Introduction to Auditing

Auditing and Internal Control 2024

Semester 1 – Learning Unit 1B (2 of 3)

Levels of Assurance
Levels of Assurance

• Assurance can loosely be described as the

confidence you get from audited financial statements
as opposed to unaudited financial statements.

• As indicated above, one of the important things

auditors do is to give assurance on whatever area of
audit they are involved. There are two levels of
assurance that an auditor can give:

• Reasonable assurance, and

• Limited assurance

3
Reasonable Assurance

• Reasonable assurance arises out of an audit

engagement; i.e is given once a full audit has been
done on an area (where comprehensive audit tests
are conducted).

• For most companies, a full audit is done at the

end of a financial year. At half-year, a review is
done.
• For a full audit, the company’s external auditors
perform detailed and broad tests and issue an
audit opinion (give reasonable assurance) on the
financial statements
• Why “reasonable assurance” and not “100%
assurance”?

4
Limited Assurance
• Limited assurance arises out of a review
engagement. i.e is given where less extensive audit
procedures (tests) are conducted. This is done in
companies with a less than 100 public interest
scores.
• For a review engagement, less intensive tests are
performed by the external auditors.
• As a result, an even lesser level of assurance is
given by the auditors (through a review opinion)
• Why do we bother checking the financial
statements at half-year because we will check
them in detail at year-end?
• Recommended additional reading: Auditing
Fundamentals sections [Link] (assurance and
non- assurance engagements) in chapter 1

5
Public Interest Score
Public Interest Score

• Public interest – the interest citizens have in

companies, because such businesses operate within
the society and among other things use resources
belonging to the society such as roads, natural
resources, employees and derive their profits out of
the society. Therefore the public/society has an
interest in businesses to see how things are done,
how such businesses are run, how resources are
used etc.

7
Public Interest Score

Consider the following companies and discuss how

society depends on them:

8
Public Interest Score

• Public interest score - in the past, according to the old companies Act, all companies were subjected to
audit while CC irrespective of their size was not forced to be audited.

Old Companies Act: New Companies Act:

All companies must be Companies: If
audited regardless of impact on society is
size. CCs not forced to big, get audited.
be audited Same applies to CCs.

9
Public Interest Score

• According to the new Companies Act the focus of

auditing has shifted from Company and CCs to the
level of public interest such business attracts
irrespective of the nature of such business.

• The new Companies Act of 2008, provides a formula

on how this public interest can be calculated.

10
Public Interest Score

• Each company including existing CCs have to

calculate their public interest for each financial year
by using the formula:
• Public interest score is the sum of:

A number of points equal to the average number of

employees during the financial year
+One point for each R1 million of turnover
+One point for every R1 million of 3rd party liability at
year end
+One point for every individual who directly or
indirectly has a beneficial interest in any company’s
shares (shareholders’ equity)

11
Public Interest Score: Example

Detail Public interest points

Employees at 1 Feb 400
Employees at 28 Feb 460
Average no. employee 860/2= 430

Long term and short term liabilities on

28 Feb R10.6 million 11

Turnover for the year on 28 Feb R89m 89

Shareholders’ equity on 28 Feb R55 m 55

Total public interest score 585

12
Public Interest Score

• It is clear now that companies and CCs with large

number of employees will have higher public interest
score.
• This public interest scores are classified into 3
categories, namely:
1. Less than 100 points as small and limited
assurance is needed (review engagement)
2. 100 to 349 points as medium:
• Audit if annual financial statements were
internally compiled (reasonable assurance).
• Review if annual financial statements were
externally compiled (review engagement).
3) 350 points and above, big and reasonable
assurance is required (audit)
13
Public Interest Score

• However, we need to understand that the new

Companies Act states that the following companies
need to be audited fully irrespective of their Public
interest scores:
• Public companies and state owned companies (e.g
Transnet, Eskom)
• A company holding assets exceeding R5 million in
the ordinary course of its business which is held on
behalf of another person/company.

• Recommended additional reading: Auditing

Fundamentals section 3.2.1 (companies that
have to be audited + calculating a public
interest score) in chapter 3

14
Assurance and Non-Assurance
Engagements
Assurance and Non-Assurance Engagements

• Accountants and auditors offer a wide range of

services such as audit, taxation, advisory, etc. All
these services can be categorised into either
assurance or non-assurance engagement:

16
Assurance and Non-Assurance Engagements

• Assurance engagements: are those in which the

professional accountant expresses a conclusion
designed to enhance the degree of confidence
for the intended users other than the responsible
party.
• Elements thereof are: various parties involved
(professional accountant / responsible party /
intended user), subject matter, suitable criteria,
sufficient appropriate evidence and a written
assurance report.
• Examples of “assurance engagements”:
• KPMG audits the financial statements of Clicks
Ltd, issues an opinion, shareholders are confident
that the financial statements are reliable

17
Assurance and Non-Assurance Engagements

Examples of “assurance engagements”:

• GrantThornton performs a half-year review on the
financial statements of VW South Africa, issues a
review opinion, shareholders are happy that the
half-year financial statements are reliable

Non-assurance engagements: engagements

which do not meet the definition of an assurance
engagement, engagements in which either the
client does not need any assurance or no criterion is
used.

18
Assurance and Non-Assurance Engagements

• Example of a non-assurance engagement:

• Pick n Pay Ltd wants to expand into the Nigerian
grocery market. It hires KPMG Advisory to
investigate the corporate laws that will need to
comply with when operating in Nigeria.

• This is a non-assurance engagement because

KPMG will not issue any opinion to the
shareholders of PnP about anything. All they will
do is give a list of laws to the Board of PnP.

• Recommended additional reading: Auditing

Fundamentals sections [Link] (assurance and
non- assurance engagements) in chapter 1

19

.
The Accounting Profession
Attributes of a Profession

• How profession is recognised?

• A profession is achieved when there is public
acceptance that such a body of knowledge and
practitioners is worthy of recognition as a profession

21
Accounting Professional Bodies

• Look at the attributes/ characteristics that

professions should comply with to be recognised as
professions on page 1/10:
• Look on page 1/10 – 1/11 for the Accounting Bodies
in South Africa:
IRBA (Independent Regulatory Board for
Auditors)
• How to become a Registered Auditor (RA) by other
means than through the SAICA route is not in full
resolved as yet.
• Final Exam

.
22
Accounting Professional Bodies

SAICA (South African Institute of Chartered

Accountants)
B Com accounting degree
• Certificate in the Theory of Accounting (CTA)
• Three year training contract
• Final Exam

23
Accounting Professional Bodies

SAIPA (South African Institute of Professional

Accountants)
• A Degree with core subjects from a Tertiary
Institution.
• At least 3 years under a supervised SAIPA
Learnership
• Final Exam

24
Accounting Professional Bodies

CIA (Certified Internal Auditor)

• A Bachelor’s degree or equivalent 3-year academic
qualification plus 3 years’ relevant experience
OR
• An Honours degree or equivalent 4-year academic
qualification plus 2 years’ relevant experience
• Final Exam

25
Accounting Professional Bodies

AAT
This is the new body in South Africa originating from
UK which gives the students with National Diploma
to qualify as Accounting Technicians after
completing 4 papers with this body AAT(SA).
• A pilot project has been run at the end of 2009, still
waiting for the results.

26
Accounting Professional Bodies

Recommended additional reading:

Auditing Fundamentals: section 1.6 (what are the
structures of the accounting and auditing
professions?) in chapter 1

27
Questions?