Slides - Chapter 1 - AFISAC - 2 Slides Per Page

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Chapter 1
Introduction about
EXTERNAL AUDITORS
Must study the following sections from

Chapter 1 of Auditing Fundamentals in a
South African Context:
Everything from Chapter, Section 1.1 to
1.6.3.2 should be studied, except the
following (which can be left out):
1.4.2; 1.4.3; 1.5.1; 1.5.2
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1.2 What is the purpose of and need for accounting records?
1.2.1.1 Nature of accounting records
Assets, liabilities, revenues, expenses,

Accounting records
equity, other transactions

Journals, general ledger, subsidiary
ledgers, supporting documents
Manual or computerized system
1.2.1.2 The need for accounting records

1. Accounting records are needed for an effective financial
management system in an entity.
2. They are used by management to:
i. Record and keep track of transactions;

ii. Obtain timely information for management decision-making
o e.g., pricing of products
o funding requirements
o strategic direction of the entity
iii. Measure results and evaluate the performance of the business
against the set goals and targets
iv. Enable preparation of financial statements for reporting to
external parties (including shareholders).
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1.2.1.2 The need for accounting records

3. Accounting records are needed for submitting income tax returns
➢ provide evidence of the income declared and expenses
claimed
4. Legislation requires companies keep proper accounting

records
➢ Requirements of the Companies Act 71 of 2008
Internal Sales order

❑ Keep track of transactions
Not Delivery note
❑ Proof of goods/services
necessary to
changing hands
memorise Sales invoice
example –
❑ Show amounts due,
(but Sales journal and debtors ledger
understand instruction to pay.
the flow of
General ledger
transactions Example of documents/
from source records: See the Appendix
documents to Auditing Fundamentals at Trial balance
to FS). the back of the text book.
Financial statements
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1.3 What is the objective of and need for financial statements?
❑ Conceptual Framework (IFRS): “Financial information that

Not is useful to wide range of users”
necessary to • Relied on for investment and financing decisions
memorise –
but rather ❑ Meets common needs of most users
understand
❑ Portrays mostly past events, not forward looking
❑ Reflection of directors’ stewardship, use of company

resources.
❑ Board of directors (BoD) responsible for:

• Ensuring that proper accounting records are kept
• Preparing and approving the financial statements before publication
❑ BoD:
• May delegate (next slide) the day-to-day finance function to the accounting
division headed by the chief financial officer (CFO) or Financial Director (FD)
• Must review and approve the accounting records and financial statements
compiled by the accounting division (under leadership of the CFO/FD)
• Remain ultimately responsible for preparing and approving the accounting
records and financial statements before publication
• Remain ultimately responsible for the fair presentation of transactions and
events that took place during the year in the financial statements
➢ Directors who knowingly misrepresent information in financial statements
are in contravention of section 29 of the Companies Act of 2008 and are
guilty of a criminal offence (may go to jail).
❑ The audit committee
• Is a subcommittee of the BoD
• Has an oversight function over the financial statements
➢ thereby assisting the BoD in discharging its responsibilities.
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Ultimately accountable to the

public and stakeholders
(including shareholders) for
preparation, approval and fair
presentation of accounting
records and financial statements
Delegate
According to International Accounting Standard (IAS) 1, the financial statements of

a company consist of: Not
necessary to
• A statement of financial position as at the end of a period; memorise
• A statement of profit and loss and other comprehensive income for the period;
• A statement of changes in equity for the period;
• A statement of cash flows for the period;
• Notes consisting of a summary of significant accounting policies and other
explanatory information;
• Comparative information in respect of the preceding period; and
• A statement of financial position as at the beginning of the preceding period
when an entity applies an accounting policy retrospectively or makes a
retrospective restatement of items in its financial statements or when it
reclassifies items in its financial statements
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❑ Approvers of financial statements (the Board of Directors/BoD) Extremely

o make promises (representations/statements) important
o that should correspond with their (BoD’s) objectives regarding the financial
statements
➢ these promises/objectives are known as ASSERTIONS
❖ made about two types of financial statement information
Two types of financial statement information about which assertions are made
Type 1 Type 2
Classes of transactions (i.e., income and Account balances (for opening and closing
expenses) balances of assets, liabilities and equity)
Events that happened at a specific time Related disclosures
during the financial year (any movement in
assets, liabilities, equity, income or expense
e.g. cash/credit purchase of an asset)
Related disclosures
Classes of transactions, events Account balances and related

and related disclosures disclosures
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Type 1: Type 2:
Classes of transactions, events Account balances and related
and related disclosures disclosures
❑ Applied to accounting information:
Trade receivables control account

Opening balance 13,587,696 Bank (receipts) xx xxx xxx
Credit sales xx xxx xxx Sales returns x xxx
Allowance for credit losses
adjustment x xxx
Closing balance 16,584,187
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ACCOUNT BALANCES AND RELATED DISCLOSURES

