ARMGT2

03 Audit process
Background and Overview of the audit process

B.K., Finance and Accounting, @2023 1

Objectives of an
audit
• to express an opinion as to whether or not
• the financial statements
• fairly present, in all material aspects,
• the financial position of the entity at a specific date, and
• the results of its operations and
• cash flow information for the period ended on that date,
• in accordance with an identified financial reporting framework and/or
other statutory requirements.

B.K., Finance and Accounting, @2023 2

Professional
opinion
• The opinion has to be supported by evidence
• The opinion carries weight because of the profession surrounding the auditor:
• The governing body of the profession (ICAZ; PAAB)
• Academic knowledge (CTA; ITC; APC)
• Practical application of knowledge (Articles)
• The users ‘trust’ the auditors’ opinion. This trust relationship will depend on the
professionalism and ethics of the auditing profession
• Code of Ethics for Professional accountants (fundamental principles)

B.K, Finance and Accounting, @2023 3

Fundamental knowledge requirements
for the auditor

B.K., Finance and Accounting, @2023 4

What does the auditor need to know?
• Accounting knowledge (IFRS)
 Client prepares AFS using IFRS, thus auditors need to know IFRS
 You can’t ‘check’ something if you don’t know what it should look like.
• Auditing knowledge (ISA’s)
 ISA’s provide the steps the auditor must follow through the audit
• Ethical requirements (CPC)
 All decisions / actions taken by auditor must uphold the principles of the CPC

B.K., Finance and Accounting, @2023 5

International Standards on Auditing
ISA’s Introduction

B.K., Finance and Accounting, @2023 6

ISA’s -
Introduction
• International guidelines developed to assist the auditor with their
audits.
• Zimbabwe adopted the ISA’s, thus CA’s registered with PAAB are
bound to comply with them.
• Covers the steps of the audit, challenges, possible approaches,
recommendations, objectives
• Provides practical guidance.
• Non-compliance contravenes PAA Act.

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 ISA 200 - Overall Objectives of the
Independent Auditor and the Conduct
of an Audit in Accordance with
International Standards on Auditing

Professional Judgment
What is it?
Why do we need it?
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Qualifications Required in an Auditor

Professional Competence
Integrity
General Skills
Objectivity and independence
Confidentiality
Skills and competence
Professional behavior
Professional Skepticism
Professional Judgement
B.K., Finance and Accounting, @2023
Professional Judgement – What is
it?
Application of relevant:
 Training
 Knowledge
 Experience
of:
 Accounting,
 Auditing &
 Ethical issues
In order to make appropriate decisions
L.H., Finance and Accounting, @2022 10
Professional Judgement – Why do we need
it?
• Objective vs Subjective information
(Factual vs Judgmental)
• Eg: Client calculates a sales invoice, you have to verify the accuracy
• Factual
• Easy to prove
• Client provides for potential bad debt, you have to verify the accuracy
• Based on the future, judgmental estimate
• Tricky to prove

L.H., Finance and Accounting, @2022 11

Professional Skepticism
What is it?
Why do we need it?

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Professional Skepticism – What is
it?
• An attitude that includes a questioning mind
• Being alert to conditions which may indicate possible error or fraud
• Critical assessment of audit evidence
• Requires professional judgment
• Reliance on others
Do we believe everything we’re told?
Does the information make sense?

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Eg: Client states that their profits haven’t
dropped, even though they’ve closed a few
branches during the year.
Does the information make sense?
Do you accept their statement without
question, investigation?
How would you ‘know’ it doesn’t make
sense?
Professional judgment
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Overview of the audit process

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Audit is a
Project
•An audit has an objective / goal
 Creates a ‘product’ (Audit Report)
• Achieve goal by defining the
process
• Manage the process
• Thus… auditing can be regarded
as project management

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• The steps in the audit process are laid out in the ISA’s
• Process must be:
Planned
Executed
Managed

Reviewe
d

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Pre-engagement activities

Audit Planning

Gathering audit evidence

Evaluation and Conclusion

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 Audit Process -
•Basics
Pre-engagement activities
 Do you want to accept the client?
 Can you do the job?
• Planning
 Strategy: What resources do you need?
 Audit Plan
o Risks: What could go wrong?
o Responses: What are you going to do about the risks?

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• Evidence
Execute your plan
Get the proof you need for your opinion

• Evaluation
What does your evidence indicate?

