one of the important uses being that of
decision making, financial information needs to be accurate and a
fair representation of the financial position and performance of a
company.
Professional Accountants in business will be responsible for the

preparation of this financial information that needs to be accurate.
Therefore, once again it is essential that they comply with the
fundamental principles.
However, there may be certain instances that pressure is placed on

the Professional Accountant to issue false and misleading
information to enhance bonuses, share prices, etc.
A Professional Accountant shall:

• Prepare or present the information in accordance with a
relevant reporting framework
• Prepare or present the information in a way that it is not
misleading or manipulative
• Exercise professional judgement
• Not omit any information in order to mislead or manipulate the users
If the professional accountant is aware that the information is

misleading or manipulative, he must seek to resolve it. If he is
unable to resolve the misleading or manipulation, he must not be
associate with the information.


• Intimidation
• Self-interest

• Integrity
Step 3: Assuming the threat is more than at an

acceptable level, what SAFEGUARDS could be
implemented?
• Discussions with the audit committee
• Obtaining legal advice and possibly reporting it
• Refuse to be associated with the misleading information
Example Let us have a look at the

example on p.52 of
Auditing Fundamentals in
a South African Context
Section 230-250
Read The Code of Professional Conduct and complete the table below:
Paragraph Short Threats Fundamental Safeguards
description principle
Acting with
sufficient
expertise
Financial
interests
Inducements

Section 260 – Responding to non-compliance with

laws and regulations Non-compliance with laws and
regulations compromises of
• Acts (intentional or unintentional)
• Contrary to the prevailing laws or regulations
• Committed by the following parties:
o The professional accountant’s employing organisation
o Those charged with governance of the employing organisation
o Management of the employing organisation
o Other individuals working for or under the direction of
the employing organisation.
A distinguishing mark of the accountancy profession is its

acceptance of the responsibility to act in the public interest.
Therefore, Professional Accountants need to respond to non-
compliance or suspected non-compliance with laws and regulations
by any of the above-mentioned parties.
If non-compliance is identified or suspected, the company protocol

for this non- compliance must be followed. This would normally
mean reporting it to your superior, if they are not involved. The
professional accountant must also consider whether further action
is required for public interest. Legal advice may need to be obtained
depending on the severity and urgency and public interest of the
matter. Furthermore, it may need to be determined whether the non-
compliance needs to be reporting to an appropriate authority.

• Intimidation
• Self-interest
Step 2 – Which FUNDAMENTAL PRINCIPLES would these threats be threatening?

• Integrity
• Professional Behaviour
Example Let us have a look at

the example on p.58
of Auditing
Fundamentals in a
South African
Context

Section 270 – Pressure to breach the

fundamental principles A professional
Accountant shall not:
• Allow pressure from others to result in a breach of compliance
with the fundamental principles or,
• Place pressure on others to breach the fundamental principles.
This created an intimidation threat. Some examples of these pressures:

• Pressures related to conflicts of interest
• Pressures to influence preparation or presentation of information
• Pressure to act without sufficient expertise or due care
• Pressure related to financial interests
• Pressure related to inducements
• Pressure related to non-compliance with laws and regulations
This could be disclosed on an ethics hotline, raised with

the Professional Accountants superior or governing
boy. Legal advice can also be sought.
Part 3: Professional Accountants in Public Practice

To start I think we need to clarify what “… in public practice” means.
A Professional Accountant who offers services to the public, such
as taxation, accounting or auditing services, for reward is
considered to be in public practice.
Section 310 – Conflicts of interest

A Professional Accountant shall not allow conflict of interest to
compromise professional or business judgement.

Consider being the auditor for all three brands above? What
happens if these brands were in a dispute or a legal battle with
each other?
What would the risks be of auditing/providing a service to all three
or even just two of these brands?
Research Research section 310

and answer and identify further
examples of situations
that may create a
conflict of interest.


• Self-interest

• Objectivity
• Confidentiality
• Professional behaviour

implemented?
• Using different engagement teams for Omo, Skip and Ariel
respectively;
• Ensure that working papers are protected from the other
teams gaining access to them;
• Notify your client of your conflict of interest and obtain their
consent to perform the engagement;
• Before a new engagement is accepted, the Professional
Accountant will take reasonable steps to identify any possible
conflicts of interest that may arise.

Example Let us have a look at

the example on p.63
of Auditing
Fundamentals in a
South African
Context
Section 320 – Professional appointment: Client and engagement acceptance

Would you want to be the auditor of a client that has been in the
press recently for evading tax worth R5million? Would you want to
be the auditor of a company that has been investigated and proved
guilty of price fixing, polluting the ocean…?
Your answer should be NO! Before accepting a new client or
deciding whether or not to continue with an existing client, we need
to perform certain investigations. (We will cover this in more detail
in Learning Unit 3.)
Being involved with a client that is for example involved in illegal

activities could pose THREATS to our FUNDAMENTAL
PRINCIPLES.

• Intimidation
• Self – interest

• Professional Behaviour
• Integrity

implemented?
• Perform pre-engagement activities (covered in Learning Unit 3)
• If you cannot identify any safeguards that would reduce the
threat to an acceptable level….DO NOT ACCEPT THE
CLIENT.
• Acquiring the knowledge and skills necessary
• Assigning staff members with the experience and skills
• Using experts
• Determining and agreeing on a timeline that is realistic and reasonable

Let us have a look

Example at the example on
pp.64 – 65 of
Auditing
Fundamentals in a
South African
Context
Section 320 – Professional appointment: Changes in professional appointment
Company
Auditor A Auditor B (To

(Current – be appointed
resigning) to replace A)
Before Auditor B replaces Auditor A, Auditor B needs to ask Auditor

A if there are any reasons, professional or otherwise, that Auditor B
should not accept the engagement of the Company.
Why? This discussion will assist Auditor B in determining if there
are any threats to their fundamental principles.
NOTE: The Company’s permission must be obtained for Auditor B

to contact Auditor A! Which fundamental principle do you think this
is protecting?

• Self-interest
Step 2 – Which FUNDAMENTAL PRINCIPLES would these threats

be threatening?
• Confidentiality

implemented?
• If the company refuses permission to this communication,
consider rejecting the engagement.
Let us have a look at the

Example example on p.66 of

Section 321 – Second opinions

I am sure you have heard many times that people seek second
opinions on a medical condition or diagnosis. Well, a Professional
Accountant could also be asked for a second opinion on
accounting, auditing, reporting standards, etc.
If Auditor A is the current auditor of a company and has stated that

the company cannot for example, capitalise certain expenditure,
however the company is of the opinion that they can capitalise the
expenditure…the company can then ask Auditor B for a second
opinion on the treatment of the expenditure.

What could go wrong with this situation?

• Self-interest
Step 2 – Which FUNDAMENTAL PRINCIPLES would these threats

be threatening?
• Professional behaviour
Step 3: Assuming the threat is more than at an acceptable level, what

• Confirm with Auditor A that you do in fact have all the material
information necessary and the same information that they had,
in order to make the opinion;
• Give a copy of your second opinion to Auditor A;
• Describe the limitations surrounding your opinion to the client.

example on p.67 of
Auditing Fundamentals in a
Section 330-350
Read pages 67 section 2.6.6.5 to page 71 section 2.6.6.7 and
based on what you have learnt so far, complete the following
table:
Section Threats Fundamental Safeguards

principles being
threatened
Section 330 –
Fees and other
types of
remuneration
Section 340 –
Inducement,
including gifts and
hospitality
Section 350 –
Custody of client
assets

Section 360 – Responding to non-compliance with

laws and regulations Non-compliance with laws and
regulations compromises of
• Acts (intentional or unintentional)
• Contrary to the prevailing laws or regulations
• Committed by the following parties:
o A client
o Those charged with governance of a client
o Management of a client
o Other individuals working for or under the direction of a client
When a Professional Accountant becomes aware of non-

compliance or suspected non-compliance with laws and
regulations, a self-interest and intimidation threat is created to the
Professional Accountants integrity and professional behaviour.
Management, with the oversight of those charged with governance,
is responsible for ensuring that the business activities are
conducted in accordance with laws and regulations.
Audit of financial statements

If a Professional Accountant becomes aware of non-compliance or
suspected non- compliance, the Professional accountant first needs
to obtain an understanding of the matter and the nature of the non-
compliance.
The professional accountant may consult confidentially with other

members of his firm or with legal counsel.
The Professional Accountant shall discuss the matter with the

appropriate level of management at the client. This is to clarify the
matter and the Professional Accountants understanding of the
matter. In this discussion, the Professional Accountant will advise
management to rectify the situation timely and that management is
to report the non- compliance to the relevant authority where
applicable.
Once the Professional Accountant has assessed management’s

response to the non- compliance, using professional judgement he
must decide whether further action is necessary; withdrawing the
engagement or reporting it to the authorities.
Professional services other than audits of financial statements

If a Professional Accountant becomes aware of non-compliance or
suspected non- compliance, the Professional accountant first needs
to obtain an understanding of the matter and the nature of the non-
compliance.

The professional accountant may consult confidentially with other

members of his firm or with legal counsel.
The Professional Accountant shall discuss the matter with the
appropriate level of management at the client. This is to clarify the
matter and the Professional Accountants understanding of the
matter. In this discussion, the Professional Accountant will advise
management to rectify the situation timely and that management is
to report the non-compliance to the relevant authority where
applicable.
If the client has an auditor that is not part of the Professional

Accounts firm or network firm, the Professional Accountant must
consider reporting it to the client’s auditors. In deciding whether to
communicate the non-compliance to the client’s auditors, the
Professional Account must consider if they are legally allowed to
report it and whether the non-compliance would have a material
effect on the financial statements of the client.
Once the Professional Accountant has assessed management’s

response to the non- compliance, using professional judgement he
must decide whether further action is necessary; withdrawing the
engagement or reporting it to the authorities.
Step 1: Becomes aware of NOCLAR or suspected NOCLAR

Step 2: Obtain an understanding of the matter
Step 3: Discuss the matter
Step 4: Determine whether further action is needed
Step 5: If applicable, decide on appropriate further action
Step 6: Documentation
HOW IS THIS DIFFERENT TO A REPORTABLE IRREGULARITY?

example on p.72 of
in a South African
Context

Section 4A – Independence for audit and review engagements
Section 400 – Independence

Being independent includes independence of mind and independence of
appearance.
Independence of mind – the state of mind that permits the
expression of a conclusion without being affected by influences that
compromise professional judgement.
State of mind that is not affected by

outside influences
Independence in appearance – the avoidance of facts and

circumstances that are so significant that a reasonable and
informed third party would be likely to conclude that integrity,
objectivity or professional scepticism has been compromised.
Reasonable man (informed third party)

test
Section 410 - Relative size of the fees
Total
audit firm
Company
A’s audit revenue
fee


• Intimidation
• Self-interest

Step 3: Assuming the threat is more than at an acceptable level,

what SAFEGUARDS could be implemented?
• Reducing the dependency on Company A’s fees
• Quality control reviews

example on p.74 of
in a South African
Context
Section 410 - Fees overdue


A Professional Accountant shall not charge a contingent fee for an audit engagement!!!
A firm shall not evaluate or compensate a key audit partner based on that partner’s
success in selling non-assurance services to the partner’s audit client.

