Chapter 1.auditing notes for an auditing students rsa

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Chapter 1Introduction to auditing

Contents

Theory an philosophy of Auditing1. What is an auditor?

rsa audit notes for sa student slides

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1. What is an audit?

a) introductionAn audit –[is an examination of financial statements in

accordance with international auditing standards. b) Types of auditorsRegistered auditor(external auditor)

Registered with IRBA(Independent Regulatory Board For Auditors)

Express an independent opinion on whether the financial statements of company are fairly presented

They offer their services to the public "public practice”


Internal auditors-[ an auditor who performs independent assignment on behalf of board of directors of a company.

Assignment relates to efficiency , internal control systems ,business activities Help senior managements to meet their responsibility( enhance the degree of management confidence by assessing risk and addressing them.

and evaluation even identifying whether the company has faced risks .

Government auditor.(auditor general)Not registered but may register with (institute of internal

auditors)Similar with internal auditor but within government

departments.Evaluate investigate government affairs on government

departments ,reporting them to senior management.


Forensic auditor.Investigate an gather evidence where there is been alleged

financial mismanagement, theft, fraud.Any institution may be audited by forensic auditor A forensic auditor must be independent from an entity

which is being audited.Degree of confidence of body /institution audited is

increased


Special purpose auditors.Auditors who specialise on particular field .Includes vat auditor for sars /environmental auditor for

environmental regulations.Degree of confidence i.e. sars will have correctness of vat

returns audited/local authorities will have environmental impact examined and reported .


c) HISTORY OF AUDITAudit comes from word audire (Latin)

In ancient times accounting took place orally. a master(auditor) will listen to oral accounts of a stewards(manager) on his/her stewardship. to increase the degree of confidentiality the master point the third party (independent trusted person) “to satisfy them selves as to the fair presentation’’

So accounting increased over the years as so to the records of financial info from oral to written (luca pacioli 1494)


d) Auditing deals with external/registered auditor‘’A professional accountant in public practice”

Must be registered with IRBA according to Audit Profession 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 intention of expressing opinion, giving assurance on fairness of financial statement or info.


2. Why is there a need for auditors?Split between ownership and management.Confidence of financial information.Accountability.


3. Levels of assuranceReasonable assurance (audit engagement)Limited assurance(review engagement)A reasonable assurance - is given only after an auditor

has done a comprehensive examination of a client’s financial records (audit)

Limited assurance –n auditor only conducts a review of entity financial records –in which an auditor does not certify the statements as being correct rather present the level of assurance as being fairness


4. Public interest and public interest scorePublic interest

the business and society runs on financial information and depends on the fact that the info is accurate , fair, and credibility

public needs as society interlink with the business needs for survival

The interest that the public have on financial info of a business as being fairly presented


• Public interest scoreThe score is based on factors which generally determined as

level of interest public has in the entityA number of points equal average number of employee p.a1 point per 1 million turnover p.a1 point per 1 million of 3rd party liabilities p.a1 point per every individual who directly or indirectly has

beneficial interest on business


• Companies regulation act(issue of public interest score)

Three levels of interest score:a) 350 points an aboveb) 100-to-349c) Below 100

Other issue on determining which company or entity must be audited by independent professional auditor is whether financial statements are:

Internally compiled . Externally compiled.


Chart for public interest scorePublic interest score

company Cc and owners of managed company

a.350 and above Audit Audit

b. 349 and below Audit if internally compiledReview if externally compiled

Audit if internally compiled No audit required

c. 100 and below review No assurance required


• Companies that needs to be audited regardless of it interest score ( companies Act of 2008)

Public companies and state owned companiesCompanies with assets of 5million and aboveReason is because there is strong element of public interest.

Public interest is the new concept in south Africa


5. Assurance and non assurance engagements

a) Assurance engagements One in which a professional accounted “express a

conclusion designed to enhance the degree of confidence of the intended user ,other than the responsible party ,about the outcomes of evaluation or measurement of a subject matter against the criteria.


b)Elements of assurance engagementsElements example3parties involved•Professional accounted•Responsible party•Intended user

•Registered auditor•Directors•shareholders

A subject matter Financial position

Suitable criteria International financial reporting standards

Sufficient appropriate evidence

Evidence must be in position to conclude tat financial statements are free of material misstatement

Written assurance report The audit report on fair statement


c)Audit of financial statement

For an auditor to pass 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 of company p.a


d. Other assurance engagementsOther assurance engagements that are classified as review

engagements and carried out to provide users with limited assurance

assurance

engagements


e)Non assurance engagementsAn engagement which do not meet the definition of

assurance engagements or which is do not contain elements of assurance engagementN.BProfessional accountant does not express the opinion or

comment on subject matter of engagement s


f)Reasonable assurance engagements(ISA 200) reasonable assurance-as “high but not absolute

level of assurance’’Is an audit or examination of financial statements by

professional auditor to express an opinion the fairness of financial statements rather than


INHERENTLIMITATIONS OF AN AUDIT(LIMITATIONS ON AUDITOR TO EXPRESS THE

FINANCIAL STATEMENT AS BEING CORRECT)1. Nature of financial reporting2. Nature of audit procedure3. Audit evidence is persuasive rather than conclusive4. Use of testing5. Inherent limitations of accounting an internal control

systems6. Timeliness of financial reporting an d balance between

benefits and cost7. Other issues on inherent limitations of audit


g)Statutory ad non statutory assurance engagements

1. Statutory assurance engagements -Are assurance that must be conducted because 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.