• Conclude / Opinion
If you have enough evidence, decide on your opinion
 Prepare audit report
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PRE- ENGAGEMENT ACTIVITIES

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Applicable Standards
• ISA 200 - Overall objectives of the independent auditor and the
conduct of an audit in accordance with international standards on
auditing
• ISA 210 – Agreeing the terms of audit engagements
• ISA 220 – Quality control for an audit of financial statements
• ISQC 1 – Quality control for firms that perform audits
• Code of Ethics for Professional Accountants

L.H., Finance and Accounting, @2022 22

Objectiv
e
•Relationship
•Professional client vs customer

KEY QUESTION
Can we accept a new client or continue with an old client?

*******Consider level of risk to accepting the client

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Management Requirements – ISA
210
Pre-conditions for an audit ISA 210 - Par 6
•Is the financial reporting framework acceptable?
•Management must acknowledge their responsibility
for:
 –Preparation of the AFS
–Internal controls they deem necessary for fair
presentation
 –Provide the auditor with access to
information
L.H., Finance and Accounting, @2022 24
Recurring Audits
ISA 210 – Par 13 & 16
• Do you need a new engagement letter every
year?
• Why would you want a new engagement
letter?
• If the terms of the audit engagement are
changed, a new engagement letter must be
issued
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Reasons why an entity may wish need an auditor

• The entity is seeking to obtain better value for money in the provision of
audit and other professional services and/or a wider range of services.
• On change of ownership of an entity.
• Where an audit firm ceases to operate.
• Users of the financial statements and providers of finance (e.g. banks)
expect organisations achieving a size or status (e.g. being listed on a
recognised stock exchange) to have multinational accountancy firms as
auditors.
• The entity has a policy of auditor rotation.
• Current auditors do not seek reappointment.
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Auditors Requirements– ISA 220
• Leadership responsibilities
• Relevant ethical requirements
• Acceptance and continuance of client relationships and
audits
• Assignment of engagement teams
• Engagement performances
• Monitoring
• Documentation

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Accepting a Client - ISA 220

To satisfy requirements of ISQC1 the auditor must obtain

answers to the following questions

1. Are there statutory reasons not to accept a new

client or not to continue with an old client?
-The auditor considers information from current and previous
audits, this includes communication with an the preceding
auditor
Continued……

2. Are there ethical reasons not to accept a client or

continue with the old client?
-Auditor is concerned with existence of ethical threats and availability
of mitigations to any such threats if any.

-In other words the auditor is worried about whether the firm can
comply with ethical requirements and the relevant standards

- Key among these ethical requirements is the independence of the

auditor both in fact and in appearance
Continued……

3. Are we competent to carry out the audit?

- The auditor’s major concern is whether the engagement

team will be competent to perform the audit, have the
capabilities, time and resources to carryout the audit.

- Considerations of need of an expert are made

Continued…..

4. Have we investigated the client?

-Do we want to be associated with the client?

-The auditor is concerned with Integrity of principal owners;
key management and the extent to which client values work of
an auditor
Continued……

5. Finally terms and conditions of an engagement are set and

documented in a engagement letter.
-When a new client is accepted or when an audit engagement continues
from year to year, an engagement letter should be prepared.

-It acts as a contract between auditor and client.

-It serves as a means of reducing the risk of misunderstandings with the

client and as a means of avoiding legal liability for claims that the
auditors did not perform the work promised
Sources of information when performing
client acceptance procedures
• Previous auditor
• Management
• External sources
• External information
• Internal documentation
• Audit firm
• Financial press
The responsibilities of each party needs to be agreed upon and
understood
• Contractual obligation
• Expectation gaps
• Auditor responsibilities
• Implement quality control procedures that provide them with
reasonable assurance that:
The audit complies with professional standards and legal
requirements
 The audit report is appropriate
Contents of an Engagement letter
1. Objective
2. Management responsibility
3. Scope
4. Form of any reports or communications
5. Inherent limitations
6. Auditor independence
7. Management representations
8. Weakness in internal control
9. Involvement of other parties
10. Other services
11. Name of designated auditor
12. Planning and performing the audit
13. Deadlines
14. Fees
Communication with the preceding Auditor
-Attempt to communicate is required

-Because of confidentiality requirements seek permission from the client

and if permitted, issues to discuss:

-Disagreements the predecessor had with the client about accounting

principles or audit procedures.

