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MO001/4/2017

Auditing Theory and Practice


AUE2601

Department of Auditing

IMPORTANT INFORMATION
Please register on myUnisa, activate your myLife e-mail address and
make sure that you have regular access to the myUnisa module
website, [AUE2601-2017], as well as your group website.

 
 

© 2016 University of South Africa

All rights reserved

Printed and published by the


University of South Africa
Muckleneuk, Pretoria

AUE2601/MO001/4/2017

70525552

   

 
AUE2601/MO001/4/2017

Dear Student 

You  are  receiving  this  document  to  provide  you  with  insight  as  to  what  information  is  being 
presented on myUnisa, the official learning management system of the university.  We would like to 
encourage  you  to  set  up  your  myLife  account  at  https://my.unisa.ac.za/portal  and  join  the  online 
learning environment, if at all possible.  

myLife

FIGURE 1: myUnisa portal 

Other information in this document includes: 

 Getting Started Letter                 p 4 
 Welcome message on the home page            p 11 
 Outcomes a nd assessment criteria              p 13 
 Frequently‐Asked Questions (FAQs)             p 15 
 Announcements                  p 27 
 The Discussion Forums and discussions            p 29 
 Preface                    p 31 
 Topic 1                    p 41 
 Topic 2                    p 73 
 Topic 3                    p 117 
 Topic 4                    p 171 
 Topic 5                    p 193 

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GETTING STARTED LETTER 

Welcome to the module on Auditing Theory and Practice (AUE2601).      
 
We hope that your experience of this module will be enjoyable and enriching.   
  

 
 
This letter contains important information to get you started.  
 

GOING ONLINE  

USING THE NAVIGATION BAR AND myUnisa TOOLS 

PLANNING AND MANAGING YOUR TIME 

PARTICIPATING IN THE ONLINE LEARNING COMMUNITY 

CLOSING REMARKS 

 
 
GOING ONLINE 
 
As a registered Unisa student you will have access to the myUnisa electronic portal.  
 

 
EXAMPLE 1: myUnisa electronic portal home page 

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From here you can access various online resources to assist you in your studies. Please ensure that 
you have activated your myLife e‐mail and familiarise yourself with the Study @ Unisa brochure and 
other guidelines.   
 
You might also find it helpful to access the following links relating to studying online: 
  Study @ Unisa (1) (2:58)   
 Study @ Unisa (2): What does it mean to be an ODL student at Unisa? (1:12)  
 Get connected before you start to register on myUnisa (6:10)  
 
Once you have registered and have obtained your myUnisa login details, you will have access to the 
module sites of all the modules you have registered for.   
 
USING THE NAVIGATION BAR AND myUnisa TOOLS 
 
You  can  use  various  navigation  options  to  navigate  the  module  sites  you  have  enrolled  for.  These 
options  are  displayed  on  the  left‐hand  side  of  the  screen  of  all  the  sites.  Click  on  the  specific 
navigation option, and it will open the page containing the information you are looking for. The first 
page you will see when opening any site is the home page.  
 

 
Example 2: Home page of module site 
 
Remember,  from  the  AUE2601  home  page,  your  lecturers  are  just  a  click  away!  We  will  follow  a 
weekly schedule indicating what needs to be done for a specific week and thus the home page will be 
updated regularly. 
 
The  following  is  an  alphabetical  list  and  accompanying  explanation of other myUnisa  tools  that  we 
will use for this module:  

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myUnisa tools  Explanation 
 
Additional Resources 
This tool allows you to access different types of resources relevant to 
your  studies  such  as  links  to  articles  and  videos  discussing  auditing 
related  content  and  PowerPoint  presentations.  The  Additional 
Resources  tool  contains  a  number  of  folders  with  files,  links,  graphs 
and  other  information.  These  additional  resources  will  support  your 
learning, and new resources might be uploaded during the semester.     
Announcements 
From  time  to  time  an  announcement  will  alert  you  to  important 
information. You will sometimes also receive an e‐mail notification in 
this  regard.  In  addition,  the  most  recent  announcements  will  be 
displayed on the home page.  
Assignments 
This  tool  allows  you  to  submit  assignments  and  monitor  your 
assessment results. We will provide clear guidelines on the submission 
of assignments.    
Discussions/Discussion 
This  tool  is  used  mainly  for  interactive  discussions  and  activities 
Forums 
relating to the various topics and themes associated with the auditing 
topics  covered  in  the  module.  The  forums  and  learning  activities  are 
created to assist and support you in mastering the learning outcomes. 
Participating in the discussions will also help you to be better prepared 
for the assignments.   
The  module  site  contains  a  variety  of  Discussion  Forums.  There  are 
forums  where  you  can  meet  and  chat  with  your  fellow  students 
(Forum 1: Student Lounge) and ask questions to your lecturers (Forum 
2: Queries to my lecturer).  In some instances, your participation in the 
discussion  forums  will  be  assessed  and  the  mark  awarded  will  form 
part of your year mark. However, this will be clearly indicated to you.   
In  Forum  1:  Student  Lounge,  you  will  be  able  to  create  your  own 
discussions should you wish to do so. To find out more about how to 
create  your  own  discussions,  consult  the  category  “Technical  issues” 
under the tool: FAQs (frequently asked questions).  
FAQs (frequently asked 
The FAQs tool provides questions and answers relating to the module.  
questions)   
These  are  grouped  in  various  categories  ranging  from  assessment 
matters  to  technical  issues.    If  you  have  any  queries  about  the 
module, start by consulting the FAQs. Should you not find an answer 
to your question, you are most welcome to contact us.   
Learning Units 
This  tool  is  the  one  that  you  will  use  most  often.  Here  you  will  find 
content  supporting  the  learning  outcomes.  The  Learning  Units  tool 
also provides information on learning activities, assessments and links 
to other valuable resources.  Please note that the Learning Units tool 
will be used in conjunction with your study guide.    
 
Official Study Material 
This tool allows you to access and download the official study material 
such as the tutorial letters.  

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Prescribed Books 
This tool is used in all the modules to display the prescribed books for 
the module.  
Schedule 
This  tool  displays  the  dates  of  the  compulsory  assignments  and 
examinations. The calendar on the home page will also display all the 
dates  of  the  various  learning  activities  captured  in  the  schedule.  To 
access the  information on scheduled  events, click on  the  date  in the 
calendar  (which  will  be  highlighted  and  underlined  if  activities  are 
scheduled for that day), or click on the Schedule tool in the navigation 
bar, which gives you the option to view the calendar by week, month 
or  year.  You  can  also  use  the  schedule  tool  to  help  you  plan  and 
manage your time so that you can keep up with the various learning 
activities for this module. Unfortunately, you will not be able to add or 
change schedule entries.  
Self‐assessment 
This  tool  allows  you  to  access  a  variety  of  self‐assessment  activities 
related to the outcomes and various parts of the module. Some of the 
self‐assessments will allow you to test your knowledge about a specific 
theme  or  topic  presented  in  the  study  guide  and  the  Learning  Units 
tool.  On  such  self‐assessments  you  will  receive  immediate  feedback. 
The assessments that will be graded and that count towards your year 
mark will be clearly indicated.     
 

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PLANNING AND MANAGING YOUR TIME 
There are 24 hours, 
1 440 minutes, and 
86 400 seconds in each day. 
Yet there never seems to be enough time to get everything done! 
 
Does this sound familiar? Attempting to balance study, work, family life and extracurricular activities 
is a challenge requiring you to manage ever‐increasing and competing demands. You therefore need 
to plan an appropriate schedule that will suit your individual needs and circumstances. Apart from 
the  suggested  study  timetable  (which  you  can  access  by  selecting  the  Learning  Units  tool  – 
Overview),  and  the  due  dates  for  assignments  (which  you  can  access  by  clicking  on  the  schedule 
tool), we do not prescribe a study timetable.  However, here are some recommendations.  Given the 
time constraints, you may want to follow some of these recommendations. 
 
Browse through the  Take time to browse through the module site and familiarise yourself 
module site  with  the  requirements  and  demands  of  the module. This  will  enable 
you to see the “big picture” of the whole module. The FAQs tool (on 
the  navigation  bar  of  the  module  site)  is  a  valuable  resource  and 
could be a useful starting point. Evaluate the demands, opportunities 
and  challenges  of  your  personal  circumstances  and  determine  how 
they  relate  to  the  assignment  due  dates  and  the  other  relevant 
learning  activities  you  need  to  attend  to.  It  may  be  a  good  idea  to 
enter these dates in your personal diary immediately. 
 
Compile  a  personal  Decide  on  strategies  for  planning  ahead  and  compile  your  personal 
study timetable  study timetable. We recommend being disciplined in keeping to your 
schedule. Perhaps you could start with some preliminary reading and 
exploring  the  recommended  material.  The  amount  of  information 
presented on the module site and the number of assignments to be 
completed  may  seem  overwhelming  at  first,  but  don’t  be 
disheartened!  
 
Approach your  Work your way systematically through the various learning activities, 
studies  reflective questions and assignments based on them. Make sure that 
systematically  you  meet  all  the  requirements  for  the  learning  activities. Use  the 
learning  outcomes  and  assessment  criteria,  the  supporting  material 
and  learning  activities  (stipulated  in  the  learning  units  tool)  to  give 
you  a  foundation  for  the  knowledge  and  skills  you  need  to 
develop. To help you approach your studies with confidence, you may 
find  it  helpful  to  start  by  browsing  through  the  module  site  and  to 
acquaint yourself with the learning outcomes and assessment criteria, 
the  additional  resources,  the  study  guide  and  learning  units.  The 
learning units are designed and developed in the form of manageable 
“chunks”  to  help  you  achieve  the  learning  outcomes  logically  and 
systematically.   
 
Contact your  Do  not  hesitate  to  contact  us,  your  lecturers,  if  you  experience  any 
lecturers  difficulties with any aspects of the module.  You can contact us either 
via  e‐mail,  telephone  or  the  discussions  tool.  Our  contact  details  are 
available  on  the  home  page  of  the  module  site.  Remember,  help  is 
just a click away.    

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Contact your peers   Please make regular contact with your peers (via the Student Lounge 
and  other  forums  accessible  by  means  of  the  Discussions  tool). 
Engage  with  your  fellow  students  to  clarify  and  broaden  your 
understanding of challenging concepts and themes. You will find that, 
by  participating  in  discussions  and  continuously  reflecting  on  your 
learning, you will expand your knowledge base and develop new skills 
that  you  can  apply  in  the  workplace. Most  students  find  these 
discussions  with  their  lecturers  or  fellow  students  extremely  useful 
 
when preparing their assignments.  
 
PARTICIPATING IN THE ONLINE LEARNING COMMUNITY 
 
If you have taken online courses before, you may well be familiar with how to participate in online 
environments. However,  if  this  is  the  first  time  you  are  taking  an  online  course,  you  may  be 
interested  in  how  to  go  about  communicating  in  cyberspace.   An  important  issue  of  online 
communities is how people relate to each other. As you may know, the internet – cyberspace – has 
its own culture and accompanying conventions for e‐mails, social networks and more formal online 
environments such as myUnisa, our educational learning management system.   
 
When  communicating  electronically,  people  often  forget  that  the  person  on  the  receiving  end  is 
someone with feelings, facial expressions, gestures and a unique tone of voice. Without being able to 
observe these communication cues it is quite possible to misinterpret participants’ meaning – in the 
case of online communication, meaning is usually conveyed by written words only.  Because online 
communication  tends  to  be  less  personal,  it  would  be  a  good  idea  to  familiarise  yourself  with 
guidelines  on  netiquette  (social  codes/etiquette  for  the  internet:  available  at
http://www.albion.com/netiquette/corerules.html). These guidelines will give you useful information 
about participating in online discussions, such as how to address one another and making sure that 
you “know what you’re talking about and make sense” (see rule 5).               

Please  note  that  when  participating  in  the  online  discussions,  we  strongly  recommend  that  you 
direct  your  responses  to  your  lecturers  and  fellow  students  by  addressing  them  at  the  opening  of 
your  response.    Also,  when  you  end  your  contribution,  sign  off  by  using  your  name  (or  title  and 
surname).  This will serve as an indication of how you would like your lecturers and fellow students to 
address you.   

We  urge  you  to  make  an  effort  and  commit  to  following  these  guidelines  to  ensure  that  your 
communication and actions online are respectful.   

Now, to get started, please access Forum 1: Student Lounge and introduce yourselves to each other 
(Discussion 1).   
 

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CLOSING REMARKS 
 
Familiarise yourself with the online environment before the module commences in January 2017. 
 
We look forward to witnessing your progress at a personal and professional level during the year. 
 
It is truly a pleasure having you as a student, and we would like to take this opportunity to wish you 
every success with your studies. 

Your lecturers   

 
Mrs A Sukhari 

Mrs P Kamolane 

Mrs I Moatshe 

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WELCOME MESSAGE ON THE HOME PAGE 

 
 
Dear Student 
 
It  is  with  great  pleasure  that  we welcome  you  to  AUE2601:  Auditing  Theory  and  Practice.  We trust 
that you will enjoy your semester studying for this module and that after working through the study 
material you will develop a keen interest in the field of auditing. 
 
This  module  is  intended  to  enable  trainee  accountants  and  auditors  or  such  individuals  in  related 
fields,  for  example,  people  who  are  interested  in  qualifying  as  chartered  accountants  or  registered 
auditors, to develop the necessary basic competencies. The purpose of this module is to provide you 
with  knowledge  and  skills  in  auditing  theory  and  practice,  which  includes  basic  auditing  concepts, 
statutory requirements, guidelines and auditing standards. 
 
Students credited with this module will know the basic auditing concepts, will be able to apply their 
knowledge  of  the  roles,  duties  and  responsibilities  of  the  registered  auditor  as  well  as  apply  the 
International  Standards  on  Auditing  in  the  statutory audit  of  an ordinary  company  trading  in  goods 
and services. 
 
We will use a study guide to direct you through the various sections. Apart from the hard copy, there 
is also an electronic version available under Additional Resources on myUnisa.  

Please visit the module site regularly to keep up to date with all the learning activities.  
 

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You might also find it helpful to access the following links related to studying online: 

  Study @Unisa (1) (2:58) http://www.youtube.com/watch?v=j6QZrRF2iVU&feature=related   
 Study @ Unisa (2): What does it mean to be an ODL student at Unisa? (1:12) 
http://www.youtube.com/watch?v=fgO_NcxduGg&feature=related 
 Get connected before you start to register on myUnisa (6:10) 
http://www.youtube.com/watch?v=MAGvmgdSkEk&feature=related 
 
Don't hesitate to contact us by means of Discussion Forum 2: Queries to my lecturer, via e‐mail or by 
paying  us  a  visit  at  our  offices  at  Muckleneuk  Campus  in  Pretoria.  Should  you  wish  to  visit  us  on 
campus, please remember to arrange an appointment beforehand (office hours: 08:00–16:00) 
 
Our contact details are: 
 
     
Mrs Aneetha Sukhari   Mrs Phindiwe Kamolane   Mrs Itireleng Moatshe  
Office number:  Office number:   Office number: 
 Samuel Pauw Building 5‐20  Samuel Pauw Building 5‐19   Samuel Pauw Building 5‐21 
Telephone number:  Telephone number:   Telephone number:  
 +27(0)12 429 6982  +27(0)12 429 3325  +27(0)12 429 6127 
E‐mail address: sukhaar@unisa.ac.za  E‐mail address: kubhepj@unisa.ac.za  E‐mail address:  
moatsip@unisa.ac.za   
 
The next step 
Please  select  the  Discussion  Forums  tool  (in  the  menu  bar  on  the  left),  go  to  Forum  1:  Student 
Lounge and introduce yourself to your fellow students under Discussion 1.  
It is truly a pleasure having you as a student, and we would like to take this opportunity to wish you 
every success with your studies! 

Mrs Sukhari, Mrs Kamolane & Mrs I Moatshe 

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OUTCOMES AND ASSESSMENT CRITERIA 

Outcomes  Assessment criteria 

Demonstrate  detailed  knowledge  and   The  auditing  theory  is  explained  by  defining 
understanding of the theory and philosophy of  an  auditor  and  explaining  the  need  for 
the  accounting  profession  and  the  financial  auditors.  
statement audit engagement.   The auditing theory is explained by discussing 
assurance  and  other  engagements  according 
  to the auditing pronouncements. 
 The auditing theory is explained by discussing 
statutory  and  non‐statutory  engagements 
according to the auditing pronouncements. 
 The  philosophy  of  auditing  is  explained  by 
describing the auditing postulates. 
 The  accounting  profession  is  described  by 
giving  the  key  elements  which  characterise 
groups  that  are  considered  to  have 
professional  status,  the  various  accounting 
bodies,  as  well  as  registration  requirements 
and  pronouncements  that  regulate  the 
profession. 
 The  financial  statement  audit  engagement  is 
explained  by  defining  the  objective  of  an 
audit,  explaining  the  roles  of  the  various 
parties  and  describing  management’s 
assertions.  
Demonstrate  detailed  knowledge  and   Knowledge  of  the  regulatory  process  in  the 
understanding of the regulatory process in the  auditing  profession  and  the  role  of  the 
profession  and  the  role  of  the  professional  professional  auditor  in  the  statutory  audit  is 
auditor in the statutory audit and the ability to  applied by referring to the Auditing Profession 
apply  the  key  terms,  concepts,  facts,  Act, 2005, and auditing pronouncements. 
principles,  rules  and  theories  thereof  to   The  duties,  rights  and  responsibilities  of 
relevant contexts.   auditors are explained and applied in terms of 
the Companies Act of 2008. 
 
 The  ethical  principles  regulating  the  auditing 
and  accountancy  profession  are  explained 
and applied by reference to the SAICA Code of 
Professional  Conduct  for  chartered 
accountants,  the  IRBA  Code  of  Professional 
Conduct  for  registered  auditors  and  the  IRBA 
Rules regarding improper conduct. 
 The  auditing  firm’s  responsibilities  for  its 
system  of  quality  control  and  quality  control 
for  audits  and  reviews  are  explained  and 
applied in terms of International Standards on 
Auditing (ISA) and International Standards on 
Quality Control (ISQC 1). 
 
 
 
 

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Demonstrate  detailed  knowledge  and   The  auditing  principles  with  regard  to 
understanding  of  auditing  principles  as  assurance  engagements  are  explained  and 
required  by  the  International  Standards  on  applied  as  required  by  the  International 
Auditing  (ISA)  and  be  able  to  apply  these  Standards on Auditing (ISA). 
principles to the statutory audit of an ordinary   The auditing principles with regard to internal 
company trading in goods and services.  control are explained and applied as required 
by  the  International  Standards  on  Auditing 
  (ISA). 
 The  auditing  principles  with  regard  to  audit 
evidence  are  explained  and  applied  as 
required  by  the  International  Standards  on 
Auditing (ISA). 
 The  auditing  principles  with  regard  to  risk 
assessment  and  audit  procedures  are 
explained  and  applied  as  required  by  the 
International Standards on Auditing (ISA). 
 The  auditing  principles  with  regard  to 
materiality  are  explained  and  applied  as 
required  by  the  International  Standards  on 
Auditing (ISA). 
 The  auditing  principles  with  regard  to  audit 
risk  are  explained  and  applied  as  required  by 
the International Standards on Auditing (ISA). 
 The  auditing  principles  with  regard  to  audit 
documentation  are  explained  and  applied  as 
required  by  the  International  Standards  on 
Auditing (ISA). 
 The  auditing  principles  with  regard  to 
assurance  reports  are  explained  and  applied 
as required by the International Standards on 
Auditing (ISA). 
Demonstrate  detailed  knowledge  and   The  different  stages  of  the  audit  process  are 
understanding  of  the  different  stages  of  the  explained  according  to  the  statutory  audit  of 
audit  process  and  be  able  to  apply  these  an  ordinary  company  trading  in  goods  and 
stages  to  the  statutory  audit  of  an  ordinary  services. 
company trading in goods and services.   The  preliminary  engagement  stage  of  the 
audit  process  is  explained  and  applied 
  according to auditing theory. 
 The  planning  stage  of  the  audit  process  is 
explained  and  applied  according  to  auditing 
theory. 
 The  putting  the  audit  strategy  and  plan  into 
action stage of the audit process is explained 
and applied according to auditing theory. 
 The  evaluating,  concluding  and  reporting 
stage  of  the  audit  process  is  explained 
according to auditing theory and applied. 
 

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FREQUENTLY‐ASKED QUESTIONS (FAQS) 

CATEGORY  QUESTIONS AND ANSWERS 

Tutorial letters  Question 1: What information do the tutorial letters contain? 
Answer:  
The tutorial letters contain important information about the scheme of work, 
resources  and  assignments  for  this  module.  We  urge  you  to  read  them 
carefully and to keep them at hand when working through the study material, 
preparing  the  assignments,  preparing  for  the  examination  and  addressing 
questions to your lecturers. 
 
More  specifically,  in  Tutorial  Letter  AUE2601/101/3/2017,  you  will  find  the 
assignments  and  assessment  criteria  as  well  as  instructions  on  the 
preparation  and  submission  of  the  assignments.  This  tutorial  letter  also 
provides all the information you need with regard to the study material, other 
resources and how to obtain it.  
 
Tutorial  Letter  AUE2601/201/1/2017  contains  feedback  on  Assignment  01; 
while Tutorial Letter AUE2601/202/1/2017 contains feedback on Assignment 
02.  
Tutorial  Letter  AUE2601/102/3/2017  contains  references  to  additional 
questions  that  you  must  attempt  and  AUE2601/103/3/2017  provides  the 
solutions to these questions. 
 
Right  from  the  start,  we  would  like  to  point  out  that  you  must  read  all  the 
tutorial  letters  you  receive  during  the  semester,  as  they  always  contain 
important and, sometimes, urgent information. 
Please  make  sure  that  you  work  through  the  tutorial  letters  before  you 
embark on any work in the study guide or assessment tasks. 
 
Question 2: Will I receive all my tutorial matter when I register? 
Answer: 
Please  note  that  not  all  of  your  tutorial  matter  may  be  available  when  you 
register.  
 
Tutorial matter that is not available when you register, will be posted to you 
as soon as possible.  
 
Please note: It is not possible to fax outstanding tutorial letters to students. It 
is, however, possible to download them from the module site under the tools 
Official Study Material and Additional Resources.  
 
It is therefore to your benefit to register as an online student so that you can 
access and obtain your study material immediately. 
 
 
 
   

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Student support  Question 1: Whom should I contact regarding administrative queries? 
services 
Answer: 
There is a Student Information Hub that will be able to assist you with your 
queries:  

Contact e‐mail: CASenquiries‐Undergraduate@unisa.ac.za 

Contact telephone number: 012 429 4211 
 
Question 2: Whom should I contact regarding academic queries? 
Answer: 
All queries about the content of this module (AUE2601) should be directed to 
your lecturers.  
 
Telephone  calls  should  be  made  during  office  hours  (08:30–16:00).  Lengthy 
problems should rather be dealt with by e‐mail. 
  
You  are  welcome  to  visit  your  lecturers  at  their  offices  on  the  Muckleneuk 
Campus,  but  please  make  sure  that  you  have  made  an  appointment 
beforehand.  Appointments  should  be  made  at  least  three  days  in  advance. 
The lecturers cannot guarantee that they will be able to attend to you if you 
arrive at the Department of Auditing without an appointment. 

The contact details of your lecturers are:  
 
     
Mrs Aneetha Sukhari  Mrs Phindiwe Kamolane  Mrs Itireleng Moatshe  
Office number:   Office number:  Office number: 
Samuel Pauw Building 5‐20  Samuel Pauw Building 5‐  Samuel Pauw Building 5‐21 
Telephone number:  19  Telephone number: 
+27(0)12 429 6982  Telephone number:  +27(0)12 429 6127 
E‐mail address:  +27(0)12 429 3325  E‐mail address: 
sukhaar@unisa.ac.za  E‐mail address:   moatsip@unisa.ac.za   
  kubhepj@unisa.ac.za 
 
Question 3: What support can I expect from my lecturers?  
Answer:  
Your lecturers will use the home page to post regular messages to guide you 
through the semester. Furthermore, you will receive regular announcements 
to  draw  your  attention  to  important  learning  events  and  assessment  tasks. 
We have also prepared supporting learning resources and various discussion 
forums and topics which you will be able to access through myUnisa. You can 
thus expect regular communication from us (your lecturers). Remember, help 
is just a click away. 
 
Question 4: What resources will I be able to access via myUnisa? 
Answer:   
We realise that, as a distance education student, you cannot always visit the 

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library  when  you  are  searching  for  information. Therefore  we  have  included 
online resources on our module site which you can access at any time. 
 
On this site, you will find the following material: 
 
 electronic copies of the study guide and tutorial letters (under Official 
Study Material) 
 past exam papers (under Official Study Material) 
 past tutorial letters (under Additional Resources) 
 additional resources to assist with your studies (under Additional 
Resources) 
 a direct link to the Unisa library (from the menu bar on the left of your 
module site) 
 summaries of discussion forums (in the relevant forums) 
Please  note:  There  are  no  prescribed  books  or  books  reserved  via  the 
electronic e‐reserves system. 
 
Question  5:    What  other  support  services  are  available  regarding  general 
student matters? 
Answer: 
If you need to contact the university about matters not related to the content 
of  this  module,  please  consult  the  publication  Study  @  Unisa  which  you 
received with your study material. This booklet contains information on how 
to  contact  the  University  (e.g.  to  whom  you  can  write  for  different  queries, 
important  telephone  and  fax  numbers,  addresses  and  details  of  the  times 
certain facilities are open).  

Always  provide  your  name,  student  number  and  module  code  when  you 
contact the university.  

 
Question 6: Are there any study groups for this module?  
Answer: 
There are no official study groups for this module. However, we strongly 
recommend that you form your own study groups with fellow students living 
in your area.  
 
To form study groups, you can share your contact details with your fellow 
students in the Student Lounge forum in Topic 2: Fellow student contact 
detail. Contact students who live near to you and invite them to form a study 
group.  

Online learning  Question 1: Is it easier to learn online than through print‐based material? 
Answer:  
No. The course content of an online class is usually identical to that of a print‐
based distance learning course on the same topic. Compared to regular face‐
to‐face  classes,  some  people  think  the  workload  is  even  more  demanding, 

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because you have to be a self‐directed learner and stay motivated to keep on 
top of your work.  
The  most  successful  online  students  tend  to  share  the  following 
characteristics. They:  

 are self‐motivated and are self‐starters 
 have good organisational and time‐management skills 
 are fairly familiar with computers and the internet  
 are resourceful and actively seek answers and solutions 
to questions and problems 

 
Question 2: What are the benefits of learning online? 
Answer:  
In the online world you can study anytime, anywhere and at a pace that suits 
your  individual  learning  style.  Remember,  though,  that  you  will  still  have  to 
meet the required deadlines for assignment submissions.  
 

Question 3: What internet skills would be useful for online learning? 

Answer:  
The most successful students tend to have the following skills: 

 Familiarity with their web browser  
 Familiarity  with  an  e‐mail  program  (including  attaching  documents  and 
reading attachments)  
 Some  familiarity  with  web‐based  interactions  –  e‐mail,  social  networks, 
learning management systems  
 Familiarity with word processing (MS Word) 
 Experience  in  successful  internet  searches,  using  a  variety  of  browsers 
and search engines  
 
Question 4: How important is attitude to achieve success in my studies and 
in an online learning environment?  
 
Answer: 
Your attitude is very important to ensure success.  

