1. AUDITING 2601

2. CONTACTING YOUR LECTURER
AUE2601
Ms Shan Malan

3. OVERVIEW TOPIC 1: INTRODUCTION TO AUDITING
TOPIC 2: REGULATION OF THE AUDITOR
TOPIC 3: GENERAL PRINCIPLES OF ASSURANCE ENGAGEMENTS
TOPIC 4: THE AUDIT PROCESS
EXAM TECHNIQUE

4. Broadcast Broadcast will only cover certain aspects of study material
Contacting us during the broadcast
Important to study everything for examination

5. STUDY APPROACH
Use Study guide and Tutorial letter 102/103
Test knowledge – Self assessment questions after each study unit
Importance of ISA’s!! 200,220,230,300,315,320,330,500,700
Framework
ISQC1
Meaning of words in Preface e.g. explain, list

6. INTRODUCTION TO AUDITING
Topic 1 in the study guide
Level 1: Basic
At this level the candidate is required to acquire a knowledge and understanding of the core / essence of the subject matter which include that the subject matter exists, the significance and relevance thereof, and its defining attributes.

7. An audit of financial statements
The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements.
HOW???? (ISA 200.3)
This is achieved by
the expression of an opinion by the auditor
on whether the financial statements are prepared, in all material respects,
in accordance with an applicable financial reporting framework.

8. THE NEED FOR AUDITING SERVICES
What is an auditor?
Auditors give assurance. Auditors examine information and then report on whether the information is fair. The auditors give assurance that the information is reliable.

9. The distinction between the different types of auditors
Assurance vs. Non-assurance engagements
Elements of an assurance engagement
Advantages/limitations of an audit
Statutory versus non-statutory audit engagements.

10. Auditing Postulates
Postulates provide a basis for thinking about problems and providing at solutions
Must know all the 8 postulates, be able to explain and discuss them

11. REGULATION OF THE AUDITOR
Topic 2 in the study guide
Level 2: Intermediate
At this level the candidate is required to acquire a detailed knowledge and understanding of the central ideas and issues that comprise the substance of the subject matter.

12. The Auditing Profession
Collective organisation
IRBA
SAICA
IFAC

13. The Auditing Profession
The Companies Act
ISA’s
SAICA’s Code of Professional Conduct
IRBA’s Code of Professional Conduct for registered auditors
IRBA’s Rules regarding Improper Conduct
The Auditing Profession Act, 2005

14. Auditing Profession Act
Important sections:
1: Definitions – Reportable irregularity
2: Objects Act
37: Registration of individuals as registered auditors
38: Registration of firms as registered auditors
39: Termination of registration
40: Renewal of registration

15. Auditing Profession Act
41: Practice
42: Compliance with Rules
43: Information to be furnished
44: Duties in relation to an audit
45: Duty to report on irregularities
46: Limitation of liability

16. Example: Reportable irregularity
Your uncle is the managing director of a well-known manufacturing company. The auditors of the company notified your uncle that they reported a reportable irregularity to the Independent Regulatory Board for Auditors (IRBA) based on evidence found relating to the dealings of the financial director of the company. During the course of the audit they discovered that the financial director, who owns shares in the company, has been falsifying the monthly Value Added Tax (VAT) returns by claiming VAT on purchases to which the company is not entitled. 

17. Required
Mention the requirements of a reportable irregularity in terms of the Auditing Profession Act of 2005, and identify the matters in the given scenario that relate to each of these requirements. Tabulate your answer as indicated below.
(16 marks)
Take note of the format in which we want the answer

18. Elements of a reportable irregularity
Requirement per the APA
Situation given in the scenario
Must be committed by the management of the entity  ^
Unlawful act or omission  ^
The falsifying was committed by the financial director of the company  ^
Falsifying the VAT returns implies that the VAT Act had been contravened  ^