(Opening and closing balances of assets, liabilities and equity)
ASSERTION DESCRIPTION/EXPLANATION OF ASSERTION
• Assets, liabilities or equity represented by balances actually exist
Existence ➢ is not fictitious and
➢ is real.
• Assets, liabilities or equity balances recorded at the correct amounts
• Includes appropriate measurement and description of any adjustments to
Accuracy,
the valuation or allocation:
valuation
❑ at recognition;
and
❑ after recognition (continuous measurement i.e. taking into account
allocation
adjustments);
❑ in disclosures.
• The entity (not another organisation) holds/controls ownership of the ASSETS
reflected in the financial statements.
Rights and
• LIABILITIES reflected in the financial statements are the obligations (debt) of
obligations the entity (not another organisation).
• [Alternative wording: The entity (not another organisation) is the obligated
(indebted) party with regards to LIABILITIES reflected in the financial
statements.]
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ACCOUNT BALANCES AND RELATED DISCLOSURES

(Opening and closing balances of assets, liabilities and equity)

• Nothing has been left out of/everything has been included in the
assets, liabilities or equity
Completeness
➢ balances recorded, and
➢ disclosures made.
Assets, liabilities or equity balances recorded in the appropriate
Classification
accounts.
• Assets, liabilities or equity interests are:
➢ appropriately presented and aggregated (combined → less
detail) or disaggregated (split-up → more detail); and
➢ clearly described.
Presentation
• Disclosures related to assets, liabilities or equity are
➢ relevant and understandable
➢ in line with the requirements of the applicable financial
reporting framework (e.g., IFRS or IFRS for SMEs).
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CLASSES OF TRANSACTIONS (income and expenses), EVENTS (any movements in assets,

liabilities, equity, income or expenses) AND RELATED DISCLOSURES

• Transactions and events that have been recorded or disclosed
Occurrence ➢ have actually happened, and
➢ relate to the entity (not another organisation).
• Nothing has been left out of/everything has been included in
Completeness ➢ the transactions and events recorded, and
➢ related disclosures made.
• Use of Transac-
Accuracy ➢ correct amounts → record tions &
➢ appropriate measurements and descriptions → disclose events
The correct accounting period have been used to record transactions
Cut-off
and events (recorded at correct date and in correct sequence).
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CLASSES OF TRANSACTIONS (income and expenses), EVENTS (any movements in assets,

liabilities, equity, income or expenses) AND RELATED DISCLOSURES

Classification The appropriate accounts are used to record transactions and events in.
• Transactions and events are:
➢ appropriately presented and aggregated (combined → less
detail) or disaggregated (split-up → more detail); and
➢ clearly described.
Presentation
• Disclosures related to transactions and events are:
➢ in line with the requirements of the applicable financial
reporting framework (e.g., IFRS or IFRS for SMEs).
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ACCOUNT BALANCES AND CLASSES OF TRANSACTIONS, EVENTS

ASSERTION
RELATED DISCLOSURES AND RELATED DISCLOSURES
Existence X
Occurrence X
Accuracy,
valuation and X
allocation
Accuracy X
Rights and
X
obligations
Cut-off X
Completeness X X
Classification X X
Presentation X X
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Example: Ntsimbi Piping’s Property Plant and Equipment (PPE) in the Statement of
Financial Position at 31 December 20X1 (see the financial statements of Ntsimbi
Piping at the beginning of the “Auditing Fundamentals in a South African Context”
textbook)
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Example: Ntsimbi Piping’s Property Plant and Equipment (PPE) in the Notes to
the Financial Statements (see the financial statements of Ntsimbi Piping at the
beginning of the “Auditing Fundamentals in a South African Context” textbook)
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Which assertions did the directors of Ntsimbi Piping make in the financial
statements about the company’s Property, Plant and Equipment (PPE)?
Take note: only the assertions for ACCOUNT BALANCES AND RELATED DISCLOSURES are
applicable to PPE (an ASSET with a balance at a specific date)
ASSERTIONS DESCRIPTION/EXPLANATION OF ASSERTION
• PPE (assets) represented by the balance of R43 169 987 in the Statement
of Financial Position (SFP) at 31 Dec 20X1:
Existence ➢ actually exist
➢ is not fictitious and
➢ is real.
• The carrying amount/value of R43 169 987 for PPE (assets) reflected in
the SFP at 31 Dec 20X1 is appropriate,
• meaning the assets were appropriately measured and described
➢ at recognition
Accuracy,
➢ after recognition
valuation and
❑ continuous measurement i.e. taking into account adjustments
allocation
for impairments, depreciation, etc.
➢ in disclosures
❑ e.g. gross carrying amount and accumulated depreciation at the
beginning and end of the year
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Which assertions did the directors of Ntsimbi Piping in the financial statements about the
company’s Property, Plant and Equipment?
Rights (only • Ntsimbi Piping holds/controls ownership of the PPE (assets) represented
relevant to by the balance of R43 169 987 in the Statement of Financial Position (SFP)
assets) at 31 Dec 20X1
(Obligations are not discussed – only relevant to liabilities)