We  want  to  encourage  you  to  develop  a  positive  attitude  towards  your 
studies and online learning environment. To achieve this, there are a number 
of things to bear in mind.  
TIME is important for a distance education student. You must be in control of 
your  time  and  manage  it  effectively.  Draw  up  a  study  programme  at  the 
beginning of the semester. This requires discipline, but will ensure that you   
 have sufficient time to work through all the relevant study 
material 
 are able to submit the relevant tasks and assignments on the due dates 

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 have sufficient time for revision and preparing for the 
assignments and examination  
 
We would like to encourage you to follow the guidelines below:  
 
 Do NOT fall behind in your planning. 
 Work regularly and consistently. 
 Make sure that you understand the work as you go along. 
 Do NOT give up on difficult work; rather seek help as soon as 
possible. 
  
We hope that this information will make your studies easier, and that you will 
do well. 
 
Question 5: How should I approach my online learning?  
Answer: 
We all have different learning styles and preferences. However, consider the 
following pointers/guidelines:   
 
 Allocate enough time to work through each study unit and do the 
activities. 
 Allow extra time for work that seems difficult or with which you 
know you have a problem. 
 When you compile a study plan, allow time for personal 
responsibilities (e.g. family responsibilities, work obligations, 
social obligations, leave).  
 Make use of your most productive time for study (e.g. late 
evening after the children have gone to bed or early morning 
before the rest of the family wake up).  
 Remember that it is more effective to study for one hour on a 
regular basis (e.g. every day) than for ten consecutive hours every 
two weeks. Decide now how many hours you are going to spend 
on your studies per week. We recommend that you put one to 
two hours aside each day.  
 Keep a record of your progress. It will be gratifying to see what 
you have accomplished, and it will inspire you if you fall behind. 
Be prepared for disruptions to your study programme due to   
unforeseen circumstances. You should therefore monitor your    
progress so that you can catch up immediately if you fall behind.  
Remember that it is easier to catch up one week's lost hours than  
an entire month's. 

Technical issues  Question 1: How do I create a new topic, using the Discussion Forum tool?  
related to 
Answer: 
myUnisa 
To create a new topic in a forum, you need to do the following: 
1. Select and access the Student Lounge forum from the list of forums in 
the Discussion Forum tool. 
2. Now, at the top of the page select the option Add a New Topic. 

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3. Give your topic a descriptive name in the Topic Title box. 
4. In the Message box, write down the instructions for the discussion. 
5. Click on the Submit button to create your topic for discussion.  
 
Question 2: What is expected of me when I participate in discussion forums? 
Answer: 
Remember, online discussion forums are not the same as e‐mail messages, or 
a  letter  to  the  lecturer,  or  a  chat  room.  Therefore,  the  myUnisa  discussion 
forums must  not  be  used for  personal  messages  to your  lecturers or  to one 
another.  You  are,  however,  welcome  to  use  the  forum  marked  Student 
Lounge  to  introduce  yourself  to  your  fellow  students,  to  form  study  groups 
and to create your own topics.  
 
In  this  module,  we  will  be  using  the  online  discussion  forum  for  academic 
purposes.  For  this  reason,  the  discussions will  be  based  on  topics  related  to 
module outcomes, the assessments and the supporting content.  
 
Online  discussion  forums  are  more  like  class  discussions  in  a  face‐to‐face 
classroom, where the lecturers raise discussion points and ask questions. All 
the  students  can  respond  to  the  lecturer's  questions  as  well  as  to  one 
another's  responses.  The  lecturer can  then  clarify  uncertainties  and  perhaps 
provide a summary at the end of a discussion.  
 
Participating in discussion forums provides you with opportunities to 
 
 discuss and clarify issues in the subject area 
 share experiences and ideas with peers and lecturers 
 solve problems collaboratively 
 debate topical issues 
 raise questions about the topic under discussion 
 introduce the most recent developments in the subject area 
 receive immediate feedback on assignments 
 have  access  to  additional  resources  related  to  relevant  topics  in  this 
subject/discipline 
 
Question 3: How do I set up my own blog? 
Answer: 
The  Blogs  tool  is  a  useful  way  of  sharing  your  views  and  thoughts  on  this 
module with your fellow students. What we would like you to do is to create 
your own blog in this site and to use it as a place where you reflect on your 
progress  in  this  module.  You  can  also  read  and  write  comments  on  your 
fellow students' blogs, as long as they are positive and uplifting! 
To get your own blog started, follow these instructions: 
1. Go to the Blogs tool. 
2. Click on the Add blog entry link at the top to start your blog. 
3. Give your blog entry a title.  
 You  could  use  something  like  "Reflections  on  my  learning 

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experience in this module." This is just an example of a title.  
 Your name will automatically show next to this blog entry. 
4. Type your message inside the text box provided. 
5. After the text box, you are asked to "choose who can see this entry". 
6. The  default  setting  of  the  blog  is  ticked:  This  entry  is  publicly 
viewable.  
 You should NOT change this, because this is the only way that 
anyone can read your reflections and leave comments. 
 If you have not quite finished, you can click on the Save Draft 
button.  No  one  else  will  be  able  to  read  your  blog  until  you 
click on Publish entry. [Note: if you save a draft, you need to 
click  on  this  entry  is  publicly  viewable  when  you  have 
finished and want to publish.] 
7. If you want to add a comment to someone's blog, just click on the link 
Leave a comment at the bottom of the blog you are reading. 
You can add links, bullets, lists and colour, and so forth, by using the editing 
buttons. You can also go back, delete and edit your blogs. You can create new 
blogs on different topics under your name by just clicking on Add blog entry 
again.  
Self‐evaluation  Question:  How  can  I  find  answers  for  the  activities  and  self‐evaluation 
questions  questions? 

Answer:  
Your study guide is a valuable reference resource, because you can refer to it 
to perform the activities included in the study units, and when answering the 
self‐evaluation questions at the end of each theme. This means that you must 
use  the  study  guide  to  find  answers  for  the  activities  and  self‐evaluation 
questions. 

The following approach might assist you in finding answers to the questions: 
While  you  are  reading  and  analysing  the  text  in  the study  units,  look  for  the 
main  points by  highlighting  or  underlining  them.  You  can  also  make  notes  in 
the margin of a printed guide. You should do the activities only after you have 
thoroughly  studied  the  content  of  the  study  guide.  When  looking  for  an 
answer,  review  the  preceding  sections  by  noting  only  the  main  points,  or 
picking out words in capital letters, bold or underlined. 
 
This will assist you to find the relevant paragraphs that address the question. 
Should  this  skimming  technique  not  be  successful,  scan  more  thoroughly 
through the content for important information. 
 
Should you still be unable to find answers to the activities and self‐evaluation 
questions, it is recommended that you break down the study units into smaller 
parts that are easy to understand. You can do this by summarising each study 
unit in your own words. 
 
Here  you  have  to  remember  to  separate  main  ideas  from  supporting 
information. Try to find keywords, as the keywords will help you to recall an 
entire idea. 

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You can also draw a mind map to summarise the content. A mind map is your 
easiest  method  of  summarising.  With  a  mind  map,  you  follow  the  same 
procedures as for any other summary, but the mind map resembles a diagram. 

Examinations  Question: Do you provide any general examination tips? 

Answer:  
We  would  like  to  draw  your  attention  to  your  preparation  for  the  May/June 
examinations and we offer the following tips: 

Read and understand the instructions 

ALWAYS read the instructions carefully. Many students do not take the time to 
do this and then discover that they answered the exam questions incorrectly.  
 
Preview the exam paper and plan your time accordingly. 
 
Note  the  number  of  questions  and  how  many  marks  each  is  worth.  Quickly 
reading over the questions will assist in activating your memory. Decide which 
questions will be easier to do and which ones will take longer and budget your 
time accordingly.  Allocate time to review the exam and make corrections. If 
you  think  of  something  while  you  are  previewing  the  exam,  write  it  down 
immediately. 
 
Tackle each question systematically 

Read each question carefully and underline key words. Is it a one‐part or two‐
part question? What are you being asked to do? Identify what you have and 
what  you  need.  Decide  how  you  plan  to  get  to  the  answer  and  make  a  few 
notes on the steps you will take. This will provide you with some guidelines – 
and  the  person  marking  the  exam  with  an  idea  of  how  you  attempted  the 
question. This will also assist you with finding and correcting mistakes. 
 
Write down something for every question 

If  all  you  can  do  is  to  provide  a  definition,  then  do  so.  Write  down  anything 
you  know  that  is  related  to  the  question,  especially  if  you  do  not  know  the 
answer. Do not leave a question unanswered. Try! 
 
If you “draw a blank” 

First, do not panic and allow anxiety to take control of how you are going to do 
on the exam. Ask yourself, “What do I need to know to answer this question?” 
and start writing down your thoughts.  Avoid negative self‐talk – focus on the 
task instead of on yourself. 
 
Review and make corrections 

Take  the  time  to  go  over  the  exam  and  check  your  answers.  Do  not  change 
anything unless you are 100% sure it is correct. 
 
Stay until the end 

Do not leave until the exam invigilators throw you out! Sometimes, it takes a 

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little  more  time  for  information  in  your  memory  to  “surface”,  so  use  all  the 
time you are given. 

Assignments  Question: Are there any assignments in the module? 

Answer:  
You  are  required  to  submit  the  compulsory  assignments  for  the  module 
AUE2601,  namely  Assignments  01  and  02.  Admission  to  the  examination  will 
be obtained by submitting Assignment 01 and the admission will not depend 
on the marks you obtain for it. Please note that, although both Assignments 01 
and  02  are  compulsory,  admission  to  the  examination  will  be  based  on  the 
submission  of  Assignment  01.  Therefore,  please  ensure  that  Assignment  01 
reaches  the  University  before  or  on  the  due  date.  Although  you  will  be 
admitted  to  the  examination  on  the  basis  of  submission  of  Assignment  01, 
your  marks  for  both  Assignments  01  and  02  will  be  used  to  determine  your 
semester mark. 

Examinations  Question: When does the exam take place? 

Answer:  
AUE2601 is a semester module. If you are registered for the first semester, this 
means  you  will  be  writing  exams  in  May/June  2017  and  the  supplementary 
examination will be written in October/November 2017. If you are registered 
for the second semester, you will write the examination in October/November 
2017 and the supplementary examination will be in May/June 2018.  

Course content  Question: What is this course about? 

Answer:  
This  module  is  intended  for  trainee  accountants  and  auditors  or  such 
individuals  in  related  fields,  for  example,  people  who  are  interested  in 
qualifying as chartered accountants or registered auditors, to enable them to 
develop  the  necessary  basic  competencies. The  purpose of  this  module  is  to 
provide you  with  knowledge  and  skills  in  auditing theory and  practice, which 
includes  basic  auditing  concepts,  statutory  requirements,  guidelines  and 
auditing standards. 

Course material  Question: Where do I obtain my course material? 

Answer:  
Go to Official Study Material and find the PDF files for your tutorial letters and 
your  study  guide.  Any  other  documents  provided  by  your  lecturer  will  be 
available  in  the  Additional  Resources  tool.    Prescribed  textbooks  must  be 
purchased. 

Discussion classes  Question: Will there be discussion classes this semester? 

Answer:  
There will not be any discussion classes for this module. 
 

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Prescribed  Question:  I  have  Graded  Questions  for  Auditing  2016.  Would  this  be 
textbooks  sufficient for this course? 

Answer:  
Unfortunately, it would not be sufficient as the questions change every year, 
and the questions in your tutorial letter refer to graded questions 2017. 
Prescribed  Question: Must I purchase all the prescribed textbooks? 
textbooks   
Answer:  
Please refer to section 4 of your Tutorial Letter 101. The prescribed textbooks 
are listed as:  
 
 Jackson, RDC & Stent, WJ. 2014. Auditing notes for South African students. 
9th edition or later edition. Durban:  LexisNexis. 
 South African Institute of Chartered Accountants (SAICA).  SAICA  Student 
Handbook 2016/2017 – Volume 2.  Durban:  LexisNexis. 
 Gowar,  H  &  Jackson,  RDC.  Graded  Questions  on  Auditing  2017.    Durban: 
LexisNexis. 
 
For  AUE2601  you  will  need  Volume  2  only.   However,  the  SAICA  handbooks 
and legislation can be downloaded from the links provided below. 
  
Volume 2A contains: 
 
 ISQC1,  ISA  200, ISA  210, ISA  230, ISA  300,  ISA  315, ISA  320, ISA  330, ISA 
500, ISA 700, International Framework for Assurance engagements:  
 
http://www.irba.co.za/index.php/auditing‐standards‐functions‐55/252‐
international‐clarity‐pronouncements‐adopted‐and‐i/831‐2014‐auditing‐
standards  
 
 The IRBA Rules Regarding Improper Conduct:  
 
http://www.irba.co.za/index.php/legal‐functions‐49 
 The IRBA Code of Professional Conduct: 
 
http://www.irba.co.za/index.php/legal‐functions‐49 
 
Volume 2B contains: 
 
 The SAICA Code of Professional Conduct 
 
Conduct:https://www.saica.co.za/Portals/0/Technical/Discipline/Code%20of%
20Prefessional%20Conduct.pdf 
 
Volume 2C contains: 
 
 The Companies Act 
 
https://www.saica.co.za/Portals/0/Technical/LegalAndGovernance/Act%2071

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%202008%20Companies%20Act.pdf 
 
 The Auditing Profession Act:  

http://www.irba.co.za/index.php/legal‐functions‐49 
Prescribed  Question:  Which  chapters  and  sections  of  the  prescribed  books  will  I 
textbooks  be using? 

Answer:  
You will make use of the following: 

1.     SAICA Handbook 2016/2017:  

Volume 2 contains: 
‐       ISQC1 
‐       ISA 200, 210, 230 
‐       ISA 300, 315, 320, 330 
‐       ISA 500 
‐       ISA 700 
‐       International Framework for Assurance engagements 
‐       The IRBA Rules regarding improper conduct   
‐       IRBA Code of Professional conduct 
‐       The SAICA Code of Professional Conduct 
‐       The Companies Act, 2008 
‐       The Auditing Profession Act, 2005 

3.     Auditing Notes for South African Students 

 We make use of the following chapters: 
‐       1 to 3 
‐       5 to 7 
‐       18 and 19 

 4.     Graded questions on Auditing 

 We make use of the following chapters: 
‐       1 
‐       3 to 6 
‐       13 
Past exam papers  Question: Do the lecturers supply memorandums of past exam papers? 

Answer:  
It is a departmental policy that we do not supply past exam memorandums. If 
you  experience  difficulty  with  a  question  you  may  contact  one  of  your 
lecturers to assist. 

Examinations  Question: Are we permitted to take textbooks into the examination venue? 

Answer: 
The  exam  is  not  an  open  book  exam  and  you  are  not  allowed  to  bring  any 
study material into the examination venue. 

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Assignments  Question: Do you mark the entire Assignment 2? 

Answer:  
Please  refer  to  section  8.2  and  8.4,  point  number  4  in  TL  101. Only  selected 
questions will be marked. 

It  is  very  important  that  you  make  sure  that  you  answer  all  sections  of  the 
assignment  as  you  do  not  know  which  sections  we  are  going  to  choose  to 
mark. 
Assignments  Question: Which topics are covered in Assignment 1? 

Answer:  
Assignment 1 covers topics 1 and 2. 

Assignments  Question: Which topics are covered in Assignment 2? 

Answer:  
Assignment 2 covers topics 1 to 3. 

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ANNOUNCEMENTS 

Announcement 1:   Message:  
Welcome and 
getting started  Dear Student 
9 January 2017 
Welcome to AUE2601. We are happy to announce that this module will be presented 
online in 2017. This means that you can download study materials and assignments to 
print them for yourself. You should have received a Getting Started tutorial letter in the 
mail explaining what is expected of you as an online student. If you have not received 
this letter, you can go to Official Study Material and you should find the PDF file. 

But  for  now,  we  would  like  you  to  first  go  to  the  Discussion  Forums  link  on  the  left‐
hand  side  of  your  screen  and  access  General  Subject  Related  Discussions:  General 
Discussions.  

In  this  topic  you  can  correspond  with  your  fellow  class  members  on  any  issues 
regarding this course. Use the Your Message box to add your message to the list. If you 
want to start a totally new topic of discussion, use the Add New Topic link which you 
will find in the Topics List. 

We  want  you  to  participate  in  your  first  online  activity  where  you  are  expected  to 
discuss the proposed assessment plan and how you will plan your time so that you are 
able to stick to the AUE2601 assessment plan/schedule.  

Please participate actively in these discussions during the first semester of 2017. 

We are looking forward to meeting you online! 

Announcement  2:  Message:  


6 February 2017  Dear Student 
We strongly encourage all AUE2601 students to participate in the Discussion Forums by 
way  of  posting  questions,  answers,  comments  and  examples.  Remember  that  e‐
learning is informal and there is no formal or specific sequence in which the questions 
should be posted. 

Please  use  the  Discussion  Forum  as  a  platform  for  more  interactive  learning  during 
your preparations for the exam. 

Announcement  3:  Message:  


6 February 2017  Dear Student 
Please note that Frequently Asked Questions have been added under FAQs. 

Ensure to visit the FAQs during your preparations for the exam. 

Announcement  4:  Message:  


1 March 2017  Dear Student 
  It is important that you prepare assignments and submit them before the closing date. 
  Remember that both Assignments 1 and 2 are compulsory and earn you marks. 
 
  You are reminded that Assignment 1 is due on 6 March 2017. Group work will not be 
  marked. 
 
Second semester: 25 August 2017 

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Announcement  5:  Message:  


5 April 2017  Dear Student 
The due date for Assignment 2 is on 10 April 2017. 
Second semester: 15 September 2017 

Announcement  6:  Message:  


1 May 2017  Dear Student 
We  trust  that  you  are  all  studying  hard  and  that  you  are  on  track  with  your 
preparations  for  the  upcoming  exam.  Remember  that  you  have  to  study  the  entire 
study guide.  
You  are  reminded  to  participate  in  the  Discussion  Forum  in  preparation  for 
examination. Please refer to the FAQs and the new discussions added under Discussion 
Forums on the myUnisa during your preparations. 
All the best with your preparations for the exam. 
 

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THE DISCUSSION FORUMS AND DISCUSSIONS 

Forums  Topics 

Forum 1:  Discussion 1: Welcome 
Student Lounge 
 Welcome to Auditing Theory and Practice, alternatively known as AUE2601. 
Use this forum  Hope you find this module very interesting. 
to discuss 
 Please  actively  participate  in  these  discussions  during  the  first  semester  of 
general matters 
2017. 
amongst 
yourselves   We are looking forward to meeting you online! 
   
Your lecturers 
 
Discussion 2: Introduce yourself 
 
Dear Student 
  Use this space to get to know your fellow students. 

  Tell  each  other  about  your  current  work  situation,  professional  background  and 
anything else you would like to share (± 250 words).  
  Your lecturers 

  Discussion 3: Fellow student contact details 
Dear Students 
 
Use this space to share your contact details with your fellow students and to form 
  study groups. 
 
 
Your lecturers 
 
Discussion 4: Study plan for AUE2601 
Forum 2  Discussion 1: Introduction to auditing 
Discussion on 
Discuss difficulties experienced with Tutorial Letter 102, Questions 1–2. 
topic 1 and 
prescribed   
questions  
Forum 3  Discussion 1: Regulation of the auditor 
Discussion on 
Discuss difficulties experienced with Tutorial Letter 102, Questions 3–6. 
topic 2 and 
prescribed  Complete Assignment 1. 
questions 
Forum 4  Discussion 1: General principles of assurance engagements 
Discussion on  Discuss difficulties experienced with  Tutorial Letter 102, Questions 7–12. 
topic 3 and 
prescribed  Complete Assignment 2. 
questions 
 

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Forum 5  Discussion 1: The audit process 
 
Discussion on 
Discuss difficulties experienced with Tutorial Letter 102, Questions 13–15 
topic 4 and 
prescribed 
questions 
 
Forum 6  Discussion 1: Revision 
 
Work through past exam papers online and discuss exam techniques. 
 

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PREFACE
1. Welcome

Dear Student
It is with great pleasure that we welcome you to module AUE2601: Auditing Theory
and Practice. Please take the time to familiarise yourself with this preface and refer
to it as often as you need to, since it will make studying this module a lot easier.
The preface outlines the purpose of this module, serves as a link to other auditing
modules, explains our teaching strategy and gives useful hints that will help you to
experience a positive learning experience.
We trust that you will enjoy your studies of this semester’s module and that you will
have developed a keen interest in this field of auditing after having worked through
the study material.

2. Purpose of this module

This module is intended for trainee accountants and auditors or individuals in related
fields, for example, people who are interested in qualifying as chartered accountants
or registered auditors, to enable them to develop the necessary basic competencies.
The purpose of this module is to provide you with knowledge and skills in auditing
theory and practice, which includes basic auditing concepts, statutory requirements,
guidelines and auditing standards.
Students credited with this module will know the basic auditing concepts, be able to
apply their knowledge of the role, duties and responsibilities of the registered auditor,
as well as apply the International Standards on Auditing in the statutory audit of an
ordinary company trading in goods and services.

3. Link to other modules


It will become clear from this overview that this introductory module forms the basis
for a range of further auditing modules. Therefore, the purpose of and learning
outcomes for this module are aimed at developing your expertise and abilities in the
field of auditing.
A brief outline of Auditing modules 200, 300 and 400, offered by the Department of
Auditing, is provided below:

Auditing 200
AUE2601: Auditing theory and practice
The purpose was discussed under point 2 above.
AUE2602: Corporate governance and the auditor
The purpose of this module is to provide students with knowledge and
skills in the principles of corporate governance, statutory matters and

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internal controls in the accounting cycles from the auditor’s perspective,


including evaluating internal controls.
Auditing 300
AUE3701: Audit planning and tests of controls
The purpose of this module is to provide students with knowledge and
skills in audit planning and the performance of tests of control, which
includes auditing concepts, statutory requirements, guidelines and
international standards on auditing.
AUE3702: Substantive procedures and finalising the audit
The purpose of this module is to provide students with knowledge and
skills in the performance of substantive procedures and the finalisation
of an audit, which includes auditing concepts, statutory requirements,
guidelines and international standards on auditing.
Auditing 400
AUE4861: Advanced auditing
The aim is to ensure that students meet 70% of the auditing knowledge
requirements of the prescribed syllabus of the South African Institute of
Chartered Accountants (SAICA) in order to produce competent
professional accountants. It will also provide a foundation of auditing
knowledge that enables students to continue to learn and adapt to
change throughout their professional lives. In particular, this module
aims to develop core competence (the acquisition of auditing
knowledge and skills) in the field of auditing.
AUE4862: Applied auditing
The aim is to ensure that students meet the other 30% of the auditing
knowledge requirements of the prescribed syllabus of the SAICA in
order to produce competent professional accountants. It will also
provide a foundation of auditing knowledge that enables students to
continue to learn and adapt to change throughout their professional
lives. In particular, this module aims not only to develop core
competence in the field of auditing, but also to integrate the knowledge
obtained in module AUE4861. Both of these modules will enable a
student to adhere to the SAICA requirements for auditing.

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4. Framework of the module


Diagram 1 below is a schematic representation of the content of the module:

5. Teaching strategy

The focus of our teaching role is on facilitating your learning experiences towards
achieving specific assessment criteria. Furthermore, for each of the topics in this
module, these learning experiences are designed to help you master the learning
content at a predetermined competence level.

5.1 The study package

The teaching strategy we have adopted to enable you to complete this module
involves utilising all the elements of the study package in an integrated manner.
The study package for mastering this module consists of the following:

 the prescribed book(s)


 the study guide in which study material is grouped into learning units on the
basis of topics
 the Tutorial Letters 101, 102, 103, 201 and 202 which contain information that
we wish to draw your attention to

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 questions and answers which relate to the various learning units and are made
available in the form of tutorial letters
 assignments which are contained in Tutorial Letter 101

When you commence with this module, a relationship begins by which you and your
lecturers interact primarily through the study material included in the study package.
A vital implication of this arrangement is that while your lecturers take responsibility
for the appropriateness of the study material, which they place at your disposal for
this module, you have the sole responsibility to ensure you make the most of each
component of the study package.
5.2 Learning outcomes and levels of mastery
Each topic dealt with in this module contains a statement of the learning outcomes
that we wish to achieve for the particular topic. In broad terms, these statements
indicate the knowledge and skills we expect you to have mastered by the time you
have completed your studies of each topic. These learning outcomes and the
required levels of mastery specified per topic indicate the required end result, which
is what you will be assessed on in this module.
In this introductory auditing module, we emphasise the acquisition of knowledge and
understanding of various topics and subtopics. To a somewhat lesser degree, we
expect you to be able to apply the knowledge and understanding that you have
acquired in given situations, for example, hypothetical situations in brief practical
scenarios and short case studies.
The level of mastery that you are required to attain in the various study topics is
indicated alongside each specified assessment criterion. The first two levels as
defined in the Education Requirements of the South African Institute of Chartered
Accountants (SAICA:2014) are distinguished for the purposes of this module:

Level 1: Basic
At this level, the candidate is required to obtain knowledge and an understanding of
the core/essence of the subject matter, which includes the fact that the subject matter
exists, and its significance, relevance and defining attributes.
Level 2: Intermediate
At this level, the candidate is required to obtain detailed knowledge and an
understanding of the central ideas and issues that form the substance of the subject
matter.
Level 3: Advanced
At this level, the candidate is required to obtain thorough knowledge and a rigorous
understanding of the subject matter. This level of knowledge and understanding
extends beyond a sound understanding of central issues, and includes complexities
and unusual/exceptional aspects of the subject matter.
You will not be confronted with level 3 (advanced) material in this module, since it will
be covered in your further auditing studies. The level of knowledge and
understanding that will be required of you regarding the various topics/learning units

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covered in this study guide, are indicated next to the learning outcome(s) formulated
for each learning unit of the topic.
Note the following points regarding the level of mastery indicated for the various
learning outcomes for each learning unit:

 The highest level of mastery that applies to a learning unit is indicated. In other
words, a learning unit indicated as being level 2 (intermediate) implies that you
should also be able to deal with the topic at level 1 (basic).
 Your mastery of the study material in terms of the specified learning outcomes will
be tested in the final examination paper, which you will have to pass in order to
successfully complete the module. Questions at both levels 1 and 2 will be
included in the examination paper.

A variety of learning activities and self-evaluation questions are included in each


learning unit to encourage your active participation in the learning process. These are
a combination of reading, studying, doing of and reflecting on activities that are
presented in a variety of ways throughout the study guide. They have been designed
to enable you to absorb the knowledge content of the topic, to practise your
understanding and to direct your thoughts.
This is a vital aspect of our learning approach, because as you encounter these
learning activities and perform them, you will become directly involved in controlling
the extent and quality of your learning experience. In short, how much and how well
you learn will depend on the extent of your progress through the learning activities,
and the quality of your efforts.
5.3 Meaning of words
Throughout this module, we communicate learning outcomes and self-assessment
criteria phrased in terms of what you should be able to do. This process involves the
use of action words, which are typically verbs or phrases containing verbs, describing
what you are expected to do in the learning activity. It is our objective to ensure that
the words we use to indicate a requirement clearly state what you have to do, and
you should ensure that you clearly understand the requirements that are conveyed
by the range of words that we will use in the study material for this module.
We list below (in alphabetical order) examples of some of the action words that you
will encounter in this module, together with their meanings for the purpose of this
module.

Advise Give advice; express an opinion as an expert.


Apply Make use of in a practical sense; use where relevant or
appropriate.
Calculate Ascertain by mathematical procedure/exact reckoning.

Compare Examine in order to observe resemblances, relationships and


differences.
Complete Finish/add what is required.