19. Elements of a reportable irregularity
Situation given in the scenario
Requirement per the APA
Has caused or is likely to cause material financial loss to the entity or to any partner, member, shareholder, creditor or investor of the entity in respect of his/her/its dealings with that entity  ^
South African Revenue Services (SARS) will suffer a financial loss. SARS is a “creditor”/stakeholder of the entity  ^

20. Elements of a reportable irregularity
Requirement per the APA
Situation given in the scenario
Is fraudulent or amounts to theft  ^
Represents a material breach of any fiduciary duty owed by such person to the entity or any partner, member, shareholder, creditor, or investor of the entity or the conduct or management thereof.  ^
Contravening the VAT Act is a criminal offence. Money is “stolen” from SARS  ^
The directors involvement in criminal activities implies a material breach of their fiduciary duties.  ^
1 mark for the format

21. Companies Act Only sections on Auditor and Audit committee
Be able to answer all the self-assessment questions

22. SAICA’s Code of Professional Conduct
PART A: GENERAL APPLICATIONS
JACKSON AND STENT 2/5-2/9
100 Introduction and fundamental principles
110 Integrity
120 Objectivity
130 Professional competence and due care
140 Confidentiality
150 Professional Behavior

23. PROFESSIONAL COMPETENCE AND DUE CARE PROFESSIONAL BEHAVIOUR
FUNDAMENTAL PRINCIPLES
INTEGRITY
OBJECTIVITY
PROFESSIONAL COMPETENCE AND DUE CARE
CONFIDENTIALITY
PROFESSIONAL BEHAVIOUR
Certain situations may create specific threats to compliance with the fundamental principles
Self Interest threat
Self review threat
Advocacy Threat
Familiarity threat
Intimidation threat
Safeguards must be put in place that will eliminate threats or reduce them to an acceptable level

24. SAICA’s Code of Professional Conduct
PART B: CHARTERED ACCOUNTANTS IN PUBLIC PRACTICE
SECTIONS 200, 210, 220, 230, 240, 250, 260, 270, 280, 290, 291
PART C: CHARTERED ACCOUNTANTS IN BUSINESS
Sections

25. Example: Independence
The annual audit fee payable by Pen and Pencil Limited to Mrs Parker, an auditor in public practice, is divided into six instalments and an amount of R is paid to her every second month. This fee represents a large portion of the total gross fees of Mrs Parker (6 marks)

26. Example: Independence
REQUIRED
To state whether the following event may give rise to an auditor’s independence being questioned and to give a reason for your answer, in terms of the provisions of the Code of Professional Conduct. Also identify the types of threat that may be created.

27. Example: Independence
Example: Answer Yes^ When the receipt of recurring fees from a client represents a large proportion of the total fees of an auditor, the dependence on that client and concern about losing the client  ^ may create A self-interest or intimidation threat 

28. IRBA RULES REGARDING IMPROPER CONDUCT
SAICA Handbook Volume 2
APPLICATION TYPE QUESTIONS

29. Integrated question
Be prepared to answer integrated questions that cover APA, SAICA Code of Professional Conduct, Companies Act and the IRBA Rules regarding Improper Conduct.
Refer Activity 20 in Study unit 2.3

30. TOPIC 3 IN THE STUDY GUIDE
GENERAL PRINCIPLES OF ASSURANCE
ENGAGEMENTS
Level 1: Basic
  Knowledge and understanding of the core / essence of the subject matter which include that the subject matter exists, the significance and relevance thereof, and its defining attributes.
Level 2: Intermediate
Acquire a detailed knowledge and understanding of the central ideas and issues that comprise the substance of the subject matter.