Section 430 - Actual or threatened litigation


Section 510 - Financial interest in audit clients

What if an audit team member or an immediate family member of
the audit team member held shares in the audit client?
A direct financial interest or a material indirect financial interest in

the audit client shall not be held by:
• The firm or a network firm;
• An audit team member, or any of that individual’s immediate family;
• Any other partner in the office, or any of that individual’s immediate family
• Any other partner or managerial employee who provides non-
audit services to the audit client, or any of that individual’s
immediate family

• Self-interest

Step 3: Assuming the threat is more than an acceptable level, what

• Selling all or a portion of the shares;
• Having the team members work reviewed;
• Remove the audit team member from the audit.
So, does that mean that you may not hold any shares in any of your
audit clients? Not necessarily, the significance of the threat shall be
determined with reference to:
• Your role on the audit
• The materiality of this interest in relation to your audit client and you personally

Let us have a look

at the example on
p.75 of Auditing
Example
Fundamentals in a
South African
Context
Section 511 - Loans and guarantees

Do you think it is a threat to objectively (independence) if a financial
institution such as Standard Bank makes a loan, under normal
conditions and terms, to an audit team member or firm? Why?
What happens if any of the following conditions are present in

the granting of this loan or guarantee:
• The loan or guarantee is material to the audit team
member/audit firm or is material to the financial
institutions?
• What if your audit client that is granting this loan or
guarantee is not a financial institution?
• What if the audit firm/audit team member/immediate
family member of the audit team members grants a loan
or guarantee to an audit client?
These can create self-interest threats to objectivity (Independence)
Safeguard: Independent
review of the audit team’s
work on the client
No safeguard due to the

significance of this threat, No safeguard due to the
unless the loan is immaterial significance of this threat, unless
to both parties. Loan should the loan is immaterial to both
not be granted or audit team parties. Loan should not be
member should resign from granted or audit team member
the audit. should resign from the audit.


example on pp.75 – 76 of
Auditing Fundamentals in a
South African Context.
Section 520 - Business relationships with clients

This is not referring to an audit firm-audit client relationship. This
section refers to other business relationships – for example an audit
firm and an audit client looking to invest together in another
company or product line etc.
This type of relationship will create a self-interest or intimidation
threat to objectivity (Independence) which may not be entered into
unless it can be reduced to an acceptable level or is considered
immaterial to both parties.

example on p.76 of
Section 521 - Family or personal relationships

Family or personal relationships between a member of the audit
team and certain employees of the client may create a self-interest,
familiarity and intimidation threat to independence.
The significance of the threat is influenced by the position of the
employee at client and the role of the member in the audit team.

Safeguards that can be implemented include:

• Removing the individual with the relationship from the audit team
Structuring the responsibilities of the audit team such that the
member of the team with the relationship does not deal with
matters that are the responsibility of the related staff member at
the client.
2) Audit client A: 3) Audit client A: 4) Audit client A: CEO
1) Audit client A:
Finance director is Personal assistant to is Mr Linnel
CFO is Mr Botha
Mrs Smith the COO is Miss Talk
Audit firm: Audit firm: Audit Audit firm: Audit Audit firm: Audit
Partner in charge trainee on Audit manager on Audit Partner has been
of Audit client A is client A is the son client A is dating friends with Mr
Mrs Botha of Mrs Smith Miss Talk Linnel for a number
of years and they
play golf every
Sunday together.
Read the information about

this section on p.76 of
Read and Auditing Fundamentals in a
discuss South African Context and
research this section in more
detail, if needs be, to
determine if the above
relationships would create a
threat and what, if any,
safeguards could be
implemented to reduce the
threat to an acceptable level.

Section 522 – 525 - Employment

Read pp.77 – 78 of Auditing Fundamentals in a South
African Context and complete the table below:
Paragraph Short Threats Fundamental Safeguards
description principle
Section 524- An audit team • Familiarity Objectivity • Quality
Employment member that • Intimidation (Independence) control review
with a client: leaves the of the audit
former partner employ of the • Assign more
or audit team audit firm to experienced
member joins work at the staff
an audit client audit client members to
and can exert the audit
significant • Have the
influence work of the
former team
member
reviewed
Employment
with a client:
Audit team
member in
negotiations
with audit
client

Section
525-
Temporary
staff
assignment
s
Section 522-
Recent
employment
at an audit
client
Section
523-
Director or
officer at a
client
Section 540 - Long association of senior personnel with an audit client’

Keeping in mind that we are still under the topic of independence, if
you were to serve on an audit for a number of years, do you believe
you would still be independent of mind and appearance?
If the same senior personnel has been serving on the same audit
client for a long period of time:

• Familiarity
• Self-interest


implemented?
• The same audit partner should not serve on the same client
for an extended period of time – the Companies Act has
limited this to five years;
• Quality control review of the work of the senior personnel.
Example Let us have a look at the example on p.80 of

Auditing Fundamentals in a South
African Context

Section 600-6110 - Provision of non-assurance services to audit clients
Recap What is a non-assurance service? Give

examples
Let us assume that Audit firm A performs a compilation

engagement of Client B and the Audit firm A audits Client B:
Threats: Fundamental Safeguards:

principle:
Consider if Audit firm A also prepares Client B’s tax return and
submits it. Let us assume they are also in the process of performing
a due diligence for Client B with regards to a sale of their shares?
Threats: Fundamental Safeguards:

principle:
The Companies Act section 90(2) prohibits the auditor of a

company from being any one of the following:
• Director/prescribed officer;
• Employee/consultant engaged for more than one year in the
maintenance of the company’s financial records or financial
statements;
• Director/officer/employee of the company secretary;
• A person who habitually/regularly performs the duties of the
bookkeeper, accountant or secretary;

• A person who in the preceding five financial years was any of the above;
• A person related to any of the above.
One overruling “safeguard” to providing non-assurance services is

that the audit committee of the company has to pre-approve any
non-assurance work done by the auditors to ensure their
independence is not compromised.
Let us have a look at the

Example
example on page 81 of
in a South African
Context
Section 4B – Independence for assurance engagements

other than audit and review engagements
Self-study – similar to 4A
Exam type questions
Question 1
ABC Limited is a Company that manufactures shoes for sale to
large retail shops all over South Africa. The company has been in
existence for 20 years. Your firm, Auditing’s Awesome has been the
auditor of the company since it was incorporated. The year under
audit is 1 January 2022 to 31 December 2022. The audit will
commence on 1 March 2023.
Quality control:
The audit firm has a monitoring process designed to provide
reasonable assurance that the policies and procedures relating to
the system of quality control are relevant, adequate, and operating
effectively.
.
Required:
1. Explain in relation to the element “monitoring”, as one of the
elements of quality control in accordance with ISQC 1, what
ABC Limited should include in the monitoring process. (2)
2. What other requirements should be implemented by
Auditing’s Awesome when conducting the audit of ABC
Limited to provide reasonable assurance that the policies and
procedures relating to the system of quality control are being
met? (10)

Question 2
You are the technical partner of Coetsee and Partners, a medium
sized auditing firm with a broad client base. The firm consists of five
partners, 10 audit managers and 17 trainee accountants.
It is standard practice that, in accordance with the firm’s quality

control policy, all the technical queries are referred to you for
consultation. The following independent matters were referred to
you for advice
1. One of the partners, Peter Ndlovu, recently met William

Harris, the marketing director of your audit firm Coetsee and
Partners. He wants to know from Peter what the requirements
of the CPC are regarding advertisements, before they start
with their new aggressive new marketing campaign. (5)
2. As the audit partner of Dodgy Deals (Pty) Ltd, Tony Edwards

has become aware of tax evasion taking place at his client. He
is considering reporting this to the South African Revenue
Services and would like to know from you what his
responsibilities are in terms of client confidentiality, before
doing so. (5)
Required:
Provide answers and advice in respect of each of the queries

listed above with reference to the relevant ethics, rules of
conduct and code requirements.
Source:
UNIVERSITY OF
JOHANNESBURG
DEPARTMENT OF
ACCOUNTANCY AUDITING
200 – NOVEMBER 2014
EXTRACT

Question 3
You are a first-year trainee accountant at PFK Auditors (“PFK”).

Your firm are the auditors of Jimmy Choo (Pty) Ltd (“JC”), a
company which imports and sells the latest woman’s shoes and
handbags. The company has been operating for the last five years
and has a number of stores in each of the nine provinces in South
Africa as well as stores operating in Malawi, Mozambique and
Tanzania. Miss High Heels is the chief executive officer (CEO) of
the company.
Possible threats to the fundamental principles of SAICA’s

Code of Professional Conduct (COPC)
Issue 1
The wife of Mr George (the lead engagement partner), owns 25% of
the shares of JC.
Issue 2
The audit fees generated from JC constitute 60% of the total revenue
earned by PFK.
Issue 3
Mr George contacted Mr Armani (financial manager of JC) and
offered him a position as senior audit manager once the audit was
complete.

Issue 4
Miss High Heels offered the audit team and their partners a fully
paid trip to a game reserve in Namibia once the audit report has
been signed off.
Required:
With reference to the paragraph “Possible threats to the
fundamental principles of SAICA’s Code of Professional Conduct
(COPC)”:
1. Explain why the circumstances in issues 1 to 4 create a threat

to the fundamental principles of the SAICA code of
professional conduct. (6)
2. For each identified threat, provide the following information:
a) The fundamental principle/s being threatened (6)
b) The type of threat (6)
c) One safeguard per circumstance that should be applied
by PFK to eliminate the threat or reduce it to an
acceptable level (5)
Source:
University of South Africa
AUE2601 – October/November 2015 Adapted

No. Explanation Fundamental Type of Safeguard

principle threat
1.
2.
3.
4.
Homework:
Auditing Fundamentals in a South African Context, Chapter 2, Question 1 part B-
D, Question 3, Question 4, Question 5, Question 6 and Question 9.

Learning Unit 3: The audit process

LO1: Discuss the stages and flow of an audit
LO2: Apply to a given scenario the principles of preliminary
engagement activities.
LO3: Identify the contents of an engagement letter in terms of
ISA 210 – Agreeing the Terms of Audit Engagements.
LO4: Discuss planning in the context of an audit.
LO5: Discuss responding in the context of an audit.
LO6: Discuss concluding in the context of an audit
Auditing fundamentals in a South African context, Chapter 11 and
12
SAICA Student Handbook 2023/2024, Volume 2A(1)
Auditing fundamentals in a South African context, Chapter 11 and
12
1. Introduction:
Preliminary
engagement activities
Planning
SAICA and
IRBA Code of Companies
Professional Act
Conduct Audit strategy Audit plan
Obtain audit
evidence
Test of controls Substantive

Auditing procedures
Professions King Code III
Act
Evaluating, concluding and reporting

2 Pre-engagement activities
Would you propose marriage to someone that you just met and
knew nothing about? Why?
The same principle applies for accepting new engagements. Audit

firms do not operate like a grocery store in that you sell their
products to any customer that walks in. An Audit firm has to
investigate the client before they decide whether to accept them as
a client or not. Can you relate this to proposing marriage to
someone?
Let us look at it in another way; when fraud is uncovered at a

company, who is the first to be blamed or the first to be questioned
about why the fraud was not uncovered earlier?......THE
AUDITORS. We have learnt that our main responsibility is not to
detect fraud, however the reputational damage is done already.
Therefore, we need to investigate each client that we intend to take
on, and we need to turn away those clients that we believe are too
high risk.
Pre-engagement activities are

Note: not only conducted for new
audit clients, but also for
existing clients. We need to
consider whether we want to
continue the relationship with
existing clients.
In the news Read the Steinhoff

scenario on p.471 of
Auditing
Fundamentals in a
South African
Context
Three step program

There are three steps to be followed in pre-engagement
activities before an audit engagement can be accepted:
• Client Investigation (Do we WANT the client);
• Determining skills and competence requirements to perform
the audit (CAN we take on the client);
• Determining and agreeing on the terms of the engagement.

However, before these are carried out, the auditor needs to

determine if they are eligible to act as auditor and if the statutory
requirements have been met for them to act as auditor. These
requirements can be found in the Companies Act and the Auditing
Profession Act, these were covered in Learning Unit 2.
Where else have we learnt about client acceptance and

continuance?... Learning Unit 2 ISQM 1 and ISA220
1. Client investigation (Do we WANT the client)
There are certain elements that we need to consider and investigate

prior to accepting the engagement to determine if we actually
WANT to take on the client. To help you remember what these are,
let us use an acronym; FIBRE PALS.
Fees – Can the prospective client pay the audit fees?