• Nothing has been left out of/everything has been included
➢ in the PPE (assets) balance of R43 169 987 recorded in the SFP at 31
Completeness
Dec. 20X1) for Ntsimbi Piping
➢ and in the related disclosures made.
• All PPE balances of Ntsimbi Piping has been recorded in the appropriate
accounts
Classification
➢ as PPE (non-current, tangible assets) and not as current assets (e.g.
inventory) or intangible assets.
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Which assertions did the directors of Ntsimbi Piping in the financial statements about the
company’s Property, Plant and Equipment?
• All PPE assets of Ntsimbi Piping have been appropriately
➢ presented
➢ aggregated (combined → into less detail) or disaggregated (split-up
→ into more detail)
❑ e.g. additions to PPE, disposals of PPE, revaluations of PPE,
depreciation and any other movements are shown in the
reconciliation of carrying amount from beginning of the year to
Presentation the end of the year
• Disclosures related to PPE assets of Ntsimbi Piping are

➢ clearly described/expressed
❑ e.g. the depreciation method, depreciation rate and useful lives
➢ in line with the requirements of the applicable financial reporting
framework (IFRS).
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• Accounting records must be:

➢ Accurate and complete Will NOT be asked as
long questions (more
➢ In one of official languages (sec 28)
than three marks). Can
➢ Kept at company’s registered office (sec 28) be asked as short
➢ Sufficient to prepare financial statements questions.
➢ Sufficient to enable audit (if applicable)
➢ Kept in written/electronic format (sec 24)
➢ Minimum of seven years (sec 24)
• Regulation 25(3) of the Companies Regulations 2011

➢ Sets out minimum requirements as to what should be included in a
company’s financial/accounting records
➢ See handbook for examples (not necessary to memorise)
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• According to Section 29(1) of the Companies Act of 2008,

companies’ financial statements must:
➢ Adhere to the prescribed financial reporting standards applicable to the
company (e.g. IFRS/IFRS for SMEs);
Will NOT be asked as long questions
➢ Fairly present the affairs of the company (more than three marks). Can be
➢ Explain the financial position of the company asked as short questions.
➢ Show the company’s assets, liabilities, equity, income and expenses and
any other prescribed information
➢ Set out the date on which the financial statements were produced
(finalized)
➢ Set out the accounting period to which the financial statements relate
➢ State whether the financial statements have been audited or
independently reviewed.
➢ State the name and professional designation of the person who
prepared or supervised the preparation of the financial statements
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• Section 29(2) requires that if a company provides its financial statements to any
person for any reason these financial statements may not be
➢ false or misleading in any material respect,
➢ or incomplete.
• It is an offence (sec 29(6)) for any person to (more than three marks). Can be
➢ prepare, asked as short questions.
➢ approve,
➢ disseminate (distribute),
➢ or publish
• any financial statements knowing that these financial statements are
➢ false,
➢ misleading,
➢ incomplete,
➢ or do not comply with the requirements of section 29(1) (previous slide).
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• According to Section 30 of the Companies Act of 2008,

companies’ financial statements must:
➢ Be prepared within six months after the year-end of the
company.
➢ Include: (more than three marks). Can be
❑ An auditor’s report asked as short questions.
❑ A director’s report
❑ Disclosures about directors’ remuneration (only for
companies that have to be audited)
➢ Approved by the board of directors
➢ Signed off by an authorised director
➢ Presented at the first shareholders’ meeting after the
financial statements have been approved.
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• Parties entitled to receive copies of the financial statements (sec 31):

➢ Shareholders
➢ Through application to the Commissioner of Companies
❑ Judgement creditors Will NOT be asked as long questions
❑ Trade unions (more than three marks). Can be
asked as short questions.
• It is an offence for a company to refuse access to the financial

statements to any of these parties.
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1.1 Background & 1.4 Why are external auditors needed and what is the purpose of
an external audit?
Very
important –
❑ The legal requirements (e.g. according to the Companies Act of 2008) for certain
should be
organisations to be audited, able to
➢ not the main and only reason why external auditors are needed discuss
o (take note: audits required because of law are called statutory audits)
❑ Principal-agent theory also relevant reason why external auditors are needed
➢ Split/separation between principals/owners/shareholders and
agents/managers/stewards/directors
o Owner/Shareholders ≠ Managers/Directors
o Modern day → companies are OWNED by shareholders who do NOT
MANAGE these companies
o Shareholders (owners) provide finance/capital (in form of buying/owning
shares)
o Shareholders (owners) appoint directors
❖ delegate some decision-making powers to directors
❖ Entrust directors to act in company’s and shareholders’ best interest
o Directors (management) are salary earners/employees of shareholders
(not owners)
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an external audit?
❑ Directors (management) required to Very

➢ Act as stewards and manage company on shareholders (owners) behalf important –
o In a perfect world, supposed to act in best interest of company and should be
shareholders able to
❖ Increase company’s profit, share price and dividends pay out discuss
➢ Report to shareholders (owners) on the financial performance of company
o in the form of the Financial Statements/FS
o which provide detailed information on how well the directors acted as
stewards/managers of shareholders investments
o assertions are automatically made by directors in FS
❑ BUT shareholders and directors could have different outcomes/motives in mind

