INTRODUCTION

AND Auditing 288/388

BACKGROUND Auditing Fundamentals

TO AUDITING
1
chpt 1&3
LECTURE 1
 AUDITING 288/388
Chpt

• Introduction and background to auditing

1,3

• Internal control & cycles

4,6,7,8,9
,10

• Ethics and auditor’s legal liability

2,3

• Audit process
11,12,
13,15

2
2
LEARNING OUTCOMES
MODULE 1
1. Describe the definition of an audit, explain the duties
and environment in which the auditor work

2. Describe underlying principles of the audit profession

3. Differentiate between types of audits, services &

auditors
4. Discuss companies act requirements

5. Discuss link between different subjects

6. Auditing postulates–
self study 1.4.7 – p20

3
SOURCES
Auditing Fundamentals – Chapter 1
Note
1.3.3 The assertions made by the financial statement
prepares – to be covered in detail later Pg
9-11
SAICA Handbook – Auditing Standards
 Preface
 Glossary of terms Volume 2 A (1) Auditing
 Framework
 ISAE 3000 Volume 2 A (2) Auditing

 ISA 200 Volume 2 A (1) Auditing

4
READING AUDIT
STANDARDS
▪Preface
▪Glossary of terms
▪ISQM1 – Quality control
▪ISAs, ISREs, ISAEs, ISRSs

5
 STRUCTURE OF THE STANDARDS
 Introduction ISA 200
Introduction
Scope of this ISA
1. This International Standard on Auditing (ISA) deals with the
independent auditor’s overall responsibilities…

 Objective
Overall Objectives of the Auditor
11. In conducting an audit of financial statements, the
overall objectives of the
auditor are:

 Definition Definitions
For purposes of the ISAs, the following terms have the meanings
attributed below:
(a) Applicable financial reporting framework –
 Requirements Requirements
Ethical Requirements Relating to an Audit of Financial
Statements
 Application and other 14. The auditor shall…
explanatory material Explanatory information 6
RELEVANCE?

7
8
9
10
 Auditor

Independence

PARTIES
INVOLVED

Financial statements –
Management assertions
Directors Shareholders
appoint
Need for corporate governance
11
 Accounting vs auditing

Transactions
Measure, note, classify
EMPLOYEES & summarise

Accounting records Trial balance

IFRS
MANAGEMENT
Financial Statements Management assertions
& DIRECTORS

Audit standards, Audit

AUDITOR evidence, prof judgement
Audit Report

12
 FINANCIAL STATEMENTS
Ntsimbi Piping Proprietary Limited 20x1 20x0
R’000 R’000

Extract of statement of comprehensive income

Income 128 320 97 802

Gross Profit 23 046 20 939

Profit before tax 2 921 2 990

Extract of statement of financial position

Total assets 69 820 64 394

Equity 37 158 35 018

13
 14
Management Financial Statements IFRS

Pre-engagement – decide to accept client

Audit process
Understand client

Audit plan & Audit strategy

Conduct Audit procedures to collect audit

evidence which supports opinion ISA’s

AUDITOR Opinion on the fairness of the AFS

Audit report
 AUDIT PROCESS OVERVIEW

ISA’s, govern
the process
Pre- Planning
engagement
1 2
4 3
Evaluation,
conclusion, Obtaining
reporting evidence

Auditing Fundamentals

15
AUDITOR

16
AUDITOR AUDITING FUNDAMENTALS PG
5 &12-13

➢satisfy himself to the truth of bookkeeping of others

➢Independence
➢Company’s Act
➢Why Auditors?
 ownership & Management
 public confidence
 accountability

17
DEFINITION : AUDIT
➢systematic process
➢gather & evaluate evidence and information objectively
to make evaluation
➢on the assertions about economic actions and
situations (made by management of the entity)
➢determine correlation (of assertions) with predefined
criteria
➢quantitative and qualitative

➢communicate results: in writing

➢to users

18
INTRODUCTION
AND Auditing 288/388
BACKGROUND Auditing Fundamentals
TO AUDITING
19
chpt 1&3
LECTURE 2
OBJECTIVE OF AN AUDIT
(ISA 200)/ AUDITING FUNDAMENTALS P14- 16

Express an opinion: ‘… financial statements as a whole are free from material

misstatements…’ ‘…present fairly in all material aspects…’

Not
 Guarantee the existence of a company
 No objective to detect fraud

Inherent limitation of an audit →Reasonable assurance:

 The nature of financial reporting
→ Use of judgement in preparing financial statements
(applying of IFRS & estimates)
 The nature of audit procedures
 Practical and legal limitations on audit
 Management provides documentation and explanation on which to base conclusions → intentionally or unintentionally
incorrect
 Management may try to hide fraud
 Timeliness of financial reporting and balance between benefit and cost
 Reliability of evidence versus cost
 Time and resources available → use of sampling
20
AUDIT OPINION
ISA 700