Why is this an important consideration, taking into account what you
learnt under the Code of Professional Conduct in learning unit 2?
Integrity of the client – Are they honest, have they been

involved in fraud, do they comply with laws and regulations?
Why is this an important consideration?
Business standing risk – what is the prospective client’s reputation in the industry?
Risks of material misstatement – The auditor will need to obtain an

understanding of the prospective client to determine if there are any
significant risks of material misstatement and whether these can be
reduced to an acceptable level. (Refer back to learning unit 1 for a
recap on risk of material misstatement)
Ethics – are there any ethical reasons why we cannot accept this
client? Independence issues? Please note that this is from the
auditors’ perspective. (Code of Professional Conduct is important
here)

Predecessor auditors – with the prospective client’s permission, the

predecessor auditors need to be contacted to ascertain whether
there are any professional or other reasons that the prospective
client should not be accepted.
What if the prospective client refuses to give this permission?
Attitude – What is the client’s management’s attitude towards laws,

regulations, accounting frameworks and standards, the auditors?
Legal vacancy – In terms of section 91 of the Companies Act is

there a legal vacancy for an auditor for the prospective client?
Scope limitation – Is there any indication that the prospective client

will limit the auditor’s scope (withhold necessary information from
the auditor) in any way?
What would be the implications on the audit if the client did

withhold information from the auditor?
Read Question 1 on
Read: p.478 to question 4
on p.480 of Auditing
Fundamentals in a
South African
Context and make
any further notes
you deem necessary
to understand this
question

2. Determining skills and competence requirements to perform

the audit (CAN we take on the client)
Once the client has been investigated and the auditors have
ascertained whether they WANT to take on the prospective client or
not, the next step is to determine if in fact we CAN take on the new
client. To determine this, certain further requirements need to be
considered. To remember these requirements, the acronym
SKEMD can be used.
Skills and competence – Do the auditors have the skills and

competence to perform the audit of the prospective client? What
skills and competencies do you think the auditor would need to
have if they were auditing a property company?
Knowledge and experience – Can the audit firm compile a team

with the necessary knowledge and experience to perform the
audit? Do you think an audit team that audits Woolworths needs
the same knowledge and experience to audit OUTsurance?
Ethics – Are there any ethical reasons that the audit firm
cannot take on the prospective client? (The Code of
Professional Conduct is important here)
Members of the team – Does the audit firm have audit team
members available to service the prospective client?
Deadline – Can the audit firm meet the deadline required by the prospective client?
Read: Read Question 2 and

3 on pp.478 – 480 of
Auditing
Fundamentals in a
South African
Context and make
any further notes you
deem necessary to
understand this
question.

Now look at the Audit

Study: working paper on
pp.481 – 482 of
Auditing
Fundamentals in a
3. Determining and agreeing on the terms of the engagement
If the audit firm has determined that they WANT to and CAN take on
the prospective client, an agreement/contract is drawn up, and this
is called an engagement letter – the audit firm will be engaging with
and performing an engagement for the client.
Some important points about the engagement letter:
• The agreement forms the contractual relationship
• It sets out the nature of the engagement
• It sets out the responsibilities of the parties involved in the engagement
• It needs to be issued for all new engagements
• It also needs to be reissued to existing clients if there are any
changes in the engagement
Below is a sample engagement letter taken from International

Standard on Auditing 210 (ISA210), Appendix 1, SAICA Student
Handbook 2015/2016:
“To the appropriate representative of management or those

charged with governance of ABC Company:
[The objective and scope of the audit]
You have requested that we audit the financial statements of ABC
Company, which comprise the balance sheet as at December 31,
20X1, and the income statement, statement of changes in equity
and cash flow statement for the year then ended, and a summary of
significant accounting policies and other explanatory information.
We are pleased to confirm our acceptance and our understanding of
this audit engagement by means of this letter. Our audit will be
conducted with the objective of our expressing an opinion on the

[The responsibilities of the auditor]

We will conduct our audit in accordance with International
Standards on Auditing (ISAs). Those standards require that we
comply with ethical requirements and plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free from material misstatement. An audit involves
performing procedures to obtain audit evidence about the amounts
and disclosures in the financial statements. The procedures
selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. An audit also includes
evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as
well as evaluating the overall presentation of the financial statements.
Because of the inherent limitations of an audit, together with the

inherent limitations of internal control, there is an unavoidable risk
that some material misstatements may not be detected, even though
the audit is properly planned and performed in accordance with
ISAs.
In making our risk assessments, we consider internal control

relevant to the entity’s preparation of the financial statements in
order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity’s internal control. However, we will
communicate to you in writing concerning any significant
deficiencies in internal control relevant to the audit of the financial
statements that we have identified during the audit.
[The responsibilities of management and identification of the

applicable financial reporting framework (for purposes of this
example it is assumed that the auditor has not determined that the
law or regulation prescribes those responsibilities in appropriate
terms; the descriptions in paragraph 6(b) of this ISA are therefore
used).]
Our audit will be conducted on the basis that [management and,

where appropriate, those charged with governance acknowledge
and understand that they have responsibility:
(a) For the preparation and fair presentation of the financial
statements in accordance with International Financial
Reporting Standards;
(b) For such internal control as [management] determines is
necessary to enable the preparation of financial statements
that are free from material misstatement, whether due to fraud
or error; and

(c) To provide us with:

(i) Access to all information of which [management] is
aware that is relevant to the preparation of the financial
statements such as records, documentation and other
matters;
(ii) Additional information that we may request from
[management] for the purpose of the audit; and
(iii) Unrestricted access to persons within the entity from
whom we determine it necessary to obtain audit
evidence.
As part of our audit process, we will request from [management

and, where appropriate, those charged with governance], written
confirmation concerning representations made to us in connection
with the audit.
We look forward to full cooperation from your staff during our audit.
[Other relevant information]
[Insert other information, such as fee arrangements, billings and

other specific terms, as appropriate.]
[Reporting]
[Insert appropriate reference to the expected form and content of the auditor’s report.]
The form and content of our report may need to be amended in the
light of our audit findings.
Please sign and return the attached copy of this letter to indicate
your acknowledgement of, and agreement with, the arrangements
for our audit of the financial statements including our respective
responsibilities.
XYZ & Co.
Acknowledged and agreed on behalf of
ABC Company by (signed)
......................
Name and Title Date”
How do we get this information?

Now that you understand the investigations that are required before
deciding whether to accept or reaccept an engagement, you now
need to know HOW you will go about performing these
investigations.
The auditor will perform what is called Risk Assessment Procedures
(You will RAP). These procedures contain the following:
• Enquiries from management and those charged with
governance (and other necessary third parties – with the
client’s permission);
• Observations of procedures and inspections of documents;
• Analytical procedures.

Look up ISA315
Research: Paragraph A6-A18 and
document some of the
above-mentioned
procedures evident
from this standard.
Enquiries:
Observation and inspection:
Analytical procedures:
Let us work through the

Application: example question 1 on
p.181 of Auditing
Fundamentals in a
South African Context:
Graded Questions

The Audit Process

The stages of an audit are as follows:
• Pre-engagement activities (dealt with above)
• Planning
• Obtaining audit evidence
• Concluding and reporting
Let us assume that our audit process is a wedding…
Planning Concluding and

reporting
Pre-engagement You would not Obtaining audit
activities propose to evidence Determining if
someone and you have
Dating Searching for
then get married sufficient quotes
(investigating quotes,
the next day, and samples to
your partner) obtaining cake
you need to plan make your
and proposing and flower
the wedding to decisions,
marriage samples, testing
ensure that you getting married
(engagement out different
do not forget and finally
letter).
anything DJ’s, etc. receiving your
important. marriage
certificate.

Planning
Read p.458 of Auditing

Read and Fundamentals in a South
document: African Context section
11.6.2 and summarise the
six benefits of planning an
audit: (Can you see a
similarity to planning a
wedding?)
We are now going to obtain a basic understanding of the

planning process in an audit, and to do this we are going to
learn about a very important audit formula:
AR = IR x CR x DR
Audit risk Control risk
The risk that the The risk that a

Needs to
auditor will express misstatement could occur
be that is not prevented,
an inappropriate
reduced to detected or corrected on
opinion when the
an a timely basis by the
acceptable are materially entity’s internal controls.
level misstated. Risk that the controls are
not operating effectively.
Inherent risk
Detection risk
The susceptibility of an item to
misstatements before the Risk that the audit
consideration of any controls. procedures will not
E.g.,: Importing goods, highly detect a material
regulated industry misstatement.
RISK OF MATERIAL
MISSTATEMENT
(Where have you heard this phrase
before?)

Planning is made up of many elements that you will learn about

throughout your studies, however the most important aspect to learn
in this module is Risk assessment at the planning stage.
There is a three-step process that an auditor follows with regards to

risk assessment: IDENTIFY, ASSESS and RESPOND to risks.
Therefore, the first step is to identify the risks of material
misstatement, i.e.: identify the inherent and control risks. If you
were asked to identify the inherent and control risks of Coca-Cola,
would you be able to?
Not so easy!!! Therefore, step 1 is obtaining an understanding of

the entity, if we understand how the entity operates, surely it will
then be easier for us to identify the inherent risks.
Step 1 – Obtain an understanding of the entity = IDENTIFY INHERENT RISKS
Application: Read p.459 of Auditing

Fundamentals in a South
African Context,
Step 2 - and summarise some of the information that the

auditor would need to obtain to gain an understanding of the
entity:

Now consider and research Coca-Cola and obtain an

understanding of them, can you identify some inherent risks
now?
When considering inherent risks of an entity the following factors are assessed:
• External factors (Industry, regulatory, economic etc)
• Internal factors (Owners, operations, finance structures etc)
• The entity’s selection and application of accounting policies
• The entity’s objectives, strategies, and related business risks
• The measurement and review of the entity’s
financial performance How do we obtain this
information? We perform RAP!
Step 2 – Obtain an understanding of the entity’s

controls = IDENTIFY CONTROL RISKS
Consider when you shop at Makro, what happens as you leave the
shop? What is this? What about when you leave Woolworths, what
do you see? What is this?
Why do you think some shops have a sign up that insists on their
customers requesting a receipt for the goods they purchased?
These are all controls; controls are put in place to mitigate or
reduce risk of loss for a business. Therefore, if a company has
controls in place AND they are operating effectively, the risk of
misstatement is lowered as well. Therefore, it is crucial for an
auditor to obtain an understanding of the control environment of an
entity. The auditor needs to obtain an understanding of the following
elements of a system of controls:
• Control environment
• Risk assessment process
• Information systems
• Control activities
• Monitoring of controls.
We will obtain a deeper understanding of these elements in Learning Unit 4.

What is important to understand now is that if the entity does not
have adequate or appropriate controls, if one of the above elements
is missing or ineffective or if any of their controls are not operating
effectively – CONTROL RISK IS INCREASED.

The only way that the auditor will be able to assess the control risk
is by obtaining an understanding of the controls and the control
environment.
How do we obtain this information? We RAP!
Step 3 – Risk of material misstatement

The auditor has now obtained an understanding of the entity and its
environment, including the entity’s controls. Therefore, the auditor
has identified the INHERENT and CONTROL risks of their client.
The product of IR (inherent risk) and CR (control risk) is referred to
as the risk of material misstatement. Therefore, in step 1 and step 2
the auditor has identified where the risks of material misstatement
for the financial statements lie.
Can you remember that we said that auditors follow a risk-based

approach, which means that the auditor identifies, assesses and
responds to risks of material misstatement? Do you agree that what
the auditor has done in step 1 and step 2 is to identify these risks,
therefore the auditor now needs to ASSESS these risks as high,
medium or low – why do we do this? Because audit risk has to be
kept at an acceptable level.
We identify and assess these inherent and controls risks (risks of

material misstatement) at the overall financial statement level and
at the assertion level. You will learn about the assertion level in
Auditing 3A (AUDI7311).
What do you think it means for a risk to be at the overall financial

statement level?

The following are some examples of risks of material misstatement

at the overall financial statement level: (Complete the table by
reading and understanding table 12.1 and 12.2 in of Auditing
Fundamentals in a South African Context page 496-498)
Risk factor Risk Inherent/control

indicator/description of
risk
Staff competence There is a risk of material Inherent
misstatement due to the
fact that staff are
incompetent and therefore
there is a higher chance of
them making mistakes.
Staff integrity
Complexity of There is a risk of material Inherent

transactions misstatement due to
complex transactions
being entered into as
errors may be made in
accounting for them.
Level of sophistication of
the information system
Age of the information

system

Design of the information

system
Degree of subjectivity in
the determination of
figures
History of misstatement There is a risk of material Inherent

misstatement due to the
history of misstatements
and therefore the
expectation that there will
be misstatements in the
current year audit.
Aggressive financial
targets
Management/staff
incentives
Degree to which duties

are segregated

Control environment
Control activities
Monitoring of internal There is a risk of material Control

control misstatement due to the
fact that controls are not
updated or improved when
necessary.

What about the following:

Risk factor Risk Inherent/control
indicator/description of
risk
Operations in foreign
countries
Liquidity issues or
Operating losses
Change in regulation
Expanding into new

locations
Third party reliance

(e.g.: banks)

Entity is listed
Owner managed
Obtaining audit evidence

IDENTIFY ASSESS
RESPOND
We have now discussed identifying and assessing risks of material
misstatement (IR and CR). The next step is to now respond to
these risks and also to deal with the last element in the formula,
detection risk (DR).
If we consider our formula again; AR = IR x CR x DR, in the planning
stage of the audit we assessed the inherent and control risk of an
entity, the risk of material misstatement. Let us assume that for
company A, the risk of material misstatement is considered high
(this was determined through step 1 to 3 above). That is a problem
because audit risk needs to be at an acceptable level, however now
it is high. Therefore, we can finally use DR to bring AR down.
Note: There is an inverse relationship

between risk of material
misstatement and detection
risk. Therefore, if your risk of
material misstatement is high,
detection risk needs to be low.
How do we bring detection risk down?

