AUDITING 2A

Khotso Nkoe ACCA

[email protected]
053 491 0567

Resources
1. Dynamic Auditing A Student Edition Latest Edition Andgraded
2. Graded Questions On Auditing (2025)
NB; Make sure it is the latest version of the book!
Students should also make use of the following recommended readings:

1. Auditing Fundamentals In A South African Context – Oxford – Latest Edition

2. Auditing Notes For South African Students – Latest Edition; Authors: Jackson RDC &
Stent WJ; Publisher: Lexisnexis, South Africa
 Theory and philosophy of auditing

Learning outcomes
1. Various roles of auditors are described
2. Assurance and other engagements are described
3. Auditing postulates are explained and discussed
4. Accounting profession is described
5. Financial statement audit engagement is explained
6. Explain the expectation gap and how it can be managed.
1. Introduction
• Audit: “Examination of, in accordance with the prescribed or applicable auditing
standards:-
- Financial statement with the objective of expressing an opinion as to their fairness or
compliance with an identified financial reporting framework and any applicable statutory
requirements; or
- Financial and other information, prepared in accordance with suitable criteria, with the
objective of expressing an opinion on the financial and other information”.

 In South Africa, the auditing profession is regulated by the Auditing Profession

Act 26 of 2005.
2. Types of auditors
(a) Registered (external) auditors:-
• Registered with the Independent Regulatory Board for Auditors (IRBA)
• Express an independent opinion on whether the financial statements of the
company/organisation are fairly presented.
• Services are commonly in public practices/listed companies
(b) Internal auditors:
• Internal auditors are the employees of the company (Must be independent department/division
or unit)
• Perform independent assignments on behalf of the board of directors of the company
• The assignments focus evaluation of efficiency, internal control, and business activities,
helping management to meet its responsibilities by providing independent information about
the company’s departments/units/divisions.
(c) Government auditors
• Government auditor is an independent examiner who reviews and evaluates the financial management,
operations, and performance of government agencies, departments, or entities. Their primary goal is to
ensure accountability, transparency, and effective use of public funds.
(d) Forensic auditors:
 Forensic auditing is a specialised field that combines accounting, auditing & investigative stills to
uncover financial crimes such as fraud, embezzlement and other financial irregularities.
 Any organisation may be audited by forensic auditors
 Forensic auditors must be independent from an entity which is being audited.
(e) Special purpose auditors
 Auditors specilised in a particular field.
 Environmental auditors, compliance, SARS auditors auditing VAT
3. History of audit

• Audit comes from the word audire (Latin TO HEAR)

• In ancient times accounting took place orally. a master(auditor) will listen to oral
accounts of stewards (manager) on his/her stewardship. To increase the degree of
confidentialitythe master points to the third party (independent trusted person) “to
satisfy themselves as to the fair presentation’’
4. External audit/ registered auditors
• This module is only focusing on external auditors/registered auditors
• Review engagements will also be discussed.
• A professional accountant in public practice
 Must be registered with IRBA according to the Auditing Professional Act
2005
 According to Auditing Profession Act 2005 any person not registered with IRBA must
not:-
- Perform audit of financial statements
- Other financial information with the intention to express an opinion, giving
assurance
fairness of financial statements or info.
5. Why there is a need for auditors
 Split between ownership and management
 Confidence of financial information
 Accountability
6. Theories related to business, auditing and profession
(a) Agency theory – relates to governance and reporting
• Relationship between business principles (shareholders/owners) and their agents (directors)
• Shareholders delegate the director to act on their behalf
• Conflict may arise between ownership and control, where those who control the entity (directors)
may not necessarily have the best interest of the shareholders and other stakeholders at heart.
(b) Legitimacy theory – it relates to governance
• Entity to continue to exist, it must act in consensus with society’s value, norms and interests.
• Entities should have social responsibilities towards and should exist in harmony with their
stakeholders.
(c) Ubuntu – relates to governance
(c) Ubuntu – relates to governance
• Its African philosophy which expresses compassion and humanity.
• The philosophy manifests that a corporation has a responsibility to serve not only its shareholders
but its wider stakeholders
(d) Utilitarian ethics – relates to business ethics
• It holds that ethical choices should be based on that which will procedure the greatest good for the
greatest number
(e) Virtue ethics – relates to business ethics.
• It has to do with a person/organisation’s moral foundation.
• The organisation should focus on what type of entity it wants to be and should practice acting in a
morally sound way.
7. Expectation gap
• It arises when there is a difference between what the public expects from the auditors and what the auditors
actually do.
• It can be categorised as:-
 Performance gap – Differences between actual audit work and what users expect
 Reasonableness gap – Misunderstanding of an auditor’s responsibilities (e.g belief that auditors detect all
fraud
 Knowledge Gap – Lack of understanding of audit procedure by stakeholders
• Managing expectation gap
 Enhanced communication – There should be a clear explanation of the audit process and limitations
 Improved standards and regulations – Strengthening audit requirements and aligning with the user’s
expectations
 Increased transparency: Clearer audit reports and disclosures
8. Levels of assurance
• Reasonable assurance (audit engagement)
A reasonable assurance - is given only after an auditor has done a comprehensive examination of a client’s
financial records (audit)
-Fair presentation must be concluded ito a framework i.e IFRS
-Audit must be performed in prescribed manner i.e. ito International Standards in Auditing (ISAs)