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Define State precisely the meaning/scope/total character of; make


clear (especially the outline of); give a concise description of
the distinguishing features of something.
Describe Clearly indicate the distinguishing details or essential
characteristics of something.
Determine Decide; draw a conclusion/make a decision based on
reasoning.
Discuss Examine/consider the opposing arguments.
Draft Prepare a preliminary version of something.
Examine Investigate carefully/in detail.
Explain Set out the meaning of something; clarify the meaning, provide
supporting evidence; argue the truth of something.
Identify Establish by considering, selecting and recognising something.
Illustrate Explain and clarify by means of an example to illustrate the
nature, meaning and importance of something (see "explain").
Interpret Convey/explain/set out in detail the nature/meaning/
significance of something.
List Record/itemise names or things belonging to a class.
Mention/name/ Specify by name; cite names, characteristics, items, elements
state or facts.

Motivate Cite facts/reasons in support of a viewpoint or argument.


Organise Arrange in an orderly structure/sequence; place into
classes/groups according to certain criteria.
Prepare Make ready/complete; make something ready on the basis of
a previous study.
Record Put in writing; set down for reference and retention.
Summarise Give a condensed version of; state the key aspects of
something.
Tabulate Arrange/organise in table form.

6. Study approach

The following are vital considerations that you should bear in mind when approaching
your studies in auditing, and also some useful hints and aids that will help you to
improve your learning experience:
6.1 Time required for academic studies in this module

The study material for this module has been developed on the basis of the
assumption that you will have a total period of 15 weeks available to study the
module. You will need to use the final three weeks before the examination to revise
and prepare for it.

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You should devote a minimum of eight hours a week to your studies for this module.
The breakdown of the estimated time required to work through the different topics
contained in the study material, including the completion of assignment work, is
provided below. You can use it to compile your own study schedule for this Auditing
module. Bear in mind that it is only a guideline. However, you may find certain topics
to be more difficult and, therefore, require more hours to master them.

Topic Number of
study hours
Preface Overview of the module 3
1 Introduction to auditing 21
2 Regulation of the auditor 23
3 General principles of assurance engagements 23
4 The audit process 10
5 Completion of assignments 16
6 Revision and final examination preparation 24
Total time 120 hours

6.2 Mastering the study material


This study guide has been compiled to guide you through your studies of this
module. With reference to the explanation of the composition of your study package,
you should bear in mind that the prescribed books, including the International
Standards on Auditing, the Auditing Profession Act, the IRBA Rules regarding
Improper Conduct and the SAICA/IRBA Codes of Professional Conduct are the
primary sources of information that you must study. These are supplemented in the
study guide where necessary with additional information, explanations, examples and
questions, aimed at making the study content of the module more accessible and
easy to understand. The study guide also indicates the level of mastery at which you
are required to master the various learning units included in the study material. Use
the study guide to help you to get the best out of the prescribed books.
You will be required to complete assignments for this module. Details relating to the
completion and submission of assignments are provided in Tutorial Letter 101.

 Creating your personal list of key ideas and terms

As you progress through your study of auditing topics, you will become aware of the
extent to which particular terminology is used to convey specific meanings in the
auditing context. Over time we have realised that this often poses problems for
students. You need to make a conscious effort to understand the technical
terminology used throughout the study texts and other study material for this module,
and apply it when doing the activities and assignments. Also note the glossary of
terms included in the SAICA Handbook (one of your prescribed books) which can be
used to clarify certain auditing terms. Your understanding of the auditing terms used
will have a direct impact on your performance levels in the assignments and
examinations.

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We provide a convenient aid in this study guide to help you to get to grips with
auditing terms as you encounter them while progressing through each auditing topic.
At the end of each topic, we provide a blank page on which you can make a record of
technical words/terms/phrases that you encounter. It is useful to summarise these on
a single page with details of each term. For example:

 a brief definition or explanation of the meaning


 page reference(s) where the term or phrase occurs in the text
 cross-references to other related topics
 any other special element that will help you master the term or phrase, possibly
even a small explanatory diagram

In this way you can accumulate a personal dictionary of technical auditing terms.
Each page should concentrate on the words/terms/phrases you feel you need to
remember and that are important to you. Different students would probably record
different terms on these pages.
6.3 Self-study and self-assessment
Self-study and self-assessment are key components of distance education teaching
methods. Always begin by trying to solve your own study problems by making sure
that you are completely familiar with all aspects of the study material. This approach
will ensure that you derive the greatest possible benefit from your studies.
Various activities are included in this study guide for you to complete. In addition to
the activities and assignment(s), additional questions and answers are provided. Use
these learning opportunities constructively by doing the activities and completing the
questions independently, without referring to the activity feedback and suggested
solutions beforehand. You must mark and analyse your own attempt against the
suggested solution.
Having said this, your lecturers are always available to help you solve problems you
may experience with the subject. The various ways in which you can contact the
lecturers are explained in the University’s official publications. Read this information
carefully and note other possible opportunities that exist to improve the quality of
your learning experience, which are brought to your attention in these publications.
6.4 Communication skills
You should view the learning outcomes for the Auditing 200 study level, provided at
the beginning of this preface, as a tool to enable auditing graduates to communicate
effectively in real situations, whether in the public practice environment or the general
business environment. A further aim associated with the Auditing 200 study level is
also to develop and enhance students’ ability to communicate effectively. While this
is an area that primarily involves personal skills, we have purposefully designed the
study material for this module to afford students the opportunity to exercise their
communication skills in elementary practical situations.
The teaching approach, therefore, involves demonstrating various aspects of the
syllabus content in practical contexts, such as written memoranda, working papers,
reports, letters, and many other appropriate written forms of communication.
You are encouraged to develop and display your communication skills as you
progress through the study activities. Your ability to communicate effectively and
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appropriately will continually form part of our assessment of your overall level of
mastery of this module.
6.5 Opportunities for effective learning
You have the opportunity to form working groups with other auditing students with
whom you are acquainted, for instance, by meeting in person from time to time, or by
participating in the discussion forums on myUnisa. We encourage you to actively
pursue these opportunities whenever you are able to, since it can help you in various
ways.
The formation of such groups will create opportunities for shared learning to reinforce
your knowledge base of auditing topics and simultaneously promote your personal
development in areas of other important skills, such as communication and study
techniques
7. What the student can expect from Unisa

You can expect us to do the following:

 We will provide you with up-to-date and relevant learning material.


 We will keep the learning material in line with the needs of industry and
commerce by consulting regularly with the profession.
 We will assist you by affording you the opportunity to develop competencies and
skills at a certain level. The outcomes correspond to the National Qualifications
Framework (NQF) level 6. You will be assessed on the basis of the NQF level
descriptors.
 We will support you whenever you require assistance. You may contact your
lecturers by making personal appointments, telephoning them or emailing them.
We understand that studying through distance education is more challenging than
attending lectures at a residential university.
 We will provide you with clear indications of what we expect from you in terms of
your assessment.
 We will give you timeous feedback on your assignments. We will return your
assignment and our feedback within three weeks after the due date, if you
submitted the assignment on or before the due date.

8. Conclusion
We trust that you will find your studies both rewarding and enjoyable. The effort you
put into this module will provide you with a solid basis for the rest of your studies in
the auditing field.

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TOPIC 1: INTRODUCTION TO AUDITING


Topic overview

The aim of this topic is to explain the theory and philosophy of auditing, assurance
and non-assurance engagements, the auditing postulates, the accounting
profession and the financial statement audit engagement.

This topic is divided into the following learning units:

Learning unit Title Page

1.1 THE AUDITOR 43


1.1.1 The definition, types and characteristics of auditors 43
1.1.2 The need for auditors 46
1.2 ASSURANCE AND NON-ASSURANCE
49
ENGAGEMENTS
1.2.1 Assurance engagements 49
1.2.2 Non-assurance engagements 55
1.2.3 Statutory and non-statutory assurance engagements 56
1.3 AUDITING POSTULATES 59
1.4 THE ACCOUNTING PROFESSION 61
1.4.1 Professional status 61
1.4.2 Accounting bodies in South Africa 61
1.4.3 Pronouncements regulating the auditing profession 63
1.5 THE FINANCIAL STATEMENT AUDIT ENGAGEMENT 66
The overall objectives of the auditor and the conduct of an
1.5.1 66
audit in accordance with ISAs
1.5.2 The roles of the various parties 67
Management’s assertions regarding
1.5.3 68
the financial statements

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Learning outcomes

Learning unit In this topic we focus on the Level


following learning outcomes:

1.1 The auditor  Describe the various roles of 1


auditors

1.2 Assurance and non-  Describe assurance and other 1


assurance engagements engagements

1.3 Auditing postulates  Explain and discuss the 1


auditing postulates

1.4 The accounting  Describe the accounting 1


profession profession

1.5 The financial statement  Explain the financial statement 1


audit engagement audit engagement

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LEARNING UNIT 1.1: THE AUDITOR

Introduction

Auditing firms are often engaged to verify the vote count at major events, such as
the Idols competition. Why do you think that the organisers arrange for these firms
to audit the results of such competitions?

The organisers require an independent verification by a reputable profession which


is perceived by the public and contestants as being independent and technically
competent. They also want assurance that the results are accurate and that no
“fixing” of the results has taken place. An auditing firm can therefore add credibility.
The auditing firm can also add value by making recommendations to ensure the
smooth running of the event and avoidance of problems.

We are certain that you will find the concepts and techniques covered in this study
guide and related references useful. However, our experience is that students often
fall into the trap of memorising definitions, objectives, rules and techniques without
first understanding what an auditor does and what an audit of an entity actually
entails.

In this study unit, auditing theory is explained by defining an auditor, describing the
different types and characteristics of auditors and explaining the fundamental ethical
principles and the need for auditors.

1.1.1 The definition, types and characteristics of auditors


In the workplace there are various types of auditors and differences in the types of
audits they perform. One thing that they all have in common is that the auditor is
independent and provides assurance.

1.1.1.1 What is an auditor?

Study
 Jackson & Stent (2014:1/2)
 SAICA Student Handbook, Volume 2A, ISA 200: Overall objectives of the
independent auditor and the conduct of an audit in accordance with International
Standards on Auditing (ISA 200: par 3 and 13[d])

Note the following in the study resources above:


 the definition of an auditor
 the meaning of the auditor “giving assurance”
 the purpose of an audit of financial statements

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1.1.1.2 Types, characteristics and classification of auditors

Study
 Jackson & Stent (2014:1/2–1/4)

Although this module focuses mainly on the independent external audit function, this
learning unit also discusses the internal auditing function and other kinds of auditing
services.

Note the following in the study resource above:


 the different types of auditors and the duties they perform
 characteristics of auditors

Activity 1

Required
Name the different types of auditors and describe the objectives of each type of
audit.

Feedback on activity 1
Reference: Jackson & Stent (2014:1/2–1/4)

See the reference in the prescribed textbook above regarding the types and
objectives of the different types of auditors.

The focus of this module will be on the external auditor. External auditors express
an opinion about the financial statements. However, you are required to understand
the differences between the different types of auditors, for example the differences
between internal and external auditors (see the table below).

Table 1: Differences between internal and external auditors

The following are important principles that distinguish internal auditors from external
auditors (see Jackson & Stent 2014:1/2–1/4):

Internal auditors External auditors


 Perform independent assignments  Perform an attestation function
on behalf of the board of directors. (audit or review engagements).
 Provide independent information  Provide an independent opinion on
about the company’s operations. the financial information examined.
 Are contracted by the company  Work for an independent audit firm.
they are working with. In some
cases the internal audit function is
in-house and the internal auditors
are employees of the company.

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 Report to management (including  Report to the shareholders.


the audit committee).
 Function independently in the  Function independently from the
organisation, but remain part of the organisation.
organisation.
 Obtain a mandate from  Obtain a mandate through
management/the audit committee. legislation.

As mentioned in the prescribed textbook, the different types of auditors have one
characteristic in common, namely “independence”. If the person performing the
audit cannot be independent of the entity that is being audited, then the result on the
audited entity is not necessarily a valid audit. Note that when internal auditors are
part of the organisation, they should still maintain independence of the specific
department that is being audited.

1.1.1.3 Independence and fundamental ethical principles

Study
 Jackson & Stent (2014:1/0–1/11)
 SAICA Student Handbook, Volume 2A: International Framework for Assurance
Engagements (Framework: par 6)
 SAICA Student Handbook, Volume 2B: Code of Professional Conduct, Part A
(section 100.5)

Independence is the characteristic that is common to all the assurance


engagements, but it is not the only essential characteristic. The International
Federation of Accountants (IFAC) lays down the fundamental ethical principles
(characteristics) that all auditors, as professional accountants, are required to
observe. The South African Institute for Chartered Accountants (SAICA) has
adopted the IFAC code in its entirety.

Note the following in the study resources above:


 fundamental ethical principles that all professional accountants are required to
observe

Activity 2
David Prince has just started his academic studies in Auditing and is asked to
comment on whether and how the following scenario could influence the ethical
principles an external auditor should comply with.

While the external auditor was performing his audit he was unable to confirm that
the vehicles owned by the company were actually registered in the company’s
name, but decided not to mention the matter to the shareholders in his report and
accepted the inclusion of the vehicles in the financial statements.

The external auditor also documented that there was a serious threat to the going
concern of the business, because the business had lost 60% of its tenders for new
contracts. However, he decided not to mention the matter to the shareholders of the

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company in his report. He was also aware that his father-in-law held shares in the
company being audited, and over dinner one evening he commented that it would
be in his father-in-law’s best interest to urgently dispose of his shareholding in the
company.

Required
List and discuss the fundamental ethical principles that the external auditor has not
complied with according to the SAICA Code of Professional Conduct.

Feedback on activity 2
References:
 Jackson & Stent (2014:1/0–1/11)
 SAICA Student Handbook, Volume 2B: Code of Professional Conduct, part A
(section 100.5)

Integrity
The external auditor has not acted with integrity. Because he failed to confirm
whether the vehicles were actually owned by the company and did not report this to
the shareholders, he was dishonest.

Confidentiality
The external auditor should have respected the confidentiality of client information.
Chartered accountants are not allowed to disclose confidential information and by
advising his father-in-law to dispose of his shareholding he has contravened a
fundamental ethical principle.

Professional competence and due care


Because the external auditor knew that there was a very serious threat to the going
concern of the business (there was a threat that the business would not be able to
continue trading) and he failed to report this to the company’s shareholders, he did
not act with professional competence and due care as required by applicable
technical and professional standards when providing professional services.

Professional behaviour
By being dishonest and not acting with professional competence and due care the
external auditor did not comply with the relevant laws and regulations and thus
discredits the profession.

Note: Objectivity is the fifth fundamental ethical principle. However, it is not


applicable to the scenario above.

1.1.2 The need for auditors

Study
 Jackson & Stent (2014:1/5–1/6)

You may ask: “Why do entities require an audit?”

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Many people answer this question by saying that audits are required by law.
However, audits are often used in situations that do not require a compulsory audit.

Reliable financial statements are vital for many different parties. These include
managers, directors, shareholders, investors, financial institutions (banks), the
South African Revenue Service (SARS) and the creditors of the entity. They all
require reliable information to make informed decisions.

Why is there a need for auditors?

As stated in Jackson & Stent (2014:1/5–1/6), the need for auditors arose out of the
natural development of businesses managed by people other than the owners
(shareholders). The owners supply the start-up funding for the business and then
appoint managers to manage these funds on their behalf. The owners expect the
managers to report to them on a regular basis on how the owners' money is being
managed. Many owners are not involved in their businesses and do not have the
necessary time or money to determine whether the reports they receive from their
managers are a fair reflection of the actual state of affairs in the business.

This has given rise to the need to appoint an independent person (the external
auditor) to evaluate the financial reporting system introduced by management and
form an opinion about the fairness of the management's presentation (including the
company’s profit/loss) in the annual financial statements.

Investors are people who wish to invest money in business entities. To make it
attractive for individuals to invest in businesses, the investors and general public
need to feel assured that the financial statements supplied by business entities
contain reliable financial information. It is the external auditor who supplies this
assurance.

Note the following in the study resources above:


 The split between ownership and management
The people who own a business are not necessarily the managers of the business.
The external auditor is appointed to evaluate the reports of the managers and
provide an opinion in his/her report to the owners.

 Confidence in financial information


Auditors inspire confidence of the users by expressing opinions on whether the
financial information produced by the business is reliable and credible.

 Accountability
Users require accountability and auditors provide an independent service which
assesses and evaluates whether the directors are in fact meeting their
responsibilities.

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Activity 3
Required
Answer the questions, if provided, in section 1.1 of Tutorial Letter 102 and compare
your answers with the solutions in section 1.1 of Tutorial Letter 103.

Summary
In this learning unit we focused on what an auditor does, the different types of
auditors and the need for auditors, which included the objective of an audit.

Self-assessment
After having worked through the learning unit and the references in the prescribed
study material, determine if you are able to answer the following questions:

1. Describe what an auditor does.


2. Explain the different types of auditors.
3. Explain the relationship between the internal and the external auditor.
4. List and explain the fundamental ethical principles that all chartered accountants
are required to observe.
5. Explain why there is a need for auditors.
6. Explain the purpose of an audit.

Feedback on self-assessment
1. Reference: Jackson & Stent 2014:1/2
2. Reference: Jackson & Stent 2014:1/2–1/3
3. Reference: Jackson & Stent 2014:1/2–1/3
4. Reference: SAICA Student Handbook, Volume 2B, Code of Professional
Conduct: Part A (section 100.5)
5. Reference: Jackson & Stent 2014:1/5–1/6
6. Reference: Jackson & Stent 2014:1/7

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LEARNING UNIT 1.2: ASSURANCE AND NON-


ASSURANCE ENGAGEMENTS
Introduction
Clients can engage auditors to perform various services. These services can be
classified as assurance and non-assurance engagements.

In this study unit, auditing theory is explained by discussing assurance and non-
assurance engagements according to the auditing pronouncements.

We will also deal with the concept of reasonable assurance and explain statutory
and non-statutory engagements.

An auditing pronouncement is an official or authoritative statement, for example the


International Standards on Auditing (ISA) or the SAICA Code of Professional
Conduct.

Diagram 1: Types of assurance and non-assurance engagements (based on


Jackson & Stent 2012:19/2)

Engagement

Assurance Non-assurance
engagement - engagement -
learning unit 1.2.1 learning unit 1.2.2

Limited Agreed-upon
Audit Compilation
assurance/Review procedures

Reasonable Moderate
No assurance No assurance
assurance assurance

1.2.1 Assurance engagements


At the conclusion of an assurance engagement an auditor is expected to give the
client a degree of assurance that the information that was subjected to the audit is
free of material misstatements. Engagements where the auditor is required to give
assurance are referred to as assurance engagements.

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1.2.1.1 Definition of an assurance engagement and the scope of the


framework

Study
 Jackson & Stent (2014:1/6)
 SAICA Student Handbook, Volume 2A: International Framework for Assurance
Engagements (Framework: par 10–11 and 17–19)

Note the following in the study resources above:


 The definition and objective of an assurance engagement (Framework: par 10–
11)
 An assurance engagement is one in which an auditor expresses a conclusion
designed to enhance the degree of confidence of the intended users, other than
the responsible party, about the outcome of the evaluation or measurement of a
subject matter against a criteria (Framework: par 10).
 The above definition can be broken down into various elements which will be
dealt with below:

1.2.1.2 Elements of an assurance engagement

Study
 Jackson & Stent (2014:1/6–1/7)
 SAICA Student Handbook, Volume 2A: International Framework for Assurance
Engagements (Framework: par 26–49)

Note the following in the study resources above:


 the elements of an assurance engagement

To ensure that you understand what is meant by the different elements of an


assurance engagement, do the following activity:

Activity 4

You are a third year trainee auditor, employed by DCM Chartered Accountants (SA),
who is busy with the audit of the annual financial statements of Bukuban Ltd. This is
an audit engagement.

Required
Your training partner has asked you to give examples of the elements of the above-
mentioned assurance engagement to your junior trainee auditors who are assisting
you with the audit.

Feedback on activity 4
Reference: SAICA Student Handbook, Volume 2A: International Framework for
Assurance Engagements (Framework: par 26–49)

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The three-party relationship

The practitioner is DCM Chartered Accountants (SA).


The responsible party is the Directors of Bukuban Ltd.
The intended users are the shareholders of Bukuban Ltd.

The subject matter

The annual financial statements (statement of financial position, statement of


comprehensive income and cash flow)

Suitable criteria

International Financial Reporting Standards (IFRS) – suitable criteria is the


benchmark used to evaluate or measure the subject matter.

Sufficient appropriate evidence

The evidence that the practitioner (DCM Chartered Accountants (SA)) needs to be
in a position to conclude that the financial statements are free of material
misstatements

A written report

The audit report on fair presentation of the annual financial statements

1.2.1.3 Types of assurance engagements, public interest and public


interest scores

Study
 Jackson & Stent (2014:1/6–1/8 )
 SAICA Student Handbook, Volume 2A: International Framework for Assurance
Engagements (Framework: par 14-16, par 73 and 77-80)
 SAICA Student Handbook, Volume 2A: International Standards on Auditing (ISA)
200: Overall objectives of the independent auditor and the conduct of an audit in
accordance with International Standards on Auditing (ISA 200: par 5)

Now that you understand what an assurance engagement is, as well as the
elements involved, we can explain the various types of assurance engagements.

As indicated in diagram 1, there are two categories of assurance engagements:

Reasonable assurance engagement


As stated in Jackson & Stent (2014:1/8) in this type of assurance engagement, an
external auditor gathers sufficient appropriate evidence to be in a position to
express an opinion on whether the directors, who are responsible for the financial
statements, have applied the International Financial Reporting Framework
appropriately in presenting fairly, the financial position, financial performance and
cash flow information of the company for the financial year.

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The auditor is not able to provide absolute assurance, in other words, the auditor
cannot provide 100% assurance. Reasonable assurance relates to the entire
auditing process, namely the collection of audit evidence and the conclusions the
auditor draws about the evidence in order to express an audit opinion (Framework:
par 73).

Limited assurance engagements

As is indicated in diagram 1, review engagements are classified as assurance


engagements and sub-classified as limited assurance (as opposed to reasonable
assurance) engagements in terms of the International Framework for Assurance
Engagements.

Public Interest Score

Reference: Jackson & Stent (2014:1/13–1/14)

The Companies Act 71 of 2008 introduced a new method of determining which


entities require an audit or an independent review of financial statements based on
the level of public interest. An entity’s public interest score will be the sum of:

 the number of points equal to the average number of employees during the
financial year
 1 point for every R1 million of turnover/revenue
 1 point for every R1 million of third party liability (creditors, loans, debt)
 1 point for every individual who directly or indirectly has a beneficial interest in
any of the company shares/member interest (number of shareholders/investors)

Public Interest Score Decision Tree (in terms of Regulation 28 of the


Companies Act)

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Note the following in the study resources above:


 the meaning of reasonable assurance
 the objective of a review engagement
 the term "assurance" and the various levels of assurance that can be provided
by an auditor with regard to a reasonable assurance engagement and a limited
assurance engagement
 how to calculate the public interest scores and determine whether audit or review
engagement is required

1.2.1.4 Distinction between reasonable and limited assurance engagements

Study
 Jackson & Stent (2014:1/8)
 SAICA Student Handbook, Volume 2A: International Framework for Assurance
Engagements (Framework: par 14–16)

Note the following in the study resources above:


 the differences between reasonable assurance engagements and limited
assurance engagements

1.2.1.5 Advantages to having an audit of financial statements

As stated in Framework (par 10) an audit enhances the degree of confidence of the
intended users in the company’s financial statements. Examples of the general
public or investing entities that may have a direct interest in the audited financial
statements include the following (Jackson & Stent 2014:1/5–1/6):

 banks and other institutions that the company may approach for loans
 SARS for the collection of taxes
 investors who base investment decisions on audited information
 employers who rely on audited information when taking decisions affecting
employee benefits
 creditors for decisions about extending trade credit
 the settlement of claims, such as insurance claims

1.2.1.6 The inherent limitations of an audit

Study
 SAICA Student Handbook, Volume 2A: ISA 200: Overall objectives of the
independent auditor and the conduct of an audit in accordance with International
Standards on Auditing (ISA 200: par A45–A52)
 Jackson & Stent (2014:1/8–1/9)

Note the following in the study resources above:


 the inherent (inbuilt) limitations of an audit

Inherent – existing as an essential constituent or characteristic. In other words, it


exists permanently and will therefore always be a limitation.

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Activity 5
At a conclusion of an audit a junior trainee accountant of the audit team assigned to
the audit of Kos Ltd was requested to make sure that the audit working papers were
all properly filed and finalised.

He was struck by how much information/evidence had been gathered on the audit.
Having seen all of the evidence he felt strongly that the audit team should certify the
financial statements as being 100% correct. Having completed all his work, he
asked his senior why the financial statements had not been certified as correct.

Required
Explain in detail to your junior, why the financial statements cannot be certified.
Include in your answer an explanation of the inherent limitations of an audit.

Feedback on activity 5
References:

 SAICA Student Handbook, Volume 2A: ISA 200: Overall objectives of the
independent auditor and the conduct of an audit in accordance with International
Standards on Auditing (ISA 200: par A45–A52)
 SAICA Student Handbook, Volume 2A: International Framework for Assurance
Engagements (Framework: par 73)
 Jackson & Stent: 2014:1/8–1/9

The auditor is unable to provide absolute assurance and can only provide
reasonable assurance. Inherent limitations of an audit prevent the auditor from
certifying or confirming 100% correctness of the financial statements.

ISA 200 provides the following explanation for the inherent limitations of an audit:

The nature of financial reporting

The preparation of financial statements involves judgement by management in


applying the requirements of the entity’s applicable financial reporting framework to
the facts and circumstances of the entity. In addition, many financial statement items
involve subjective decisions or assessments or a degree of uncertainty (estimates),
for example, allowance for credit losses. Consequently some financial statement
items are subjected to an inherent level of variability which cannot be eliminated by
the application of additional audit procedures.

The nature of audit procedures

There are practical and legal limitations on the auditor’s ability to obtain audit
evidence. For example:
 There is the possibility that management or others may not provide, intentionally
or unintentionally, the complete information that is relevant to the preparation of
the financial statements or that has been requested by the auditor.

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 Fraud may involve sophisticated and carefully organised schemes designed to


conceal it. Therefore, audit procedures used to gather audit evidence may be
ineffective for detecting an intentional misstatement that involves, say, collusion
to falsify documentation which may cause the auditor to believe that audit
evidence is valid when it is not. The auditor is neither trained as, nor expected to
be an expert in the authentication of documents.

 An audit is not an official investigation into alleged wrongdoing. Accordingly, the


auditor is not given specific legal powers, such as the power of search, which
may be necessary for such an investigation.

Timeliness of financial reporting and the balance between benefit and cost

The matter of difficulty, time or cost involved is not in itself a valid basis for the
auditor to omit an audit procedure for which there is no alternative or to be satisfied
with audit evidence that is less than persuasive. The relevance of information, and
thereby its value, tends to diminish overtime and there is a balance to be struck
between the reliability of information and its cost.

Other matters that affect the inherent limitations of an audit are the following:

 fraud, particularly fraud involving senior management or collusion between


employees
 the existence and completeness of related party relationships and transactions
 the occurrence of non-compliance with laws and regulations
 future events or conditions that may cause an entity to cease to continue as a
going concern

Related party relationships


A related party relationship exists when there is a relationship between two parties
in which one of the parties has influence over the other. For example, a company
may do substantial business with a firm owned by one of its directors. Related party
transactions offer the possibility of a conflict of interest.

1.2.2 Non-assurance engagements

The main characteristic of a non-assurance engagement is that no opinion or


comment is given by the auditor in his or her report (see diagram 1).