Detection risk is the risk that the audit procedures will not detect a
material misstatement. In other words, it is a risk that material
misstatements will go undetected and therefore the auditor may
issue the incorrect audit report due to the misstatement not being
detected and corrected.
So, if the risk is that the procedures will not detect the material
misstatement, what do you think the auditor can do to reduce this
risk, thereby reducing detection risk? DO MORE PROCEDURES.
Therefore, the higher the risk of material misstatement, the more

audit work (our response) the auditor will need to do. More
specifically, the more detailed audit work the auditor will need to do.
There are two categories of procedures that an auditor can

perform. Give a brief explanation and an example of each:
Test of controls (page 461 Auditing Substantive procedures (page 461)

Fundamentals in a South African Auditing Fundamentals in a South
Context) VS African Context)
Why do we perform audit procedures? To obtain audit evidence.

Why do we need to obtain audit evidence? To respond to the risks
of material misstatement, i.e.: to determine if an account or class of
transactions does in fact contain material misstatements or not.
Research Research and

and document different
document: types/sources of
audit evidence
1) Financial statements
2) Invoices
Let us put this all together in an example

Let us consider property, plant and equipment at Coca-Cola. Let us
be more specific and discuss the machine that adds sugar into the
coke.
Information on the machine:
• The Machine is situated in Limpopo;
• Due to strikes, access to the factory cannot be obtained by the auditor;
• There is an increase in sugar tax that is about to be
implemented on all Coke products that will double the price of
Coke;
• Any decisions regarding capital expenditure are not approved by the board.
Conduct the planning for the audit of this machinery under the AR
formula. Discuss fully your answers and recommendations. (NB:
Don’t forget the assertions that you learnt In Learning Unit 1)
1) INHERENT RISKS
HINT: Obtaining an understanding of the entity
IDENTIFY
2) CONTROL RISKS
HINT: Obtaining an understanding of the internal controls
3) RISK OF MATERIAL MISSTATEMENT

HINT: high, medium, low and why
ASSESS
4) DETECTION RISK
HINT: High or low level. Give examples of procedures and
evidence that can be obtained
RESPOND
Reporting and concluding

The auditor has now done the following:
• Decided whether or not to accept/reaccept the engagement;
• Planned the audit by considering the risks of material misstatement at the
client;
• Obtained audit evidence to lower detection risk and respond to
the risks identified in the planning stage of the audit.
The final step of an audit is to conclude on the results of the audit

evidence obtained and then to issue the audit report.
The auditor will need to evaluate whether or not they have obtained
sufficient and appropriate audit evidence in order to conclude
whether the financial statements are free from material
misstatement or not. Once the auditor has determined this they can
finally issue the audit report that accompanies the annual financial
statements – this being the main objective of an audit.
Exam type questions
Question 1
Background information
ABC Incorporated is a small audit firm with an audit partner (Mr
Hammer), yourself as an audit manager and one audit team
consisting of four members. You are the only audit manager
employed by ABC Incorporated. You and the audit team conduct all
of the audits of ABC Incorporated’s audit clients.
Pills 4 U (Pty) Ltd (Pills), a company with a complex manufacturing

process, approached ABC Incorporated to conduct its year-end
audit. Pills’ management indicated that ABC Incorporated must
deliver the final audit report and audited financial statements within
two weeks after the financial year end, which ended on 30
September 2023. Six of ABC Incorporated’s other audit clients also
have the same year end. All of ABC Incorporated’s audit clients are
in the financial services industry, and you and the audit team are
very excited to audit a company in the pharmaceutical industry, as
you as the audit team will be able to gain knowledge of the
pharmaceutical regulations for the first time.
Pills manufactures generic pills according to the standards

prescribed by the Medicines Control Council (MCC), which is the
regulatory body for medicine in South Africa.
The engagement partner (Mr Hammer) has received chronic

medicine free of charge from the CEO of Pills for the past two years.
The arrangement enabled Mr Hammer to assist his chronically ill
mother-in-law in reducing her medical expenses. Because of this
arrangement, the engagement partner (Mr Hammer) and the CEO
of Pills agreed that the fee for the audit work would be very low.
Mr Jones, Pills’ operations director, indicated that a new entrant in

the market opened its business during the financial year, which
resulted in the majority of personnel in the finance department
leaving the services of Pills to join the new competitor. In view of
this, many new personnel were appointed to fill these vacant
positions.
Pills management’s business strategy included target reduction of

65% of operating costs for the quality control department for the
year under review. Management’s aim is to increase the company’s
profits, as the company is experiencing liquidity problems owing to
the worldwide economic recession.
Pills has agreed to the terms of the engagement contained in the

engagement letter and signed the audit engagement letter.
However, Pills has expressed reservations about the right of access
of the audit team to its shareholder register and trading licence.
Required:
1. With reference to the background information on Pills:
Discuss the factors that the partner in charge of the audit of
Pills should have considered before accepting the audit and
conclude whether this audit should have been accepted or
not.
(12)
2. With reference to the background information on Pills:

(a) Identify the risk indicators at the overall financial statement level.
(b) For each identified risk indicator, identify the relevant audit risk
component.
(c) For each identified risk indicator, describe the audit risks
at the overall financial statement level for Pills 2023
financial year end.
Present your answer in the following table:

(29)
(a) Risk (b) Audit risk (c) Description of audit risks at the
indicators component overall level
Source:
Homework:
Auditing Fundamentals in a South African Context, Chapter 12, Question 8, Question
9, Question 13 and Question 17.
Learning Unit 4: Internal control concepts

LO1: Describe the definition of internal controls;
LO2: Describe the purpose of internal controls;
LO3: Describe the five components of internal control;
LO4: Describe the limitations of internal control;
LO5: Discuss the external auditor’s interest in internal controls.
1 Definition and purpose of internal controls
IDENTIFY ASSESS
RESPOND
Do you remember these three steps? We learnt about them in the

previous learning unit in terms of an auditor’s approach which is risk
based; an auditor identifies and assesses the risks of material
misstatement and then responds to these risks in terms of
performing audit procedures.
Those charged with governance in an entity perform a similar

process with regards to business risks. What do you think the
difference is between a business risk and an audit risk?
Those charged with governance have a responsibility to identify,

assess and respond to business risks. Where an auditor would
perform audit procedures in response to a risk of material
misstatement, those charged with governance will implement
internal controls in response to business risks identified. This is
because internal controls are designed to prevent, detect and/or
correct errors.
Let us look at a simple example:
Company A has a factory that manufactures cell phones and cell

phone accessories. These items are small and are of a high value.
Identify the risk:
Assess the risk (High, medium, low):
Respond to the risk:
Can you think of any

other controls that you
Think,
have observed, whether
research, they are from a part
discuss time job or merely from
everyday life? What risk
do you think they are
mitigating? Complete
the following table and
then discuss these in
groups to identify other
controls you were not
aware of.
Internal control Risk

1.
2.
3.
4.
5.
6.
7.
So, what is the definition of an internal control?

Read pp.119 – 120 of Auditing Fundamentals in a South
African Context.
• It is a process;
• That is designed, implemented and maintained
• By those charged with governance, management and other
personnel in the entity
• To provide reasonable assurance
• About the achievement of objectives with regards to:
o Reliability of financial reporting;
o Effectiveness and efficiency of operations;
o Compliance with laws and regulations.
Pick any of the

controls that you
identified in the above
Activity
table and apply it to
this definition.
Objectives of internal controls is also very important to know, they

follow on from the definition of an internal control and are as
follows: (If all your controls are in place you can take a long-
deserved VAC)
• Validity – Transactions and events are properly authorised,
actually occurred and are supported by evidence/supporting
documentation
• Accuracy – Transactions and events are recorded at the
correct amounts and are correctly classified and summarised.
• Completeness – Transactions and events are recorded

timeously and no transactions or events have been left out
Therefore, if controls are implemented and effective there is

reasonable assurance that transactions and events recorded will be
VALID, ACCURATE AND COMPLETE.
2 Components of internal control

The following five components of internal control need to be present
and operational for any system of internal controls to be effective.
(Recap on what was said about control risk in Learning Unit 3)
1) Control environment
2) Entity’s risk assessment process
3) Information system, including the business processes
relevant to financial reporting and communication
4) Control activities
5) Monitoring of controls
Control environment
Management and those in charge set the tone for an organisation
as their staff members will follow in their footsteps in terms of culture
and operations of a business. Consider your family life and who you
look up to and the influence they have on you as a person and your
actions? Consider a teacher that you respected and if they
respected you, how did you do in that class?
Some important points on control environment are as follows:
• Attitude of management with respect to internal controls.
• Strong leadership.
• Integrity and ethical values that are instilled in employees by management.
• Commitment to competence.
• Participation of those charged with governance in the
management and support of management in the entity.
• Strong reporting structure and levels of authority established and respected.
Now consider, as an auditor, how do you think you could assess the control
environment of an entity?
Entity’s risk assessment process

IDENTIFY ASSESS
RESPOND
As discussed in the introduction, just as auditors use this as the

base of their audit, those charged with governance have a
responsibility and duty to govern risk within their entity. This must be
done on an ongoing basis where business risks are identified,
assessed and responded to by implementing controls.
Information system, including the business processes relevant to
financial reporting and communication
Consider the accounting system or flow of a transaction:
Transaction occurs (is

initiated); e.g.: purchase
of inventory
Source documents where the transaction is recorded; e.g.: purchase invoice
Transaction is processed
Journals Ledgers Trial balance
Financial statements,
where all transactions
are reported and
communicated
This flow or path of any transaction is used to initiate, record,

process and report the entity’s transactions. This flow or path as
represented above, including the procedures and process to record
these transactions is the information system of an entity. It is also
important to remember that this information system can either be
manual or automated.
Refer back to the definition of an internal control, why do you think

this element is an important element to ensure a system of controls
is effective?
Control activities
Control activities are the procedures and policies implemented to
ensure that risks identified are prevented and if not prevented that
they are detected and corrected. Control activities are the ‘general’
controls that are implemented and that specific controls are built on.
Here is a list of these control activities: (DAASI)
• Documentation and records
• Authorisation and approval
• Access controls
• Segregation of duties
• Independent checks and reconciliations
Control activity Description

Documentation and records Documents, such as source documents,
need to aid in the accurate recording of
transactions and therefore need to have
some of the following elements in their
design:
• Pre-printed
• Sequentially numbered
• Multi-copies
• Different colours
• Compulsory completion
• Clear instructions
• Secure and managed
appropriately
Authorisation and approval • Different employees to approve

different transactions
• Predetermined levels of
authorisation and approval
• Supporting documents attached to
transactions for approval
Access controls • Physical
• Logical
Segregation of duties • An employee should not be responsible for
multiple incompatible duties
• The following should be
segregated:
o Initiation
o Authorisation
o Executing
o Recoding
o Safeguarding
Independent checks and • One employee must check the work of
reconciliations another.
• Reconciliations from physical to the
records.
• Signatures as evidence of these checks
Monitoring of controls
As mentioned, those charged with governance, govern the risk of
an entity. Therefore, they will identify and assess and design a
system of internal controls. However, these internal controls need to
be implemented, applied and maintained by management.
Therefore, it is crucial that internal controls are monitored for their
effectiveness on an ongoing basis and amended, more controls
added, controls removed if necessary to ensure the system of
internal controls is effective in meeting their objectives.
Some of the reasons for monitoring and amending controls will be
discussed under the inherent limitations of internal controls below.
3 Limitations of internal controls

There are certain inherent limitations that prevent controls giving
absolute assurance that the objectives are met. Hence controls may
only give reasonable assurance as to the meeting of objectives of
an entity due to the following inherent limitations:
Inherent limitation Example/further description

Cost vs benefit
Controls are more directed to routine

rather than non-routine transactions
Human error, lack of understanding,

time constraints
Use of judgement
Collusion to override a control
Override controls for personal benefit
Inadequate due to changes
4 External auditor’s interest in internal controls

So, what is the use of an entity’s internal controls to the external auditor?
Recap what you have

Recap and
learnt about the audit
activity:
process and internal
controls and consider
what the use is of
internal controls to the
external auditor.
Audit work Interest in controls is because…