➢ Shareholders: want company’s profit, share price and dividends paid out to grow
➢ Directors: want their own financial rewards (e.g. salaries/bonuses), labour market
opportunities and relationships with other parties not relevant to the principal to
strengthen
➢ Conflicting interest between shareholders/company and directors/management
o Directors may act in their own best interest instead of best interest of company
and shareholders
o Tempt directors to misrepresent company’s financial statements and assertions
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an external audit?
❑ Certain mechanisms are put in place

➢ to reinforce the trust that the shareholders place in directors
o One of these mechanisms → external audit of company’s financial statements
Very
❑ Most shareholders (owners) do not have important –
➢ Time should be able
➢ Expertise to discuss
o Determine whether FS is fair representation
o of the reality of directors’ stewardship and assertions
❖ shareholders appoint external auditor
❑ An external auditor is a specialist, independent, external party

➢ Verifies and reviews credibility (trustworthiness) of financial information
➢ Expresses an opinion
o on whether the directors have fairly presented to the shareholders (owners)
the financial effects of their (the directors’) activities in the financial
statements
➢ Audit opinion is provided in the form of an audit report
o provides assurance (comfort) to the shareholders
o on fair presentation of financial statements
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an external audit?
Expresses an independent
External independent auditor opinion on the fair presentation
of the financial statements
FINANCIAL
REPORTING
BOARD OF DIRECTORS SHAREHOLDERS
Responsible for preparation Appoint directors and external auditors

and approval of financial
Use financial statements to evaluate
statements
directors’ stewardship of company
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1.4 Why are external auditors needed and what is the purpose of an external audit?
Very
1.4.1.1 External audit can add value important
❑ Encourages good corporate governance in a company
❑ Makes it easier and safer to invest in wealth-creating businesses

➢ Audit process adds credibility to financial statements approved by directors
➢ Allows investors and providers of credit finance greater confidence
o in making equity investments and loan advances
➢ Stimulates the economy
❑ Improves legitimate tax collection, thereby lowering the tax burden on society
➢ Reduces the need for SARS to perform detailed inspections on company’s tax
returns
➢ Provide assurance that companies carry proper share of tax burden
❑ Improves the accuracy of the information contained in financial statements.

➢ May provide management the opportunity to correct material misstatements in
FS
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1.4 Why are external auditors needed and what is the purpose of an
external audit?
1.4.3 The history of the external auditing

profession in South Africa
Read only, not
necessary to
memorise/study
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1.4 Why are external auditors needed and what is the purpose of an external
audit?
❑ The uses of financial statements include

➢ shareholders → evaluate management’s/directors’ stewardship;
➢ investors → decide whether to invest in a company or to sell their
investment;
➢ banks → decide whether or not to grant a loan to the company.
❑ BoD’s responsibility to make/approve significant estimates and judgements (e.g.

depreciation, provision for doubtful debts) into FS preparation
❑ External auditor’s responsibility to express opinion whether BoD fairly presented

FS according to financial reporting framework (IFRS/IFRS for SMEs).
➢ Knowledgeable about auditing, accounting and financial reporting
➢ Enhances the degree of confidence users have in FS
➢ Obtains sufficient appropriate audit evidence
o Reasonable assurance → FS free from material misstatement
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audit?
❑ Reasonable assurance (provided by external auditor)

➢ High level of assurance (“confidence”/”comfort”) but not absolute assurance (not 100%)
➢ Not guarantee that all material misstatements are detected
➢ Cannot identify every error or irregularity in the company being audited
➢ Achieved when the auditor has obtained sufficient and appropriate audit evidence
o risk of expressing an incorrect opinion on the FS statements → audit risk
o reduced to an acceptably low level
Very
❑ Misstatements in financial statements important
➢ Incorrect information due to
o Fraud or
o Error
❑ Misstatements are material if
➢ Individually or in aggregate
➢ Reasonably expected to influence economic decisions of users
➢ Taken on the basis of the financial statements
❑ External auditor also evaluates going concern the foreseeable future.
➢ Not guarantee future success/viability
❑ “External audit process”: Comply with International Standards on Auditing (ISAs).
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external audit?
1.4.5.1 Assurance provided by an external audit
❑ Assurance (“confidence”) as to fair presentation (free from

material misstatement due to error and fraud)…
• … to users of financial statements through audit opinion
provided in an audit report.
❑ Reasonable assurance only, not absolute (not 100%)