Study
 Jackson & Stent (2014:1/7–1/8, 19/17 par 2 and 19/19 par 2)
 SAICA Student Handbook, Volume 2A: International Framework for Assurance
Engagements (Framework: par 17 and 20–21)

What are non-assurance engagements?

These are engagements that do not meet the definition of an assurance


engagement. The defining characteristic is that the practitioner does not express an

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opinion on the subject matter of the engagement (Jackson & Stent 2014: 1/7–1/8,
19/17 par 2 and 19/19 par 2).

They include the following:


 agreed-upon procedures engagement
 compilation engagement

Note the following in the study resources above:


 the objective of an agreed-upon procedures engagement
 the objective of a compilation engagement
 the level of assurance that can be provided by an auditor with regard to an
agreed-upon procedures engagement and a compilation engagement

Activity 6
Required
Explain the objective of an agreed-upon procedures engagement and a compilation
engagement and give an example of each.

Feedback on activity 6
Reference: Jackson & Stent (2014: 19/1–19/18 and 19/19–19/22)

Agreed-upon procedures engagement


Objective: See the reference in the prescribed textbook for a discussion of the
objectives of an agreed-upon procedures engagement.
Example: The practitioner is requested to report on his or her factual findings on the
validity of accounts payable at year-end.

Compilation engagement
Objective: See the reference in the prescribed textbook for a discussion of the
objectives of a compilation engagement.
Example: The practitioner is requested to prepare the accounting records and the
financial statements of a client at year-end but not to perform any audit procedures.

1.2.3 Statutory and non-statutory assurance engagements


An auditor can be given an engagement for auditing services either in terms of
statutory requirements or because of another obligation or requirement.

A statutory audit is an assurance engagement that must be conducted in terms of


the Companies Act 71 of 2008. A non-statutory audit is an audit that arises from
another obligation or a request by the client.

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Activity 7
Required
Answer the questions, if provided, in section 1.2 of Tutorial Letter 102 and compare
your answers with the solutions in section 1.2 of Tutorial Letter 103.

Summary
In this learning unit we focused on assurance engagements, non-assurance
engagements, reasonable assurance, public interest and public interest scores, as
well as statutory and non-statutory engagements.

Self-assessment
After having worked through the learning unit and the references to the prescribed
study material, determine whether you are able to answer the following questions:

1. Define an assurance engagement.


2. Explain what is meant by the outcome of the evaluation or
measurement of subject matter.
3. Explain what is meant by subject matter information.
4. Explain the elements of an assurance engagement.
5. Define a reasonable assurance engagement.
6. Define a limited assurance engagement.
7. Explain the difference between a reasonable assurance engagement
and a limited assurance engagement.
8. Explain the term "assurance" and the various levels of assurance that
can be provided by an auditor with regard to an audit engagement
and a review engagement.
9. Explain the advantages of having an audit of financial statements.
10. Explain the inherent limitations of an audit.
11. Describe a non-assurance engagement.
12. Define the objective of an agreed-upon procedures engagement.
13. Define the objective of a compilation engagement.
14. Describe the level of assurance that can be provided by an auditor
with regard to an agreed-upon procedures engagement and a
compilation engagement.
15. Describe and give an example of a statutory and non-statutory
assurance engagement.
16. Explain public interest and public interest scores.

Feedback on self-assessment
1. Reference: Jackson & Stent (2014:1/6)
2. Reference: SAICA Student Handbook, Volume 2A, (Framework: par 11)
3. Reference: SAICA Student Handbook, Volume 2A, (Framework: par 11)
4. Reference: Jackson & Stent (2014:1/6)
5. Reference: Jackson & Stent (2014:1/8)

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6. Reference: Jackson & Stent (2014:1/8)


7. Reference: Jackson & Stent (2014:1/8)
8. Reference: Jackson & Stent (2014:1/6–1/7)
9. Reference: SAICA Student Handbook, Volume 2A, (Framework: par 10)
10. Reference: Jackson & Stent (2014:1/8–1/9)
11. Reference: Jackson & Stent (2014:1/7–1/8)
12. Reference: Jackson & Stent (2014:19/17)
13. Reference: Jackson & Stent (2014:19/19)
14. References:

 SAICA Student Handbook, Volume 2A (Framework: par 14–16, 73 and 77–


80)
 SAICA Student Handbook, Volume 2A: (ISA 200: par 5)

15. A statutory audit is an assurance engagement that must be conducted because


of the Companies Act 71 of 2008. A non-statutory audit is an audit that arises
from other obligation or request by the client.
16. Reference: Jackson & Stent (2014:1/13–1/14)

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LEARNING UNIT 1.3: AUDITING POSTULATES


Introduction
According to Jackson & Stent (2014:1/21), the word “postulate” is best explained by
considering the following definitions from the Oxford dictionary: “…a postulate
provides a basis for thinking about problems and arriving at solutions…a starting
point fundamental condition…”. A postulate is a foundation on which a discipline is
built and there are certain underlying principles or postulates, which serve as the
basis of auditing theory. These will be dealt with in this study unit.

The postulates are not theories but basic assumptions, logical principles and
requirements which serve the auditors in forming their opinions. The postulates
provide guidance for the auditor that helps to determine the extent of audit
procedures that should be applied in the audit.

Postulates are useful to auditors as they can provide answers to problems that may
seem difficult.

In this study unit, the philosophy of auditing is explained by describing the auditing
postulates.

Study
 Jackson & Stent (2014:1/21–1/24)

Note the following in the study resources above:


 the term “postulate”
 the eight postulates as suggested by Mautz and Sharaf (note the postulate, the
explanation, and the discussion of each of the postulates)

Activity 8

Required
8.1 Explain the term “postulate“ in the context of auditing.
8.2 Explain what is meant by the following postulate and then discuss its
applicability as a basis for an audit in current times, remembering that the
postulates were formulated more than 40 years ago (based on Gray and
Manson 2005:33). ‘

Postulate – no necessary conflict of interest exists between the auditor and


management/employees of the enterprise under audit.

Feedback on activity 8
Reference: Jackson & Stent (2014:1/7)

8.1 A postulate provides a basis or framework for thinking about problems and
arriving at solutions. A postulate is a starting point for thinking about a
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discipline. In the context of auditing the postulates are the foundations on


which the subject Auditing is built.

8.2 Explanation: It means that both the auditor and the management of a
company want to ensure that the financial statements achieve fair
presentation. It assumes that management will not want to manipulate the
financial statements.

Discussion: In recent times there has been increase in theft, fraud and
financial mismanagement, and this could result in any auditor wondering
whether management do in fact want to report honestly and fairly. An auditor
plans and performs an audit with professional scepticism. Hence, the auditor
cannot accept that this postulate holds true when performing an audit of
financial statements.

Activity 9
Required

Answer the questions, if provided, in section 1.3 of Tutorial Letter 102 and
compare your answers with the solutions in section 1.3 of Tutorial Letter 103.

Summary
In this learning unit the philosophy of auditing was explained by describing the
auditing postulates.

Self-assessment
After having worked through the learning unit and the references in the prescribed
study material, determine whether you are able to answer the following questions:

1. Explain the term “postulate” in an auditing context.


2. Explain and discuss the eight auditing postulates.

Feedback on self-assessment
1. Reference: Jackson & Stent (2014:1/21–1/24)
2. Reference: Jackson & Stent (2014:1/21–1/24)

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LEARNING UNIT 1.4: THE ACCOUNTING PROFESSION


Introduction
The accounting profession has followed an evolutionary path in the development of
the functions and services it performs, the responsibilities its members assume in
relation to its role, and its structure and regulatory processes.

It is essential for the accounting profession to uphold a high standard of


professionalism. In 2013/2014 The World Economic Forum’s Global
Competitiveness Survey ranked South Africa first out of 148 countries in the world
for its strength of auditing and reporting standards.

In this study unit, the accounting profession is described by listing the key elements
that characterise groups that are considered to have a professional status,
explaining the various accounting bodies, as well as dealing with the registration
requirements and pronouncements that regulate the profession.

The elements covered in this learning unit are fundamental to the concept of
auditing as a professional activity.

1.4.1 Professional status


Jackson & Stent (2014:1/10) explains the words "profession" and "professional".
Professional status is achieved when there is public acceptance that such a body of
practitioners is worthy of recognition as a profession.

On the basis of this assumption about the underlying nature of professional status,
attributes and elements that generally characterise a profession can be
distinguished.

Study
 Jackson & Stent (2014:1/10–1/11)

Professionalism refers to the conduct, aims or qualities that characterise a


profession or professional person. A profession is characterised by certain
attributes.

Note the following in the study resource above:


 the characteristics that distinguish a profession

1.4.2 Accounting bodies in South Africa


Jackson & Stent (2014:1/11–1/12) identify the Independent Regulatory Board for
Auditors (IRBA) and the South African Institute of Chartered Accountants (SAICA)
as the dominant accounting bodies in South Africa.

Study
 Jackson & Stent (2014:1/11–1/12)

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Note the following in the study resources above:


 membership requirements of SAICA
 the difference between chartered accountants in public practice and those in
business
 the role and responsibility of the IRBA
 membership requirements of the IRBA

The South African Institute of Chartered Accountants (SAICA)

Refer to SAICA website for additional information on how to become a chartered


accountant: https://www.saica.co.za/training/becomingaca/tabid/157/language/en-
za/default.aspx

Independent Regulatory Board for Auditors (IRBA)


Refer to the IRBA website for additional information on how to become a registered
auditor: http://www.paab.co.za/index.php/education-training-a-professional-develop-
ment/67?task=view

The IRBA has the following goals as contained in the IRBA Manual of Information
(in status and corporate mission of the IRBA):’

 Develop and maintain auditing and ethical standards which are internationally
comparable.
 Provide an appropriate framework for the education and training of properly
qualified auditors as well as their on-going competence.
 Register auditors who meet the registration requirements.
 Monitor compliance with reportable irregularities and money laundering.
 Monitor the compliance of registered auditors with professional standards.
 Investigate and take appropriate action against registered auditors in respect of
improper conduct.
 Develop and maintain stakeholder relationships to enhance performance,
accountability and public confidence.
 Strengthen the IRBA’s organisational capability, capacity and performance to
deliver on its mandate in an economically efficient and effective manner, in
accordance with the relevant regulatory frameworks.

Activity 10
Required

A chartered accountant is registered only with the South African Institute of


Chartered Accountants (SAICA). Which one of the following codes or legislation
would regulate the chartered accountant in this instance?

10.1 Parts A and B of the Code of Professional Conduct of the Independent


Regulatory Board for Auditors (IRBA)
10.2 Parts A and C of the Code of Professional Conduct of the South African
Institute of Chartered Accountants (SAICA)

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10.3 The rules regarding Improper Conduct of the Independent Regulatory Board
for Auditors (IRBA)
10.4 The Auditing Profession Act 26 of 2005

Feedback on activity 10
Reference: Jackson & Stent (2014:1/11–1/12)

Option 10.2: Parts A and C of the Code of Professional Conduct of the South
African Institute of Chartered Accountants (SAICA)

The Auditing Profession Act 26 of 2005, The Rules regarding Improper Conduct and
the Code of Professional Conduct of IRBA all relate to the registered auditor in
public practice. SAICA is applicable to all chartered accountants in South Africa, but
the question only stipulated part A and C, not B which applies to chartered
accountants in public practice.

1.4.3 Pronouncements regulating the auditing profession

Professional regulation is necessary to ensure that high standards of ethics, conduct


and skill are set for and maintained by its members (Jackson & Stent 2015:1/12).

Legal and professional requirements have therefore been developed over the years
to ensure that the appropriate standards are set and adhered to.

Study

 Jackson & Stent (2014:1/12)


 SAICA Student Handbook, Volume 2A: International Framework for assurance
engagements (Framework: par 6–8)
 SAICA Student Handbook, Volume 2A: International Standards on Auditing (ISA)
200: Overall objectives of the independent auditor and the conduct of an audit in
accordance with International Standards on Auditing (ISA 200: par 14 and A14–
A17)

Note the following in the study resources above:

 the ethical principles and quality control standards (Framework: par 6–8)
 the ethical requirements relating to an audit of financial statements.(ISA 200: par
14 and A14–A17)
 the pronouncements regulating the auditing profession in South Africa and
international auditing standards:

o The Auditing Profession Act 26 of 2005


o The Companies Act 71 of 2008
o The Constitution and By-Laws of the South African Institute of Chartered
Accountants (SAICA)
o The International Federation of Accountants (IFAC) Code of Ethics for
Professional Accountants
o The Code of Professional Conduct and the Rules regarding Improper
Conduct of the Independent Regulatory Board for Auditors (IRBA)
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o International Standards on Auditing (ISA)


o International Standards on Review Engagements (ISRE)
o International Standards on Assurance Engagements (ISAE)
o International Standards of Related Services (ISRS)
o International Standard on Quality Control (ISQC)
o International Auditing Practice Statements (IAPS)
o South African Auditing Practice Statements (SAAPS)

The Auditing Profession Act 26 of 2005, the Companies Act 71 of 2008, IFAC Code
of Ethics for Professional Accountants, the SAICA Code of Professional Conduct,
the Rules Regarding Improper Conduct of the IRBA, ISA and the ISQC will be
covered in the remaining topics of the study guide.

Activity 11
Required

Answer the questions, if provided, in section 1.4 of Tutorial Letter 102 and
compare your answers with the solutions in section 1.4 of Tutorial Letter 103.

Summary
In this learning unit we focused on the key elements that characterise groups that
are considered to have a professional status, the various accounting bodies in
South Africa, the registration requirements of the auditing profession, and
pronouncements regulating the profession.

Self-assessment
After having worked through the learning unit and the references in the prescribed
study material, determine if you are able to answer the following questions:

1. Describe the key elements which characterise the auditing function as a


profession.
2. List and describe the dominant accounting bodies in South Africa.
3. Describe the requirements to register as a member of SAICA.
4. Describe the registration requirements of the IRBA.
5. Explain the goals of the IRBA in South Africa.
6. List the pronouncements that regulate the auditing profession in South
Africa.

Feedback on self-assessment
1. Reference: Jackson & Stent (2014:1/10)
2. Reference: Jackson & Stent (2014:1/11)
3. Reference: Jackson & Stent (2014:1/11)
4. Reference: Jackson & Stent (2014:1/11–1/12)

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5. Reference: Jackson & Stent (2014:1/11)


6. Reference: Jackson & Stent (2014:1/12)

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LEARNING UNIT 1.5: THE FINANCIAL STATEMENT AUDIT


ENGAGEMENT

Introduction
As was mentioned previously, in this module we will be focusing mainly on the
external audit function. In this study unit the financial statement audit engagement is
explained by dealing with the auditor’s overall objectives, explaining the roles of the
various parties and describing management’s assertions.

1.5.1 The overall objectives of the auditor and the conduct of an


audit in accordance with ISAs

In performing an audit, the auditor has certain objectives that must be attained
before the audit can be concluded. This learning unit will deal with the auditor’s
overall responsibilities in conducting an audit.

Study

 Jackson & Stent (2014:1/8)


 SAICA Student Handbook, Volume 2A: International Standards on Auditing (ISA)
200: Overall objectives of the independent auditor and the conduct of an audit in
accordance with International Standards on Auditing (ISA 200: par 1–13 and A1-
A13)

1.5.1.1 An audit of the financial statements

The purpose of an audit was dealt with in Learning Unit 1.1. Refer to this learning
unit to ensure that you understand the purpose of an audit.

Note the following in the study information regarding the preparation of the
financial statements and the formation of the auditor’s opinion:

 the scope of the ISA 200


 what management acknowledge and understand in accepting responsibility for
the preparation of financial statements
 what is required by management in the preparation of the financial statements
 the meaning of an applicable financial reporting framework
 what an applicable financial reporting framework may encompass
 the formation of the auditor’s opinion
 the requirements of the auditor when reasonable assurance cannot be obtained
and a qualified opinion in the auditor’s report is insufficient

1.5.1.2 Auditor’s responsibility

ISA 200: par 7 requires that the auditor exercise professional judgment and maintain
professional scepticism throughout the planning and performance of the audit and,
among other things the following:

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 Identify and assess risks of material misstatement, whether due to fraud or error,
based on an understanding of the entity and its environment, including the
entity’s internal control.
 Obtain sufficient appropriate audit evidence regarding the existence of material
misstatements by designing and implementing appropriate responses to the
assessed risks.
 Form an opinion on the financial statements based on conclusions drawn from
the audit evidence obtained.

1.5.1.3 Overall objectives of the auditor

In conducting an audit of financial statements, the overall objectives of the auditor in


terms of ISA 200: par 11 are:

 to obtain reasonable assurance about whether the financial statements as a


whole are free from material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on whether the financial
statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework; and
 to report on the financial statements, and communicate as required by the ISAs,
in accordance with the auditor’s findings

1.5.1.4 Definitions

Note the following in the study resources:

 the meanings of the terms in ISA 200: par 13

1.5.2 The roles of the various parties


There are various parties involved in an audit engagement, namely the auditors,
directors and the shareholders.

Study
 Jackson & Stent (2014:1/15–1/16)

Note the following in the study resource above:


 the roles of the shareholders, directors and auditors of a company

Activity 12
You are a trainee auditor and your audit manager has requested that you answer
the following questions regarding the responsibilities of the various parties to an
audit.

Required
12.1 Identify the three parties involved in the audit process.
12.2 Describe the duties of each of the parties identified above.

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Feedback on activity 12
Reference: Jackson & Stent (2014:1/16)

12.1 Shareholders
Directors/Management
Auditor

12.2 Shareholders

To provide finance for the business; appoint directors to manage the


business; appoint auditors; and receive the annual financial statements.

Directors/Management

They are responsible for running the company and reporting the results of
their operation to the shareholders. They also prepare the financial
statements in terms of an appropriate financial reporting framework

Auditor

He or she is responsible for gathering sufficient appropriate audit evidence to


be in a position to give an independent opinion on whether the financial
statements prepared by the directors to the shareholders, fairly present the
financial position and results of the operations of the company, in terms of the
applicable financial reporting framework.

1.5.3 Management’s assertions regarding the financial


statements

As stated in Jackson & Stent (2014:1/17–1/19), management are responsible for the
fair presentation of the financial statements (management of a company report to
the shareholders in the annual financial statements). Management make
representations about the company’s assets, equity, liabilities, transactions and
events. These representations are termed assertions of management. This
learning unit will deal with management’s assertions.

Study

 Jackson & Stent (2014:1/17–1/19)


 SAICA Student Handbook, Volume 2A: International Standards on Auditing (ISA)
315: Identifying and assessing the risks of material misstatement through
understanding the entity and it’s environment (ISA 315: par 4(a) and A123–
A124)

What are assertions?

Assertions are representations by management, explicit or otherwise, that are


embodied in the financial statements, as used by the auditor to consider the
different types of potential misstatements that may occur (ISA 315: par 4(a)).

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Note the following in the study resources above:

 the three categories under which management assertions falls


 assertions about classes of transactions and events for the period under audit
 assertions about account balances at the period end
 assertions about presentation and disclosure

The assertions will be dealt with in more detail later in the study guide.

In order to have a better understanding of the auditor’s role with regard to the
assertions, do the following activity:

Activity 13
13.1 You are a trainee auditor employed at the audit firm DCM Chartered
Accountants (SA). You are currently performing the audit of Pretty-in-Pink
Limited, a clothing retail company.

The following are extracts from the financial statements of the company for the
year ended 28 February 20XX:

20XX
R ’000
Statement of financial position
Property, Plant and Equipment 1 550

Required

List the assertions which are implied by management with the inclusion of the
following item in the financial statements: (for purposes of this question, you are not
required to list the assertions relating to presentation and disclosure)
 Property, Plant and Equipment

13.2 The statement of comprehensive income (detailed income statement) of RLM


Limited contains the following account heading which is classified as a class
of transactions:

Salaries R1 244 361

Your fellow trainee auditor is under the impression that the assertions
pertaining to salaries are as follows:

Valuation: Salaries are presented at the gross amount less


deductions.
Completeness: All salaries paid by the company in respect of the financial
year are included in the amount.
Obligation: The company has an obligation to pay the amounts
making up the R1 244 361.

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Disclosure: The names of all salary earners have been disclosed in


the financial statements.

Required
13.2.1 Indicate and explain for each assertion whether you agree with your fellow
trainee auditor regarding the applicability of the mentioned assertions to
salaries.
13.2.2 List and describe four assertions pertaining to salaries in the statement of
comprehensive income (income statements).

Feedback on activity 13
Reference: SAICA Student Handbook, Volume 2A: International Standards on
Auditing (ISA) 315: Identifying and assessing the risks of material
misstatement through understanding the entity and its environment
(ISA 315: par A123–A124)

13.1 Property, Plant and Equipment

Reference: SAICA Student Handbook, Volume 2A: International Standards


on Auditing (ISA) 315: Identifying and assessing the risks of material
misstatement through understanding the entity and its environment (ISA 315:
par A124)

13.2 Salaries

13.2.1 Assertions

 Valuation – Do not agree

This is an assertion about account balances at period end/presentation.

 Completeness – Agree

All transactions that should have been recorded have been recorded.

 Obligation – Do not agree

This is an assertion about account balances at period end.

 Disclosure – Do not agree

This is an assertion about presentation and disclosure.


Not all salary earners names need to be disclosed.

13.2.2 Assertions pertaining to salaries

 Occurrence: All salary expenses are genuine expenses and pertain to the
entity.
 Accuracy: Salary amounts have been recorded appropriately.

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 Cut-off: Salaries have been recorded in the correct accounting period.


 Classification: Salaries have been recorded in the proper accounts.

Note the following when attempting questions on management assertions:

When we ask a question about management assertions on either classes of


transactions and events or account balances we expect you to give all the relevant
assertions and only mention that the assertions relating to presentation and
disclosure will apply. If we expect you to give all the assertions relating to
presentation and disclosure we will clearly indicate this in the question.

Activity 14
Required

Answer the questions, if provided, in section 1.5 of Tutorial Letter 102 and
compare your answers with the solutions in section1.5 of Tutorial Letter 103.

Summary
In this learning unit we explained the objectives of an audit, the roles of the various
parties in a statutory audit and management’s assertions.

Self-assessment
After having worked through the learning unit and the references in the prescribed
study material, determine if you are able to answer the following questions:

1. Explain the scope of ISA 200.


2. Describe what management acknowledge and understand when it is said they
have a responsibility in the preparation of financial statements.
3. Describe what is required by management with regard to the preparation of the
financial statements.
4. Explain what is meant by an applicable financial reporting framework.
5. Describe what an applicable financial reporting framework can encompass.
6. Explain the form of the auditor’s opinion.
7. Explain the requirements of the auditor when reasonable assurance cannot be
obtained and a qualified opinion in the auditor’s report is insufficient.
8. Describe the auditor’s responsibility during the planning and performance of an
audit.
9. Explain the overall objectives of the auditor.
10. Give the meaning of the definitions in ISA 200: par 13.
11. Identify the various parties to an audit.
12. Explain the roles of the various parties in a statutory audit.
13. Explain the term “assertions”.
14. Describe and apply, to practical scenarios, management’s assertions relating to

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classes of transactions, account balances at year-end and presentation and


disclosure.

Feedback on self-assessment
1. Reference: SAICA Student Handbook, Volume 2B, ISA 200: par 1
2. Reference: SAICA Student Handbook, Volume 2B, ISA 200: par A2
3. Reference: SAICA Student Handbook, Volume 2B, ISA 200: par A3
4. Reference: SAICA Student Handbook, Volume 2B, ISA 200: par 13
5. Reference: SAICA Student Handbook, Volume 2B, ISA 200: par A5
6. Reference: SAICA Student Handbook, Volume 2B, ISA 200: par A12
7. Reference: SAICA Student Handbook, Volume 2B, ISA 200: par 12
8. Reference: SAICA Student Handbook, Volume 2B, ISA 200: par 7
9. Reference: SAICA Student Handbook, Volume 2B, ISA 200: par 11
10. Reference: SAICA Student Handbook, Volume 2B, ISA 200: par 13
11. Reference: Jackson & Stent (2014:1/15–1/16)
12. Reference: Jackson & Stent (2014:1/15–1/16)
13. Reference: SAICA Student Handbook, Volume 2B, ISA 315: par 4(a)
14. Reference: Jackson & Stent (2014:1/17–1/19)

Conclusion

In this topic, Introduction to Auditing, we explained the theory and philosophy of


auditing, the accounting profession and the financial statement audit engagement.
We dealt with the auditor, assurance and non-assurance engagements, statutory
and non-statutory assurance engagements, auditing postulates, the accounting
profession and the financial statement audit engagement.

In topic 2 we will be dealing with the regulation of the auditor.

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TOPIC 2: REGULATION OF THE AUDITOR


Topic overview
The aim of this topic is to explain and apply knowledge of the regulatory process in
the profession and to explain the role of the professional auditor in the statutory audit.

This topic is divided into the following learning units:

Learning unit Title Page

2.1 THE AUDITING PROFESSION ACT 26 OF 2005 (APA) 76


2.1.1 Chapter I: Objects of the APA 76
2.1.2 Chapter III: Registration of individual auditors and 77
auditing firms
2.1.3 Chapter IV: Conduct by and liability of registered auditors 80
2.2 THE COMPANIES ACT 71 OF 2008 86
(THE AUDITOR)
2.3 ETHICAL PRINCIPLES REGULATING THE 90
PROFESSION
2.3.1 The SAICA Code of Professional Conduct for Chartered 93
Accountants
2.3.2 The IRBA Code of Professional Conduct for Registered 106
Auditors
2.3.3 The IRBA Rules regarding Improper Conduct 106
2.4 QUALITY CONTROL OF AUDIT WORK 113
2.4.1 Auditing firms’ system of quality control 113
2.4.2 Quality control for the audit of financial statements 114

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Learning outcomes

Learning unit In this topic we focus on the following Level


learning outcomes:
2.1 The Auditing Profession  Describe and apply the duties, rights, 2
Act 26 of 2005 (APA) responsibilities and liability of auditors
in terms of the Auditing Profession Act
26 of 2005 (APA).
2.2 The Companies Act 71 of  Describe and apply the duties, rights 2
2008 and responsibilities of auditors in
terms of the Companies Act 71 of
2008.
2.3 Ethical principles  Describe and apply the ethical 2
regulating the profession principles regulating the auditing and
accountancy profession by referring to
the IFAC Code of Ethics for
Professional Accountants, the SAICA
Code of Professional Conduct for
Chartered Accountants, the IRBA
Code of Professional Conduct for
Registered Auditors and the IRBA
Rules regarding Improper Conduct.
2.4 Quality control of audit  Describe and apply the auditing firm’s
work responsibilities for its system of quality
control and quality control for audits
and review of financial statements.

The previous topic was an introduction to auditing where we dealt with the theory and
philosophy of auditing, the accounting profession and the financial statement audit
engagement. We will now move forward and deal with the regulation of the auditor.

Introduction
The regulation of auditors is necessary to ensure that auditors behave ethically and
professionally in the conduct of an audit. An example of auditors not behaving
ethically and professionally is the Enron Scandal, which took place in 2001. The
following is a brief summary of the scandal:

The Enron scandal, revealed in October 2001, eventually led to the bankruptcy
of the Enron Corporation, an American energy company based in Houston,
Texas, and the dissolution of Arthur Andersen, which was one of the five largest
audit and accountancy partnerships in the world. In addition to being the largest
bankruptcy reorganization in American history at that time, Enron was attributed
as the biggest audit failure.