2. Non statutory assurance engagementsThis are audits which raise out of other obligation rather than

that of companies Act of 2008.i.e. a bank loan to a business may first require loan audit to

qualify


6.Auditing postulates

• A foundation /starting point /fundamental condition• Auditing postulates are the very foundation on which the discipline of built’.

a. No conflict between auditor and management on fair presentation of financial statements.

b. Auditor must act exclusive to offer independent and objective opinion about financial statements.

c. Professional status of an auditor possess professional obligation.d. Internal control reduces probabilities of errors and irregularitiese. Financial data is verifiable .f. Financial statements submitted to an Auditor for verification is free from

collusive and unusualg. irregularitiesh. That which is held true in the past will hold true in the future i. Application of gaap practice results fair presentation.


7. The accounting professionA. Nature of professional statusi. A profession offers skills and services which are highly

specialised and requires:-formal education-Intellectual abilities-Practical training ii. A profession is supported by various regulations

including: -laws restricting an admission to practiceiii. Profession demonstrate and intellectual and ethical

commitmentIv .chapter 2 of(Ifac) code of ethics for professional

accountants lay down fundamental principles--integrity--objectivity--Professional competence and due cure --confidentiality--Professional behaviour

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B. Accounting bodies in south Africa

I. South African Institute of Chartered Accountants( saica) -SAICA is an registered with international Federation of

accountants(IFAC) -Is a body which looks after interests of its members

whether they are public practice business ,or other pursuits .

qualitative to be a member of saicaa. Bcom (horn)and pass in either of training outside or

inside public practice( topp or Tipp) examination -Topp training occurs in an approved training

organisation(ato) such as south African breweries -Tipp training occurs in registered training office(rto)

i.e. deloittes or gobodo Incrsa audit notes for sa student slides


b. Any one who has done a. May join saica and ca(sa)c.-A member of saica can either be CA in public practice or

CA in business practiced.CA in a public practice is an accountant in a firm who gives

services requiring accountancy e. CA into business is an accountant employed or engaged in

areas such as commerce ,industry ,services ,public sector and even education

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II. The independent regulatory board for auditors IRBA has responsibility to look after the

professional interest s of auditors. Functions are : registration/education/ and

training/accrediting of professional bodies for membership and prescribing standards of commence an ethics/to protect public into their dealing with registered auditors/to discipline IRBA members who “break the rules’’

III. IRBA members are “Registered auditors’’



C. Pronouncements that regulates the(Auditing)profession

• Is important for accounting profession to seek to ensure that high standards of ethics , conduct and skills are set and maintained by its members.

• If this standards are allowed to slip ,public confidence will be undermined.

• ISA200 require that auditor must comply with ethical requirements


Important legislation,regulations and standards are:• The audit profession Act(2005)• Companies Act 2008• Constitution law and law of saica• BN89• International Standard on:

• Auditing(isa)• Review engagements(ISRE)• Assurance engagements(ISAE)• Related services(ISRs)

• International auditing practice statements(IAPS)• South African Auditi Practice Statements(SAAPS)


8. The financial statements audit engagements

A. An audit of financial statement which is assurance engagements by external auditor.

(ISA200) are objectives of auditora. To obtain reasonable assurance that

financial statements are free from misstatement caused by fraud or error

b. To see that the financial statements comply with financial reporting framework .

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B. Model of Independent Audit of financial statements of a company according to

companies Act 20.08Roles of the various parties and companies Act

Auditor


ShareholdersDirectors

Auditor

appointsPerform Audit on Assertion

Report: AFS

appoints


C. The roles of various parties a) Shareholders provides finance for business Appoints directors to manage business Appoints auditors Receives annual financial statements from directors and

report from auditors for assuranceb). Directors Run the company and report results of stewardship to

shareholders Prepare the financial statements in accordance with IFRSc). Auditors Reasonable gather all evidence to pass independent report Report Audit opinion to shareholders


D. The roles of companies Act 2008Section 30 makes it compulsory for any public company to

be auditedProvides 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 disqualifying certain individuals on filling those roles

Plays obligation to directors to prepare annual financial statement as and providing legal backing for financial statements for financial reporting standards

Provide right to an auditor to have full access to financial statements

Require that an public company appoint an audit committee


E . The roles of The Auditing Profession Act 2005

Sec 41 prohibits anyone who is not registered as public audit to conduct an audit

Sec44(1) individual responsible for an audit is named a “designated auditor’’

Sec 44 state 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


ii. Accounting records has been put in one of official languagesThe auditor has not had occasion to report the reportable

irregularities to the IRBAThe auditor has compiled the law relating to the audit of

the entity The auditor is satisfied as to the fairness of financial

statementsSec 45 place the duty of an auditor to report any report

enable irregularities uncovered at an audit client to IRBA

Chapter 1.auditing notes for an auditing students rsa

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