• Unavoidable risk some material misstatement not detected.
➢ Due to inherent limitations of an audit
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1.4.5.2 Inherent limitations of an external audit (reasonable assurance, not absolute because):
• Nature of financial reporting
Very important –
➢ Management must should be able to discuss
o Apply (human) judgment
o Make estimates (e.g. useful lives of PPE, depreciation, allowance for doubtful
debts/credit losses, allowance for obsolete inventory)
• Nature of audit procedures
➢ practical and legal limitations on auditor’s ability to obtain audit evidence supporting
management’s assertions in FS
o Nature of audit evidence gathered by auditor
❖ Directors/management are asked to provide documentation and explanations to
the auditor → forms part of audit evidence gathered
❖ Auditor uses these to come to conclusions about the transactions, balances and
disclosures being audited.
❖ This information persuades/convinces auditor to draw conclusion on whether FS
are fairly presented or not
❖ information supplied by directors/management could be
(intentionally/unintentionally) incorrect/incomplete/misrepresented to the
auditor
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Very important –
should be able to discuss
1.4.5.2 Inherent limitations of an external audit (reasonable assurance, not absolute because):
• Nature of audit procedures
➢ practical and legal limitations on auditor’s ability to obtain audit evidence supporting
management’s assertions in FS
o Fraud committed by management/directors
❖ Involve clever schemes
❖ Auditor not expected to be a forensic expert on authentication of supporting
documents
• Timeliness (benefit vs cost)
➢ expectation of users of FS → auditor complete audit within reasonable time frame (as
soon as possible after financial year-end) and at a reasonable cost
o Thus limited time and resources available to auditor
o Auditor must balance extent and quality of audit evidence gathered against cost to
obtain it
o Auditor cannot verify every single transaction that occurred in company during
financial year
❖ auditor selects a sample of transactions/events → conducts audit procedures
❖ entire population not investigated by auditor → risk that fraud or errors go
undetected
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1.4.5.3 Assurance (International Framework for Assurance Engagements)

and non-assurance engagements
❑ Assurance engagements: auditor expresses a conclusion/opinion designed to
enhance degree of confidence of users in the information audited
❑ Five elements that must always be present in an assurance engagement (see next
slides)
Very
Three-party Suitable important
relationship criteria
Subject
matter
Supporting Assurance
evidence (audit) Report
❑ Two types:
➢ Reasonable assurance engagements
o Example: External audit of financial statements
➢ Limited assurance engagements
o Example: Independent review of financial statements
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1.4.5.3 Assurance (International Framework for Assurance Engagements)

and non-assurance engagements Very important –
Five elements that must always be present in an assurance engagement:
❑ Three party relationship:
1.) A practitioner appointed by the shareholders
➢ Such as
o External auditor or
o Practitioner performing independent review engagements
2.) A responsible party
➢ Such as:
o Directors responsible for the preparation and approval of FS
3.) Users (basing decision-making on assurance report)
➢ Such as:
o Shareholders
o Investors
❑ Appropriate subject matter:
➢ Such as:
o Financial performance or conditions (e.g. FS)
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Very important –
1.4.5.3 Assurance (International Framework for Assurance
Engagements) and non-assurance engagements
Five elements that must always be present in an assurance engagement:
❑ Suitable criteria:
➢ Benchmarks used to evaluate/measure subject matter against
o Suh as:
❖ IFRS or IFRS for SMEs, if the subject matter is FS
❑ Evidence:
➢ Practitioner obtains sufficient appropriate evidence when planning and
performing engagement
o to support opinion expressed
❑ Assurance report:
➢ Practitioner provides written report to intended users
o report contains opinion/conclusion
o expresses assurance obtained
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audit?
1.4.5.3 Assurance and non-assurance engagements

❑ Reasonable assurance engagements
➢ Example: External audit of financial statements
Recognise, measure, present and Directors fulfil obligations →

disclose approve FS prepared
→ assets, liabilities, equity, classes of in terms of requirements of e.g.
transactions and events IFRS/IFRS for SMEs
Auditor fulfils obligations → Express

Follows ‘audit process’ prescribed by
opinion on fair presentation of FS in
International Standards on Auditing
terms of e.g. IFRS/IFRS for SMEs
(ISAs) → 4 phases
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audit?
4 phases of external audit process

Pre-
(see textbook for detail discussion engagement Planning
and Figure 1.3) 1 2
4 3
Evaluation,
conclusion, Obtaining
reporting evidence
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audit?


PHASE 1: PRE-ENGAGEMENT ACTIVITIES
• aim to establish
➢ whether the auditor can and wants to accept the engagement as auditor of
the client,
➢ the terms of the engagement
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audit?
1.4.5.3 Assurance and non-assurance

engagements
4 phases of external audit process:
PHASE 2: AUDIT PLANNING
• Auditor determines how audit should be
performed in efficient and
effective manner.
• Includes:
➢ understanding of engagement
circumstances
➢ understanding of engagement/audit risks
(risk of expressing an incorrect audit
opinion)
➢ design of specific audit procedures to be
performed by the auditor
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audit?


PHASE 3: PERFORMING THE PLANNED AUDIT PROCEDURES
• obtain sufficient appropriate audit evidence to determine and support the
auditor’s conclusion and opinion on the fair presentation of the FS
Take note:
The details of what tests of controls
and substantive procedures are, are
discussed during a later stage of
your studies
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audit?


PHASE 4: EVALUATING, CONCLUDING AND REPORTING
• Evaluating the audit evidence gathered,
• Forming the audit opinion on the basis of the audit evidence
• Expressing the audit opinion about the fair presentation of the FS in the
auditor’s report
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audit?