Many executives at Enron were indicted for a variety of charges and were later
sentenced to prison. Enron's auditor, Arthur Andersen, was found guilty in a
United States District Court, but by the time the ruling was overturned at the U.S.
Supreme Court, the firm had lost the majority of its customers and had shut down.

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As a consequence of the scandal, new regulations and legislation were enacted


to expand the accuracy of financial reporting for public companies. One piece of
legislation, the Sarbanes-Oxley Act, expanded repercussions for destroying,
altering or fabricating records in federal investigations or for attempting to defraud
shareholders. The act also increased the accountability of auditing firms to
remain unbiased and independent of their clients.
(Wikipedia accessed on 25 March 2015 at http://en.wikipedia.org/wiki/Enron
scandal)

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LEARNING UNIT 2.1: THE AUDITING PROFESSION ACT 26


OF 2005 (APA)
Introduction

In South Africa the Independent Regulatory Board for Auditors (IRBA) is the statutory
body controlling the auditing profession and it functions in terms of the Auditing
Profession Act 26 of 2005 (APA).

The IRBA’s mission is to protect the financial interest of the South African public and
international investors in South Africa through the effective regulation of audits
conducted by registered auditors (RAs), in terms of internationally recognised
standards and processes.

In this learning unit, knowledge of the regulatory process in the auditing profession
and the role of the professional auditor in the statutory audit is described and applied
to practical scenarios by referring to the Auditing Profession Act 26 of 2005 (APA).

The Auditing Profession Act 26 of 2005 can be downloaded from the following link:
http://www.irba.co.za/index.php/legal-functions-49

Note: The Auditing Profession Act 26 of 2005, hereinafter referred to as the APA or
“the Act”, is contained in Volume 2C of the SAICA Student Handbook.

Structure of the APA

The Act comprises 60 sections which are subdivided into seven chapters.
Chapters II and III are further subdivided into various parts.

For study purposes in this module you will only be expected to know certain sections
of the APA. Bear in mind that you are only required to study the sections referred to
in the study guide.

2.1.1 Chapter I: Objects of the APA


This chapter provides the definitions and objects of the APA.

Study

 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005:


Chapter I (section 1 and 2)
 Jackson & Stent (2014:3/80−3/81)

Note the following in the study resources above:

 the definitions contained in the APA


 the objects of the APA

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Activity 1
Required
State the objects of the APA.

Feedback on activity 1
References:

 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005:


Chapter 1 (section 2)
 Jackson & Stent (2015:3/80)

Objects

 to protect the public by regulating audits performed by registered auditors


 to provide for the establishment of an Independent Regulatory Board for Auditors
(IRBA)
 to improve the development and maintenance of internationally comparable
ethical standards and auditing standards for auditors
 to set out measures to advance the implementation of appropriate standards of
competence and good ethics in the auditing profession
 to provide for procedures for disciplinary action in respect of improper conduct

2.1.2 Chapter III: Registration of individual auditors and auditing


firms
This chapter is subdivided into two parts. You are only required to study Part 2 which
deals with the registration of individual auditors and audit firms.

Study

 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005:


Chapter III, Part 2 (section 37–40)
 Jackson & Stent (2014:3/81–3/82)

Part 2 (section 37–40): Registration of individual auditors and auditing firms

Note the following in the study resources above:

 Section 37: Registration of individuals as registered auditors


 the requirements to be registered with the IRBA
 the situations in which the IRBA may not register an individual

 Section 38: Registration of firms as registered auditors

The only firms that may become registered auditors are

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 partnerships of which all the partners are individuals who are themselves
registered auditors
 sole proprietors where the proprietor is a registered auditor
 companies which comply with subsection 3

 Section 39: Termination of registration

 situations which present grounds for the cancellation of a member’s


registration

 Section 40: Renewal of registration

 A registered auditor must apply in the prescribed manner to the IRBA for the
renewal of his or her registration.
 A registered auditor whose registration was terminated or cancelled may apply
for reregistration at the IRBA in the prescribed manner.

Activity 2
Hashim and Wiseman is a small auditing firm in Durban. The two partners Dev
Hashim and Peter Wiseman are the only two registered auditors (RAs) in the practice
but they are assisted by Juanita Claasen who has passed both parts of her
professional examinations but has not yet completed her training contract. Neither of
the partners deal with tax matters; these are left to Ella Kotze, who is a qualified
lawyer but who has specialised in taxation. The practice also has a computerised
bookkeeping section, which keeps the books and records for numerous small
businesses, and this section is headed by Kieran Peterson who has a BCom degree.

The two partners have decided to convert the partnership into a company to engage
in public practice at the earliest opportunity.

(Based on Gowar & Jackson 2010:319. Graded Questions on Auditing)

Required
State whether the following actions/situations are true or false in terms of the APA
and give reasons for your answers:
2.1 Juanita Claasen may be appointed as a shareholder of the company.
2.2 Ella Kotze may be appointed as a shareholder of the company.
2.3 Kieran Peterson may be appointed as a director of the company.
2.4 The company to be formed must have at least seven shareholders.
2.5 By forming a company the shareholders will be protected from being liable for
the company’s debts in their personal capacities.
2.6 If one of the shareholders leaves the company, the company may purchase
his or her shares.

Feedback on activity 2
Reference: SAICA Student Handbook, Volume 2C, Auditing Profession Act of
2005: section 38

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2.1 False: Juanita Claasen cannot be registered because she has not yet
completed her training contract. Because she has passed her professional
examinations, she may register with the IRBA once she has completed her
training contract and may then become a shareholder.
2.2 False: Ella Kotze cannot be a shareholder of the company. Only persons
registered with the IRBA as registered auditors (RAs) may be shareholders in
an “auditing” company. She is a lawyer and therefore cannot register with the
IRBA because she does not possess the professional (training contract) or
academic qualifications.
2.3 False: Kieran Peterson may not be appointed as a director, because every
director must be a shareholder and he does not qualify as a shareholder
because he is not registered with the IRBA and does not possess the
necessary qualification.
2.4 False: Section 38 of the APA does not specify a minimum number of
shareholders. Even a sole practitioner may form a company.
2.5 False: The shareholders will not be protected. Section 38 of the APA requires
that the memorandum of association include a provision that the directors
(who must also be shareholders) will be liable jointly and severally with the
company for the debts of the company.
2.6 True: The company is permitted to buy back the shares of the departing
partner and the shares will be available for allotment in terms of the company’s
articles of association. It is not required that the shares be sold to the other
shareholders (section 38(d)(i) of the APA).

Activity 3

Deviya Naidoo recently passed her SAICA ITC and APC examinations. According to
her career planning, she expects to set up her own small practice as a registered
auditor once she has completed her training contract and has been admitted to public
practice.

You are Deviya’s younger brother registered for the Auditing AUE2601 module this
semester at Unisa. You are keen to show Deviya that you have a thorough
knowledge of the various aspects of professional auditing practice.

Required
3.1 Explain the statutory registration requirements that apply to persons who want
to enter public practice as an auditor.
3.2 Mention the situations which present grounds for the cancellation of a person’s
registration as a registered auditor (RA) by the IRBA.

Feedback on activity 3
Reference: SAICA Student Handbook, Volume 2C, Auditing Profession Act of
2005: Chapter III (section 37.1−3 and section 39.1−2)

3.1 Registration requirements for persons wishing to enter public practice as


an auditor (see the APA (section 37.1−2) for the registration requirements).

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3.2 Grounds for the cancellation of registration [see the APA (section 39.1−2
and 37.3) for information on the situations which present grounds for the
cancellation of a person’s registration].

2.1.3 Chapter IV: Conduct by and liability of registered auditors


This chapter deals with the conduct of registered auditors and registered auditors’
liability.

Study

 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005: Chapter
IV (section 41−46)
 Jackson & Stent (2014:3/83−3/90)

Note the following in the study resources above:

 Section 41: Practice (note section 1−10)


 Section 42: Compliance with Rules
 Section 43: Information to be furnished
 Section 44: Duties in relation to an audit (note section 1−6)
 Section 45: Duty to report on irregularities (note section 1−6)
 Section 46: Limitation of liability (note section 1−8)

Activity 4

Required
Name the requirements in terms of the APA that must be complied with before an
auditor is permitted to express an unmodified audit opinion.

Feedback on activity 4
References:

 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005: Chapter
IV (section 44: 2−3)
 Jackson & Stent (2014:3/84–3/85)

See the above references in the prescribed book for the criteria that the registered
auditor has to be satisfied with to enable him or her to express an unmodified
opinion.

Activity 5

Your uncle is the managing director of a well-known manufacturing company. The


auditors of the company notified your uncle that they have reported a reportable
irregularity to the IRBA based on evidence that they have found relating to the
dealings of the company’s financial director. During the audit, they discovered that

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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.

Required
Mention the requirements of a reportable irregularity in terms of the APA, and identify
the matters in the given scenario that relate to each of these requirements. Tabulate
your answer as indicated below (one of the requirements has been supplied as an
example):

Requirement in terms of the APA Situation in the given scenario


Must be committed by the The falsification was committed by the
management of the entity company’s financial director.

Feedback on activity 5
References:

 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005: Chapter I
(section 1) – Reportable Irregularity and section 45
 Jackson & Stent (2014:3/85−3/89)

Elements of a reportable irregularity

Requirements in terms of the APA Situation in the given scenario


Must be committed by the management The falsification was committed by the
of the entity company’s financial director.
Unlawful act or omission Falsifying the VAT returns implies that the
Value-Added Tax Act 89 of 1991 (VAT
Act) had been contravened.
Has caused or is likely to cause material The South African Revenue Service
financial loss to the entity or to any (SARS) will suffer a financial loss. SARS
partner, member, shareholder, creditor or is a “creditor”/stakeholder of the entity.
investor of the entity in respect of
his/her/its dealings with that entity
Is fraudulent or amounts to theft Contravening the VAT Act is a criminal
offence. Money is “stolen” from SARS.
Represents a material breach of any The director’s involvement in criminal
fiduciary duty owed by such person to the activities implies a material breach of his
entity or any partner, member, fiduciary duties.
shareholder, creditor or investor of the
entity under any law applying to the entity
or the conduct or management thereof

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Activity 6

Mr Heuer, an auditor registered with the IRBA, has discovered a reportable


irregularity in the conduct of the management of the affairs of the company during his
audit of Beta Ltd.

Required
Mention the procedures that Mr Heuer should follow, in terms of the APA, when he
discovers a reportable irregularity.

Feedback on activity 6
References:

 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005: Chapter
IV (section 45)
 Jackson & Stent (2014:3/85−3/89)

Procedures

 Mr Heuer who is satisfied or has reason to believe that a reportable irregularity


has taken place or is taking place in respect of that entity must send, without
delay, a written report to the IRBA.
 The report must give particulars of the reportable irregularity and must include
such other information and particulars as Mr Heuer considers appropriate.
 Within three days of sending the report to the IRBA, Mr Heuer must notify the
members of the management board of the entity in writing that he has sent the
report to the IRBA and supply them with a copy of the report sent to the IRBA.
 As soon as possible, but within 30 days after the date on which the report was
sent to the IRBA

(a) Mr Heuer must take all reasonable measures to discuss the report with the
members of the management board of the entity
(b) afford members of the management board of the entity the opportunity to
make representations in respect of the report
(c) send another report to the IRBA, which must include

(i) a statement that the registered auditor is of the opinion that

 no reportable irregularity has taken place or is taking place; or


 the suspected reportable irregularity is no longer taking place and
that adequate steps have been taken for the prevention or
recovery of any loss as a result thereof; or
 the reportable irregularity is continuing

(ii) detailed particulars and information supporting the statement

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Activity 7

Required

Describe the basis of auditors' civil liability towards clients and third parties and the
elements of proof required under common law for negligence.

Feedback on activity 7
References:

 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005: Chapter
IV (section 46)
 Jackson & Stent (2014:3/89–3/90)

In discussing the legal liability of auditors in respect of audit services it is usual to


distinguish between the following two main types of plaintiffs:

The client

An auditor’s liability to clients is based upon breach of contract or delict, that is the
client could sue the auditor for financial loss on the grounds that the auditor did not
meet the terms of the engagement (contract) or in delict on the grounds that the
auditor did not meet his or her “duty of care” (see Jackson & Stent 2014:3/89−3/90).

Third parties

As stated in Jackson & Stent (2014:3/90), an auditor’s liability to third parties


cannot be based upon breach of contract because there is normally no contract
between the auditor and the third party – in other words: the auditor “contracts” with
his client, not with the parties who may use the audited financial statements or
information. The third party, therefore, will have to bring a delictual action against the
auditor and prove the following:

 The auditor was negligent in expressing the opinion, or making his or her report or
statement.
 The third party relied upon the opinion, report or statement, and suffered loss as a
result of the reliance.
 The auditor knew or reasonably could have been expected to know (at the time
the negligence occurred) that the third party would rely on the opinion, report or
statement.

Activity 8

Required
Answer the questions, if provided, in section 2.1 of Tutorial Letter 102 and compare
your answers with the solutions in section 2.1 of Tutorial Letter 103.

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Summary
In this learning unit we focused on the theory contained in the various sections of the
APA and the sections were also applied to various practical scenarios.

Self-assessment
After having worked through the learning unit and the references to the prescribed
study material, determine whether you are able to answer the following questions:

1. Describe the objects of the APA.


2. Explain the registration requirements of individuals as registered auditors.
3. Explain the registration requirements of firms as registered auditors.
4. Describe the situations which present grounds for the termination of
registration as an auditor.
5. Describe the requirements for renewal of registration and reregistration.
6. Explain the impermissible actions by persons who are not registered auditors
in terms of the APA.
7. Explain the permissible actions by persons who are not registered auditors in
terms of the APA.
8. Describe the auditor’s duties in conducting an audit.
9. Define a reportable irregularity.
10. Describe the procedures that an auditor must follow if he or she discovers a
reportable irregularity.
11. Explain the limitation of the auditor’s liability to the client and to third parties.
12 Explain the impact of reportable irregularities on the audit opinion.
13. Mention the consequences for the registered auditor for failing to report a
material irregularity.

Feedback on self-assessment
1. References:

 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005:


Chapter I (section 2)
 Jackson & Stent (2014:3/80)

2. References:

 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005:


Chapter III, Part 2 (section 37)
 Jackson & Stent (2014:3/81–3/82)

3. References:

 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005:


Chapter III, Part 2 (section 38)
 Jackson & Stent (2014:3/82)

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4. References:

 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005:


Chapter III, Part 2 (section 39)
 Jackson & Stent (2014:3/81−3/82)

5. Reference: SAICA Student Handbook, Volume 2C, Auditing Profession Act of


2005: Chapter III, Part 2 (section 40)
6. References:

 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005:


Chapter III, Part 2 (section 41)
 Jackson & Stent (2014:3/83−3/84)

7. References:

 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005:


Chapter III, Part 2 (section 41)
 Jackson & Stent (2014:3/83−3/84)

8. References:

 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005:


Chapter III, Part 2 (section 44)
 Jackson & Stent (2014:3/84−3/85)

9. References:

 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005:


Chapter I (section 1) – Reportable Irregularity
 Jackson & Stent (2014:3/85)

10. References:

 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005:


Chapter IV (section 45:3)
 Jackson & Stent (2014:3/85−3/86)

11. Reference: SAICA Student Handbook, Volume 2C, Auditing Profession Act of
2005: Chapter IV (section 46)
12. Reference: Jackson & Stent (2014:3/90)
13. Reference: Jackson & Stent (2014:3/90)

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LEARNING UNIT 2.2: THE COMPANIES ACT 71 OF 2008


(THE AUDITOR)
Introduction

The Companies Act 71 of 2008 replaced the Companies Act 61 of 1972. The new
Companies Act was signed by the President on 8 April 2009 and gazetted in Gazette
no. 32121.

The Companies Act 71 of 2008 came into effect on 1 May 2011 and can be
downloaded from the following link:
https://www.saica.co.za/Portals/0/Technical/LegalAndGovernance/Act%2071%20200
8%20Companies%20Act.pdf

In this learning unit, the duties, rights and responsibilities of auditors and audit
committees are explained and applied in terms of the Companies Act 71 of 2008.

We will only be dealing with the sections of the Companies Act 71 of 2008 that relate
to auditors and the audit committee.

Study
 SAICA Student Handbook, Volume 2C, Companies Act 71 of 2008 Chapter 3:
Part C (section 90–93) – Enhanced Accountability and Transparency and Part D:
(section 94)
 Jackson & Stent (2014:3/51–3/54)

Note the following in the study resources above:


 Section 90 – Appointment of auditors

This section deals with when an auditor must be appointed, who may and who may
not be appointed as an auditor, the requirements of the audit committee regarding
the appointment of an auditor being independent of the company and the
reappointment of a retiring auditor.

 Section 91 – Resignation of auditors and vacancies

This section relates to the effective date of the resignation of an auditor and the
procedures to be followed when a vacancy arises.

 Section 92 – Rotation of auditors

This section covers the requirements relating to the rotation of auditors.

 Section 93 – Rights and restricted functions of auditors

This section deals with the rights of auditors and the services that auditors are not
permitted to perform.

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 Section 94 – Audit committees

This section covers the election of an audit committee, membership of an audit


committee, duties of an audit committee, requirements of an audit committee in
considering whether the registered auditor is independent of a company and the
appointment of an auditor by the audit committee.

Activity 9

Brian May and Co, a large international firm of registered auditors based in Cape
Town, are the auditors of Scooby Ltd. The partner of Brian May and Co responsible
for the audit have informed the directors of Scooby Ltd that the firm will be resigning
as its auditors effective from 1 March 20xx.

The directors of Scooby Ltd realise that there are certain requirements in terms of the
Companies Act that have to be fulfilled following the resignation of the current auditor
and the appointment of a new one.

Required
9.1 State the procedure to be followed by the board of directors of Scooby Ltd,
following the resignation by Brian May and Co as the registered auditors.
9.2 List the requirements of the audit committee regarding independence of the
new auditor to be appointed.

Feedback on activity 9
References:

 SAICA Student Handbook, Volume 2C, Companies Act 71 of 2008: section 90


and section 91.2(a), 3(a) & (b) and section 94.8
 Jackson & Stent (2014:3/51–3/54)

9.1 The following procedures should be followed when a vacancy arises:

 The board of directors must propose to the audit committee, within 15


business days, the name of at least one registered auditor to be
considered for appointment.
 The audit committee has five business days, after the proposal has been
delivered to it, to reject the proposed replacement auditor in writing, if they
so wish, otherwise the board of directors may make the appointment.
 Whatever the situation, a new auditor must be appointed within 40
business days of the vacancy arising.

9.2 The person appointed as auditor must be acceptable to the company’s audit
committee as being independent of the company. To this end the audit
committee must
 ascertain that the auditor does not receive any direct or indirect
remuneration except
 as auditor, or
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 for rendering other non-audit services which have been determined by


the audit committee

 consider whether the auditor’s independence may have been


prejudiced
 as a result of any previous appointment as auditor, or
 regarding the extent of any consultancy, advisory or other work
undertaken by the auditor for the company

 consider whether the auditor complies with the “Rules and Regulations” of
the IRBA, for example, the Code of Professional Conduct for Registered
Auditors, in relation to independence and conflict of interest

The audit committee must evaluate the independence of the auditor in the context of
the company itself, and within the group of companies if the company is a member of
a group.

Activity 10

Required
Answer the questions, if provided, in section 2.2 of Tutorial Letter 102 and compare
your answers with the solutions in section 2.2 of Tutorial Letter 103.

Summary

In this learning unit we focused on the theory contained in the sections dealing with
auditors in the Companies Act 71 of 2008. The sections were also applied to practical
scenarios.

Self-assessment
After having worked through the learning unit and the references to the prescribed
study material, determine whether you are able to answer the following questions:

1. Describe the requirements an individual or firm must comply with in order to


be appointed as an auditor of a company.
2. Describe the requirements of the audit committee regarding independence of
the person or firm to be appointed as an auditor of a company.
3. Explain the situations in which a retiring auditor may not be re-appointed at
an annual general meeting without any resolution being passed.
4. Explain the procedures of the board of a company following a vacancy in the
office of auditor of a company.
5. Explain the rotation of auditors required in terms of the Companies Act 71 of
2008.
6. Explain the rights of auditors with regard to information and meetings.
7. Describe the actions that auditors can take if their rights are not enforced.
8. Explain the requirements for the election of an audit committee.
9. Describe the duties of an audit committee.

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Feedback on self-assessment
1. References:
 SAICA Student Handbook, Volume 2C, Companies Act of 2008: section 90
 Jackson & Stent (2014:3/51–3/52)
2. References:
 SAICA Student Handbook, Volume 2C, Companies Act of 2008: section 90
 Jackson & Stent (2014:3/51)
3. References:
 SAICA Student Handbook, Volume 2C, Companies Act of 2008: section 90
 Jackson & Stent (2014:3/51–3/52)
4. References:
 SAICA Student Handbook, Volume 2C, Companies Act of 2008: section 91
 Jackson & Stent (2014:3/52)
5. References:
 SAICA Student Handbook, Volume 2C, Companies Act of 2008: section 92
 Jackson & Stent (2014:3/52)
6. References:
 SAICA Student Handbook, Volume 2C, Companies Act of 2008: section 93
 Jackson & Stent (2014:3/52−3/53)
7. References:
 SAICA Student Handbook, Volume 2C, Companies Act of 2008: section 93
 Jackson & Stent (2014:3/52−3/53)
8. References:
 SAICA Student Handbook, Volume 2C, Companies Act of 2008: section 94
 Jackson & Stent (2014:3/53−3/54)
9. References:
 SAICA Student Handbook, Volume 2C, Companies Act of 2008: section 94
 Jackson & Stent (2014:3/53–3/54)

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LEARNING UNIT 2.3: ETHICAL PRINCIPLES REGULATING


THE PROFESSION
Introduction

In this learning unit, the ethical principles regulating the auditing and accountancy
profession are explained and applied by reference to the International Federation of
Accountants (IFAC) Code of Ethics for Professional Accountants, the South African
Institute of Chartered Accountants (SAICA) Code of Professional Conduct for
Chartered Accountants and the Independent Regulatory Board for Auditors (IRBA)
Code of Professional Conduct for Registered Auditors. The acts or omissions which
may constitute improper conduct on the part of the registered auditor are described
with reference to the IRBA Rules regarding Improper Conduct.

The ethical principles governing the conduct of auditors belonging to the profession
are summarised in three principal sources, namely the SAICA Code of Professional
Conduct for Chartered Accountants, the IRBA Code of Professional Conduct for
Registered Auditors and the IRBA Rules regarding Improper Conduct, all of which
are contained in Volume 2B of the SAICA Student Handbook.

You will probably feel somewhat confused when we mention all the above Codes of
Conduct, because many of you may never have heard of them. Keep in mind that a
person who is registered with the SAICA is a “chartered accountant”, but unless he or
she is also registered with the IRBA, he or she is not a “registered auditor”. A person
registered with both the SAICA and the IRBA is therefore a “chartered accountant”
and a “registered auditor”.

The relevant documents can be downloaded from the following links:

 The SAICA Code of Professional Conduct for Chartered Accountants:


https://www.saica.co.za/Portals/0/Technical/Discipline/Code%20of%20
Professional%20Conduct.pdf
 The IRBA Code of Professional Conduct for Registered Auditors; and
 The IRBA Rules regarding Improper Conduct:
http://www.irba.co.za/index.php/legal-functions-49

Study the diagram below and read through the following paragraphs to familiarise
yourself with the different Codes of Conduct (the IFAC, the SAICA and the IRBA):

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Diagram 1: Illustration of the various bodies responsible for regulation of the ethics
of the profession

Profession

South Africa International

SAICA IRBA
IFAC
For all CA(SA)’s For Registered auditors only

SAICA Code of Professional Conduct IRBA


 IRBA Code of Professional conduct Parts
A and B(modified IFAC code of conduct for IFAC Code of Ethics for Professional
Adopted Parts A & B of the IRBA's Code jurisdiction in SA) Accountants
Adopted Part C of the IFAC code IRBA’s Rules regarding Improper conduct Parts A,B,C

Minor amendments

The SAICA Code of Professional Conduct for Chartered Accountants, as set


out in Volume 2B of the SAICA Student Handbook

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The IFAC Code of Ethics for Professional Accountants consists of three parts:

Part A – General Application of the Code


Part B – Professional Accountants in Public Practice
Part C – Professional Accountants in Business

The SAICA Code of Professional Conduct for Chartered Accountants (see SAICA
Student Handbook, Volume 2B), which was revised and became effective on 1
January 2014, conforms to the IFAC Code of Ethics for Professional Accountants
and is consistent in all material respects with the IFAC Code of Ethics for
Professional Accountants for Parts A, B and C, except for minor amendments to
accommodate terminology and jurisdictional requirements specific to South Africa.
The SAICA Code of Professional Conduct for Chartered Accountants and definitions
are also consistent in all material respects with the IRBA Code of Professional
Conduct for Registered Auditors for Part A and Part B.

The SAICA has replaced references to “professional accountants” in the IFAC


Code with a reference to “chartered accountants” as the SAICA regulates
individual chartered accountants in South Africa.

The IRBA Code of Professional Conduct for Registered Auditors, as set out in
Volume 2B of the SAICA Student Handbook

The IRBA Code of Professional Conduct for Registered Auditors is applicable to


members engaged in public practice as Registered Auditors (RAs).

The IRBA has adopted Parts A and B, and the related definitions contained in the
IFAC Code in their entirety, because these relate to professional services provided
by registered auditors. Part C of the IFAC Code has not been adopted, since it
provides for ethical conduct of Professional Accountants in businesses who are not
registered auditors. The IRBA has included a few requirements in the Code and
incorporated them into the relevant sections in Parts A and B. The IRBA has also
replaced references to “professional accountants” in the IFAC Code with a
reference to “registered auditors”, since the IRBA regulates individual registered
auditors and registered audit firms in South Africa.

The adoption of the IFAC Code of Ethics for Professional Accountants by both the
SAICA and the IRBA contributes to the worldwide convergence of ethical
standards. It is anticipated that this convergence will facilitate the implementation
of the Code by chartered accountants and registered auditors in South Africa.

The IRBA Rules regarding Improper Conduct as set out in Volume 2B of the
SAICA Student Handbook

The IRBA Rules regarding Improper Conduct provide the registered auditor with a list
of acts or omissions which could constitute improper conduct and which are
punishable in terms of the provisions of the Act and Disciplinary Rules.

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2.3.1 The SAICA Code of Professional Conduct for Chartered


Accountants
Parts A and B of the SAICA Code of Professional Conduct for Chartered Accountants
apply to chartered accountants in public practice and Parts A and C to chartered
accountants in business.

Note: In our discussion of Parts A and B of the SAICA Code of Professional


Conduct for Chartered Accountants and the IRBA Code of Professional Conduct
for registered auditors hereafter, our reference to an auditor or auditors implies a
person registered with both the SAICA and the IRBA. These auditors are therefore
chartered accountants and registered auditors.

2.3.1.1 Definitions and Part A (section 100–150): General application of


the Code

Study
 Jackson & Stent (2014:2/5–2/12)
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Definitions and Part A (section 100−150)

Note the following in the study resources above:


 the meaning and definitions of words referred to in the SAICA Code of
Professional Conduct for Chartered Accountants

Activity 11

Required
Briefly define each of the following concepts:
 assurance client
 assurance engagement
 assurance team
 firm
 network firm
 independence
 financial statement audit client

Feedback on activity 11
Reference: SAICA Student Handbook, Volume 2B, SAICA Code of Professional
Conduct: Definitions

Definitions of concepts
See the references above in the prescribed textbook for the definition of each of
these concepts.

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Part A: General application of the Code

Part A establishes the fundamental principles of professional ethics for auditors


(chartered accountants and registered auditors) and provides a framework for
applying those principles.