31. Importance of topic 3 All study units are equally important
Only certain aspects where students experience the most difficulty will be dealt with due to time constraints

32. Risk management and internal control
Take note of the following:
Definition of internal control
5 components of internal control (ISA 315)
The elements that are included in each of the components
Inherent limitations of internal controls

33. Internal Control The Control Environment
The Entity’s Risk Assessment Process
The Information System including the related business processes
The Control Activities
Monitoring of controls

34. Risk management and internal control
Question: Each of the following scenarios are practical examples of the inherent limitations of an internal control system. For each example given, state the inherent limitation to which that example relates to and explain how the inherent limitation can be overcome:

35. Risk management and internal control
Example A: A company trading in fresh produce sells one of its delivery trucks. The financial assistant dealing with the sale of the truck did not capture the transaction in the company’s records, as there was no customer order and delivery note for the transaction.

36. Risk management and internal control
Answer: Example A Inherent limitation: Problems with non-routine transactions Safeguard: Ensure that non-routine transactions are reviewed and approved by a senior member of staff.

37. Risk management and internal control
Example B: A recently appointed financial clerk did not calculate the VAT accurately on the goods exported from South Africa to Europe as instructed by the company’s VAT procedure manual.

38. Risk management and internal control
Answer: Example B Inherent limitation: Human error Safeguard: The employer should provide appropriate training and supervision for newly appointed employees.

39. AUDIT EVIDENCE ISA 500 Audit evidence:
Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based.
Includes info in accounting records as well as other info.

40. AUDIT EVIDENCE Requirements for audit evidence: Sufficient = QUANTITY
Appropriate = QUALITY
How do we get audit evidence to draw reasonable conclusions on which to base the auditor’s opinion?

41. Obtaining audit evidence
ISA 500 para A10-A25
By performing:
Risk assessment procedures
Further audit procedures
Test of control :Testing an internal control measure throughout the period of reliance
Substantive procedures, including tests of detail and substantive analytical procedures: Audit procedure designed to detect material misstatement at the assertion level

42. Types of audit procedures
Seven types that may be used as risk assessment procedures, tests of control or substantive procedures
INSPECTION
OBSERVATION
EXTERNAL CONFIRMATION
RECALCULATION
REPERFORMANCE
Analytical procedures
INQUIRY

43. ASSERTIONS What are assertions?
In representing that the financial statements give a true and fair view in accordance with the applicable financial reporting framework, management implicitly or explicitly makes assertions regarding the recognition, measurement, presentation and disclosure of the various elements of financial statements and related disclosures.

44. CATEGORIES OF ASSERTIONS
CLASSES OF TRANSACTIONS AND EVENTS
ACCOUNT BALANCES
PRESENTATION AND DISCLOSURE
OCCURANCE X
COMPLETENESS
ACCURACY
CUT OFF
CLASSIFICATION
EXISTENCE
RIGHTS AND OBLIGATIONS
VALUATION AND ALLOCATION

45. EXAMPLE ASSERTIONS QUESTION:
When the auditor gathers evidence about sales transactions he or she will be seeking evidence to support which of the assertions?
First ask yourself the following,
Are we asking about a transaction and event an account balance or presentation and disclosure.

46. SALES TRANSACTION
Occurrence: Sales that have been recorded have occurred and pertain to the entity
Completeness: All sales that should have been recorded have been recorded
Accuracy: Sales have been recorded appropriately
Cut-off: Sales have been recorded in the correct accounting period
Classification: Sales have been recorded in the proper accounts

47. Risk assessment and audit procedures
Refer to Study unit 3.4 pg 86 for an overview
The required understanding of the entity and it’s environment is obtained by obtaining knowledge about the following categories.

48. Auditor performs risk assessment procedures which include: Inquiries
Analytical procedures
Observation and inspection
Other procedures (including information obtained in prior periods)
Discussion among engagement team
to obtain an understanding of the entity and its environment
Industry, Regulatory &other external factors
Nature of the entity
Accounting Policies
Objectives, Strategies & business risks
Financial performance
Internal control
(refer to study unit )

49. The entity and it’s environment
J&S 7/10-7/14
Take note for each of the factors what matters are to be considered.
Internal Control: Already discussed but refer to J&S 7/14-7/18.