21
STRUCTURE OF AUDIT
PROFESSION IN SA
Minister of Finance

Auditing Professions Act

Independent Regulatory Board for Auditors (IRBA)

Ch 2
(Ethics)

South African Institute of Chartered Accountants (SAICA)

International Federation of Accountants (IFAC)

International Auditing and Assurance Standards Board (IAASB)

CPD
ISAs ISREs ISAEs ISRSs

Audits Review Other than historical

Related services (agreed-upon
info
procedures & compilations)

22
 AUDIT PROFESSION
WWW.IFAC.ORG, PREFACE

SAICA
(South African Institute of Chartered Accountants)
➢ Main purpose is to protect and promote the interests of CA’s
in SA
• Mastery of intellectual skill
• Acceptance of duties to society
• Objective outlook
• Rendering service to a high standard

IRBA
(Independent Regulatory Board of Auditors)
➢Main purpose is to protect and promote the interests of
Investors, Public and support Auditors

23
 AUDIT PROFESSION
WWW.IFAC.ORG, PREFACE

• strive to comply with audit practice

IFAC • attempts to harmonise auditing worldwide
International Federation of • also South Africa
Accountants

IAASB • via IFAC

International Auditing and • authority to develop & issue audit
Assurances Standards Board standards(ISA’s)

Mission statement – IFAC:

Worldwide development and enhancement of accountancy profession with
harmonised standards -able to provide services of consistently high quality in public
interest
24
 Possible Auditor’s Engagements

Assurance (Opinion Non-assurance

or conclusion
(NO Opinion or
conclusion)

Reasonable Limited
assurance assurance Other services
engagements engagements

Agreed upon Other services

Audit Review procedures Compilation e.g.-Tax,
consultation,

Financial Other
statement

Compliance with laws &

regulations
(specific in audit report)

25
ASSURANCE
& NON-ASSURANCE
APPOINTMENTS:
Assurance engagements
 Conclusion or opinion
 Provide a degree of confidence for the users of Fin
Statements
 (For example audit report providing opinion over AFS)

Non assurance engagements

 No opinion or conclusion
 (For example compiling tax return)

26
TYPES OF AUDITORS
External Auditor (independent auditor)
Internal Auditor
 employee, renders a service to co
Auditor General – Public auditors/Government
auditors
 e.g. Auditor General, SARS
Forensic Auditor
 e.g. investigates fraud
Special purpose Auditors
 e.g. whether particular provisions of a contractual agreement,
such as a loan agreement, have been complied with

27
PRIVATE VS PUBLIC SECTOR
AUDITS AUDITS
External Audit Auditor General
o Audit of entities
o Audit of government
(Companies, CC’s, Trusts
(National, provincial, local)
etc.)
o In terms of The Public Audit
o In terms of The Auditing
Act 25 of 2004
Profession Act 26 of 2005
o Audit of:
o Audit of:
1. financial statements
1. Financial statements
2. compliance with laws and
regulations
3. performance in terms of
predetermined objectives

28
CO ACT REQUIREMENTS
COMPANIES ACT

Directors/Company:
 Fin year-end date S27
 Accounting Records S28
 Compile Annual Financial Statements (AFS) S29
 Approve & AGM S30
 (section.27-30)

Auditor:
→every public co must appoint AND PI Score S90
 with inception- members or directors
 otherwise Registrar
 annual appointment
 access to records, books, documents, info & explanations S93
 report to members
 other responsibilities
 (section 90-93)

29
PUBLIC INTEREST SCORE
COMPANIES ACT

➢Method to assess companies public interest

➢Act prescribes audit or review based on this
➢Calculation:
 1 point per employee
 1 point per Rmillion or part thereof Turnover
 1 point per Rmillion or part thereof 3rd party liabilities at year end
 1 point per individual who has a beneficial interest in the securities in
issue by the company

30
SUMMARY FOR A PRIVATE
COMPANY:
PIS Company CC’s or owner managed

< 100 Independent review No assurance required

100 – 349 • Audit if AFS internally compiled • Audit if AFS internally

• Independent review if AFS compiled
externally compiled • No assurance required - if AFS
externally compiled

> 350 Audit Audit

31
PUBLIC INTEREST SCORE
COMPANIES ACT

Self-study example page 93

32
QUESTION PACK

33
 AUDITING 288/388
Chpt

• Introduction and background to auditing

1,3

Next week →
• Internal control & cycles slides, questions &
4,6,7,8,9
,10 solutions

• Ethics and auditor’s legal liability

2,3

• Audit process
11,12,
13,15

34
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