Part A (section 100): Introduction and fundamental principles

Note the following in the study resources above:


 the profession's acceptance of its responsibility towards the public (section 100.1)
 the structure of the Code (section 100.2−4)
 the fundamental principles that the auditor must observe in order to achieve the
objectives of the profession (section 100.5) (Note: These are discussed in more
detail in section 110−150)
 the conceptual framework approach (section 100.6−11)
 the circumstances that can threaten the auditor’s compliance with the
fundamental principles (section 100.12)
 the safeguards the auditor is obliged to apply which will eliminate or reduce the
threat to an acceptable level (section 100.13−16)
 ethical conflict resolution that may be required to comply with the fundamental
principles (section 100.17−22)

* Safeguards are actions or other measures that may eliminate threats or reduce them to
an acceptable level (The SAICA Code of Professional Conduct: section 100.13). For
example, if you are an auditor and have shares in a public company, you will have to
sell the shares if you become the engagement partner on the audit.

Part A (section 110–150): Integrity, Objectivity, Professional competence and


due care, Confidentiality and Professional behaviour

Note the following in the study resources above:


 the principles relating to each of the fundamental principles (section 110–150)

Activity 12

As mentioned above, the SAICA Code of Professional Conduct for Chartered


Accountants has been subdivided into three parts.

Required

12.1 Describe each part of the Code.


12.2 List and briefly explain the five fundamental principles of professional conduct
which should be adhered to by auditors (chartered accountants and registered
auditors).

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Feedback on activity 12
References:
 Jackson & Stent (2014:2/6–2/10)
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part A (section 110–150)

12.1 Part A – General Applications of the Code (applies to CAs (SA) and (RAs).
Part B – Chartered Accountants in Public Practice (applies to CAs (SA) who
are registered as (RAs).
Part C – Chartered Accountants in Business (applies to CA)s (SA) who are
not registered as (RAs).

12.2 Integrity
Objectivity
Professional Competence and Due Care
Confidentiality
Professional Behaviour

Note: See Jackson & Stent (2014:2/6–2/10) for a brief explanation of each of the five
fundamental principles.

Activity 13

The SAICA Code of Professional Conduct for Chartered Accountants categorises


threats to compliance with the fundamental ethical principles into five categories.

Required
Identify and explain the meaning of each of the threats and give an example of how
each threat could arise.

Feedback on activity 13
References:
 Jackson & Stent (2014:2/10–2/11)
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part A (section 100.12)

Self-interest threat – the threat that a financial or other interest will inappropriately
influence the auditor’s judgement or behaviour.

This may occur as a result of the financial or other interests of an auditor or of an


immediate or close family member (e.g. when the auditor has shares in a company
that is about to become an audit client).

Self-review threats – the threat that an auditor will not appropriately evaluate the
results of a previous judgement made or service performed by the auditor, or by an

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individual in the auditor’s firm, on which the auditor will rely when forming a
judgement as part of providing a current service.

This may occur when previous work needs to be re-evaluated by the auditor
responsible for that work (e.g. if the auditor has written up the accounting records of
a client for which he or she has also been appointed to audit).

Advocacy threats – the threat that an auditor will promote a client’s position to the
point that the auditor’s objectivity is compromised.

This may occur when an auditor promotes a position or opinion to the point that his or
her subsequent objectivity may be compromised (e.g. an auditor values a client’s
shares and then leads the negotiations on the sale of the client’s company).

Familiarity threats – the threat that because of a long or close relationship with a
client, an auditor will be too sympathetic to their interest or too accepting of their work
(e.g. the auditor fails to report fraud at a client because the perpetrator is a close
friend).

Intimidation threats – the threat that an auditor will be deterred from acting
objectively because of actual or perceived pressures, including attempts to exercise
undue influence over the auditor.

This may occur when an auditor is deterred from acting objectively by actual or
perceived threats (e.g. a chartered accountant in business fails to report a fraud
committed by the section head because of fear of dismissal by the section head or
the financial director; or the financial manager of a client advises the audit partner
that unless audit fees are reduced by 50% he or she will lose the specific audit
client).

Activity 14

Big Deal, an auditing firm, uses university students dressed as clowns to hand out
brochures at traffic lights during peak hour traffic. The brochure states that Big Deal
is the best auditing firm in South Africa and that no work performed by any other
auditing firm can compare to the quality of Big Deal’s audits. The brochure also
states that the firm will substantially reduce the tax liability of the prospective clients.
The brochure also mentions the charge-out rates for the various staff members in the
firm.

Required
State the requirements with which all publicity, advertising and solicitation by an
auditor must conform and explain why Big Deal has not complied with these
requirements.

Feedback on activity 14
References:
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part A sec 150.2–5

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 Jackson & Stent (2014:2/8–2/9)

Requirements Non-compliance by Big Deal


 They may not make exaggerated  They state that they are the best
claims for the services they are able to auditing firm in South Africa.
offer, the qualifications they possess
or the experience they have gained
(section 150.2(a)).
 They may not make disparaging  They state that no work
references or unsubstantiated performed by any other auditing
comparisons with the work of others firm can compare to the quality
(section 150.2(b)). of the audits they perform.
 Advertising must be in good taste  It is not in good taste because
(Jackson & Stent (2014:2/9). clowns are handing out the
brochures.
 The medium used must be consistent  The brochure is being handed
with the dignity of the profession (sec out at traffic lights in peak hour
150.3). traffic.
 The medium used must conform to  They are being dishonest by
the accepted norms of legality, stating that they will reduce the
decency, honesty and truthfulness tax due to SARS.
(section 150.4).
 Reference may be made to the basis  The brochure contains details of
on which professional fees for the firm’s hourly charge rates.
services are calculated but hourly
rates should not be stated (section
150.5).

2.3.1.2 Part B (section 200–291): Chartered accountants in public practice

Study
 Jackson & Stent (2014:2/13–2/45)
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part B (section 200–291)

Part B of the SAICA Code of Professional Conduct illustrates how the conceptual
framework contained in Part A is to be applied by auditors in public practice.

Part B (section 200): Introduction

Study
 Jackson & Stent (2014:2/13–2/16)
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part B (section 200)

Note the following in the study resources above:


 the nature and significance of threats in the audit of public interest entities
 threats (and examples) of

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 self interest
 self-review
 advocacy
 familiarity
 intimidation
 safeguards created by the profession, legislation or regulation, and safeguards in
the work environment and examples of safeguards in the work environment that
can be implemented to overcome the threats

Activity 15

You are a trainee auditor at the firm Jordan and Redeye Inc. You are currently busy
with the audit of Fila 2014 Ltd, whose financial director happens to be your father.
One of your father’s main responsibilities is to approve the company financial
statements and he has asked you to reduce the extent of the audit work performed in
order to reduce the audit fees. You have also been entering into negotiations about
employment with the company because you plan to leave Jordan and Redeye Inc in
the next few months.

Required
State three threats to compliance with the fundamental ethical principles in terms of
the SAICA Code of Professional Conduct.

Feedback on activity 15
Reference: SAICA Student Handbook, Volume 2B, SAICA Code of Professional
Conduct: Part B (section 200.3)

Threats

 A familiarity threat is created by your father, since he is the company’s financial


director.
 An intimidation threat is created by your father by asking you to reduce the extent
of the audit work in order to reduce the audit fee.
 A self-interest threat is created because you plan to enter into employment
negotiations with Fila 2014 Ltd.

Part B (section 210): Professional appointment

Study
 Jackson & Stent (2014: 2/17–2/18
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part B (section 210)

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Note the following in the study resources above:

 Client acceptance – the responsibility, threats and safeguards that the auditor
should consider before accepting a new client
 Engagement acceptance – the responsibility, threats and safeguards that the
auditor should consider before accepting a specific client engagement
 Changes in professional appointment – the responsibility, threats and
safeguards that the auditor should consider when asked to replace another
auditor or when considering tendering for an engagement currently held by
another auditor

Activity 16
Required
What procedure should a proposed auditor follow before he or she accepts an
engagement to render professional services formerly rendered by another auditor?

Feedback on activity 16
References:

 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:


Part B (section 210.9–15)
 Jackson & Stent (2014:2/18)

The proposed auditor shall determine whether there are any reasons professional or
other, for not accepting the engagement, such as circumstances that threatens
compliance with the fundamental principles.

The auditor shall evaluate the significance of any threats. This may require direct
communication with the existing auditor.

In addition, the proposed auditor should implement the following safeguards:

 Discuss the client’s affairs fully and freely with the existing auditor. It will be
necessary for the proposed auditor to obtain the client’s permission in writing to
do so. If the client declines to give this permission, it would suggest that a
significant threat may have arisen which probably could not be addressed.
 Ask the existing auditor to provide known information on any facts or
circumstances of which, in the existing auditor’s opinion, the proposed auditor
should be aware of before accepting the engagement (e.g. poor relations
between the client and its professional advisors).
 Obtain necessary information from other sources.
 Where the proposed client refuses to give permission for the proposed auditor to
communicate with the existing auditor, or fails to do so, the proposed auditor shall
decline the appointment, unless there are exceptional circumstances of which the
proposed auditor has full knowledge, and he or she is satisfied, by some other
means, regarding all relevant facts.

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Part B (section 220): Conflicts of interest

Study
 Jackson & Stent (2014:2/19–2/20)
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part B (section 220)

Note the following in the study resources above:


 the responsibility of the auditor when the interests of the firm may be in conflict
with the interests of a client
 the threats that could pose a conflict of interest
 the safeguards to be considered when a conflict of interest may exist

Part B (section 230): Second opinions

Study
 Jackson & Stent (2014:2/20)
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part B (section 230)

Note the following in the study resources above:


 the responsibility of the auditor when he or she is asked to provide a second
opinion
 situations which may give rise to threats to compliance with the fundamental
principles
 the safeguards to be considered and steps that can be applied to eliminate or
reduce the threats to an acceptable level

Part B (section 240): Fees and other types of remuneration

Study
 Jackson & Stent (2014:2/21–2/22)
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part B (section 240)

Note the following in the study resources above:

 the responsibility, threats and safeguards relating to normal fees, contingent fees
and referral fees/commissions

Activity 17
The auditor may quote whatever fee he or she deems appropriate when entering into
negotiations regarding the provision of professional services. Nevertheless, there
may be threats to compliance with the fundamental principles.

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Required
Describe the safeguards that may be applied by the auditor when entering into
negotiations for the provision of professional services in order to eliminate or reduce,
to an acceptable level, the threats of not complying with the fundamental principles.

Feedback on activity 17
References:
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part B (section 240.2)
 Jackson & Stent (2014:2/21–2/23)

Safeguards
 Make the client aware of the terms of the engagement.
 Provide the client with the basis on which fees are charged and which services
are covered by the quoted fee.
 Assign appropriate time and suitably qualified staff to the engagement.

Part B (section 250): Marketing professional services

Study
 Jackson & Stent (2014:2/22)
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part B (section 250)

Note the following in the study resources above:


 the auditor’s responsibility when marketing professional services
 situations that may give rise to threats to compliance with the fundamental
principles
 the safeguards to be considered and applied to eliminate or reduce the threats to
an acceptable level

Part B (section 260): Gifts and hospitality

Study
 Jackson & Stent (2014:2/22–2/23)
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part B (section 260)

Note the following in the study resources above:


 the auditor’s responsibility when receiving gifts from a client
 situations that may threaten the auditor’s fundamental principles
 the safeguards to be considered and applied to eliminate or reduce the threats to
an acceptable level

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Activity 18
Required
State, in terms of the SAICA Code of Professional Conduct, whether each of the
following is true or false and briefly explain your answer:

18.1 Auditing firms should never accept gifts from their clients.
18.2 Auditors in public practice may call on prospective audit clients to offer their
services.
18.3 In their advertising campaigns auditing firms may
(a) include testimonials from their most prestigious clients
(b) indicate their links to prominent figures in the business world
18.4 Advertisements for professional services may
(a) state hourly charge-out rates (these are the rates that auditing firms
charge their clients on an hourly basis for work done)
(b) compare the firm’s charge-out rates with those of other firms
18.5 Fees should be charged in terms of what the "market can bear".
18.6 Commission paid to an auditor by a third party as a result of the auditor
referring a product to a client, should be disclosed to the client only if the
provider of the service agrees to it.

(Based on Gowar & Jackson 2010:49: Graded Questions on Auditing)

Feedback on activity 18
References:
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part B (section 240–260)
 Jackson & Stent (2014:2/21–2/23)

18.1 False: Small gifts that do not pose a threat (usually a familiarity threat) to
the auditor’s independence may be accepted; in fact it may be
discourteous to reject such a gift, although some auditing firms do
have a specific policy in place regarding this (section 260).

18.2 False: Auditors in public practice are NOT permitted to engage in cold
calling to offer professional services (section 250).

18.3 (a) False: This is not regarded as being in good taste (section 250).
(b) True: This is acceptable provided that excessive emphasis is not placed
on such persons.
18.4 (a) False: This would be inconsistent with the dignity of the profession
(section 250).
(b) False: This would be inconsistent with the dignity of the profession
(section 250).

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18.5 False: Fees should be a fair reflection of the value of the service rendered,
taking into account factors such as the time spent, skill and
knowledge required (section 240).

18.6 False: The commission may only be accepted if it was disclosed


beforehand and in writing to the client that the auditor will receive the
commission (section 240).

Part B (section 270): Custody of client assets

Study
 Jackson & Stent (2014:2/23)
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part B (section 270)

Note the following in the study resources above:


 the auditor’s responsibility when taking custody of a client’s assets
 situations that may threaten the auditor’s fundamental principles
 the safeguards to be considered and applied to eliminate or reduce the threats to
an acceptable level

Part B (section 280): Objectivity – all services

Study
 Jackson & Stent (2014:2/24)
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part B (section 280)

Note the following in the study resources above:


 the requirement that auditors shall not compromise their professional judgement
because of bias, conflict of interest or the undue influence of others
 the requirement of independence in mind and appearance (see section 290 and
291 for specific guidance on the independence requirements)
 the safeguards to be considered and applied to eliminate or reduce the threats to
an acceptable level

Part B (section 290): Independence – audit and review engagements and


(section 291): Independence – other assurance engagements

Study
 Jackson & Stent (2014:2/24–2/45)
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part B (section 290 and 291)

Bear in mind that section 290.4 of the SAICA Code of Professional Conduct states
that in the case of audit engagements, it is in the public interest that members of

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audit teams, firms and network firms shall be independent of audit clients.

As stated in section 290.6 of the SAICA Code of Professional Conduct, auditors


should be independent in mind and appearance when undertaking a reporting
assignment. In your study of the introduction of the SAICA Code of Professional
Conduct you were introduced to a number of concepts relating to independence.

Independence: Structure
The SAICA (IFAC) Code of Professional Conduct emphasises the importance of
independence, particularly in respect of the audit of public interest entities (section
290.4 of the SAICA Code of Professional Conduct).

It is very important to note the following sections for study purposes:


Independence – Audit and Review Engagements (section 290.1–500)
Independence – Other Assurance Engagements (section 291.1–157)

The conceptual approach applied to independence


The SAICA Code of Professional Conduct states in section 290.7 that the conceptual
framework approach shall be applied by auditors in public practice to
 identify threats to independence
 evaluate whether these threats are clearly insignificant
 apply appropriate safeguards to eliminate or reduce the threat to an acceptable
level, where they are not clearly insignificant

See Jackson & Stent (2014:2/24–2/45) for a discussion of situations that may provide
threats to an auditor’s independence. Note the type of threat, and the proposed
safeguard to eliminate or reduce the threat to an acceptable level.

Activity 19
Note: The information in this activity is the same information as in activity 15.

Here you should indicate how an auditor’s independence will be influenced in the
case of an audit engagement.

You are a trainee auditor at the firm Jordan and Redeye Inc. You are currently busy
with the audit of Fila 2014 Ltd, whose financial director happens to be your father.
One of your father’s main responsibilities is to approve the company financial
statements and he has asked you to reduce the extent of the audit work performed in
order to reduce the audit fees. You have also been entering into negotiations about
employment with the company because you plan to leave Jordan and Redeye Inc in
the next few months.

Required
Indicate three threats to your independence in terms of the SAICA Code of
Professional Conduct.

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Feedback on activity 19
Reference: SAICA Student Handbook, Volume 2B, SAICA Code of Professional
Conduct: Part B (section 290)

Threats
 A familiarity threat is created, since your father is the company’s financial director
(section 290.130).
 An intimidation threat is created by your father asking you to reduce the extent of
the audit work in order to reduce the audit fee (section 290.132).
 A self-interest threat is created because of you have entered into employment
negotiations with Fila 2014 Ltd (section 290.138).

2.3.1.3 Part C (section 300–350): Chartered accountants in business

Study
 Jackson & Stent (2014:2/46–2/52)
 SAICA Student Handbook, Volume 2B Code, SAICA Code of Professional
Conduct: Part C (section 300–350)

This part of the Code illustrates how the conceptual framework contained in Part A is
to be applied by chartered accountants in business (SAICA Code of Professional
Conduct: section 300.1).

A chartered accountant in business may be a salaried employee, a partner, a


director, an owner manager, a volunteer or working for one or more employing
organisation (SAICA Code of Professional Conduct: section 300.3).

Part C (section 300): Chartered accountants in business

Study
 Jackson & Stent (2014:2/46–2/48)
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part C (section 300)

Note the following in the study resources above:


 compliance with the fundamental principles may be threatened by self-interest,
self-review, advocacy, familiarity and intimidation threats
 examples of circumstances which can threaten the chartered accountant’s
compliance with the fundamental principles
 the safeguards the chartered accountant is obliged to apply which will eliminate or
reduce the threat to an acceptable level

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Part C: (section 310–350)

Study
 Jackson & Stent (2014:2/48–2/52)
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part C (section 310–350)

Note the following in the study resources above:


 the responsibility of the chartered accountant
 situations that may give rise to threats to compliance with the fundamental
principles
 the safeguards to be considered and applied to eliminate or reduce the threats to
an acceptable level

2.3.2 The IRBA Code of Professional Conduct for Registered


Auditors
As stated in the introduction of learning unit 2.3, the IRBA Code of Professional
Conduct for Registered Auditors and the SAICA Code of Professional Conduct for
Chartered Accountants (learning unit 2.3.1 above) are consistent in all material
respects regarding Parts A and B of the Codes, which apply to auditors in public
practice. However, the IRBA has not adopted Part C because it provides for ethical
conduct for chartered accountants in businesses who are not registered auditors.

Note the reason why two separate Codes of Professional Conduct exist for the
SAICA and the IRBA. As stated in Jackson & Stent (2014:2/3), the SAICA and the
IRBA are two separate professional bodies, which do not have identical membership,
and therefore must have their own Codes to which their members must adhere.

Also note that the IRBA Code of Professional Conduct for Registered Auditors has
replaced the reference to “chartered accountant” with “registered auditor” throughout.

2.3.3 The IRBA Rules regarding Improper Conduct


The IRBA Rules regarding Improper Conduct was already referred to in the
introduction of learning unit 2.3, as one of the pronouncements relating to ethics and
professional conduct in South Africa.

If a registered auditor commits an act or omission specified in the following


paragraphs of the IRBA Rules regarding Improper Conduct, he or she shall be guilty
of improper conduct.

Study
 Jackson & Stent (2014:2/53)
 SAICA Student Handbook, Volume 2B, IRBA Rules regarding Improper Conduct
Definitions and sec 2.1–2.17

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Note the following in the study resources above:


 definitions of words as used in the IRBA Rules regarding Improper Conduct
 the contraventions of the IRBA Rules regarding Improper Conduct and the
instances where the registered auditor would be guilty of improper conduct

To ensure that you understand how to answer an integrated question on the


regulation of the auditor you are required to complete the following activity:

Activity 20
The following conversation takes place between Mike Benji, a newly qualified
accountant (in charge of the audit), and Mrs King, the employee in charge of trade
and other receivables at the client, Jub Ltd. This is the first year that Mike Benji’s firm
has conducted the audit of Jub Ltd, a long standing company in the interior
decorating sector. Prior to this conversation Mike Benji had not met Mrs King.

Mike Benji: Howzit Mrs K, I'm Mike Benji from the auditors. You can call me Mike B.

Mrs King: Good morning Mr Benji. What can I do for you?


Mike Benji: I need to do some audit tests on your trade receivable files. I
understand from my senior trainee that you have three files of invoices.

Mrs King: Yes I do, but as I told your trainee, there is a fourth file in which we
keep queries pertaining to trade receivables.

Mike Benji: He didn't tell me that, but then I do have to watch him as he is very
unreliable and quite honestly, incompetent.

Mrs King: I can't give you the queries file as Mr Kimble, the financial director, has
given strict instructions that nobody other than himself may take control
of the file. This includes the auditors.

Mike Benji: OK. That’s fine. I won't worry about auditing it then. What about the
other files?

Mrs King: I can let you have Files 1 and 2 now, but File 3 is with the chief
accountant, Mr Calder. Shall I introduce you to him?

Mike Benji: Not necessary, he's my uncle. I'll get the file from him.

Mrs King: I also have an analysis book that I use for my own purposes to assist in
evaluating long outstanding debts. The previous auditors used it. Would
you like to use it?

Mike Benji: No, I'm not interested in the other auditors − they couldn't even retain
this audit − why should I do what they did?

Mrs King: As you wish.

Mike Benji: By the way, I want all the invoices for one of your debtors, Design
Fabrics Ltd. I was auditing there last week and they are heading for
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financial trouble. You had better get them to pay quickly before they are
declared insolvent.

Mrs King: Thank you. We didn't know that.

Mike Benji: Why not? If you are in charge of trade receivables you should know
these things. In this audit I will really be concentrating on trade
receivables because I’m not going to do any work at all on inventory. I'll
see you later.

Required
Discuss fully Mike Benji’s understanding of professional conduct and audit
procedures as reflected in the above conversation. In your answer refer to the APA,
the SAICA Code of Professional Conduct for Chartered Accountants, the Companies
Act 71 of 2008 and the IRBA Rules regarding Improper Conduct.

(Based on Gowar and Jackson 2010:55: Graded Questions on Auditing)

Feedback on activity 20
References:

 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005: section
44
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
section 120,140, 150, 290
 SAICA Student Handbook, Volume 2B, IRBA Rules Regarding Improper Conduct:
Rule 2.7, 2.6, 2.17
 SAICA Student Handbook, Volume 2C, Companies Act of 2008: Chapter 3:
Enhanced Accountability and transparency – Part C (section 93)

20.1 Mike Benji's attitude (SAICA Code of Professional Conduct: (section 150) −
Professional Behaviour

An auditor should conduct himself or herself with courtesy and consideration


towards all with whom he or she comes into contact. His or her conduct should
be consistent with the good reputation of the profession and should not
discredit the profession.

Mike Benji was arrogant and discourteous, towards Mrs King:

20.1.1 Howzit Mrs K (he had not met her before).


20.1.2 You can call me Mike B!
20.1.3 He rudely turned down her offer of the analysis book.
20.1.4 He was critical of her ability to do her job (you should know these
things).

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20.2 Criticism of his senior trainee

Mike Benji should never criticise his staff in front of the client, because it is
unprofessional to do so. He should discuss the matter privately with his
trainee. In essence Mike Benji has a "responsibility to his colleague" and
should act in a manner that promotes co-operation and good relations with his
team. To describe a senior trainee as very unreliable and incompetent is
completely unacceptable (SAICA Code of Professional Conduct: section 150).

20.3 Scope restriction acceptance

20.3.1 An auditor should "...remain free from any influence... which could
impair his professional judgement or independence." Mike Benji has
contravened this requirement by allowing people to influence his
choice of records to be audited. Mike Benji has failed to recognise or
respond to a threat to his objectivity (SAICA Code of Professional
Conduct: section 120).
20.3.2 In terms of Section 44 of the Auditing Profession Act 26 of 2005, the
audit should be conducted free of restriction and the auditor should
have access to all information he or she deems necessary. A
competent auditor would consider the queries file to be "necessary
evidence".
20.3.3 Mike Benji has failed to recognise or respond to threats to his
objectivity (independence) and has compromised the fundamental
principle of professional competence (SAICA Code of Professional
Conduct: section 130).
20.3.4 In terms of section 93 of the Companies Act 71 of 2008 the auditor is
given right of access to all information he or she requires.

20.4 Independence

20.4.1 In terms of section 290 of the SAICA Code of Professional Conduct


(Independence) a close family member or personal relationship can
result in a significant self-interest, familiarity or intimidation threat to
the auditor. Although the relationship is one between an auditor and
his uncle (and thus not a close or immediate relationship as defined),
the threat could easily exist in view of the fact that

 the uncle is involved in the financial aspects of the business


 Mike Benji is in charge of the audit and is therefore directly
involved in all aspects of it

20.4.2 Whilst this is essentially the firm’s problem, Mike Benji is


compromised and should have brought this to the attention of his
engagement partner (SAICA Code of Professional Conduct: section
290.8 and section 290.10).

20.5 Criticism of previous auditor

20.5.1 An auditor should not irresponsibly criticise a fellow auditor (Jackson


& Stent (2014:2/10).

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20.5.2 Mike Benji's statement "They couldn't even retain the audit..." is an
uninformed, irresponsible criticism of their ability.
20.5.3 Mike Benji has failed to comply with the fundamental principles of
professional behaviour and integrity.

20.6 Confidentiality

20.6.1 In terms of section 140 of the SAICA Code of Professional Conduct,


an auditor must respect the confidentiality of information acquired by
him or her in the course of his or her work. The information
concerning Design Fabrics should not have been disclosed. Hence
Mike Benji has failed to comply with the fundamental principle of
confidentiality.

20.7 No work on inventory

Mike Benji has transgressed on three counts here:

20.7.1 The APA (section 44) requires the auditor to satisfy himself or herself
about the existence of all assets and liabilities − this requirement will
not be met if no work is done on inventory.
20.7.2 In addition, Mike Benji should not be informing the client of what his
audit plan is – this client now knows that they could manipulate the
financial statements if they wish to, without fear of discovery by the
auditors.
There is no suggestion that the company wishes to manipulate the
financial statements, but Mike Benji’s disclosure is technically
unsound (and unwise).
20.7.3 The extensive audit of trade receivables cannot be a substitute for an
audit of inventory – again Mike Benji has compromised the
fundamental principle of professional competence (SAICA Code of
Professional Conduct: section 130).

20.8 The IRBA Rules regarding Improper Conduct − overall

20.8.1 Rule 2.7 states that an auditor will be guilty of improper conduct if he
or she fails to perform his or her duties with due care and skill.
20.8.2 Rule 2.6 states that an auditor will be guilty of improper conduct if he
or she contravenes the Code.
20.8.3 Rule 2.17 states that an auditor will be guilty of improper conduct if he
or she conducts himself or herself in a manner which is discreditable
on the part of an auditor or which brings the profession into disrepute.

Mr Benji has clearly transgressed these rules.

Activity 21

Required
Answer the questions in section 2.3, if provided, of Tutorial Letter 102 and compare
your answers with the solutions in section 2.3 of Tutorial Letter 103.

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Summary
In the preceding learning units we focused on professional conduct as contained in
the SAICA Code of Professional Conduct for Chartered Accountants (Parts A, B and
C), and the IRBA Rules regarding Improper Conduct. The sections contained in the
above were also applied to practical scenarios.