-Communicate the recommendations the predecessor auditors gave the

former client about fraud, illegal acts, and internal controls

-The predecessor auditors’ understanding about the reasons for the

change of auditors (particularly about the predecessor auditors’
termination).
 Practice question 1
You are a member of the Quality Control Committee of a large audit firm, Art Andersunn and Co. Part of the committee's responsibility is to
determine whether prospective clients are acceptable and whether existing clients should be retained. Being a large practice, numerous
potential clients are brought to the committee for consideration and the following list includes a number of recent such cases where the audit
appointment is available.
1. Trigger Happy Ltd, a company which hires out mercenaries to foreign governments involved in conflict and anyone else who is interested.
The company is not listed on any stock exchange.
2. Bossman Ltd, a listed company (with a substantial audit fee), whose chairman is an outspoken critic of the ZIMCODE Report on Corporate
Governance. His stance is that business is tough and that all the transparency, disclosure and fairness simply weakens the company as it
gives competitors insights they shouldn’t have and that business is not supposed to be fair!
3. Nicotar (Pvt) Ltd, a company which manufactures cigarettes.
4. Bluevex Ltd, a public company which owes its current auditors US$75 000 in audit fees. The company’s audit committee claims that the
current auditors have overcharged.
5. King Couriers Ltd, a company which has on two previous occasions sued its auditors and on both occasions the auditors (different firms)
have admitted negligence and settled out of court.
6. Skweeze (Pvt) Ltd, a chain of retail shops which sells pornographic materials and runs escort agencies. The company is a subsidiary of a
listed company in the entertainment sector. The holding company auditors have declined the audit.
7. La Paint (Pvt) Ltd, an interior decorating business which is owned by the wife of Art Andersunn and Co’s partner in charge of the Taxation
department. The company’s MOI requires that the company be externally audited.
8. Interworld Ltd, a prestigious, international corporation with operations world wide and its head office in Harare.

Required
a. Discuss what an auditing firm sets out to achieve by implementing policies and procedures relating to the acceptance of new clients. (4)
b. Comment of how information about a prospective client can be obtained. (4)
c. Comment on the matters to which your committee should give consideration in deciding on whether to accept the above audit
appointments. (25)
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Suggested solution
1. Trigger Happy Ltd
a. The activities of a company such as this may as a result of a recent Act of Parliament, be illegal.
b. However, one of the major reasons for conducting preliminary engagement activities is to determine whether there will be any negative
consequences for the firm. The practice of hiring out mercenaries and being involved in war activities is morally questionable and is
probably not something which
 the staff of the firm or
 the clients of the firm would be particularly keen for Art Andersunn & Co to be associated with. It is therefore, an unwise
business decision.
c. Another aspect to consider would be whether we would be able to actually render our professional service. In a business like this, there
is likely to be shady dealing between parties, undisclosed movements of funds and balances etc, which would make auditing very
difficult, placing us at risk.
2. Bossman Ltd
a. The objectives of corporate governance spelled out in the ZIMCODE are to achieve openness, accountability and honesty in "big
business".
b. In addition, for listed companies, adherence to the requirements of corporate governance, including making certain disclosures such as
the integrated (sustainability) report in the annual report, is a ZSE requirement.
c. It is therefore unlikely that we would take this audit (despite the fact that it is a listed company with a high fee) as we might
 place ourselves at risk by taking on a client who does not embrace the qualities of openness, accountability and honesty.
 have great difficulty in reporting on those disclosures which must be contained in the annual report relating to corporate
governance.
d. If the Chairman of the company does not believe in the principles of Corporate Governance, the integrity of the company’s personnel
“charged with the governance of the company” may be in question.

L.H., Finance and Accounting, @2022 39

Cont….
3. Nicotar (Pvt) Ltd
a. The consideration here is whether the firm wishes to be associated with an industry which
manufactures (and promotes) a product which causes disease and which is becoming more
and more socially unacceptable.
b. Again, the attitude of social responsibility which the partners have, will determine this as
the association which the firm has (audit) is in itself unlikely (at this stage) to have business
implications UNLESS Art Andersunn and Co have large clients who adopt a strong anti-
smoking stance, e.g. medical supply companies.
4. Bluevex Ltd
a. This, on the face of it, amounts to a straight business decision. We do not want to get
involved with this client, investing time and money, only to find that they refuse to pay the
fee!
b. It is possible that they have been overcharged - this should be investigated with the
existing auditor (with Bluevex Ltd’s permission) and the Bluerex Ltd audit committee.

