Advanced Auditing

Introduction to Auditing

• Theory and Philosophy of Auditing

• What is an auditor?
• Why is there a need for auditors?
• More about the assurance engagements
• Reasonable assurance, limited assurance and absolute assurance
• The Accounting Profession
• The nature of professional status
• Accounting Bodies in South Africa
• Pronouncements which regulate the auditing profession
• Financial Statement Audit Engagement
• Independent audit
• Public interest and public interest score
• Roles of the parties and regulations
• Assertions
• Professional scepticism and professional judgement
• Auditing postulates
Theory and Philosophy of Auditing

• What is an auditor?
• A person who gives assurance by comparing what is with what should
be (a standard) and expressing a conclusion
• Why is there a need for auditors?
• To add credibility to financial information
• Assurance engagements
• Assurance is when information is independently evaluated and an
opinion or conclusion is given that gives assurance on the nature of
the information
• What are auditing postulates?
• The basic foundation used for assurance engagements
• Reasonable, limited and absolute assurance
 What is an Auditor?
• Auditors are assurance providers
• There are different forms or types of auditing and different levels of assurance
• Providing assurance is to add value by improving the credibility of work
performed by other people through evaluating the work and giving a conclusion.
The auditor add assurance, trust or enhanced credibility to the worked
performed by others
• Examples of Auditors
• Registered (external) auditors – legal restraints must be registered with IRBA
• Internal auditors
• Government auditors
• Forensic auditors
• Special purpose auditors
Why is There a Need for Auditors?

• The agency theory: split between management and ownership

• The owners are different from the managers and need assurance on the
trustworthiness of management’s reports and findings
• Confidence in financial information
• The users of financial information need some assurance as to the reliability
and credibility of the information to help guide future decisions
• Accountability
• At all levels in a business people who are responsible are held accountable.
The increased need for accountability lead to an increased need for
assurance services, i.e. internal audit, government audit, forensic audit and
environmental audit
Assurance Engagements

• Assurance engagements
• “Express a conclusion designed to enhance the degree of confidence
of the intended user, other than the responsible party, about the
outcome of the evaluation or measurement of a subject matter
against the criteria”
• Criteria for an assurance engagement include:
• Three party relationship
• Criteria
• Evidence
• Conclusion or report
• Audit of financial statements is the most common assurance
engagement
• Other assurance engagements include a report on the effectiveness
of the internal control, limited assurance on sustainability reports
Assurance Engagements

• Levels of assurance
• Assurance granted differs depending on the type of engagement and range
from limited assurance in a review engagement to reasonable assurance in
an audit engagement
• Provide an opinion or a conclusion
• Reasonable assurance vs limited assurance
• Audit vs review
Non-Assurance Engagement

• Engagements that do not meet the definition of an assurance

engagement
• No third party
• No suitable criteria to use for reliable measurement
• An opinion is not expressed
• Examples include
• Prepare financial statements
• Secretarial services
• Tax advice
 Reasonable Assurance
• Why only reasonable assurance is given and not absolute assurance
• Auditor cannot guarantee that the AFS are 100% correct
• ISA 200 provides a basis for understanding the inherent limitations of an audit
Limitations of an audit

• Nature of financial reporting ( judgements required, subjective

aspects)
• Nature of audit procedures (incomplete info by management)
• Audit evidence is usually persuasive rather than conclusive (cant
witness every transaction)
• The use of testing
• Inherent limitations in internal control systems and accounting
systems (reliance on system design)
• Timeliness of financial reporting
• Other matters ( related parties, going concern, fraud)
Auditing Postulates ( in appendix)
• No conflict of interest between the auditor and management (both have
the same objective for fair presentation) ISA 200 – professional skeptism
• Act exclusively as auditor to be able to offer an independent opinion on
the fair presentation of the financial information (no bias - independent)
• Professional status imposes commensurate professional obligations
• Financial data is verifiable
• Internal control reduces the probability of errors and irregularities
• Application of GAAP results in fair presentation
• That which held true in the past will hold true in the future
• Financial statements are free from collusive and other unusual
irregularities
The Accounting Profession