Self-assessment

After having worked through the learning unit and the references to the prescribed
study material, determine whether you are able to answer the following questions:

1. Explain the definitions referred to in the SAICA Code of Professional Conduct.


2. Describe the five fundamental principles contained in Part A that must be
observed to achieve the objectives of the profession.
3. Explain the two categories of safeguards that can be implemented.
4. Explain the main categories of threats and explain each threat.
5. With reference to section 210–290 of the SAICA Code of Professional Conduct,
explain the responsibility of the chartered accountant/auditor, the threats and
the safeguards to be considered for each of the sections contained in Part B
and illustrate their application in practical situations.
6. With reference to section 300–350 of the SAICA Code of Professional Conduct,
explain the responsibility of the chartered accountant/auditor, the threats and
the safeguards to be considered for each of the sections contained in Part C
and illustrate their application in practical situations.
7. Explain what constitutes improper conduct and illustrate its application in
practical situations.

Feedback on self-assessment
1. Reference: SAICA Student Handbook, Volume 2B, SAICA Code of Professional
Conduct: Definitions
2. References:
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part A (section 110–150)
 Jackson & Stent (2014:2/6–2/12)
3. References:
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part A (section 100.13–16)
 Jackson & Stent (2014:2/12)
4. References:
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part A (section 100.12)
 Jackson & Stent (2014:2/10–2/11)
5. References:
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Part A (sec 210–290)
 Jackson & Stent (2014:2/14–2/45)
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6. References:
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct
of SAICA: Part A (section 300–350)
 Jackson & Stent (2014:2/46–2/52)
7. References:
 SAICA Student Handbook, Volume 2B, IRBA Code of Professional Conduct:
Definition of Improper Conduct
 Jackson & Stent (2014:2/53)

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LEARNING UNIT 2.4: QUALITY CONTROL OF AUDIT WORK


Introduction
Auditing firms are required to implement policies and procedures to monitor the firm’s
practices and ensure that the International Standards of Auditing (ISAs) are being
followed.

The International Standards on Quality Control (ISQC 1) requires the auditing firm to
establish policies and procedures designed to provide it with reasonable assurance
that the firm and its personnel comply with the relevant ethical requirements
(Integrity, Objectivity, Professional Competence and Due Care, Confidentiality and
Professional Behaviour). ISA 220 deals with the specific responsibilities of the
engagement partner’s regarding quality control procedures for an audit of financial
statements (see ISA 200: par A17).

In other words, ISQC 1 establishes an auditing firm’s responsibility for its system of
quality control while ISA 220 provides guidance on the engagement team’s
responsibilities regarding quality control for audit engagements.

In this learning unit you will be introduced to the quality control standards of auditing
firms and for audit engagements.

ISAs are available for download from the following link:


http://www.irba.co.za/index.php/auditing-standards-functions-55/252-international-
clarity-pronouncements-adopted-and-i/831-2014-auditing-standards

2.4.1 Auditing firms’ system of quality control


The requirement of quality control applies to all firms in respect of audits and reviews
of financial statements (ISQC 1: par 4). The auditing firm shall comply with each
requirement of ISQC 1, unless, in the circumstances of the auditing firm, the
requirement is not relevant to the services provided in respect of audits and reviews
of financial statements (ISQC 1: par 14).

Study
 SAICA Student Handbook, Volume 2A, ISQC 1: Quality control for firms that
perform audits and reviews of financial statements, and other assurance and
related service engagements (par 1–18, 20, 26, 29, 32 and 48 & A1–A3).

Note the following in the study resource above:


 the auditing firm’s objective in establishing and maintaining a system of quality
control
 the meaning of the definitions
 the elements of a system of quality control (you should be able to briefly describe
each element)

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Activity 22
Every audit firm performing audits has to have a system of quality control.

Required
22.1 Describe the objective of establishing a system of quality control for an
auditing firm.
22.2 List the six elements of a quality control system and explain each element.

Feedback on activity 22
Reference: SAICA Student Handbook, Volume 2A, ISQC 1: par 11 (a) and (b), 18,
20, 26, 29, 32 and 48

22.1 See ISQC1: par 11 (a) and (b) for the objective of establishing a system of
quality control for an audit firm.

22.2

Element of quality control Explanation


Leadership responsibilities for quality in the firm See ISQC 1 par 18
Relevant ethical requirements (including Independence) See ISQC 1 par 20
Acceptance and continuance of client relationships and See ISQC 1 par 26
specific requirements
Human resources See ISQC 1 par 29
Engagement performance See ISQC 1 par 32
Monitoring See ISQC 1 par 48

2.4.2 Quality control for an audit of financial statements


The engagement partner is responsible for the overall quality on each audit
engagement to which that partner is assigned (see ISA 220: par 8).

Study
 Jackson & Stent (2014:17/14)
 SAICA Student Handbook, Volume 2A, International Standards on Auditing (ISA)
220: Quality control for an audit of financial statements (par 1−11 and A1–A7)

Note the following in the study resources above:


 the objective of the auditor in implementing quality control procedures at the
engagement level
 the meaning of the definitions (you would have already studied many of these in
ISQC 1 referred to in learning unit 2.4)
 the leadership responsibilities for quality on audits
 the ethical requirements that the engagement partner shall comply with
throughout the audit engagement (these have also been dealt with in learning unit
1.1)
 the requirements of the engagement partner relating to independence

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Activity 23
Required
Answer the questions in section 2.4, if provided, of Tutorial Letter 102 and compare
your answers with the solutions in section 2.4 of Tutorial Letter 103.

Summary
In this learning unit we focused on quality control of audit work which includes the
firms system of quality control and quality control for an audit of financial statements.

Self-assessment
After having worked through the learning unit and the references to the prescribed
study material, determine whether you are able to answer the following questions:

1. Explain the objective of the firm in establishing and maintaining a system of


quality control.
2. Explain the meaning of the definitions in ISQC 1 and ISA 220.
3. List and describe the six elements of a system of quality control.
4. Explain the objective of the auditor and the responsibility of the engagement
partner in implementing quality control procedures at the engagement level.
5. List the ethical requirements that the engagement partner has to comply with
throughout the audit engagement.
6. Describe the requirements of the engagement partner relating to independence.

Feedback on self-assessment
1. Reference: SAICA Student Handbook, Volume 2A, ISQC1: par 11 (a) and (b)
2. Reference: SAICA Student Handbook, Volume 2A, ISQC1: (Definitions) and ISA
220
3. Reference: SAICA Student Handbook, Volume 2A, ISQC 1: par 18, 20, 26, 29,
32 and 48
4. Reference: SAICA Student Handbook, Volume 2A, ISA 220: par 6, 8, 9, 11, 12,
14–16, 18, 19, 22–24
5. Reference: SAICA Student Handbook, Volume 2A, ISA 220: par 9 and A4
6. Reference: SAICA Student Handbook, Volume 2A, ISA 220: par 11

Conclusion
In this topic, Regulation of the Auditor, we explained and applied knowledge of the
regulatory process in the profession and the role of the registered auditor in the
statutory audit.

We dealt with the Auditing Profession Act 26 of 2005 (APA), the SAICA Code of
Professional Conduct for Chartered Accountants, the IRBA Code of Professional
Conduct for Registered Auditors, the Companies Act 71 of 2008, the IRBA Rules
regarding Improper Conduct and the quality control of audit work.

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In topic 3 we will be dealing with the general principles of assurance engagements,


internal control, audit evidence, risk assessment and audit procedures, materiality,
audit risk, audit documentation and assurance reports.

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TOPIC 3: GENERAL PRINCIPLES OF


ASSURANCE ENGAGEMENTS
Topic overview

The aim of this topic is to explain and apply the general principles of assurance
engagements in terms of the International Standards on Auditing (ISAs), to the
statutory or voluntary audit of a company or other business entity.

This topic is divided into the following learning units:

Learning unit Title Page


3.1 ASSURANCE ENGAGEMENTS 119
3.2 INTERNAL CONTROL 122
3.2.1 An overview of internal control 122
3.2.2 Understanding internal control 123
3.3 AUDIT EVIDENCE 134
3.3.1 The nature of audit evidence 134
3.3.2 Sufficient appropriate audit evidence 134
3.3.3 Assertions in financial statements 137
3.4 RISK ASSESSMENT AND AUDIT PROCEDURES 144
3.4.1 Types of audit procedures for obtaining audit evidence 144
3.4.2 Identifying and assessing the risks of material 144
misstatement
3.4.3 Tests of controls and substantive procedures 147
3.5 MATERIALITY 155
3.5.1 The concept of materiality 155
3.5.2 Materiality in planning and performing an audit 156
3.6 AUDIT RISK 160
3.6.1 The concept audit risk and its components 160
3.6.2 The interaction between the components of audit risk 162
3.7 AUDIT DOCUMENTATION 166
3.8 ASSURANCE REPORTS 168

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Learning outcomes

Learning unit In this topic we focus on the Level


following learning outcomes:
3.1 Assurance engagements  Explain the auditing principles 1
relating to assurance engagements.

3.2 Internal control  Explain and apply the auditing 2


principles relating to internal control.

3.3 Audit evidence  Explain and apply the auditing 2


principles relating to audit evidence.

3.4 Risk assessment and  Explain and apply the auditing 2


audit procedures principles relating to risk assessment
and audit procedures.

3.5 Materiality  Explain and apply the auditing 2


principles relating to materiality.

3.6 Audit risk  Explain and apply the auditing 2


principles relating to audit risk.

3.7 Audit documentation  Explain and apply the auditing 2


principles relating to audit
documentation.

3.8 Assurance reports  Explain the auditing principles 1


relating to assurance reports.

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LEARNING UNIT 3.1: ASSURANCE ENGAGEMENTS

Introduction

Certain sections of the International Framework for Assurance Engagements


(Framework) and ISA 200 were dealt with in the preceding topics of the study guide.
In this learning unit we will cover the sections on assurance engagements not
previously dealt with in the study guide.

As stated in the International Framework for Assurance Engagements (par 01), the
purpose of the Framework is to define and describe the elements and objectives of
an assurance engagement performed by practitioners. ISA 200 further deals with the
independent auditor’s overall objectives and requirements when conducting an audit
of financial statements in accordance with the ISAs.

Study
 SAICA Student Handbook, Volume 2A, International Standards on Auditing (ISA)
200 – Overall objectives of the independent auditor and the conduct of an audit in
accordance with International Standards on Auditing: par 15 and16,18–24 and
A18–A27 and A53–A76
 SAICA Student Handbook, Volume 2A, International Framework for Assurance
Engagements: par 1–4

The International Standards on Auditing (ISAs) and the International Framework for
Assurance Engagements can be downloaded from the following link:

http://www.irba.co.za/index.php/auditing-standards-functions-55/252-
international-clarity-pronouncements-adopted-and-i/831-2014-auditing-
standards

Note the following in the study resources above:


 the purpose of the Framework and an overview of the Framework (Framework:
par 1–4)
 the requirement of professional scepticism to be observed by the auditor (ISA
200: par 15 and A18–A22)
 the requirement of professional judgement to be observed by the auditor (ISA
200: par 16 and A23–A27)
 the conduct of the audit in accordance with ISAs (ISA 200: par 18–24 and A53–
A76)

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Activity 1

Professional judgment means that the auditor applies relevant knowledge and
experience in making informed decisions during the planning and conduct of an audit
of financial statements.

Required
Mention the situations during an audit of financial statements where the auditor is
required in particular to exercise professional judgment in his or her decisions.

Feedback on activity 1
Reference: SAICA Student Handbook, Volume 2A (ISA 200: par A23)

See the above reference in the prescribed textbook regarding situations in which
professional judgment is essential for the proper conduct of an audit.

Activity 2

Required
Answer the questions, if provided, in section 3.1 of Tutorial Letter 102 and compare
your answers with the solutions in section 3.1 of Tutorial Letter 103.

Summary

In this learning unit we dealt with the auditing principles relating to assurance
engagements.

Self-assessment

After having worked through the learning unit and the references to the prescribed
study material, determine whether you are able to answer the following questions:

1. Explain the purpose of the Framework.


2. Describe the overview of the Framework.
3. Explain what is meant by professional scepticism.
4. Explain what is meant by professional judgment.
5. Explain when professional judgment is required by the auditor during the
planning and performance of the audit.
6. Explain the nature of the ISAs.
7. Describe the considerations specific to audits in the public sector.

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8. Explain the contents of the ISAs.


9. Describe the considerations to be taken into account in audits of smaller
entities.
10. Describe the purpose of objectives in the ISAs.
11. Mention the auditor’s responsibility regarding compliance with the requirements
of the ISAs.
12. Mention the auditor’s action if an objective in a relevant ISA is not achieved.

Feedback on self-assessment
1. Reference: SAICA Student Handbook, Volume 2B (Framework: par 1–3)
2. Reference: SAICA Student Handbook, Volume 2B (Framework: par 4)
3. Reference: SAICA Student Handbook, Volume 2B (ISA 200: par 13(l))
4. Reference: SAICA Student Handbook, Volume 2B (ISA 200: par 13(k))
5. Reference: SAICA Student Handbook, Volume 2B (ISA 200: par 16 and
A23–A27)
6. Reference: SAICA Student Handbook, Volume 2B (ISA 200: par A53–A56)
7. Reference: SAICA Student Handbook, Volume 2B (ISA 200: par A57)
8. Reference: SAICA Student Handbook, Volume 2B (ISA 200: par A58–A63)
9. Reference: SAICA Student Handbook, Volume 2B (ISA 200: par A64–A66)
10. Reference: SAICA Student Handbook, Volume 2B (ISA 200: par A67–A69)
11. Reference: SAICA Student Handbook, Volume 2B (ISA 200: par A70–A74)
12. Reference: SAICA Student Handbook, Volume 2B (ISA 200: par A75–A76)

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LEARNING UNIT 3.2: INTERNAL CONTROL

Introduction

As stated in Jackson & Stent (2014:5/3), all of us experience internal controls around
us in our everyday lives, often without even realising it. Refer to the prescribed
textbook for some examples. These controls are in place to address and limit
potential risks.

In this learning unit we will deal with the importance of the components of internal
control, the limitations of internal control and internal controls in smaller entities, as
well as the external auditor’s interest in internal controls.

3.2.1 An overview of internal control

Internal control is the process designed, implemented and maintained by those


charged with governance, management and other personnel to provide reasonable
assurance about the achievement of the entity’s objectives regarding the reliability of
financial reporting, the effectiveness and efficiency of operations, and compliance
with applicable laws and regulations (see ISA 315: par 4(c)).

Internal controls and controls relating to the cycles (e.g. the revenue and receipts
cycle) from a governance perspective will be dealt with in the AUE 2602 module. In
this module we will be dealing with internal control from the perspective of the
external auditor to identify and assess the risk of material misstatement.

Study
 Jackson & Stent (2014:5/3–5/5)
 SAICA Student Handbook, Volume 2A, International Standards on Auditing (ISA)
315 – Identifying and assessing the risks of material misstatement: par 4(c) and
A51

Note the following in the study resources above:


 the definition of internal control
 the fact that internal control is designed and effected by those charged with
governance (e.g. an entity’s board of directors or audit committee), management
and other personnel to provide reasonable assurance on the achievement of an
entity’s objectives with regard to
 the reliability of financial reporting
 the effectiveness and efficiency of operations
 compliance with applicable laws and regulations

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3.2.2 Understanding internal control

When conducting an audit, the auditor should obtain an understanding of internal


controls relevant to the audit. In order to do so, the auditor should evaluate the
design of the controls and determine whether they have actually been implemented
(see ISA 315: par 12 and 13). If a client has an effective (good) accounting and
internal control system, the financial information produced by the system will also be
adequate (good).This means that the financial information will be valid, accurate,
complete and timeously produced (see Jackson & Stent:2014:5/10).

Note: In this section of the study guide you must study the internal control of a
business in the context of the auditor’s understanding of the entity and its
environment, including the entity’s internal control as part of his or her risk
assessment procedures. The auditors’ risk assessment procedures will be dealt with
in learning unit 3.4.

In this learning unit you will encounter the components of internal control, the
limitations of internal controls, the accounting system and the tasks and
responsibilities relating to the internal control of an entity.

3.2.2.1 Internal control components

Study
 Jackson & Stent (2014:5/5–5/19 and 7/1 –7/19)
 SAICA Student Handbook, Volume 2A, International Standards on Auditing (ISA)
315 – Identifying and assessing the risks of material misstatement: par 12–24 and
A49-A50, A58-A117 and Appendix 1

Internal control consists of five components, as illustrated in diagram 1 below:

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Diagram 1: Five components of internal control (based on ISA 315: par 14–24)

Internal control

The
information
The entity’s system
The control risk Control Monitoring
environment including the activities of controls
assessment related
process business
processes

Activity 3

Required
List and define the five components of internal control.

Feedback on activity 3
Reference: SAICA Student Handbook, Volume 2A, International Standards on
Auditing (ISA) 315 – Identifying and assessing the risks of material
misstatement: par 12–24 and A49, A50, A58

Definition of the five components of internal control:

Component of internal control Definition of the component


Control environment The control environment includes the governance
and management functions and the attitudes,
awareness and actions of those charged with
governance and management concerning the
entity’s internal controls. The control environment
sets the tone of the organisation, influencing the

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control consciousness of its people (ISA 315: par


A76).
The entity’s risk assessment The entity’s risk assessment process forms the
process basis for how management determines the risks
to be managed. (ISA 315: par A87).
The entity’s information system The information system relevant to financial
and related business processes reporting objectives, which includes the
accounting system, consists of procedures and
records designed and established to
i) initiate, record, process and report entity
transactions and to maintain
accountability for the related assets,
liabilities and equity
ii) resolve incorrect processing of
transactions
iii) process and account for system overrides
or bypass of controls
iv) transfer information from the transaction
processing system to the general ledger
v) capture information relevant to financial
reporting
vi) ensure information required to be
disclosed by the applicable financial
reporting framework is accumulated,
recorded, processed, summarised and
appropriately reported in the financial
statements (ISA 315: par A89)
Control activities Control activities are the policies and procedures
that help to ensure that management directives
are carried out. Examples include: authorisation,
performance reviews, information processing,
physical controls and segregation of duties (ISA
315: par A96).
Monitoring of controls Monitoring of controls is a process to assess the
effectiveness of internal control performance over
time. It involves assessing the effectiveness of
controls on a timely basis and taking necessary
remedial action (ISA 315: par A106).

Note the following in the study resources above:


The control environment
 the concept “control environment" as an essential element in the implementation
of an internal control system
 the elements of the control environment (ISA 315: Appendix 1: par 2)
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The entity’s risk assessment process


 the extent of risk assessment as an essential element in the implementation of
an internal control system
 the circumstances to which the management of an entity should pay close
attention when assessing risk (ISA 315: Appendix 1: par 4)

The information system including the related business processes


 the extent of the information system, including the related business processes,
relevant to financial reporting as an essential element in the implementation of an
internal control system
 the matters that should be covered by an information system (ISA 315:
Appendix: par 6)

The control activities


 the extent of control activities as an essential element in the implementation of
an internal control system
 the policies and procedures that may be categorised as control activities (ISA
315: Appendix 1: par 9)

Monitoring of controls
 the extent of monitoring as an essential element in the implementation of an
internal control system
 the procedures that may be classified as monitoring. (ISA 315: Appendix 1: par
11−13)

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Diagram 2: Schematic representation of the five components of internal control in


relation to the objectives of internal control

Control 
environment 

Monitoring  The entity's 
of controls risk 
Objectives of internal control: assessment 
process
Reliabilty of financial reporting
Effectiveness and efficiency of operations
Compliance with laws and regulations

The 
information  Control 
system activities

This diagram illustrates that internal control is designed, implemented and


maintained to address identified business risks that threaten the achievement of any
of the entity’s objectives concerning internal control (see ISA 315: par A51).

3.2.2.2 Limitations of internal controls

Irrespective of how well the internal controls are designed and applied by the
employees and management, they can only provide an entity with reasonable
assurance about achieving the entity’s financial reporting objectives (see ISA 315:
par A53).

Study
 SAICA Student Handbook, Volume 2A, International Standards on Auditing (ISA)
315 − Identifying and assessing the risks of material misstatement: par A53−A55
 Jackson & Stent (2014:5/4−5/5)

Note the following in the study resources above:


 the inherent limitations that may be present in any internal control system

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3.2.2.3 The accounting system

Study
 Jackson & Stent (2014:5/12)

Note the following in the study resources above:


 the explanation of an accounting system

Activity 4

You are busy with the audit of Elm Ltd and have made the following observation:

A creditor’s clerk, who has no formal training and who was previously employed as a
sales representative, does not sign off the creditor’s reconciliation before submitting it
for review to the financial manager. Payment is then authorised by the financial
manager prior to it being reviewed by him. The organisation has no formal
procedures in place for the creditor’s function.

As a trainee auditor, you know that management is responsible for running all
aspects of the business, and to this end, they must put in place policies and
procedures to achieve the orderly and efficient operation of the business. It thus
follows that if the client has an effective accounting system and internal controls then
the information produced by the system will be valid, accurate, complete and
timeously produced.

Required
4.1 Define an internal control system.
4.2 In terms of ISA 315, describe the characteristics of a good control
environment.
4.3 Mention four control weaknesses in the above scenario and for each
weakness indicate what control could be put in place to overcome the
weakness.
4.4 Mention the elements that may have an impact on the effectiveness of an
internal control system (limitation of internal controls).
4.5 Explain what is meant by an accounting system.

Feedback on activity 4
4.1 Reference: SAICA Student Handbook, Volume 2A (ISA 315: par 4(c))
4.2 Reference: SAICA Student Handbook, Volume 2A (ISA 315: Appendix 1:
par 2)

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4.3 Reference: SAICA Student Handbook, Volume 2A (ISA 315: par 12 and 20
and Appendix 1: par 2 and 9)
4.4 Reference: Jackson & Stent (2014:5/12−5/17)
4.5 References:
 SAICA Student Handbook, Volume 2A (ISA 315: par A53−A55)
 Jackson & Stent (2014:5/4−5/5)

4.1 Definition of an internal control system


Internal control is the process designed and affected by those charged with
governance and management (and other personnel) to provide reasonable
assurance about the achievement of the entity’s objectives with regard to the
reliability of financial reporting, effectiveness and efficiency of operations, and
compliance with applicable laws and regulations. If follows that internal control
is designed and implemented to address identified business risks that threaten
the achievement of any of these objectives.

4.2 Effective control environment


 Communication and enforcement of integrity and ethical values
Integrity and ethical behaviour are the products of the entity’s ethical and
behavioural standards and the way in which they are communicated, and
enforced in practice.

 Commitment to competence
Competence is the knowledge and skills necessary to accomplish tasks that
define the individual’s job.

 Participation by those charged with governance


The importance of the responsibilities of those charged with governance (e.g.
audit committee/board of directors) is recognised in the codes of practice and
other laws and regulations.

 Management’s philosophy and operating style


Management’s philosophy and operating style will be affected, firstly, by the
formal structure of the organisation and the way in which authority is
exercised; and, secondly, by the characteristics or behavioural aspects and
operating styles of the board and management, and their attitude towards
responsible risk assessment and internal control.

 Organisational structure
The establishment of a relevant organisational structure involves considering
the key areas of authority and responsibility and appropriate lines of reporting.

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 Assignment of authority and responsibility


Assignment of authority deals with the manner in which the board and
management assign responsibility to company employees for all entity
activities. For authority to be assigned effectively, all employees need to
understand how their work is interrelated to that of others in achieving the
company’s objectives.

 Human resource policies and practices


Human resource policies and practices should demonstrate important
matters in relation to the control consciousness of an entity.

4.3 Weaknesses in internal control


 Weakness: The creditor’s clerk has no formal training and was previously
employed as a sales representative.
 Control: Management must ensure that the staff member is adequately
trained for the position and should only employ people who have the
necessary experience (control environment).
 Weakness: There is no proof on the creditor’s reconciliation that it has
been performed and completed correctly.
 Control: The creditor’s clerk needs to be made aware of the interrelation
between his or her work and that of others, and should realise how
important it is to reconcile properly before handing over to the financial
manager for payment (control activity).
 Weakness: The financial manager authorises payment without first
inspecting that the creditor’s reconciliation has been completed properly
and signed off by the creditor’s clerk.
 Control: Management must have a proper organisational structure in place
to ensure that a proper review is always done (control activity).
 Weakness: There are no formal procedures in place for the creditor’s
function.
 Control: There should be standard policies and procedures in place to
ensure that the creditor’s clerk and the financial manager are aware of the
control consciousness of the entity (control environment).

4.4 Elements impacting the effectiveness of internal control (inherent


limitations of internal controls)
 Management’s usual requirement is that the cost of internal control should
not exceed the expected benefits to be derived.
 Most internal controls tend to be directed at routine transactions instead of
non-routine transactions.
 There is a potential for human error due to carelessness, distraction,
judgment errors and the misunderstanding of instructions.

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 There is a possibility of circumventing internal controls through collusion of


a member of management, or an employee, with parties outside or inside
the company.
 There is a possibility that a person responsible for exercising an internal
control could abuse that responsibility.
 There is a possibility that procedures may become inadequate because of
changes in conditions and compliance with procedures.

3.2.2.4 Internal control in smaller entities

Study
 Jackson & Stent (2014:5/18)
 SAICA Student Handbook, Volume 2B (ISA 315: par A56−A57, A84−A86, A88,
A93, A95 and A108)

Note the following in the study resources above:


 the reasons why internal control in smaller entities differs to internal control in
large companies

3.2.2.5 The external auditor’s interest in internal control

An auditor requires a thorough understanding of a client’s internal control system


before an effective audit can be conducted (see Jackson & Stent 2014: 5/19–5/20).

Study
Jackson & Stent (2014:5/19-5/20)

Note the following in the study resource above:


The external auditor’s interests in the internal control of an entity are the following:
 evaluating the components of the entity’s internal controls
 the entity’s risk assessment
 the entity’s monitoring activities

Activity 5

Required
Answer the questions in section 3.2, if provided, of Tutorial Letter 102 and compare
your answers with the solutions in section 3.2 of Tutorial Letter 103.

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Summary

In this learning unit we explained the auditing principles relating to internal control
and applied the knowledge gained to practical scenarios.

Self-assessment

After having worked through the learning unit and the references to the prescribed
study material, determine whether you are able to answer the following questions:

1. Define the concept “internal control”.


2. Explain the purpose of internal control.
3. List and describe the five components of internal control.
4. Explain the elements of the control environment.
5. Explain the circumstances that management must consider when assessing
risk.
6. Describe the matters that should be covered by an information system.
7. Discuss the policies and procedures that may be categorised as control
activities.
8. Describe the procedures that may be classified as monitoring.
9. Explain the inherent limitations of internal control.
10. Define the concept “accounting system”.
11. Explain internal control in smaller entities.
12. Explain the external auditor’s interest in the internal control of an entity.

Feedback on self-assessment
1. Reference: SAICA Student Handbook, Volume 2B (ISA 315: par 4(c))
2. Reference: SAICA Student Handbook, Volume 2B (ISA 315: par A51)
3. Reference: SAICA Student Handbook, Volume 2B (ISA 315: par A58)
4. References:
 SAICA Student Handbook, Volume 2B (ISA 315: par A76−A77)
 Jackson & Stent (2014:5/7−5/8)
5. References:
 SAICA Student Handbook, Volume 2B (ISA 315: par 15−17 and A87−A88)
 Jackson & Stent (2014:5/8−5/10)
6. References:
 SAICA Student Handbook, Volume 2B (ISA 315: par 18−19 and A89−A95)
 Jackson & Stent (2014:5/10-5/12)

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7. References:
 SAICA Student Handbook, Volume 2B (ISA 315: par 20−21 and A96-A105)
 Jackson & Stent (2014:5/12−5/17)
8. References:
 SAICA Student Handbook, Volume 2B (ISA 315: par 22−24 and A106−A117)
 Jackson & Stent (2014:5/17−/18)
9. References:
 SAICA Student Handbook, Volume 2B (ISA 315: par A53−A55)
 Jackson & Stent (2014:5/4−5/5)
10. Reference: Jackson & Stent (2014:5/12) (section 4.4)
11. Reference: Jackson & Stent (2014:5/18−5/19)
12. Reference: Jackson & Stent (2014:5/19−5/20)

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LEARNING UNIT 3.3: AUDIT EVIDENCE

Introduction

The auditor must design and perform audit procedures in such a way that he or she
will be able to obtain sufficient appropriate audit evidence to draw reasonable
conclusions on which to base his or her auditor’s opinion (see ISA 500: par 4). As
stated in the International Framework for Assurance Engagements, the auditor
should, with an attitude of professional scepticism, obtain sufficient appropriate audit
evidence (see Framework: par 50).