• Limited assurance(review engagement)

- Limited assurance –the auditor only conducts a review of entity financial records –in which an auditor does not
certify the statements as being correct but rather presents the level of assurance as being fairness.
- Reviewer gathers sufficient appropriate evidence to form a conclusion whether anything has come to his
attention which causes him to believe the FS are not prepared in accordance with IFRS (IFRS for SME)
9. Public interest and public interest score
• Public interest
 The business and society run on financial information and depends on the fact that the information is accurate, fair and credibility
 Public needs and society interlink with business needs for survival
 Thus it is in the public interest that there is a method of achieving the production and use of credible information.
• Public interest score
• CoAct required all companies to be audited
• CoAct 2008 – shift regarding which business must be audited
• The Act introduced a new method to determine if auditing is required
• The score is based on factors which generally determine the level of interest the public has in the entity
• Public interest score is the sum of:
 A number of points equal to the average number of employees p.a
 1 point per R1 million (or portion) turnover p.a
 1 point per R1 million (or portion) of 3rd party liabilities at YE
 1 point per every individual who directly or indirectly has a beneficial interest in any of the company’s shares/member’s interest
9. Public interest and public interest score
• Companies Act’s regulations (issue of public interest score)
• Three levels of PI score:
(i) 350 points and above
(ii) 100 to 349
(iii) Below 100
• Other issue on determining which company or entity must be audited by independent professional auditor is whether financial
statements are: Public Company CC and owners of managed
interest company
 Internally compiled
score
 Externally compiled.

350 and above Audit (regardless of Audit (regardless of compiler)

compiler)
100 to 349 Audit if AFS internally Audit if internally
compiled compiled
Review if AFS No audit required if externally
compiled
externally compiled

Less than 100 Review No assurance required

10. Assurance and non-assurance engagement
(a) Assurance engagements
• One in which a professional accountant “expresses a conclusion designed to enhance the degree of confidence
of the intended users, other than the responsible party, about the outcomes of evaluation or measurement of a
subject matter against the criteria.
(b) Elements of an assurance engagement
(c) Audit of financial statements
• For an auditor to express an opinion he/she must gather all sufficient appropriate evidence on whether directors
have applied the IFRS (or other suitable reporting framework) in presenting fairness , financial position, financial
performance and cash flow info and accompanying notes for a company p.a
(d) Other assurance engagement
• Other assurance engagements that are classified as review engagements and carried out to provide users with
limited assurance
• Done in terms of ISRE 2400 International Standards on Review engagements
(e) Non assurance engagements
• An engagement which does not meet the definition of assurance engagement or which do not contain the elements of
assurance engagement
• Professional accountant does not express an opinion or comment on the subject matter of the engagement
• Example- the professional accountant is requested by the client to prepare and submit the company’s tax returns
(f) Reasonable assurance engagement
• (ISA 200 – Overall objectives of the Independent Auditor) reasonable assurance-as “high but not absolute level
of assurance’’
• Is an audit or examination of financial statements by a professional auditor to express an opinion on the fairness
of financial statements rather than the total correctness of information
(g) Limitation of an audit
I. Nature of financial reporting – judgement is applied (subjective)
II. Nature of the audit procedures – Practical and legal limitations
III. Audit evidence is usually persuasive rather than conclusive
IV. Use of testing – Sampling -
V. The inherent limitations of accounting and internal control systems
VI. Timelines of financial reporting and the balance between benefit and cost – audit performed in a reasonable
time after year-end
VII. Other matters that affect the inherent limitations of an audit – effect of fraud conducted by management,
completeness of related parties on the AFS, Non-compliance with laws and regulations
(h) Statutory and non-statutory assurance engagement
i. Statutory assurance engagements
• Are assurance engagements that must be conducted because a statute or Act of Parliament requires them .e.g. companies
Act 2008 requires all public companies to undergo an annual audit and certain other companies to undergo a review of their
financial statements.