• Professional status
• Highly specialised skills and services
• Quality of the services cannot be easily evaluated by the public
• Ethical and intellectual commitment that transcends the desire for monetary
gain (1.3 & 1.4 – Page 10)
• Accounting bodies in South Africa
• SAICA – www.saica.co.za
• ACCA – www.accaglobal.com
• CIMA – www.cimaglobal.com
• Auditing bodies in South Africa
• IRBA – www.irba.co.za
 Pronouncements
• Compliance with appropriate standards and ethical requirements are
critical
• Important pronouncements
• Auditing Professions Act, 2005
• Companies Act, 2008 and its regulations
• SAICA’s constitution, bylaws and Code of Professional Conduct
• IFAC’s Code of Ethics
• IRBA’s Code of Conduct and the Disciplinary rules
• International standards on
• Auditing (ISA)
• Review engagements (ISRE)
• Assurance engagements (ISAE)
• Related services (ISRS)
• International Auditing Practice Statements (IAPS)
• South African Auditing Practice Statements (SAAPS)
 Financial Statement Audit Engagement
Auditors
• External audit of financial
statements
• Conducted by a Registered
Auditor (RA)
Issue Audit
report

AFS –
assertions

Directors Shareholders
Appoint

External audit or Audit Independent audit model

 Roles of the Three Parties
• Shareholders
• Fund the business
• Appoint directors to manage the business
• Appoint auditors to provide assurance on the AFS
• Receive AFS
• Directors
• Responsible to manage the business
• Account for their stewardship in the AFS
• Prepare AFS in terms of a framework
• Auditor
• Gather evidence to render an independent opinion on whether the financial
statements issued by the Directors fairly present the financial position and
results of the operations of the company according to the financial reporting
framework
• Report the audit opinion to the shareholders
Role of the Companies Act

• Recognise the importance of assurance

• Audits compulsory for public companies
• Other companies can either:
• Independently reviewed
• Voluntary audit
• Some larger private companies could be required to be audited
• Annual turnover
• Size of the workforce
• Nature and extent of its activities
• Depending on their Public Interest Score
• Regulate appointment of directors and auditors with obligations and
rights
Role of the Auditing Professions Act 2005

• Prohibits non RA from performing audits

• Designated auditor must be identified
• Can only express an unqualified opinion when:
• Audit is free from restrictions
• Complied with applicable auditing pronouncements
• Satisfied of the existence of all assets and liabilities shown in the FS
• Proper accounting records have been kept in an official language
• All necessary information was obtained
• No reportable irregularity was reported to IRBA
• Auditor complied with all laws relating to the entity under audit
• Auditor is satisfied as to the fairness of the financial statements
Role of the International Standards on
Auditing
• ISA provide standards which the auditor must attain and provide
guidance on how it should be done
• ISA cover the entire audit process
• You will need to bring your ISA’s into tests and exams (open book
policy)
 Assertions (ISA 315)
• Completeness – all events, elements and transactions
• Occurrence – took place and pertains to the entity
• Existence – elements exist at the date
• Cut off – recorded in the correct period
• Accuracy – amounts and other data is appropriately recorded
• Classification –recorded in the proper accounts
• Rights and Obligations – hold or control the rights to assets and
liabilities are its obligation
• Valuation and allocation – elements included at appropriate amounts
• Presentation and disclosure – all events occurred and pertain to the
entity, financial information is appropriately presented and clearly
expressed, and financial information is fairly disclosed at appropriate
amounts
Role of Professional Scepticism

• Its an attitude
• Approach your work with a questioning mind
• Don’t accept things at face value
• It is not an option - it is a requirement
• Auditors must still remain polite and professional and dignified
Role of Professional Judgement

• No “ one size fits all” for an audit

• Rely on professional judgement for certain aspects
• What is professional judgement?
• ISA 200 – the auditor is required to exercise professional judgement
in planning and performing an audit of financial statements
• E.g. professional judgement is used when determining materiality,
evaluating the integrity of management, identifying and assessing
risk, drawing conclusions etc.
 Summary
• Auditors are professional people who strengthen the credibility of
financial information
• Auditors are a body of practitioners who demonstrate attributes which
set them apart from the general public
• The auditing profession adheres to a strict code of ethical principles