50. Identifying the risks of material misstatement
At the FINANCIAL STATEMENT LEVEL
These are risks that relate to the Financial statements as a whole and can affect many assertions.
May result from a deficient control environment
At THE ASSERTION LEVEL
These relate to the risks at the assertion level for classes of tx’s, account balances and disclosures.
Consideration of these risks assists in determining the nature, timing and extent of further audit procedures

51. MATERIALITY AND AUDIT RISK
Information is material if it’s omission or misstatement could influence the economic decisions of users based on information in the financial statements.
Audit risk:
It is the risk that the auditor will express an inappropriate opinion when the financial statements are materially misstated. AR = risks of material misstatement X detection risk

52. Considering materiality
When does an auditor consider materiality:
At the planning stage (planning materiality)
During the performance of the audit (performance materiality)
At the evaluating stage of the audit
( final materiality)

53. Example: Audit risk
There following are components of audit risk. Namely risk of material misstatement(inherent risk & control risk) and detection risk.
1. Explain each type of risk?
2. Give an example which could have contributed to the high inherent risk of inventory?
3. Give an example which could have contributed to the high control risk of inventory?

54. Example: Audit risk
1. Inherent risk(IR): Is the susceptibility of an assertion to material misstatements assuming there are no related controls.
Control risk(CR): Is dependent on the efficiency of the client’s system of internal controls.
Detection Risk(DR): The risk that the audit procedures performed by the auditor will not detect a material misstatement.
Risk of material misstatement: IR x CR!!!

55. Example: Audit Risk 2.High inherent risk of inventory
The inventory may consist of jewellery which is more complex to value than, for example, a cricket bat whose components can easily be valued (refer ISA 200 A38 for additional examples)

56. 3. High control risk of inventory
Example: Audit Risk
3. High control risk of inventory
There is a weak control environment in the business (refer ISA 200 A39)
NB: Understand the audit risk model
AR= risk of material misstatement(Inherent risk x control risk) X DR (detection risk)

57. Audit documentation The purpose of audit documentation
The form and content of audit working papers
Be able to draw up a working paper to be included in the audit file

58. Example of an audit working paper
RLM (Proprietary) Limited Ref: O1
Year ended: 28 February XXXX Compiled by: SM
Datecompiled:24/3/XX
Bank Reviewed by: MM
Date reviewed:26/3/XX
Balance: R x
Audit procedure
X= agreed bank balance to bank statement

59. TOPIC 4 IN THE STUDY GUIDE
STAGES OF THE AUDIT PROCESS
Level 1: Basic
  Knowledge and understanding of the core / essence of the subject matter which include that the subject matter exists, the significance and relevance thereof, and its defining attributes.

60. THE AUDIT PROCESS Preliminary engagement stage Planning
Putting the audit strategy and plan into action
Evaluating, concluding and reporting

61. PRELIMINARY ENGAGEMENT STAGE
Consider whether the firm wants to establish a relationship with the prospective client or continue the relationship with the existing client
The partner must be satisfied that requirements in terms of ISA 220 and ISQC 1 have been complied with
Gather preliminary information
Establish the terms of engagement

62. Engagement acceptance
Example:
Explain the considerations that apply to the auditor’s decision whether or not to accept an assurance engagement.

63. Engagement acceptance
An auditor may only accept an engagement where preliminary knowledge of the engagement indicates:
Relevant ethical requirements, such as independence and professional competence will be satisfied
AND

64. Engagement acceptance
The engagement exhibits all the following
The subject matter is appropriate (eg. financial position , financial performance or cash flows)
The criteria to be used are suitable and are available to the intended users( eg. IFRS)
The practitioner has access to sufficient, appropriate evidence
The practitioner’s conclusion is to be contained in a written report
The practitioner is satisfied that there is a rational purpose for the engagement(limitation of scope may indicate that there is not a rational purpose)

65. PLANNING STAGE The importance of adequate audit planning
Understand the difference between the “overall audit strategy” and the “Audit plan”