ii. Non statutory assurance engagements

• These are audits which raise out of other obligations rather than that of companies Act of 2008. eg bank loan to a
business may require a loan audit.
10. Accounting profession
A. Nature of the professional status :- officers skills and services which are
highly specialized and require:-
i. Formal education, intellectual abilities, practising training
ii. Profession is supported by various regulations including laws restricting an admission
to practice.
iii. Professional demonstrates and intellectual and ethical commitment
iv. Professional ethics (Chapter 2):-
• Integrity – Being straightforward and host in all professional and business relations
• Objectivity – No allowing bias, conflict of interest and undue influence of other to
override professional or business judgements (impartiality, independence)
• Confidentiality – Respecting the confidentiality of client information
• Professional competence and due care – maintaining professional knowledge and
skill at the required level and performing work diligently in accordance with
applicable technical and professional standards
• Professional behaviour – complying with laws and regulations and avoiding actions
which discredits the profession
10. Accounting profession
B. Accounting Bodies in South Africa
• SAICA
• ACCA
• CIMA
• SAIPA
• RGA
• IFAC (SAICA, ACCA, CIMA, SAIPA, RGA)
• IRBA – It was brought into being by the Audit Profession Act (APA)
10. Accounting profession
C. Pronouncements which regulate the auditing profession
• It is important for the accounting profession to seek to ensure that high standards of ethics , conduct and skills are set and
maintained by its members.
• If these standards are allowed to slip , public confidence will be undermined.
• ISA 200 requires that the auditor must comply with ethical requirements
• Important legislation, regulations and standards are:-
i. The audit profession Act(2005)
ii. Companies Act 2008 & Companies Regulations Act
iii. Constitution law and SAICA bylaws
iv. International Standard on:
• Auditing(ISAs)
• Review engagements(ISRE)
• Assurance engagements(ISAE)
• Related services(ISRs)
• International auditing practice statements(IAPS)
• South African Auditing Practice Statements(SAAPS)
11. The roles of the various parties
(a) Shareholders
• Provide finance for the business
• Appoint the directors to manage the business
• Appointment auditors at the AGM
• Hold management accountable for corporate governance and performance
• Exercise voting rights on the key business matters
(b) Directors
• They are responsible for running the company and reporting the results of their stewardship (management)
• Preparation of the financial statements in terms of an appropriate financial reporting
(c) External auditors
• Conducts audits in accordance with International Standards on Auditing (ISAs) and South African auditing regulations.
• Evaluate the fair presentation of financial statements as per IFRS or GAAP.
• Ensures compliance with the Companies Act (No. 71 of 2008) and other applicable laws.
• Identifies material misstatements due to fraud or error.
• Assesses the company's internal controls and risk management practices.
• Issues an audit report with an opinion (unmodified, qualified, adverse, or disclaimer).
• Maintains independence and objectivity to ensure credibility.
(d) Internal auditors
• Evaluate the effectiveness of internal controls and risk management.
• Ensures compliance with corporate policies, laws, and regulations.
• Conducts operational audits to improve efficiency.
• Provides recommendations for process improvements.
• Works under the guidance of the audit committee but remains independent of management.
(e) Role of Companies Act 2008
• Section 30 makes it compulsory for any public company to be audited
• Provides ministered of finance the duty to make regulations which require private companies to be audited with regard to
public interest and interest score
• Regulates appointment of auditors and directors and even disqualifies certain individuals from being directors
• Places an obligation on directors to prepare annual financial statements and provide legal backing for financial reporting
standards
• Provide the right to an auditor to have full access to financial statements
• Require that a public company appoint an audit committee to provide functions of the audit committee
(f) The roles of The Auditing Profession Act 2005
• Sec 41 prohibits anyone who is not registered as public audit from conducting an audit
• Sec 44(1) individual responsible for an audit is named a “designated auditor’’
• Sec 44 states that an auditor may not express an unqualified audit opinion on financial statements unless:
i. audit has been carried out free from restriction in compliance with auditing pronouncements.
ii. auditor is satisfied with all financial info provided to him
iii. Accounting records have been put in one of the official languages
iv. The auditor has not had occasion to report the reportable irregularities to the IRBA
v. The auditor has complied with all the laws relating to the audit of the entity
vi. The auditor is satisfied with the fairness of the financial statements
• Sec 45 places the duty of an auditor to report any report enable irregularities uncovered at an audit client to IRBA
(c) Summary of key interaction between the parties

Party Key Role Reports To Interacts With

External Auditor Audits financials, issues opinion Shareholders, Audit Committee Management, Audit Committee