Preliminary engagement activities
Planning an audit
Obtaining audit evidence
The rest of this module will now focus on risks and internal
controls, but specifically for the business cycles:
• Revenue and receipts
• Acquisition and payments
• Inventory ad production
• Payroll and personnel
• Finance and investment
Exam type questions
Question 1
Match the columns:
1.Entry to and exit from the warehouse a. Control Environment

are monitored 24 hours a day by
surveillance cameras.
2. Any warehouse personnel who is b. Control activities – Documentation
caught stealing inventory is dismissed and records
immediately
3. As the business has grown and the c. Monitoring of controls
number of transactions per day has
multiplied, the financial accountant is
very busy and constantly making errors.
4. Regular stock counts are performed d. Inherent limitations – Cost vs benefit
and the actual count compared to the
inventory on the system.
5. The internal auditors perform random e. Control activities – Access controls
testing on controls to ensure they are
operating effectively.
6. Although the barcoding system in the f. Validity of transactions
warehouse is outdated and ineffective,
the company cannot see the benefit in
upgrading the system based on the
high cost of the system.
7. All invoices are pre-printed, g. Control activities – Independent
sequentially numbered and pre- checks and reconciliations
numbered.
8. Before a purchase of inventory can h. Inherent limitations - Human error,
be made, it has to be authorised and time constraints
supported by all relevant supporting
documentation.
1.
2.
3.
4.
5.
6.
7.
8.
Homework:
Auditing Fundamentals in a South African Context, Chapter 4, Question 2 and
Question 4.
Learning Unit 5: Business cycles

LO1: Explain the revenue and receipts cycle;
LO2: Describe weaknesses in a given scenario relating to the
LO3: Describe the risks in a given scenario relating to the
LO4: Describe recommendations in a given scenario relating
to the revenue and receipts cycle;
LO5: Explain the acquisition and payments cycle;
LO6: Describe weaknesses in a given scenario relating to the
to the acquisition and payments cycle;
LO9: Explain the inventory and production cycle;
LO10: Describe weaknesses in a given scenario relating to
the inventory and production cycle;
inventory and production cycle;
to the inventory and production cycle;
LO13: Explain the payroll and personnel cycle;
the payroll and personnel cycle;
payroll and personnel cycle;
to the payroll and personnel cycle;
LO17: Explain the finance and investment cycle;
the finance and investment cycle;
finance and investment cycle;
LO20: Describe recommendations in a given scenario
relating to the finance and investment cycle.
Auditing fundamentals in a South African context, Chapter 6 –
10
Prescribed material used for this learning
unit: Auditing fundamentals in a South African
context
1 Revenue and receipts cycle
Some important points on the revenue and receipts cycle:

• Revenue from the sale of goods
• Revenue from the rendering of services
• Cash sales
• Credit sales
• Sales returns
• Accounts receivable and the management of the function
• Bad debts
• Discounts
Forms of Revenue
Manufacturers that Wholesalers who Revenue from

sell to Retailers who sell
make and sell their provision of
to the public
own products retailers services
Let us have a look at the journal entries that are processed

in the revenue and receipts cycle to better understand the
accounts involved in this cycle. (Ignore inventory and cost of
sales effects)
A. A customer purchased
items on credit: Dr.
Accounts receivable
Cr. Revenue Cr. VAT output
B. The customer then

settles their account Dr.
Bank
Cr. Accounts receivable
C. The customer
returns the
goods Dr.
Revenue/sales
returns
Dr. VAT input
Cr. Accounts receivable/Bank
D. Customer
received a
discount Dr.
Settlement
discount
granted Dr.
VAT input
E. The customer does not

settle their account Dr.
Credit losses
Dr. VAT input
Therefore, in summary, which accounts are affected:

• Accounts receivable
• Revenue
• VAT control
• Bank
• Settlement discount granted
• Bad Debts
Recap and Before we continue,

activity: it is important that
you recap on the
assertions applicable
to the revenue and
receipts cycle.
Assertion Revenue Accounts

Receivable
Occurrence
Completeness
Existence
Accuracy
Valuation
Rights
Classification
Cut-off
Accuracy,
Valuation and Allocation
Presentation
Let us now look at the flow of the cycle in terms of a business cycle.
Complete the source documents, journals and ledgers, database
and masterfiles, reports and reconciliations required in each sub
section on the lines provided on the right; refer to pp.202 – 209 of
Auditing fundamentals in a South African context.
Receive customer
order
Credit
management/
Authorisation of
sale
Warehouse/picking
stock
Despatch
Invoice
Recording sale
Receipt
Other adjustments
Weaknesses, risks and recommendations

Now that you have an understanding of the Revenue and Receipts
Cycle, it is important that you know the risks and controls involved in
this cycle. You need to know these so that you will be able to
answer the following questions on this cycle:
• What are the risks/business consequence/what could go wrong in this cycle?
• What weaknesses are present in this cycle?
• What recommendations of internal controls would you make
to improve this cycle?
If you understand what controls should be present in this cycle, you

will be able to identify and describe the weaknesses in controls as
well as make recommendations. However how do we know what
controls should be present in the revenue and receipts cycle?
IDENTIFY ASSESS
RESPOND
Let us once again recap: A company will identify and assess

business risks and they will respond to these risks by implementing
internal controls to mitigate these risks. Therefore, how do we know
what controls should be present in the revenue and receipts cycle?
By knowing what the risks are!!!
Therefore, STEP 1 is to identify what can go wrong.
Don’t forget the objectives

Recap and of controls… VAC! Validity,
activity: Accuracy and
Completeness! Refer to
Auditing fundamentals in a
South African context
p.220, table 6.5 and link
the assertions identified
above with the control
objectives:
Validity Accuracy Completeness
Occurrence
Completeness
Existence
Accuracy
Valuation
Rights
Classification
Cut-off
Accuracy, Valuation
and
Allocation
Presentation
Why is it important to be able to link management assertions and control objectives?

This is because if the control objectives are met, then the financial
statements will not be misstated and hence the assertions will hold
true too. Control objectives contribute to the appropriateness of
management assertions.
These control objectives are achieved (and risks mitigated) by

implementing controls. Therefore, STEP 2 is to design and
implement effective controls.
AND WHAT IS THE OBJECTIVE OF ALL OF THIS?... TO ENSURE

THE FINANCIAL STATEMENTS ARE FREE FROM MATERIAL
MISSTATEMENT AND FAIRLY PRESENTED.
The following table will be used to summarise the risks and controls
for each stage of the revenue and receipts cycle. The following
table is summarised from von Wielligh, Prinsloo, Penning, Butler,
Josset, Kunz, Motholo, O’Reilly, Rudman and Scholtz (2014):
Risks/consequences Controls Control

objective
Receive customer order
Risk: orders received are • Document design for the Completeness
not acted on at all or not internal sales order:
acted on timeously o Pre-printed
o Sequentially numbered
Consequence: may lead • Follow up on ISO not
to loss of revenue or matched to picking slips
reputational damage. • Sequential checking of ISO
to ensure none missing
Risk: order accepted • Ensure there is stock either Completeness
when there is no stock with the warehouse manager or
on hand inventory Masterfile
Consequence: may lead • Inform customer
to delays • Prepare back order note
in delivery and (Sequential numbering and pre-
reputational damage printed)
• Regular follow ups on back order
notes
Risk: ISO captured • Independent check of ISO Accuracy

incorrectly with incorrect • Approved price list by
prices or details of goods management
ordered or customer • Read back the order and
details to the customer to
Consequence: may confirm the order
lead to incorrect delivery
to customer, financial
loss,
reputational
damage.
Credit management and authorisation of the sale
Risk: that customers • Credit application forms Validity
granted credit that are • Reference checks
not credit worthy • Credit limits set
• Credit applications reviewed
Consequence: may and approved by management
lead to financial loss due
to non- payment.
Risk: unauthorised • Changes to credit limits may Validity
changes to credit limits only be done after an
application is completed by the
Consequence: may customer and approved by the
lead to customers credit manager
unable to pay and
therefore financial loss
Risk: amounts owing are • Process for collection Accuracy

not collected formalised and followed by
all staff
Consequence: may • Long overdue accounts
lead to financial loss. are handed over for
collection
• Cease trading with the
customer until the account
is
settled
Risk: allowance for credit • Allowance reviewed and Accuracy
losses is not calculated approved by financial manager
or not calculated correctly • Policies for the calculation
formalised and
Consequence: may lead documented
to misstated financial • Debtors age analysis analysed
records. on a regular basis and
analysed debtor by debtor
Warehouse/picking of stock
Risk: incorrect goods • Independent check of the Validity
or incorrect quantity goods picked to the picking slip
picked • Picking slip to be signed as
evidence of this check being
Consequence: may performed
lead to delays in deliver
and reputational
damage.
Risk: goods not picked or • Refer to receiving orders Completeness
not picked timeously where the picking slip must be
matched to the ISO
Consequence: may lead • Picking slips must be
to delays in delivery and sequentially numbered and
reputational damage. sequence tests to be performed
to ensure each one is filled
Despatch
Risk: incorrect goods • Separate despatch area Validity
transferred to despatch with access controls
due to misappropriation • Any transfer of goods is
accompanied by transfer note
Consequence: may (Picking slip or delivery note)
lead to financial loss, which is compared to physical
incorrect delivery, items being transferred by the
reputational damage. staff member receiving and
the staff member transferring
the goods
• Documents are signed as
evidence of these controls
being carried out
Risk: items being • Delivery notes are created Completeness
delivered to the that are sequentially
customers that were not numbered
ordered and hence the • Delivery notes are matched
customer not being to picking slips
charged for them • Driver agrees goods on the
delivery note to those
Consequence: may loaded onto the truck
lead to financial loss • Security at the gate before the
delivery leaves the premises
performs another check of the
goods loaded on the truck to
the delivery note
• The delivery note is signed as
evidence of these checks being
performed
Risk: customer denies • Customers are required to Occurrence

having received the sign the delivery note on
goods receipt of the goods
Consequence: may
lead to financial loss
(consequence).
Invoicing
Risk: invoice never • A copy of the signed Completeness
raised for goods delivery note to be returned
delivered to customer to the accounts department
• Signed delivery note to be
Consequence: may matched to the ISO and
lead to financial loss filed numerically
• Sequence tests to be
performed to ensure none are
missing or
Forgotten
Risk: invoices are not • Follow up on missing Completeness
prepared timeously delivery notes, delivery notes
not invoiced per above
Consequence: may lead • Ensure when invoicing that
to recorded in the the date of delivery
incorrect period corresponds
with the financial year
Risk: incorrect pricing • Independent check of invoice Accuracy
used for accuracy and comparison to
ISO and delivery note
Consequence: may
lead to
over/undercharge
customers, reputational
damage, financial loss
Recording sale
Risk: invoices are not • Invoices must be recorded Validity/complete
recorded in the sales in numerical sequence ness/ accuracy
journal, recorded twice or • Sequence tests to be performed
recorded incorrectly • Independent check of sales
recording in the sales
Consequence: may lead journal
to incorrect accounting • Completion of debtors
records reconciliation
Receipt and recording of payment from customer

Risk: if it is a cash sale, • For cash received on the Completeness
cash may be premises
misappropriated o Cameras, security on
premises
Consequence: may lead o Note reminding
to financial loss customers to insist on a
receipt
o Cashier and manager
prepare a reconciliation at
the end of the shift
Risk: receipts are not • Bank reconciliations Validity/
posted accurately, performed monthly completeness/
posted twice or not • Debtors reconciliations and accuracy
posted at all statements prepared and sent
out monthly
Consequence: may • Reconciliations checked by
lead to financial loss independent person
and inaccurate • List of unidentified deposits
accounting records created and posted to a
suspense account in the
general ledger and followed
up on
Other adjustments
Risk: that credit is • Separate receiving section Validity
granted for goods not supervised by receiving clerk
returned • Sequentially numbered goods
returned voucher created
Consequence: may after inspecting the goods
lead to financial loss • Sequentially numbered
credit note prepared by the
accountant
• The credit note must be
accompanied by the
original invoice and goods
returned voucher to be
checked and authorised by
the financial manager
• Sales returns journal
reviewed on a regular basis
by the financial manager to
ensure
they were all authorised by
him
Risk: sales returns are • Independent check of accuracy Completeness

not recorded accurately of the credit notes to the and accuracy
or not recorded at all original invoices and goods
(risk) returned voucher
• Review goods returned
Consequence: may vouchers on a regular basis
lead to reputational to ensure that they are all
damage and financial accompanied by a credit note
loss (consequence). • Independent check of
sequential numbering of
credit notes
• Perform debtors
reconciliations and send out
debtors
statements on a monthly basis
Risk: unauthorised • Discounts to be approved Completeness
discounts given to by management before and validity
customers being granted
Consequence: may
lead to
financial loss
Risk: discounts not • Independent check of accuracy Accuracy
recorded accurately or of discounts granted
at all in the financial • Perform debtors
records reconciliations and send out
debtors statements on a
Consequence: may monthly basis
lead to Incorrect records
and reputational
damage
(consequence).
The above table is derived