❑ Limited assurance engagements
• 5 elements that must be present in an assurance engagement are
all relevant
• Thus, auditor also draws conclusion and expresses opinion in terms
of suitable criteria (e.g. IFRS/IFRS for SMEs, if subject matter is FS)
• However, procedures performed and assurance provided more
limited than reasonable assurance engagements
• Example: Independent review
➢ E.g required by the Companies Act of 2008 for certain types of
companies (instead of external audit of financial statements)
➢ Performed according to International Standards on Review
Engagements (ISREs)
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external audit?

❑ Non-assurance engagements
• No opinion expressed
• No assurance provided
• Two parties (instead as with assurance services, three) involved
➢ The practitioner (e.g., accountant, financial advisor, etc.)
➢ The client (appoint practitioner: e.g., directors → those
ultimately responsible for the final output aimed at; or e.g.,
owners → those to use the final output aimed at)
• Examples of non-assurance engagements:
➢ Compiling (preparing) financial statements,
➢ Consulting or business advisory services
➢ Estate planning services
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audit?
“External auditing is a systematic process of obtaining and considering evidence and

information objectively regarding assertions about economic actions and events
(contained in the auditee’s financial statements) to evaluate the degree of correlation
between those assertions and predefined criteria and to communicate the results in
writing to the users of the financial statements.”
Systematic process
Obtaining & considering evidence
Objectivity
Evidence regarding assertions
Evaluate assertions against criteria
Communicate results
To users
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audit?
SYSTEMATIC PROCESS
• External auditor follows organised and logical process → referred to as “the
audit process” and is prescribed by the International Standards on Auditing
(ISAs).
OBTAINING AND CONSIDERING EVIDENCE AND INFORMATION
• External auditor must gather sufficient and appropriate audit evidence about
director’s assertions in the FS
• Consider this evidence to determine the nature/type of the audit opinion to
be expressed (see “COMMUNICATE RESULTS” for the 4 types of auditor
opinions).
OBJECTIVELY
• External auditor has no significant personal interest in or ties (relationships or
financial investments) with the entity (or persons associated with the entity)
that is being audited.
• Allows an objective, professional approach to work.
• Audit evidence/facts are the only basis for expressing audit opinion→ not
based on potential personal (financial) gain or emotion (relationships).
55
audit?
EVIDENCE REGARDING THE ASSERTIONS (ABOUT ECONOMIC ACTIONS AND

EVENTS)
• External auditor must perform audit procedures to obtain sufficient appropriate
audit evidence
➢ about the assertions that directors made in FS (see section 1.3.3)
➢ about whether these assertions are free from material misstatement
(whether due to fraud or error) or not.
o See handbook for example using Ntsimbi Piping’s PPE
EVALUATE CORRELATION OF ASSERTIONS WITH PREDEFINED CRITERIA

• The external auditor must evaluate whether the assertions contained in the FS
comply with predetermined criteria.
• An example of the predetermined criteria for FS is IFRS or IFRS for SMEs.
• Example:
➢ Auditor has to evaluate that PPE in FS is consistent with the IFRS requirements
relating to PPE (as contained in International Accounting Standard (IAS) 16 on
PPE).
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audit?
COMMUNICATE RESULTS
• External auditor must communicate results (audit opinion) of audit process.
• Results (audit opinion) are reported in writing in auditor’s report (see page 2
of FS of Ntsimbi Piping for example).
• International Standards on Auditing (ISAs) prescribe 4 types of auditor’s
reports/opinions to be issued in various circumstances (see next slide – not
necessary to memorise next slide)
TO USERS
• The users of the FS are any stakeholders that would use the auditor’s report to
make more informed decisions.
• May include shareholders, employees, investors and providers of debt finance.
• For audits of RSA companies, the users specifically identified in the auditor’s
report are the company’s shareholders.
57
COMMUNICATE RESULTS
Not necessary to study

this slide – just here to
show you the four types
of audit opinions Type 1 (good, desirable)
Type 2 (poor, undesirable)
Type 2A
Type 2B Type 2C
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external audit?
These are “assumed truths” which provide basis for

theory of auditing:
Not
❑ Truth and fairness necessary to
memorise –
• Financial data verifiable read only
• Free from collusive and other irregularities
• Consistent GAAP leads to fair presentation
• True in past, true in future.
❑ Independence
• No conflict of interest - management and auditor
• Professional obligations
• Objectivity: In capacity of auditor.
59
external audit?
Govern-
External Internal Forensic
ment
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audit?
(REGISTERED) EXTERNAL AUDITOR

❑ Designation: Registered Auditor [RA(SA)] & Chartered Accountant [CA(SA)]
❑ Professional body: The South African Institute of Chartered Accountants (SAICA)
❑ Statutory body: Independent Regulatory Board for Auditors (IRBA)
❑ MUST be registered with IRBA to practice as a RA(SA)
➢ According to requirements: Auditing Profession’s Act of 2005
❑ Deliver service to the PUBLIC
➢ In “PUBLIC PRACTICE”
❑ Also called “PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE”
➢ Word “Accountant” is confusing here – but see next bullets on
“Chartered Accountants” (CA(SA))
❑ Note that an additional specialisation is required for CA(SA) to register as RA(SA)
➢ Thus all CAs(SA) are NOT automatically RAs(SA)
➢ but ALL RAs(SA) must ALSO meet the requirements relevant to being a CAs(SA)
➢ since meeting the requirements of the CA(SA) designation is a PREREQUISITE to
qualify as a RA(SA)
61
audit?
(REGISTERED) EXTERNAL AUDITOR