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Cont…
5. King Couriers Ltd
a. This company is obviously aware of what auditors should be doing, as it has successfully sued its
previous auditors twice.
b. This should not cast the company in a bad light, indeed they may well be the type of efficiently run,
successful company which we would like to work with.
c. We should be satisfied that our quality controls are of the standard which will prevent negligent
performance and the threat of litigation should not be the overriding consideration. This would be a
negative approach but may have some business risk implications!
d. We must be satisfied that the client’s actions with regard to the previous auditors do not reflect a lack
of integrity, and that we understand the business sufficiently to be certain that we can satisfy the
technical, resource, and time requirements.
6. Skweeze (Pvt) Ltd
a. It is unlikely that our firm would want to be associated in any way with this company.
b. Firstly, pornographic materials are generally not socially acceptable and any association with them is
undesirable and discreditable to the profession and its members.
c. Of even more significance is the fact that the company is involved in activities (escort agencies) which
may be illegal (prostitution) and which in no way would we wish to be involved or associated.

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Cont…
7. La Paint (Pvt) Ltd
a. The difficulties with this engagement is the lack of independence.
b. Whilst it may be argued that the partner who is "creating" the lack of independence is not an audit
partner and that because we are a large firm, need not have anything to do with the audit of his wife’s
company, we must still be seen to be independent, which, if we take the appointment, we will not.
8. Interworld Ltd
9. The question to be asked here is whether we are large enough to service this international client.
10.Although we are a large firm, do we have
 sufficient manpower
 sufficient resources
 international affiliations (even if we do have, we must still be large enough in our own right to
justify holding the position of principal auditor).
11.We will also need to consider whether we have the necessary expertise to conduct the audit e.g.
international law, tax practice etc (affiliated offices may be able to provide this).
4. On the positive side, the prestige of having a client of this nature would enhance the image and profile
of our firm.

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 Self Practice
Before your firm accepts any additional ongoing engagements, e.g. new audits, the partners meet to decide on whether the engagement should be
accepted. The firm is mindful of the requirements to conduct preliminary engagement activities including compliance with ISA 220 – Quality control for an
audit of financial information. The following prospective audit clients are being evaluated. Your firm has seven partners and a diverse portfolio of clients
ranging from small business entities to medium-sized companies. None of its existing audit clients is a listed company.
1. Vaughan’s Porn (Pvt) Ltd, a recently opened retailer of adult entertainment requisites. The business is lucrative and efficiently run. It is owned by a
group of businessmen who are not active in the business itself. They require that the financial statements be audited and have included the
requirement in the company’s Memorandum of Incorporation.
2. Fishy Business Ltd, a large fishing company in Kariba, which was recently convicted for exceeding its fishing quotas, and threatened with closure by
the authorities should it occur again as this was not a first offence. Should your firm accept the engagement, it will be the third auditing firm to have
been appointed in the last four years. The previous auditors have resigned. The company is a public company but is not listed.
3. Middleman (Pvt) Ltd, a medium-sized company which is about to expand considerably through a Black Economic Empowerment deal which involves a
large listed company. The listed company requires that Middleman (Pvt) Ltd be externally audited annually. Our firm has no experience in the industry
in which Middleman (Pvt) Ltd and the listed company operate.
4. Stonebridge (Pvt) Ltd, a small company which is owned by Harry Jack, the father of one of your firm’s partners. Harry Jack believes that having the
company audited externally adds to its credibility when negotiating with prospective business partners.
5. Mishin (Pvt) Ltd, is a medium-sized company in the light engineering sector. The directors informed your firm that they were changing their auditors
because their previous auditors had “different views” to them (the directors) on which accounting policies were appropriate for their company. They
have declined to provide specific details. The previous auditors would not comment on this stating only that the directors of Mishin (Pvt) Ltd had not
given them permission to discuss the company’s affairs.
6. Soldier Boy (Pvt) Ltd, a company which provides companies and governments operating in Africa with security personnel, including bodyguards and
equipment such as armoured vehicles and firearms. The audit fees paid to the previous auditors were substantial.
REQUIRED
Discuss the matters to which your firm should give consideration, when deciding on whether to accept the above prospective audit appointments.

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