Study: from the information in
pp.224 – 245. Study this
table in the textbook and
add to and elaborate on the
table above
Recap on the control

Note and
activities that you learnt
activity:
about in learning unit 4,
can you identify these in
the table above?
List some below:
Let us now put what we have

Class learned into practice,
Activity Auditing Fundamentals in a
graded questions Chapter 6
example question 1 and 2.
What have you noticed about
the key words to use when
answering?
Risks:
Weakness:
Recommendations:
Exam type question

Question 1
The management of RF presented you with the following system
description for the ordering of vegetables and fruit in the revenue
and receipts cycle:
• All orders are placed with the farmer’s wife Nicole. All orders
are placed either via telephone or e-mail.
• As soon as Nicole receives an order from a customer, she
writes down the order on a piece of paper that is always
placed next to her telephone.
• The only details that she asks of the customer is the
customer’s name and the description of the vegetables and
fruits that the client would like to order
• Nicole then signs the piece of paper and forwards it to the cold room
• RF’s customers are allowed to buy on credit. Should new
clients want to open an account, the account and client limit
is granted immediately and the client can start buying.
Required:
Describe the weaknesses as well as the risk resulting from the
weaknesses in the internal controls with regards to the above
ordering function in the revenue and receipts cycle. For each
weakness identified, recommend an appropriate internal control that
would mitigate the risk identified.
Present your answer in the following table:

(25)
Weakness Risk Control
Source:
UNIVERSITY OF
JOHANNESBURG
DEPARTMENT OF
ACCOUNTANCY
AUDITING 3A (ADIA003) – 10 JUNE 2014 ADAPTED
Homework:
Auditing Fundamentals in a South African Context, Chapter 6, Question 1,
Question 5, Question 7, Question 9 and Question 10.
2 Purchases and payments cycle
Some important points on the purchases and payments cycle:

• Purchase of goods and services for use in the company
• These goods and services can be bought for cash or on credit
• Acquisition of goods or services for resale or use
within the business (expenses), excluding
Property, Plant and Equipment
• Creditors control
• Return of goods to suppliers
• Discounts received
Forms of
Purchases
Business
Finished
Raw Materials Services running
Goods
expenses
Let us have a look at the journal entries that are processed in

the purchases and payments cycle to better understand the
accounts involved in this cycle.
A. The company purchased items on credit:

Dr.
Purchases/expense/inve
ntory (Perpetual vs
periodic) Dr. VAT Input
Cr. Accounts payable
B. The company then settles their account

with the supplier Dr. Accounts payable
Cr. Bank
C. The company
returns the
goods Dr.
Accounts
payable/Bank
Cr. VAT output

Cr. Purchases returns
D. Company
received a
discount Dr.
Accounts
payable
Cr. VAT output
Cr.
Settlement discount
received
Therefore, in summary, which

accounts are affected:
• Accounts payable
• Expenses
• Inventory
• Purchases returns
• VAT control
• Bank
• Settlement discount received
Recap and Before we continue,

activity: it is important that
you recap on the
assertions
applicable to the
Purchases and
payments cycle.
Assertion Expenses Inventory Accounts

Payable
Occurrence
Completeness
Existence
Accuracy
Valuation
Rights
Classification
Cut-off
Accuracy, Valuation
and
Allocation
Presentation
Purchase
requisition
Ordering of goods
and services
Receiving goods
and services
Recording of
purchases
Payment
preparation
Actual payment
Recording of the
payment
Returning goods
Weakness, risks and recommendations
Don’t forget the objectives

Recap and of controls… VAC! Validity,
activity: Accuracy and
Completeness! Refer to
p.282, table 7.2 and link
the assertions identified
above with the control
objectives:
Occurrence
Completeness
Existence
Accuracy
Valuation
Rights
Classification
Cut-off
Accuracy, Valuation
and Allocation
Presentation
for each stage of the purchases and payments cycle. This table is
summarised from von Wielligh et al (2014):
Risks/consequences Control Control

s objective
Purchase requisition
Delayed or no • Use of Economic order NA
identification of quantity (EOQ), Just-in-time
material/goods required etc processes
= delay in customer • Constant monitoring of budgets
delivery, reputational vs actuals
damage • Regular stock counts
Fictitious or • Each requisition needs to be NA
unnecessary items approved and signed by a
ordered = financial manager or supervisor
loss • Each order requisition must be
accompanied by supporting
documentation proving the need
for the items
• Document design for the

Purchase requisition:
o Pre-printed
o Sequentially numbered
Ordering of goods and services

Incorrect or • Purchase orders must be Validity
unauthorised orders accompanied and attached to
are sent to suppliers = the approved purchase
financial loss requisition
• Manager/supervisor must
approve the purchase order by
signing it after agreeing it to the
purchase
requisition
Purchase orders are • Purchase orders must be filed NA
not sent to the sequentially and followed up on
suppliers in a timely if not matched to a goods
manner = delay in received note
delivery
Goods of an inferior • Maintenance of an Validity

quality are ordered = approved supplier list
increased wastage • Purchases may only be made
during production, from approved suppliers
reputational damage • New suppliers need to be
approved my management
Goods are ordered at • If a new supplier is being used, NA
inflated prices = at least three quotations need to
financial loss for the be obtained before the order is
company placed with any supplier
• The quotation needs to be
approved by a manager before
the order is placed
Receiving of goods from
suppliers
Incorrect goods, too • Dedicated goods receiving staff Validity
many, too few goods to prepare a goods received note
delivered = delay in that is matched to the purchase
production/delivery to order
customer • Goods received to be matched
to the delivery note and the
goods received note
• Goods that were not ordered
must not be accepted and sent
back with the driver
• Goods not accepted must be
noted on the delivery note and
signed by the goods receiving
staff and the
driver
Inferior, damaged • Dedicated goods receiving Validity
goods accepted = personnel to inspect the goods
customer for damage and quality
dissatisfaction • Goods that are of inferior quality
must be returned with the driver
to the supplier and a note made
on the delivery note and signed
by the goods receiving personnel
and the
driver
Items being delivered • Responsibility of receiving NA

could be goods must be given to
misappropriated dedicated personnel (isolation
= financial loss for of responsibilities)
the company • A separate, secure goods
receiving section dedicated to the
receiving of goods from suppliers
• Physical security measures to
be implemented, such as
CCTV and security guards
Goods received are not • Pre-numbered, sequential Completeness
recorded or are goods received notes to be
recorded inaccurately = prepared
inaccurate records • Second independent check of
the physical goods received to
the goods received note
prepared before the goods are
put in the
warehouse
Recording of purchases
Purchase is recorded for • All purchases to be recorded in Validity
which the goods were the accounting records need to
never received (fictitious be matched to the goods
purchase) = financial received note, delivery note and
loss for the company purchase
order before being recorded
Purchases are • Goods received notes Validity
recorded more than and purchase orders to
once be pre- numbered and
sequentially numbered
• Regular sequence checks to
be performed
Purchases are recorded • All purchases that are Validity,
in the incorrect recorded must be matched to completenes
accounting period the goods received note and s
delivery note and the date
confirmed
Purchases are • Accounts clerk to reperform the Accuracy
incorrectly recorded – in calculation on the supplier’s
the incorrect ledger invoice to confirm accuracy
account or at the • Units invoiced to be compared
incorrect amounts to the purchase order and
goods received note
• Unit price invoiced to be
compared to the price list of the
supplier/quotation received from
the supplier
• Supplier invoice signed by
the accounts clerk as
evidence of these checks
being done
• Independent check of the
posting of the invoice to the
correct ledger accounts
Purchase is not • Supplier invoices to be matched Completeness

recorded but the goods to goods received notes
were received • Goods received notes
pre- numbered and
sequentially numbered
• Unmatched goods received
notes to be followed up on a
regular basis
• Review of the purchases journal
for sequential numbering of
goods received notes and to
follow up on any missing
numbers
• Unmatched goods received
notes at year end to be
recorded as an accrual
• Monthly creditors reconciliations
of the creditors control account
and the general ledger and the
creditors ledgers
• Reconciliations to be
independently reviewed
• Reconciliations to be signed by
the preparer and the reviewer
Payment preparation
Payments are prepared • Supplier statements to be Validity
incorrectly, or fictitious requested from suppliers and and
payments are prepared reconciliations to be prepared accuracy
= financial loss for the and reviewed
• Reconciliations to be signed by
company
the preparer and the reviewer
• Any reconciling items to
be investigated
• Each payment prepared to be
supported by supplier invoice,
delivery note, goods received
note and purchase order
• Before payments are made,
a supervisor will examine
the supporting
documentation and match it
to the payment schedule
Paying the supplier
Payments made to • Payments made by EFT must Validity
fictitious suppliers and have at least two releases with and
not made per the one-time passwords and other accuracy
payment preparation effective password controls
• Payment documentation must
documentation =
be reviewed and compared to
financial loss for the the payment requisition before
company the payment is released
• Supporting documentation
signed/stamped as proof of
the review.
• Segregation of duties between
the payment preparation and
release of payment
• Bank reconciliation to be
prepared and reviewed
• Bank reconciliation to be signed
by the preparer and the reviewer
Recording of payments
Fictitious payments • Bank reconciliation to be Validity
are recorded prepared and reviewed
• All reconciling items to be
followed up on
Payments are • Bank reconciliation to be Accuracy
incorrectly recorded prepared and reviewed
followed up on
Not all payments that • Bank reconciliation to be Completeness

were made are recorded prepared and reviewed
followed up on
Returning of goods
Fictitious purchase • Debit notes are only prepared if Validity
returns recorded they are supported by a “goods
returned to supplier voucher” and
a supplier invoice of the original
purchase
• All debit notes to be authorised
by a senior staff member after
confirming the debit note with
the
supporting documentation
Purchase returns • Independent review of the Accuracy
inaccurately debit note for accuracy by
recorded comparing it to the
• Independent reviewer to sign
the debit note as evidence
Not all purchase • Goods returned vouchers and Completeness
returns are recorded debit notes to be pre-numbered
and sequentially numbered
• Sequential testing to be
performed on goods returned
vouchers and debit notes
• Missing numbers in the purchase
returns journal to be followed up
on

pp.289 – 307.
Study this table in the
textbook and add to and
elaborate on the table
above

Note and
activity:
about in Learning Unit 4,
the table above?
List some below:
Let us now put what we have learned into practice, Auditing

Fundamentals in a South African Context graded questions chapter
7 question 3, 6 and 8.
What have you noticed about the key words to use when answering?
Risks:
Weakness:
Recommendations:
Exam type question

Question 2
The directors of Yellow Cab are committed to good corporate
governance. During a recent risk committee meeting, they
identified the following risks relating to the acquisitions and
payments cycle, specifically in the ordering of goods function:
• Ordering incorrect or unnecessary goods, resulting in liquidity problems
• Ordering unauthorised goods resulting in losses to the company through fraud
• Requisitions not acted upon or orders not placed timeously or not at all
• Obtaining inferior quality goods
• Paying unnecessary high prices for goods
• Orders placed with suppliers not filed/not filed timeously
• Order forms misused e.g.: placing orders for
private purposes
Required:
Describe the internal controls for the risks identified by the risk
committee in the acquisition and purchases cycle that Yellow Cab
should implement to mitigate those risks.
Source:
3 Inventory and production cycle