• Works for an external auditing firm.
• Is not an employee of the entity under audit → is an employee of
external auditing firm that provides contracted external audit services
to an entity.
• Express an independent opinion on the fair presentation of the FS of
the auditee (entity under audit).
➢ Provides users (of FS) with increased assurance/confidence about
the reliability of auditee’s FS.
o Increases users (of FS) willingness to use FS as a basis for taking
economic decisions.
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audit?
INTERNAL AUDITORS
❑ Designation: Certified Internal Auditor (CIA)
❑ Professional body: The Institute of Internal Auditors (IIA)
❑ Statutory body: None
❑ Works for any one of two parties:
1.) an internal auditing firm
➢ Internal auditor is not an employee of the entity under audit → is an
employee of an internal auditing firm that provides
contracted/outsourced internal audit services to an entity.
2.) the entity under audit
➢ Is a salary earning employee of the entity under audit
Ignore the rest of the information about internal auditors. It will be studied in
future from the “Internal Auditing: An Introduction” (green) textbook.
63
GOVERNMENT AUDITORS
• May work as government auditor, without registration with a professional body
(e.g. SAICA, IIA, etc.) or statutory body (IRBA)
• BUT highly advised/preferred if registered as CA(SA) (SAICA), RA(SA) (IRBA), CIA
(IIA) etc.
• The government auditor is an auditor who objectively performs evaluations of
local, provincial and national government departments FS and adherence to
specific government finance legislation.
• Issues audit reports to the government.
• These audits aim to increase the confidence of stakeholders (including the
public/voters) in government departments’ functioning and reporting.
• The government auditor in South Africa is called the Auditor-General (South
Africa) (AGSA).
• Works for/employee of government (but independent of government
departments it audits)
South Africa’s current AG:
Tsakani Maluleke CA(SA)
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FORENSIC AUDITORS
❑ Designation: Certified Fraud Examiner (CFE)
❑ Professional body: The Association of Certified Fraud Examiners
❑ Statutory body: None
❑ The forensic auditor performs an independent investigation into financial fraud
or fraudulent activities.
❑ On completion of the engagement, the forensic auditor issues a report to the
party that appointed him or her.
❑ This report is often used in a court of law.
65
1.5 What are examples of major corporate accounting scandals

in recent years?
Refer to section 1.5 in Auditing Fundamentals for

examples of international and local corporate
accounting scandals in the past
Not
necessary to
memorise –
read only
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1.6 What are the structures of the accounting and auditing professions?
• Definition of a profession:
➢ An occupation that involves the attainment and the application of
specialised training and education and which also has a set of strict ethical
standards that need to be complied with.
• Each profession has a coordinating body called a professional body, which

performs a number of functions.
• Examples of professions and their professional bodies
PROFESSION PROFESSIONAL BODY

Accountancy South African Institute of Chartered Accountants (SAICA) or
South African Institute of Professional Accountants (SAIPA)
Internal auditing Institute of Internal Auditing (IIA)
Forensic auditing The Association of Certified Fraud Examiners
67
FUNCTIONS OF PROFESSIONAL BODIES:
• Sets and assesses professional examinations in order to determine who

may become a member of the professional body (only those that pass
exams).
• Provides support for continuing professional development (CPD)
through learning opportunities and tools for recording and planning;
• Publishes professional journals or magazines;
• Provides networks for professionals to meet and discuss their field of
expertise;
• Issues a code of conduct to guide professional and ethical behaviour;
and
• Deals with complaints against professionals and implements disciplinary
procedures
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1.6.2.1 International Federation of Accountants (IFAC)

❑ Global organisation for accountancy profession Memorise name and
abbreviation of body, understand
(not necessary to memorise word
❑ Mission of the IFAC by word) its function etc.
o serve the public by
❖ strengthening the worldwide accountancy profession
❖ contributing to the development of strong international economies by:
➢ Issuing high-quality international accounting and auditing standards
➢ Converging (merging) of such standards; and
➢ Speaking out on public interest issues where the profession’s voice is
most relevant.
❑ International standards enable investors and others to

o compare enterprises in a transparent way
o make more informed investing decisions
o increasing investor confidence
69
Memorise name and abbreviation of body,