66. OVERALL AUDIT STRATEGY
Sets the scope, timing and direction of the audit (ISA 300: para 7)
AUDIT PLAN includes
The nature, timing and extent of planned risk assessment procedures sufficient to assess the risks of material misstatement
The nature, timing and extent of planned further audit procedures at the assertion level for each material class of transactions, account balance and disclosure
Other planned audit procedures that are required to be carried out to comply with the ISA’s (ISA300: para 9)

67. PUTTING THE AUDIT STRATEGY AND PLAN INTO ACTION
Auditor’s overall response to assessed risks of material misstatement at the financial statement level.
Auditor’s procedures to respond to assessed risks of material misstatement at the assertion level.

68. PUTTING THE AUDIT STRATEGY AND PLAN INTO ACTION
The factors that determine the nature, timing and extent of audit procedures to respond to the assessed risks of material misstatement at the assertion level.
The various categories of audit procedures used to gather audit evidence

69. EVALUATING, CONCLUDING AND REPORTING STAGE
Evaluation of the audit findings
Drawing conclusions
Auditor’s opinion
The auditor’s report: Must know and be able to explain all the elements of the auditor’s report.

70. Example Auditor’s report
Required
You are required to list the elements that must be included an auditor’s report with an unmodified opinion
(8 marks)

71. Elements of an audit report
Take note of the verb “list” , this question could have required you to also explain what must be included in each element

72. Elements of an auditor’s report
Title
Addressee 
Introductory paragraph 
Management’s responsibility for the financial
statements 
Auditor’s responsibility 
Auditor’s opinion 
Signature of the auditor 
Date of the auditor’s report 
Auditor’s address 

73. CONCLUSION TL’S 101,102 AND 103 DON’T LEAVE ANY STUDY UNIT OUT
REMEMBER ASSIGNMENT 2
ASSIGNMENT 3 for self assessment
LEAVE ENOUGH TIME FOR REVISION
EXAMINATION TECHNIQUE

74. Examination Technique

75. Start your preparation in good time.
Examination preparation
Start your preparation in good time.
Compile a realistic study time table, allocating adequate time for the continuous revision of topics as you complete them.
Cover all the topics indicated in the study guide and the references to the prescribed books in your final revision programme. Utilise the self-assessment questions specified for each study unit to evaluate whether you have covered the material adequately.

76. Examination preparation
Ensure that you prepare for the examination properly. Do not attempt to “spot” the content of the examination paper - the examination paper is designed to give coverage to all the main syllabus topics and you must prepare yourself accordingly.
Ensure that you are well-rested before you sit for the examination. Avoid going to sleep earlier or later than usual on the night prior to the examination

77. Examination technique
Do not discuss any topics with fellow-students outside the examination hall before the commencement of the examination. It may prejudice your chances rather than help you to pass the examination.
Start the answer to every question on a new page. Number your answers clearly to correspond with the various questions contained in the examination paper.

78. Read each question very carefully
Read each question very carefully. Take a couple of minutes to think over its requirements and then prepare a framework for your answer.
Answer all questions as far as possible in point form, under suitable headings and subheadings. Do not give more information than the question requires. In doing so you will waste valuable time.

79. Relate the length of your answer to the marks allocated to the question, taking into account the question’s requirements and the level of difficulty of the topic being examined.
Allow ± 1,2 minutes per mark, i.e. a question of 10 marks requires ± 12 minutes for planning and final answering. Remember that a well-planned answer takes much less time to write out than does an unplanned answer.

80. Answer all questions. It is dangerous to leave out one or more questions in an Auditing paper.
Write as clearly and as neatly as possible.
Do not conduct a post-mortem of the paper immediately after the examination. It might spoil your enthusiasm to prepare for subsequent examinations, especially if it did not go as well as you had anticipated. Also remember that other students' answers are not necessarily correct.

81. GOOD LUCK
WISH YOU SUCCESS IN THE EXAM