Internal Auditor Evaluates internal controls, risks Audit Committee, Management Audit Committee, Management

Oversees audits, risk

Audit Committee Board of Directors External & Internal Auditors
management

Board of Directors Corporate governance, strategy Shareholders Audit Committee, Management

Management (CEO & CFO) Prepares financial statements Board of Directors Auditors, Regulators

Shareholders Review financial reports Themselves (AGM) Board of Directors, Auditors

Regulators (IRBA, CIPC, Monitor compliance, enforce

Government, Public Interest Auditors, Management
SAICA, JSE) standards
(d) Assertions in terms of ISA 315 revised
• In the context of ISA 315 (Revised) – Identifying and Assessing the Risks of Material
Misstatement, assertions are the representations made by management regarding the
recognition, measurement, presentation, and disclosure of financial statements.
• These assertions form the basis on which auditors design and perform audit procedures to gather
sufficient and appropriate audit evidence.
• ISA 315 categorizes assertions into two broad groups:
i. Assertions about Classes of Transactions and Events, and Related Disclosures (Income Statement
& Cash Flow items)
ii. Assertions about Account Balances and Related Disclosures (Balance Sheet items)
• Assertions in terms of ISA 315 revised
Assertions about classes of transactions and events and related disclosures for the period under audit
Assertion Description Example
Ensuring that sales revenue recorded
Transactions and events recorded in
in the financial statements
Occurrence the financial statements actually took
corresponds to actual sales
place and relate to the entity.
transactions.
All transactions and events that Checking that all expenses, such as
Completeness should be recorded have been employee salaries, have been properly
recorded. recorded.
Transactions and events have been Ensuring that interest income has
Accuracy
recorded at the correct amounts. been calculated correctly.
Transactions and events have been
Verifying that year-end sales are
Cut-off recorded in the correct accounting
recorded in the correct financial year.
period.
Ensuring that repairs and
Transactions and events have been
Classification maintenance are not incorrectly
recorded in the proper accounts.
capitalized as assets.
Transactions and events are
Checking that revenue from different
appropriately aggregated,
Presentation segments is properly disclosed in the
disaggregated, and clearly described
notes.
in the financial statements.
• Assertions about account balances and related disclosures at the reporting date

Assertion Description Example

Assets, liabilities, and equity balances
Confirming that inventory physically
Existence recorded in the financial statements
exists by performing a stock count.
actually exist.
Ensuring that vehicles recorded in
The entity has ownership rights to
Rights and Obligations fixed assets are actually owned by the
assets and obligations to liabilities.
company.
All assets, liabilities, and equity
Checking that all loans and contingent
Completeness balances that should be recorded have
liabilities are disclosed.
been recorded.
Assets, liabilities, and equity balances
Ensuring that accounts receivable are
are recorded at appropriate values,
Valuation & Allocation recorded net of doubtful debt
including adjustments for impairments
allowances.
and allowances.
Assets, liabilities, and equity are Ensuring that long-term loans are
Classification properly classified as current or non- correctly classified as non-current
current. liabilities.
Account balances are appropriately Checking that share capital and
Presentation aggregated, disaggregated, and retained earnings are correctly
clearly described. disclosed.
12 Auditing postulates
The key auditing postulates:
i. The financial statements and underlying records are free from material misstatement.
ii. Auditors should maintain an attitude of professional skepticism.
iii. Auditors must be independent in both fact and appearance.
iv. The existence of internal controls reduces the risk of fraud and error.
v. The application of Generally Accepted Accounting Practice (GAAP) results in reliable financial
statements.
vi. Auditors exercise due professional care in the performance of their duties.
vii. An audit provides reasonable, but not absolute, assurance.
viii.The audit process is conducted within a legal and ethical framework.
ix. Users of financial statements rely on the auditor’s opinion for decision-making.
12 Auditing postulates
The key auditing postulates:
i. The financial statements and underlying records are free from material misstatement.
ii. Auditors should maintain an attitude of professional skepticism.
iii. Auditors must be independent in both fact and appearance.
iv. The existence of internal controls reduces the risk of fraud and error.
v. The application of Generally Accepted Accounting Practice (GAAP) results in reliable financial
statements.
vi. Auditors exercise due professional care in the performance of their duties.
vii. An audit provides reasonable, but not absolute, assurance.
viii.The audit process is conducted within a legal and ethical framework.
ix. Users of financial statements rely on the auditor’s opinion for decision-making.
GRADED QUESTION ON AUDITING
1. 1.1
2. 1.2
3. 1.3
4. 1.5 – Part and and B
5. 1.7
6. 1.11
7. 1.14
8. 1.17