1.6.2.1 International Federation of Accountants (IFAC)
understand (not necessary to memorise
• STANDARD SETTING COMMITTEES word by word) its function etc.
❑ International Auditing and Assurance Standards Board (IAASB)
➢ aims to set high-quality international standards for auditing, assurance and related services
➢ facilitates convergence (merging) of international and national auditing and assurance
standards.
➢ enhances the quality and consistency of audit and assurance practices throughout the world
➢ strengthens public confidence in the global auditing and assurance profession.
❑ International Ethics Standards Board for Accountants (IESBA)
➢ sets high-quality ethical standards for professional accountants
➢ facilitates convergence (merging) of international and national ethical standards, including
auditor independence requirements
➢ development of a robust, internationally appropriate code of ethics
❑ International Accounting Education Standards Board (IAESB)
➢ development and enhancement of accountancy education
o includes professional knowledge, skills, values, ethics and attitudes
➢ developing and implementing International Education Standards
➢ ensure certain minimum competence requirements for the global accountancy profession
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1.6.2.2 International Accounting Standards Board (IASB)

❑ Independent standard-setting body of the International Financial
Reporting Standards (IFRS) Foundation
❑ Members: 15 full-time members
➢ develop/publish IFRS and IFRS for SMEs
➢ approving interpretations of IFRS as developed by the IFRS Interpretations
Committee
❑ Aims for a thorough, open and transparent standard-setting process

❑ Close engagement with stakeholders. Memorise name and abbreviation of body,
understand (not necessary to memorise
word by word) its function etc.
71
1.6.3.1 Professional bodies: Accounting profession
❑ The South African Institute of Chartered Accountants

(SAICA)
❑ Certified Institute of Management Accountants (CIMA)
❑ Association of Chartered Certified Accountants (ACCA)
❑ South African Institute for Professional Accountants (SAIPA)
❑ Institute of Internal Auditors (IIA)
❑ Southern African Institute of Government Auditors (SAIGA).
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1.6.3.2 Regulator of the auditing profession in

South Africa
❑ IRBA: Independent Regulatory Board for Auditors
❑ Registration with IRBA if want to practice as Registered
Auditor (RA)
❑ External audits
❑ Education, training, competency requirements and CPD
❑ Disciplines improper member conduct
❑ Mission of the IRBA.
73
Any questions?
74
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2024/02/07

Must study the following sections from

1.2 What is the purpose of and need for accounting records?

1.2.1.1 Nature of accounting records

Assets, liabilities, revenues, expenses,

equity, other transactions

Manual or computerized system

1.2 What is the purpose of and need for accounting records?

1.2.1.2 The need for accounting records

i. Record and keep track of transactions;

1.2 What is the purpose of and need for accounting records?

1.2.1.2 The need for accounting records

4. Legislation requires companies keep proper accounting

1.2 What is the purpose of and need for accounting records?

Internal Sales order

1.3 What is the objective of and need for financial statements?

❑ Conceptual Framework (IFRS): “Financial information that

❑ Reflection of directors’ stewardship, use of company

1.3 What is the objective of and need for financial statements?

❑ Board of directors (BoD) responsible for:

Ultimately accountable to the

1.3 What is the objective of and need for financial statements?

According to International Accounting Standard (IAS) 1, the financial statements of

1.3 What is the objective of and need for financial statements?

❑ Approvers of financial statements (the Board of Directors/BoD) Extremely

Classes of transactions, events Account balances and related

1.3 What is the objective of and need for financial statements?

❑ Applied to accounting information:

Trade receivables control account

1.3 What is the objective of and need for financial statements?

ACCOUNT BALANCES AND RELATED DISCLOSURES

1.3 What is the objective of and need for financial statements?

ACCOUNT BALANCES AND RELATED DISCLOSURES

ASSERTION DESCRIPTION/EXPLANATION OF ASSERTION

1.3 What is the objective of and need for financial statements?

CLASSES OF TRANSACTIONS (income and expenses), EVENTS (any movements in assets,

ASSERTION DESCRIPTION/EXPLANATION OF ASSERTION

1.3 What is the objective of and need for financial statements?

CLASSES OF TRANSACTIONS (income and expenses), EVENTS (any movements in assets,

ASSERTION DESCRIPTION/EXPLANATION OF ASSERTION

1.3 What is the objective of and need for financial statements?

ACCOUNT BALANCES AND CLASSES OF TRANSACTIONS, EVENTS

1.3 What is the objective of and need for financial statements?

1.3 What is the objective of and need for financial statements?

(Obligations are not discussed – only relevant to liabilities)

1.3 What is the objective of and need for financial statements?

• Disclosures related to PPE assets of Ntsimbi Piping are

1.3 What is the objective of and need for financial statements?

• Accounting records must be:

• Regulation 25(3) of the Companies Regulations 2011

1.3 What is the objective of and need for financial statements?

• According to Section 29(1) of the Companies Act of 2008,

1.3 What is the objective of and need for financial statements?

1.3 What is the objective of and need for financial statements?

• According to Section 30 of the Companies Act of 2008,

1.3 What is the objective of and need for financial statements?

• Parties entitled to receive copies of the financial statements (sec 31):

• It is an offence for a company to refuse access to the financial

❑ Directors (management) required to Very

❑ BUT shareholders and directors could have different outcomes/motives in mind

❑ Certain mechanisms are put in place

❑ An external auditor is a specialist, independent, external party

BOARD OF DIRECTORS SHAREHOLDERS