Some important points on inventory and production cycle:
• Theft/misappropriation of stock is the biggest risk (read the
article in Auditing Fundamentals in a South African Context,
page 322)
• The payments and acquisition cycle “brings inventory into the business”
• The revenue and receipts cycle “takes inventory out of the business”
• Stock counts are an important control
• There are three types of inventory; Raw material, WIP and finished goods
• Some companies use the perpetual system and others use
the periodic system. What is the difference?
• The cycle is “triggered” by an order being
received from a customer There are therefore
three main functions/purposes of this cycle:
1) Safeguard the inventory against theft, loss or damage
2) Control of the movement of stock between the goods
receiving section, the warehouse, production (if
applicable), finished goods warehouse (if applicable)
and despatch. (See figure 8.2 and 8.3 in Auditing
Fundamentals in a South African Context, page 325 and
326 for the difference between a retail and
manufacturing company)
The following is a summary of the movement of inventory in a manufacturing

company:
Goods are Moved to the Moved to

Moved to
received (PP raw materials finished goods
production
cycle) warehouse (PP warehouse
Cycle)
Despatched to
Transfer of customer (RR
goods note cycle)
The following is a summary of the movement of inventory in a retail

company:
Goods are Moved to the Despatched to

received (PP warehouse (PP Stored customer (RR
cycle) Cycle) cycle)
3) Control the production process (if applicable)

OR
Process costing? Job costing?

the inventory and production cycle to better understand the
accounts involved in this cycle.
A. The company purchased items on credit:
Dr.
Purchases/inve
ntory
(Perpetual vs
periodic) Dr.
VAT Input
Cr. Accounts payable
B. The company
returns the
goods Dr.
Accounts
payable/Bank
Cr. VAT output
Cr. Purchases returns/Inventory (Perpetual vs periodic)
C. A customer
purchases
inventory Dr.
Bank/Accounts
receivable
Cr. VAT output Cr. Sales
Dr. Cost of sales (Perpetual only) Cr. Inventory
D. A customer returns goods
Dr. Inventory (Perpetual only)
Cr. Cost of sales Dr. Sales returns Dr. Input VAT
Cr. Bank/Accounts receivable
• Accounts payable (PP Cycle)
• Inventory
• Purchases (PP Cycle)
• Purchases returns (PP Cycle)
• VAT control (PP and RR cycle)
• Bank (PP and RR cycle)
• Accounts receivable (RR Cycle)
• Sales (RR Cycle)
• Cost of sales
• Sales returns (RR Cycle)
Recap and Before we continue, it is

activity: important that you
recap on the assertions
applicable to the
Inventory and
production cycle.
Assertion Cost of sales Inventory
Occurrence
Completeness
Existence
Accuracy
Valuation
Rights
Classification
Cut-off
Accuracy, Valuation and
Allocation
Presentation
Storage of raw
materials
Production
planning
Transfer of raw
materials to
production
Production
Transfer of finished
goods to finished
goods warehouse
Storage of finished
goods
Updating of costing
records
Maintenance of
inventory records

Don’t forget the
Recap and objectives of controls…
activity: VAC! Validity, Accuracy
and Completeness!
Refer to Auditing
fundamentals in a South
African context page
341, table
8.3 and link the
assertions identified
with the control
objectives:

Occurrence
Completeness
Existence
Accuracy
Valuation
Rights
Classification
Cut-off
Accuracy, Valuation
and Allocation
Presentation
for each stage of the inventory and production cycle. This table is

objective
Storage of raw materials
Inventory could be • Physical controls to be Accuracy
damaged = financial loss implemented such as
ventilation, water proofing,
fire proofing, neatly stacked
and
packed
Inventory could be stolen = • Physical controls to be Validity
financial loss implemented such as CCTV,
security guards, limited
entry and access points to
the
warehouse
Production planning
Too much or too little • Production plan to be produced Accuracy
inventory could be based on targets, budgets and
manufactured = past trends
dissatisfied customers, • Production plans to be
reviewed and authorised by the
financial loss
production manager
• Production plan must be used
to prepare the production
schedule
The factory may: • Raw material requisition to NA
• Run out of raw be prepared based on the
materials = delayed production schedule
production • Raw material requisition to
be authorised by production
• Request too much manager
raw materials =
wastage
• Request the
incorrect raw
material = inferior
products
• Fictitious request
for raw materials =
financial loss
Transfer of raw materials to production
Incorrect materials • Raw materials transferred must NA
transferred = delay in be matched to the raw
production materials transfer note by the
raw material store man and
production personnel and
signed by both parties
Transfer may not be • Transfer of inventory notes Accuracy

recorded or recorded must be pre-numbered,
inaccurately sequentially numbered
• Regular reviews of
sequential numbering in the
inventory
transfer journal
Production
Theft or wastage = • Physical controls to Validity
financial loss be implemented as
discussed above
• Quality control
procedures and
supervision by the
production manager at all
times
• Production reports
compared to the material
requisitions and orders
placed on regular intervals
• Reports
reviewed and
authorised by
senior
management
Transfer of finished goods to finished goods warehouse
Finished goods may be • Finished goods transfer Validity
transferred when not actually note to be prepared
finished or finished goods may • Finished goods transfer
be stolen or damaged note to be pre-numbered
and sequentially
numbered
• Senior management to
test sequential numbering
in the transfer of inventory
journal on a regular basis
and follow up on missing
numbers
• Production personnel and
finished goods warehouse
manager to compare
goods to the finished
goods transfer note and
sign as evidence of the
check being performed
Cost allocation and updating of inventory records

Costs allocated to • All costs to be allocated
inventory could be: to be independently
• Incorrectly checked and reviewed Accuracy
calculated and compared to the Occurrenc
• Invalid production schedule e
• Actual costs to be
• Incomplete compared to budgeted Completeness
• Incorrectly costs and variances
recorded investigated Accuracy
• Recording to be
independently checked
and reconciled to the
production schedules
Maintenance of inventory records
Inventory could be • Any adjustments to Validity and
incorrectly added or inventory to be authorised completenes
deleted once compared to s

from the information in
Study:
South African context page
344-353. Study this table in
the textbook and add to
and elaborate on the table
above
Note and Recap on the control

activity: activities that you learnt
the table above? List some
below:
Controls to be implemented at a stock count

• Count teams should be made up of two people – one being
independent of inventory
• Teams to be given a floor plan detailing which areas they are accountable for
• All inventory items to be neatly packed and labelled
• No dispatching or receiving of goods must occur during the count period
• Counters must draw lines through blank spaces on the count
sheets and sign the sheets
• Inventory sheets must be pre-printed, numerically sequenced,
only contain description/inventory number/location and should
NOT have the quantity
• The sheet must have columns for both counts and a discrepancy column
• Inventory sheets signed in and out and the counters to sign the count sheets
• All inventory must be counted twice (within team or new team)
• Once the item is counted, it must be marked (first and second count)
• If items appear damaged, obsolete by the counters, this must
be marked on the count sheets
• If packaging appears tampered with, these boxes should be

opened and counted and noted on the count sheets
• Random selection of boxes where the contents must be agreed to the description
• Count controller should do the following:
o Once the count is completed ensure that all items have been marked
twice
o Compare the two counts and agree to the inventory system
o If the two counts do not agree, instruct the teams to recount
o Perform test counts
o Perform sequential testing on count sheets to ensure all
of them have been returned

8 question 7.
Risks:
Weakness:
Recommendations:
Exam type question

Question 3
Movement of components through the production
process as work in progress:
1. The time that is spent on each stage of production, by
production employees and in machine time, is captured by the
store man on a loose piece of paper. He then ensures that he
sends the piece of paper to the accounting department in
order for them to capture the time spent on each stage of the
production.
2. At the end of each month, the total time recorded on the
production summary sheet, is reconciled to the total hours
worked by production staff. Any differences are sorted out
during month end.
Transfer of manufactured goods to finished goods inventory:

3. Once the production process is complete the produced
billboards are transferred to the finished goods store.
4. Acceptance of the goods into finished goods inventory is
acknowledged by the inventory store staff through signing of
the finished goods report.
Required:
Identify the weaknesses from the above description and for each
weakness identified, describe the business risk due to the weakness
and recommend internal controls that should be implemented to
address the identified weakness. (20)
Weakness Business risk Internal control to be

implemented
Source:
UNIVERSITY OF
JOHANNESBURG
DEPARTMENT OF
ACCOUNTANCY
AUDITING 3A (ADIA003) – 10 JUNE 2014 ADAPTED
Homework:
Auditing Fundamentals in a South African Context, Chapter 8, Question 4,
Question 5, Question 6 and 9.
4 The Human Resources cycle

Some important points on the human resource cycle:
• There can be salaried employees and wage earners. What is the difference?
• Generally, the largest expense on the statement of comprehensive income
• Salaries/wages can be paid in cash, or EFT (most common)
• Gross salary/wage = Net salary/wage (amount paid to
employee) + UIF contributions + SDL contributions + PAYE +
Medical aid contributions + pension/provident fund
contribution
• Salaries/wages are reflected on payslips (internally generated)
• Biggest risk in the human resource cycle is the payment of
salaries/wages to fictitious employees or payment for fictitious
hours worked

the human resource cycle to better understand the accounts
involved in this cycle.
A. The company prepares the payroll for

the month/week:
Dr. Salaries/wage
expense (gross amount)
Cr.
Salaries/
wages
payable
(Net
amount)
Cr. PAYE
payable
Cr. Pension
payable, etc.
B. The company pays salaries

Dr.
Salaries/
wages
payable
(Net
amount)
Dr. PAYE
payable
Dr. Pension payable etc.
Cr. Bank
C. Dr. Provision for

leave pay (SOCI)
Cr.
Provision
for leave
pay (SFP)

• Salaries and wages expense (gross)
• Bank
• Accruals for deductions payable (PAYE, UIF, SDL, Pension etc)
• Provision for leave pay expense
Recap and Before we continue, it is

activity: important that you recap
on the assertions
applicable to the human
resource cycle.
Assertion Salary/wage expense Accruals
(gross)
Occurrence
Completeness
Existence
Accuracy
Valuation
Rights
Classification
Cut-off
Accuracy, Valuation and
Allocation
Presentation
Let us now look at the flow of the cycle in terms of a business cycle. Complete the
source documents, journals and ledgers, database and masterfiles, reports and
reconciliations required in each sub section on the lines provided on the right; refer to
pp.374 – 383 of Auditing fundamentals in a South African context.
Personnel
Time keeping
Calculation and
recording of
salaries, wages
and deductions
Payment
preparation and
payment
Payment of
deductions
Recording of salary
and wage
transactions in the
records

Don’t forget the
Recap and objectives of controls…
activity: VAC! Validity, Accuracy
and Completeness!
Refer to Auditing
fundamentals in a South
African context page
390, table
9.3 and link the assertions
identified above with the
control objectives:

Occurrence
Completeness
Existence
Accuracy
Valuation
Rights
Classification
Cut-off
Accuracy, Valuation
and Allocation
Presentation
for each stage of the Human resource cycle. This table is

objective
Personnel (Hiring and firing)
Unauthorised • For posts to be filled, a Validity
appointments made or request and motivation to fill
fictitious employees the post is submitted by the
included on the payroll = line manager for authorisation
financial loss • These requests are approved
after ensuring it is in line with
the budget
• Reference and criminal checks
to be conducted on all potential
candidates for the post
• Comprehensive
interviews conducted by
senior management and
the line manager
• A contract for employment is
drawn up and signed by the
employee and representative of
the company
• An employee file is started

which will contain a copy of the
contract, the employee’s ID and
any further amendments to the
employee’s employment with the
company
Unauthorised or incorrect • All amendments to payroll need Validity
changes made to the to be completed on a pre-printed
payroll = financial loss sequentially numbered
amendment form and need to be
authorised by senior
management after comparing the
amendment to the supporting
documentation
Unauthorised or • Termination of an Validity and
unrecorded dismissal = employee should be signed completeness
litigation and financial loss by the employee and senior
management
• Amendments to payroll
per above
Time keeping (wage earners)
Payment made for hours • For Biometric access controls: Validity
not worked or to fictitious Scanners for fingerprint
employees = financial recognition/face recognition
loss etc to be installed at each
entry/exit point and employees
to scan their biometrics when
they enter/exit the
factory/warehouse.
• For access card controls: card
readers to be installed at each
entry/exit point and employees
to scan their access cards
when they enter/exit the
factory warehouse
• Daily reports of the entry/exit
movements to be generated,
reviewed and signed by the
factory/warehouse manager
• For manual registers: Pre-
printed, pre-numbered and
sequentially numbered daily
registers to be prepared
• Employees to manually sign
the register when they
enter/exit the
factory/warehouse
• The process of employees

signing in to be supervised
• Entry and exit points to the
factory/warehouse to be
limited
• A reconciliation of the hours
worked from the registers to be
performed by the manager and
reviewed by an independent
person to confirm accuracy.
• The recons to be signed by the
manager and the independent
reviewer.
Incorrect calculation of • Independent checks of the Accuracy
the normal and overtime accuracy of these
hours calculations to be performed
• Preparer and reviewer to sign
the calculation
Calculation and recording of salaries, wages and deductions
Dismissed or fictitious • Employees included in the Validity
employees are paid = payroll for payment must be
financial loss traced to the Masterfile/payroll
register
Employees not paid for • Masterfile/updated employee Completeness

hours work or paid for register/file to be used to
hours not worked = prepare the payroll
financial loss • Any overtime worked to be
authorised by the
factory/warehouse
manager
Unauthorised or incorrect • Independent checks of Accuracy
deductions taken from accuracy of payroll to be
employees. Inaccurate performed
calculations of salaries • Preparer and reviewer to sign
and employees = financial the payroll
loss, unhappy employees • Reconciliations of payroll
performed to the employee list
and prior payroll period
Payment preparation and payment
Incorrect/unauthorised • Payments made by EFT must Accuracy and
wage/salary amount paid have at least two releases with validity
= financial loss one-time passwords and other
effective password controls
• Bank signatories to review the
wage/salary journal and
reconciliation before releasing
the payment
• Bank signatories to sign the
wage/salary
journal/reconciliation as
evidence of review before the
release of the payment
If wages paid in cash, • Cash to always be locked in Validity
cash could be a safe
misappropriated = • Any handling of cash to be
financial loss done together by two
independent people
Incorrect cash placed in • Wage envelopes prepared by Accuracy
envelopes for wage two independent clerks
payments = financial loss • Each clerk checks the work
of the other clerk
Wages are paid to the • Foreman/supervisor to hand out Validity
incorrect/fictitious wage the wage envelopes to compare
earners number of envelopes to the list
of employees from the masterfile
• Foreman and an independent
employee present at the pay-
out and to conduct the pay-out
• Wage envelopes only given to

employees that present a
positive form of identification,
count the cash in front of the
foreman and independent
employee and finally sign for
the wage
• Wages are only paid to
employees in person and not to
others on their behalf
• Unclaimed wage register
prepared for all wage earners
that did not collect their wage
in person on pay-out
Unclaimed wages are • Independent employee from the Validity

stolen or paid to the pay-out team to compare
incorrect person = envelopes to the unclaimed
financial loss, dissatisfied wage register and claimed
employee wage register
• Unclaimed wage register to be
signed by this independent
person as evidence of this being
conducted
• Unclaimed wages to be locked
in a safe
• When unclaimed wages are
collected by the employees, they
may only take the envelope after
presenting a positive form of
identification, count the cash
and finally sign for the wage
• All unclaimed wages not
collected within a
reasonable amount of time
must be re- banked.
• On a regular basis, surprise
checks of unclaimed wages on
hand to the unclaimed wages
register should be performed
by management
Payment of deductions
Deductions are calculated • Independent checks of all Accuracy
and paid over incorrectly deductions calculated and
paid over to be performed
• Returns submitted annually
for the deductions
• Reconciliations of gross and
net salaries to be performed
Deductions that should • Monthly schedule to be Completeness
have been paid over have prepared and reviewed
not been paid over at all • Preparer and reviewer to sign
or timeously the schedule
• An independent review of the
relevant General Ledger
accounts should be performed
on a regular basis to ensure
that they are being promptly
cleared
• At year end, the financial

manager should ensure that
these are raised as
liabilities
Recording of salary and wage transactions in the accounting records
Recording of the payroll • Payroll reconciliation between Completeness,
may be incomplete, the payroll journals and accuracy,
inaccurate, recorded in ledgers to be performed and Validity
the incorrect period or independently reviewed
classified incorrectly • Any reconciling items to
be followed up
• Journal entries to account
for payroll to be reviewed
and authorised by senior
management
• Reconciliation of payroll to the
prior period and number of
employees to be prepared and
reviewed
• At year end, the financial
manager should ensure that
unpaid deductions are
accounted
for as liabilities

pp.393 – 409. Study this
table in the textbook and
add to and elaborate on the
table above

Note and
activity:
the table above? List some
below:

9 question 4 and question 7.
Risks:
Weakness:
Recommendations:
Exam type question
Question 4
The following information relates to the payroll and personnel cycle
at Forever Awesome.
Recruitment
When you arrived to conduct the audit at Forever Awesome, you
noticed a number of weaknesses with regards to the staff that were
employed. There were a number of staff that were not performing
any work, while you also noticed one of the staff members leaving
the premises with an expensive item of inventory.
On enquiry with one of the staff members who was resting at the
back of the warehouse, about his qualifications, he mentioned that
he was excellent at his previous job, where he was a janitor at a
local school, but was forced to take “extended leave” because of
some “misunderstanding with regard to a missing purse of one of
the teachers”.
Wages pay-out
Every Friday the warehouse manager performs that wage pay-out.
He asks the staff to assist him in the process of identifying all the
employees as he does not know everyone. He asks the staff to
divide into groups based on the production groups they work in and
then nominate an employee to collect all of the wages for the
particular group. The nominated employee will also sign as proof of
the receipt of the pay- packets.
Required:
Identify the weaknesses in the recruitment and wages pay-out
functions of Forever Awesome and recommend internal controls to
be implemented to address the identified weaknesses. (12)
Weakness Recommendation
Source:
UNIVERSITY OF
JOHANNESBURG
DEPARTMENT OF
ACCOUNTANCY
AUDITING 3A (ADIA003) – 10 JUNE 2014 ADAPTED and
AUDITING 3A (ADIA003) – JULY 2014
SUPPLEMENTARY ASSESSMENT ADAPTED
Homework:
8 and Question 9
5 The finance and investment cycle
Name some examples of investments that a company can make:
Name some examples of financing that a company can utilise:
What accounts are involved in this cycle? (Add some more to the
table, refer to pp.422 and 423 of Auditing fundamentals in a South
African context)
Statement of financial position Statement of comprehensive income

Share Capital Profit or loss
Reserves Interest paid
Long term loans Profit or loss on sale, depreciation
Property, plant and equipment Profit or loss on investment, dividends
received
Investment in shares
Dividends paid
Characteristics of finance and investment cycle

• Frequency of transactions – There are limited amounts of these transactions
• Size/magnitude of transactions – They are usually material
• Legal and regulatory requirements – MOI/Companies Act
• Non-routine internal controls – Not be subjected to routine controls
• Non-standard documentation – Contracts/agreements

• Most of these transactions are subjected to management
estimates and are complex in nature – Depreciation,
impairments, revaluations
• Major risks
The characteristics can also be seen as risks of material

misstatement within this cycle. How do we mitigate these risks?
High level overview of compensating controls

• Planning – There needs to be proper planning for any
transaction in the finance and investment cycle. Some of this
planning can involve specific committees, budgets to be
prepared for the transaction and comparison of actual to
budget
• Authorisation – As these transactions are large, risky and
generally have legal implications in terms of the Companies
Act, the board of directors or an equivalent need to authorise
these transactions
• Implementation – This is only to be carried out by competent
staff and properly controlled throughout the entire
implementation
• Review and approval – Throughout implementation of these
transactions progress reporting needs to be completed,
comparison to plans and budgets and scrutiny by internal audit
where applicable
Source documents and supporting schedules involved in this cycle
Investments Financing
Capital budgets and variance tracking Minutes of board meetings
Memorandum of incorporation Special resolutions
Minutes of board meetings Memorandum of incorporation
Special resolutions Financing agreements or contracts
Asset requisition form Securities/share register
Purchase contracts or agreements Masterfiles and Masterfile amendment
forms
Brokers note or brokers statement Calculation schedules and amortisation
tables
Share certificates
Fixed asset register
Masterfiles and Masterfile amendment
forms
Schedules of calculations
Assertions
Before we continue, it is
Recap and
important that you recap
activity:
on the assertions
applicable to the finance
and investment
cycle.
Assertion: Issue of Payment Long Finance Repayment

Finance shares of term charges of loan
dividends loan
Occurrence
Completeness
Existence
Accuracy
Valuation
Rights
Classification
Cut-off
Accuracy,
Valuation and
Allocation
Presentation
Assertion: Acquisition Property, Depreciation Impairments

Investment and plant and
disposal of equipment
property,
plant and
equipment
Occurrence
Completeness
Existence
Accuracy
Valuation
Rights
Classification
Cut-off
Accuracy,
Valuation and
Allocation
Presentation
Risks and controls

Based on the above information regarding the types of transactions
and the high level overview of the risks and controls, complete the
below table for each transaction.
Refer to pp.425 – 430 of Auditing fundamentals in a South African
context to assist you in completing the table. The textbook refers to
the main activities for these transactions, what else could these
main activities be referred to as?
Transaction Main activities/Internal Key risks
(Financing) controls
Issue of shares
Journal entry:
Dr.
Cr.
Payment of dividends
Journal entry:
Dr.
Cr.
Raising/obtaining of a
long-term loan
Journal entry:
Dr.
Cr.
Finance charges
Journal entry:
Dr.
Cr.
Loan repayments
Journal entry:
Dr.
Cr.
Transaction Main activities/Internal Key risks

(Investments) controls
Acquisition of
property, plant and
equipment
Journal entry:
Dr.
Cr.
Disposals of property,
plant and equipment
Journal entry:
Dr.
Cr.
Depreciation
Journal entry:
Dr.
Cr.
Impairments and
revaluations
Journal entry:
Dr.
Cr.
Now refer to pp.437 – 438 and pp.445 – 446 of Auditing

fundamentals in a South African context and add in the key
assertion level risks per transaction and add any other internal
controls that you may not have found from the main activities.
And finally, having regard to the risks identified above, which control
objective would be at risk of not being achieved for each risk. Refer
to Table 10.1 on p.441 of Auditing fundamentals in a South African
context for guidance on this.
Exam type Question
Question 5
You are the auditor of Steelworks Ltd, a listed company trading
within the steel industry.
The company makes significant ongoing purchases of property,

plant and equipment causing the company’s fixed assets balance to
be material. The financial manager of Steelworks Ltd informed you
that the company’s finance and investment cycle controls were
somewhat neglected in the last few years.
Required:
List the internal controls required for effective control over the
property, plant and equipment of Steelworks Ltd (10)
Source:
UNIVERSITY OF
JOHANNESBURG
DEPARTMENT OF
ACCOUNTANCY
AUDITING 3A (ADIA003) – JULY 2014
SUPPLEMENTARY ASSESSMENT ADAPTED
Homework:
5, Question 8 and Question 9.
Reference list
1. The South African Institute of Chartered Accountants (2021).

[Online]. Available at: https://www.saica.co.za [Accessed 11
December 2023].
2. The Independent Regulatory Board for Auditors (2017).
[Online]. Available at: https://www.irba.co.za [Accessed 11
December 2023].
3. SAICA Student Handbook, 2022/23, International Audit Standards, Volume 2.
4. Von Wielligh, P and Prinsloo, F. 2014. eds. Auditing
Fundamentals in a South African Context. Cape Town, Oxford
University Press Southern Africa.

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IIE Module Workbook AUDI6211

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Using this Workbook ....................................................................................................5

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Using this Workbook

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Auditing is a very important aspect of your studying and working

Auditing 2A consists of five learning units which will be completed

Learning Unit 1 considers the need for an audit in today’s global

Learning Unit 3 is fundamental. It discusses each stage of the

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• The five components of any system of internal control, namely

Learning Unit 5 focuses on one of management’s objectives which

Auditing is like a puzzle which we need to piece together, this is the

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Please note that this module workbook is intended to

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Module Pacer and

Related LO1: Describe the auditing profession; Chapter 1

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Related LO1: Discuss the duties and Chapter 2 and

Related LO3: Apply the principles of quality Chapter 2 and

Related LO8: Apply the principles of the Chapter 2 and

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Related LO1: Discuss the stages and flow of Chapter 11 and

Related LO4: Discuss planning in the context Chapter 11 and

Related LO1: Describe the definition of Chapter 4

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LO13: Explain the payroll and personnel

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LO20: Describe recommendations in a

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Formatives Test 1 Test 2

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Learning Unit 1: Introduction to auditing

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Image source: http://quotesgram.com/img/auditor-funny-quotes-about-

An auditor is an individual or individuals who conduct an audit, they

1.1 Different types of auditors

When we hear the word “auditor” we automatically think of an

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Research if there are

Note: We will be focussing on external auditors and external

1.1) The auditing profession

We will pay special attention and focus on two of these bodies,

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What is SAICA’s mission? According to the South African Institute