In this learning unit, the auditing principles relating to audit evidence are explained
and applied as required by International Standards on Auditing.

3.3.1 The nature of audit evidence

Study
 Jackson & Stent (2014:5/20)
 SAICA Student Handbook, Volume 2A, International Standards on Auditing (ISA)
500 – Audit evidence: par 1−5 and A7−A13

Note the following in the study resources above:


 the objective of the auditor in obtaining audit evidence
 the definition of "audit evidence"
 the explanation of accounting records
 the sources of audit evidence
 the audit procedures for obtaining audit evidence (these will be covered in greater
detail in learning unit 3.4)

3.3.2 Sufficient appropriate audit evidence

Study
 Jackson & Stent (2014:5/20–5/22)
 SAICA Student Handbook, Volume 2A, International Standards on Auditing (ISA)
500 – Audit evidence: par 5(b) and (e), 6−11 and A1−A6 and A26−A33
 SAICA Student Handbook, Volume 2A, International Framework for Assurance
Engagements: par 50-66, 76, and 81
 SAICA Student Handbook, Volume 2A, International Standards on Auditing (ISA)
200 – Overall objectives of the independent auditor: par 17 and A 28−A31

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Note the following in the study resources above:


 The sufficiency of audit evidence is the criterion that determines the quantity of
audit evidence gathered (see ISA 500: par A4). The appropriateness of audit
evidence is the criterion for measuring the quality of audit evidence and its
relevance to a particular assertion (see ISA 500: par A5).
 The factors that influence the auditor's judgment about what constitutes sufficient
appropriate audit evidence are important.

Diagram 3: Illustration of sufficient appropriate evidence

Audit evidence

Appropriate
Sufficient evidence
evidence
Relates to the
Relates to the
quantity of audit
quality of audit
evidence gathered
evidence gathered

Reliability Relevance
There is a Relevance to the
hierarchy of assertion being
reliability for audit audited
evidence

Activity 6

An auditor performs audit procedures during an audit to obtain audit evidence


regarding the assertions in the financial statements of an entity to be able to express
assurance in an auditor’s report.

Required
In terms of International Standards on Auditing (ISAs), do the following:
6.1 Mention the audit procedures that can be performed to obtain audit evidence.
6.2 Define audit evidence.
6.3 Mention the requirements that evidence must meet to be acceptable as audit
evidence.

Feedback on activity 6
For the answers to questions 6.1 and 6.2 in this activity, refer to the prescribed
textbook.
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6.1 Reference: SAICA Student Handbook Volume 2A (ISA 500: par A10(a) and (b))
6.2 Reference: SAICA Student Handbook Volume 2A (ISA 500: par 5(c))
6.3 Reference: SAICA Student Handbook Volume 2A (ISA 500: par A4−A5 and
A27−A31)

The evidence must be sufficient and appropriate (ISA 500: par 6).

Sufficient: The sufficiency of audit evidence relates to the quantity of audit evidence
gathered. However, the sufficiency and appropriateness of audit evidence are
interrelated. The quantity of audit evidence needed is affected by the auditor’s
assessment of the risks of misstatement as well as the quality of such evidence.
Obtaining more audit evidence may not compensate for its poor quality (ISA 500: par
A4).

Appropriate: Appropriateness of audit evidence is the measure of its relevance and


its reliability in providing support for the conclusions on which the auditor’s opinion is
based (ISA 500: par A5).

The relevance of audit evidence deals with the logical connection with or bearing
upon the purpose of the audit procedure and where appropriate, the assertion under
consideration (see ISA 500: par A27−A30).

The reliability of audit evidence is influenced by its source and nature, and the
circumstances under which it was obtained, including the controls over its
preparation and maintenance where relevant. Some evidence is more reliable than
other evidence, for example, evidence generated internally by the undertaking,
obtained from independent sources outside the entity (third parties) or obtained
directly by the auditor, has different degrees of reliability (see ISA 500: par A31).

Activity 7

Required

For each of the following unrelated instances regarding appropriate audit evidence,
identify the most reliable audit evidence and substantiate your answer:
7.1. Confirmation of accounts receivable balances
(a) The auditor sends debtor statements to debtors for confirmation and the
debtors then return the statements directly to the auditor.
(b) The auditor follows through sales invoices, credit notes and bank deposit slips
to the debtor statements and reviews the calculations.
7.2. Confirmation of depreciation
(a) The auditor performs a recalculation of the depreciation written off on non-

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current assets and agrees the amount to the depreciation figure in the statement of
comprehensive income (income statement).

(b) The auditor agrees a computer generated printout of the calculation of


depreciation on non-current assets to the depreciation figure in the statement of
comprehensive income (income statement).

Feedback on activity 7
References:
 Jackson & Stent (2014:5/21)
 SAICA Student Handbook, Volume 2A (ISA 500: par 31)

7.1 Option (a) will provide the most reliable evidence.


Audit evidence from external sources, say confirmation received from a third
party, is more reliable than that generated internally.

7.2 Option (a) will provide the most reliable evidence.


Audit evidence obtained directly by the auditor is more reliable than that
obtained from the entity.

3.3.3 Assertions in financial statements

The assertions made by management about the financial statements were dealt with
in learning unit 1.5, but will now be covered in greater detail to confirm the link
between the assertions and sufficient appropriate evidence (see Jackson & Stent
2014:5/23).

Assertions used by the auditor to consider the different types of potential


misstatements that may occur are grouped into three categories (see ISA 315:
A124).

Study
 Jackson & Stent (2014:5/23−5/55)
 SAICA Student Handbook Volume 2A, International Standards on Auditing (ISA)
315 – Identifying and assessing the risks of material misstatement par
A123−A124

Note the following in the study resources above:


 the meaning of "assertions" in financial statements
 the three categories into which assertions in the financial statements can be
divided and the implication of each category

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As per ISA 200: par 13(f) the term "financial statements" ordinarily refers to a
complete set of financial statements as determined by the requirements of the
applicable financial reporting framework. A complete set of financial statements
consists of the statement of financial position, the statement of comprehensive
income, the statement of changes in equity, the statement of cash flows and the
related notes to the financial statements.

In representing the financial statements, management implicitly or explicitly make


assertions about the elements of the financial statements and related disclosures
(see ISA 315: par A124).

Example of company financial statements


In your accounting studies you will be dealing with the preparation of company
financial statements, if you have not already done so. To relate your auditing studies
to your accounting studies, consider as an example the financial statements of a
company, trading as an ordinary commercial enterprise.

The following is an example of an extract from the financial statements of a company


trading as an ordinary commercial enterprise (see International Financial Reporting
Standards (IFRS) in IAS 1 IG – Guidance on Implementing IAS 1 Presentation of
Financial Statements):

Statement of Financial Position as at 31 December 20xx

20xx 20xx
R R
'000 '000

ASSETS

Non-current assets 2 850 2 550

Property, plant and equipment 2 600 2 150


Investments 240 385
Other intangible assets 10 15

Current assets 3 635 3 358

Inventories 1 625 1 583


Trade receivables 1 826 1 662
Cash and cash equivalents 184 113

Total assets 6 485 5 908

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EQUITY AND LIABILITIES

Equity 4 441 4 056

Share capital 10 7

Retained earnings 4 431 4 049

Non-current liabilities 790 355

Long-term borrowings 790 355

Current liabilities 1 254 1 497

Trade and other payables 1 120 976

Current tax payable 134 521

Total equity and liabilities 6 485 5 908

Statement of comprehensive income for the year ended 20xx

20xx 20xx
R R
'000 '000

Revenue 21 450 19 720


Cost of sales 16 088 15 776

Gross profit 5 362 3 944

Other income 34 45
Operating expenses
(4 895) (2 498)
Profit before tax 501 1 491

Income tax expense (134) (521)

Profit for the year 367 970

By implication or explicitly, management make assertions about the recognition,


measurement, presentation and disclosure of the various elements in the financial
statements (see ISA 315: par A123). Management are implying, for example, that all
the assets, liabilities and equity at the period-end did actually exist have been
completely recorded, at the correct value, and that rights and obligations thereto
exist.

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Assertions about classes of transactions and events are applicable to all


transactions and events affecting both the statement of financial position and
statement of comprehensive income during the period under review. Assertions
about account balances at the period end are applicable to the balances as stated
in the statement of financial position. The assertions about presentation and
disclosure apply to both the statement of comprehensive income and the statement
of financial position.

In Jackson & Stent (2014:5/24), the following summary of the assertions indicate the
categories to which the assertions apply:

Diagram 4: Summary of management’s assertions (Jackson & Stent 2014:5/24)

ASSERTION CLASSES OF ACCOUNT PRESENTATION


TRANSACTIONS AND BALANCES AND DISCLOSURE
EVENTS

Occurrence

Completeness

Accuracy

Cut off

Classification
(and understandability)

Existence

Rights and obligations

Valuation and allocation

Activity 8

Required
8.1 Describe the assertions made by management in the following statement of
financial position balance at the period-end:
R R

'000 '000

Loans from related companies 790 355

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8.2 Describe the assertions made by management in the following statement of


financial position and statement of comprehensive income transactions which
took place during the year:
8.2.1 the purchase of new machinery for an amount of R1 200 000
8.2.2 purchases of trading goods (inventory) − invoice 1817 to the value of
R80 520

Feedback on activity 8
References:
 SAICA Student Handbook Volume 2A (ISA 315: par A124)
 Jackson & Stent (2014:5/23−5/25)

8.1 Loans from related companies (non-current liability)


Note: This relates to the account balance at period-end.
 The loans exist at year-end (existence).
 The loans are the obligations of the entity at year-end (obligations).
 All loans, that should have been recorded, have been recorded
(completeness).
 The loans are included at appropriate amounts and any resulting valuation or
allocation adjustments are appropriately recorded (valuation and
allocation).
 The loans are properly presented and disclosed at year-end.

8.2 Purchases

8.2.1 Purchase of new machinery


Note: This relates to the acquisition of the machinery, which is a transaction.
 The purchase of machinery actually occurred and pertains to the entity
(occurrence).
 All purchases of machinery were recorded (completeness).
 The purchase of machinery was appropriately recorded (accuracy).
 The purchases of machinery were recorded in the correct accounting
period (cut-off).
 All purchases of machinery were recorded in the proper accounts
(classification).
 The acquisition of machinery was properly presented and disclosed at
year-end.

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8.2.2 Purchase of trading goods (inventory)


Note: This relates to the acquisition of inventory, which is a transaction.
 The purchase of inventory actually occurred and pertains to the entity
(occurrence).
 All purchases of inventory were recorded (completeness).
 The purchase transaction of the inventory was appropriately recorded
(accuracy).
 The purchase transaction of the inventory was recorded in the correct
accounting period (cut-off).
 The purchase transaction of the inventory was recorded in the proper
accounts (classification).

Because the individual transaction will not be disclosed in the financial


statements, the assertions about presentation and disclosure do not apply.

Note: When we ask a question about management assertions on either classes of


transactions and events or account balances we expect you to give all the relevant
assertions and to only mention that the assertions relating to presentation and
disclosure will apply. If we expect you to give all the assertions relating to
presentation and disclosure we will clearly indicate this in the question.

Activity 9

Required
Answer the questions in section 3.3, if provided, of Tutorial Letter 102 and compare
your answers with the solutions in section 3.3 of Tutorial Letter 103.

Summary

In this learning unit we explained the auditing principles relating to audit evidence
and assertions and applied the acquired knowledge to practical scenarios.

Self-assessment

After having worked through the learning unit and the references to the prescribed
study material, determine whether you are able to answer the following questions:

1. Define the term "audit evidence".


2. Explain accounting records.
3. Explain the sources of audit evidence.
4. Describe the audit procedures for obtaining audit evidence.
5. Determine and describe the sufficiency and appropriateness of audit evidence.

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6. Explain the factors that influence the auditor’s judgement about what constitutes
sufficient appropriate audit evidence.
7. Explain the concept “assertions” in financial statements.
8. Explain the assertions made by management for each of the account balances
in the statement of financial position and the transactions recorded in the
statement of financial position and statement of comprehensive income. Include
the presentation and disclosure assertions in your response.

Feedback on self-assessment
1. Reference: SAICA Student Handbook, Volume 2B (ISA 500: par 5(c))
2. Reference: SAICA Student Handbook, Volume 2B (ISA 500: par 5(a))
3. Reference: SAICA Student Handbook, Volume 2B (ISA 500: par A7−A9)
4. Reference: SAICA Student Handbook, Volume 2B (ISA 500: par A10−A13)
5. References:
 SAICA Student Handbook, Volume 2B (ISA 500: A26−A33)
 Jackson & Stent (2014:5/20−5/22)
6. Reference: Jackson & Stent (2014:5/22)
7. References:
 SAICA Student Handbook, Volume 2B (ISA 315: par 4(a) and A123−A124)
 Jackson & Stent (2014:5/23−5/24)
8. References:
 SAICA Student Handbook, Volume 2B (ISA 315: par A123−A124)
 Jackson & Stent (2014:5/23−5/24)

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LEARNING UNIT 3.4: RISK ASSESSMENT AND AUDIT


PROCEDURES

Introduction

As explained in ISA 500: par A10 and A11, audit evidence is obtained by performing
risk assessment procedures and further audit procedures, which comprise tests
of control and substantive procedures. The audit procedures conducted by the
auditors include inspection, observation, external confirmation, recalculation, re-
performance, analytical procedures and inquiry.

In this learning unit, the auditing principles relating to risk assessment procedures
and further audit procedures (tests of controls and substantive procedures) are
explained and applied as required by the International Standards on Auditing (ISAs).

3.4.1 Types of audit procedures for obtaining audit evidence

Study
 Jackson & Stent (2014:5/2−5-5/27)
 SAICA Student Handbook Volume 2A, International Standards on Auditing (ISA)
500 – Audit evidence: par A10−A25

Note the following in the study resources above:


The procedures inspection, observation, external confirmation, recalculation, re-
performance, analytical procedures and inquiry to be used when performing risk
assessment procedures, carrying out tests of controls or carrying out substantive
procedures (see ISA 500: par A11).

3.4.2 Identifying and assessing the risks of material


misstatement

A misstatement is defined in ISA 200: par 13(i). It is a difference between the


amount, classification, presentation, or disclosure of a reported financial statement
item and the amount, classification, presentation, or disclosure required for the item
to be in accordance with the applicable financial reporting framework.

The auditor’s objective is to identify and assess the risks of material misstatement at
the financial statement and assertion levels by understanding the entity and its
environment, including its internal control, thereby providing a basis for designing
and implementing responses to the assessed risks of material misstatement (see ISA
315: par 3).

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Internal control was dealt with in learning unit 3.2. We will now continue with a
discussion of the auditor’s risk assessment procedures and related activities.

3.4.2.1 The auditor’s risk assessment procedures and related activities

Study
 Jackson & Stent (2014:7/8−7/10)
 SAICA Student Handbook Volume 2A, International Standards on Auditing (ISA)
315 – Identifying and assessing the risks of material misstatement: par 3−10 and
A1−A23

Note the following in the study resources above:


 the auditor’s objective in identifying and assessing the risks of material
misstatement
 the definitions of business risk, risk assessment procedures and significant risks
 risk assessment procedures to be carried out by the auditor to provide a basis for
the identification and assessment of risks of material misstatement at the
financial statement and assertion level

3.4.2.2 The required understanding of the entity and its environment

Study
 Jackson & Stent (2014:7/11−7/14)
 SAICA Student Handbook Volume 2A, International Standards on Auditing (ISA)
315 – Identifying and assessing the risks of material misstatement: par 11 and
A24−A47

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Diagram 4: A schematic overview of the auditor’s risk assessments procedures and


related activities (based on Jackson & Stent 20140:7/115−7/148)

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,  Internal control 
Objectives,  Financial  (refer  to 
regulatory &  Nature of the  Accounting 
strategies &  performance learning unit 
other external  entity policies
business risks 3.2.2.1)
factors

Note the following in the study resources above:


 The auditor's understanding of the industry, regulatory and other external factors,
the nature of the entity, the accounting policies, the objectives, strategies and
related business risks, and the financial performance measures (see learning unit
3.2 for the auditor's understanding of the entity’s internal control).

3.4.2.3 Identifying and assessing the risks of material misstatement at


financial statement level and at assertion level

Study
 SAICA Student Handbook Volume 2A, International Standards on Auditing (ISA)
200 – Overall objectives of the independent auditor: par 17 and A34–A36 – Risk
of material misstatement
 SAICA Student Handbook Volume 2A, International Standards on Auditing (ISA)
315 – Identifying and assessing the risks of material misstatement: par 25–32 and
A118−A147
 Jackson & Stent (2014:6/16–17 and 7/20−7/21)

Note the following in the study resources above:

 the factors the auditor should take into account when assessing the risks of
material misstatement at the financial statement level and at the assertion level
 the process the auditor should follow when identifying and assessing the risks of
material misstatement
 risks that require special audit consideration (significant risks)

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 instances in which it is unsuitable to perform only substantive procedures in


relation to the risk (substantive procedures are dealt with in learning unit 3.4.3)
 revision of risk assessment as the audit progresses
 the documentation requirements (audit documentation is dealt with in greater
detail in learning unit 3.7)

Diagram 5: Identifying and assessing the risks of material misstatement (see ISA
315: par 25 and 26)

Identifying and assessing the risks


of material misstatement

At the financial statement level At the assertion level

Relate risks to
Identify risks
Assess the risks what may go
during process of
that relate to the wrong at the
obtaining an
financial assertion level, Consider the
understanding of
statements as a taking into likelihood of
the entity and its
whole and may account the misstatement
environment and
affect many controls that (ISA 315:
internal controls
assertions need to be tested par 26 (d)
(ISA 315:
(ISA 315: par 26 (ISA 315:
par 26 (a) and
(b) par 26 (c) and
A127−A128)
A128−A131)

3.4.3 Tests of controls and substantive procedures

It is the responsibility of the auditor to design and implement responses to the risks of
material misstatement identified and assessed by the auditor in accordance with ISA
330.

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Study
 Jackson & Stent (2014:5/25-5/28)
 SAICA Student Handbook Volume 2A, International Standards on Auditing (ISA)
330 – The auditor’s response to assessed risks: par 4

Diagram 6: The nature of further audit procedures (see ISA 330: par 4)

Main classes of further 
audit procedures

Substantive procedures
Tests of controls
Audit procedure designed 
Testing an internal control 
to detect material 
measure throughout the 
misstatement at the 
period of reliance
assertion level

Tests designed to evaluate the  Tests of detail of
operating effectiveness of 
controls in preventing, or   classes of transactions
Analytical procedures
detecting and correcting   account balances
material misstatements at the 
assertion level  disclosures

3.4.3.1 Tests of controls

Study
 Jackson & Stent (2014:5/27−5/28)
 SAICA Student Handbook Volume 2A, International Standards on Auditing (ISA)
330 – The auditor’s response to assessed risks: par 4(b), 8, 9 and A20−A25
The auditor shall design and perform tests of controls to be carried out to obtain
sufficient appropriate audit evidence as to the operating effectiveness of relevant
controls if
 the auditor’s assessment of risks of material misstatement at the assertion level
includes an expectation that the controls are operating effectively or substantive
procedures alone cannot provide sufficient audit evidence at the assertion level
(see ISA 330: par 8)

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Note the following in the study resources above:


 the definition of tests of controls
 factors that the auditor should consider in designing and performing tests of
controls

3.4.3.2 Substantive procedures

Study
 Jackson & Stent (2014:5/28)
 SAICA Student Handbook Volume 2A, International Standards on Auditing (ISA)
330 – The auditor’s response to assessed risks: par 4(a),18,19 and A42−A51

Substantive procedures are audit procedures designed to detect material


misstatements at the assertion level (see ISA 330: par 4(a)).The auditor shall design
and perform substantive procedures for each material class of transactions,
account balance and disclosure (see ISA 330: par 18).

Note the following in the study resources above:


 the definition of substantive procedures
 the factors to be considered by the auditor when designing and performing
substantive procedures carried out in order to obtain audit evidence
 the factors to be considered when the auditor considers whether external
confirmations are to be performed

Activity 10

The audit procedures used to gather audit evidence are the following:
 inspection
 observation
 external confirmation
 recalculation
 re-performance
 analytical procedures
 inquiry

Required

Explain each of the audit procedures and give one example of each. For each
example given, also state whether the procedure is a risk assessment procedure, a
test of controls or a substantive procedure.

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Feedback on activity 10
Reference: Jackson & Stent (2010:5/25−5/28)

Note: The examples of audit procedure given cannot be categorised simply as a risk
assessment procedure, test of control or substantive procedure. The procedure will
be categorised in terms of what the auditor is trying to achieve (see Jackson & Stent
2010:5/25−5/28).

 Inspection
Inspection involves examining records, documents (physical files or electronic
storage media), or tangible assets.
Example: inspecting a lease agreement to determine whether it has been signed
by an authorised signatory (test of control and/or substantive procedure).

 Observation
Observation entails looking at a process or procedure being performed by the
client's staff.
Example: attending the annual inventory count to observe the performance of the
counters (test of control and/or substantive procedure).

 Inquiry
Inquiry involves seeking information from knowledgeable persons inside or outside
the entity. Inquiries may range from formal written inquiries addressed to third
parties to informal oral inquiries addressed to persons inside the entity.
Example: inquiring from the warehouse controller about to the methods of
identifying obsolete or damaged inventory (test of control).

 Recalculation
Recalculation entails checking the arithmetic accuracy of source documents and
accounting records.
Example: recalculating depreciation on plant and equipment (substantive
procedure).

 Analytical procedures
Analytical procedures relate to the analysis of significant ratios and trends and the
resulting investigation of fluctuations and relationships that are inconsistent with
other relevant information or deviate from predicted amounts.
Example: ratio analysis is conducted on the turnover and compared to prior years
(risk assessment procedure and/or substantive procedure).

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 Re-performance
Re-performance entails the auditor repeating, either wholly or in part, the same
procedures performed by the client.
Example: re-performing the bank reconciliation at the financial year-end
(substantive procedure).

 External confirmation
External confirmation involves obtaining a direct written response from a third
party to a request/query from the auditor to that third party.
Example: confirming an accounts receivable balance (debtor’s balance) directly
with a debtor (substantive procedure).

Activity 11

Pro-Paint (Ltd) is a paint manufacturer and retailer. The following audit procedures
were carried out by the auditor during the audit:
 She asked the credit manager for details of the procedures followed for granting
credit and the authorisation of sales.
 She performed analytical review procedures of sales per month and obtained
explanations for extraordinary fluctuations.
 She inspected duplicate sales invoices for the authorising signature of the sales
manager.
 She observed procedures followed regarding gate control at the inventory store.
 She re-performed the leave pay accrual at year-end.
 She performed a debtor’s circularisation at year-end on selected large debtors,
requiring the debtors to confirm the balance at year-end.

Required
Indicate for each of the audit procedures whether the procedure is a tests of controls
or a substantive procedure.

Feedback on activity 11
Reference: Jackson & Stent (2014:5/27−5/28)

Note: The procedure will be categorised in terms of what the auditor is trying to
achieve (Jackson & Stent: 2014:5/27−5/28).
 Ask (inquire) the credit manager for details of procedures followed for the granting
of credit and the authorisation of sales − test of control.
 Perform analytical review procedures of sales per month and obtain explanations
for extraordinary fluctuations − substantive procedure.

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 Inspect duplicate sales invoices for the authorising signature of the sales
manager − test of control.
 Observe procedures followed regarding gate control at the inventory store − test
of control.
 Re-perform the leave pay accrual at year-end − substantive procedure.
 Perform a debtor’s circularisation at year-end on selected large debtors, requiring
the debtors to confirm the balance at year-end − substantive procedure.

Activity 12

Required
Answer the questions, if provided, in section 3.4 of Tutorial Letter 102 and compare
your answers with the solutions in section 3.4 of Tutorial Letter 103.

Summary

In this learning unit we explained the audit procedures performed by auditors to carry
out risk assessment procedures. We also dealt with further audit procedures (tests of
control and substantive procedures).

Self-assessment

After having worked through the learning unit and the references to the prescribed
study material, determine whether you are able to answer the following questions:

1. List and describe the audit procedures used by the auditor when carrying out
risk assessment, tests of control and substantive tests.
2. Explain the auditor’s objective in identifying and assessing the risks of material
misstatement.
3. Define the concept “business risk”.
4. Define the concept “significant risk”.
5. Explain the risk assessment procedures the auditor can perform.
6. Describe the factors the auditor should take into account when obtaining
information about the entity and its environment.
7. Describe the factors that the auditor should take into account when assessing
the risk of material misstatement at the financial statement level and at the
assertion level.
8. Describe the process that the auditor should follow when identifying and
assessing the risk of material misstatement at the financial statement level and
at the assertion level.
9. Explain the risks that require special audit consideration.
10. Describe when it is not suitable to perform only substantive procedures in

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relation to risk and revision of risk assessment as the audit progresses.


11. Define tests of controls.
12. Describe the factors that the auditor should take into account in designing and
performing tests of controls.
13. Define substantive procedures.
14. Describe the factors the auditor should consider when designing and
performing substantive procedures carried out in order to obtain audit
evidence.
15. Describe the factors to be considered when the auditor considers whether or
not external confirmations should be performed.
16. Apply your knowledge of tests of control and substantive procedures to
practical scenarios.

Feedback on self-assessment
1. References:
 SAICA Student Handbook, Volume 2B (ISA 500: par A10−A25)
 Jackson & Stent (2014: 5/25−5/27)
2. Reference: SAICA Student Handbook, Volume 2B (ISA 315: par 3)
3. Reference: SAICA Student Handbook, Volume 2B (ISA 315: par 4(b))
4. Reference: SAICA Student Handbook, Volume 2B ISA 315: par 4(e)
5. References:
 SAICA Student Handbook, Volume 2B (ISA 315: par 5−10 and A1−A23)
 Jackson & Stent (2014:7/8−7/10)
6. References:
 SAICA Student Handbook, Volume 2B (ISA 315: par 5−10 and A24−A47)
7. References:
 SAICA Student Handbook, Volume 2B (ISA 315: par A118−A125)
 Jackson & Stent (2014:6/16-6/17)
8. Reference: SAICA Student Handbook, Volume 2B (ISA 315: par 26)
9. References:
 SAICA Student Handbook, Volume 2B (ISA 315: par 27−29 and A132−A139)
 Jackson & Stent (2014:7/20-7/21)
10. Reference: SAICA Student Handbook, Volume 2B (ISA 315: par 30 and
A140−A142)
11. Reference: SAICA Student Handbook, Volume 2B (ISA 330: par 4(b))
12. References:
 SAICA Student Handbook, Volume 2B (ISA 330: par 8−10 and A20−A25)
 Jackson & Stent (2014:5/27−5/28)

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13. Reference: SAICA Student Handbook, Volume 2B (ISA 330: par 4(b))
14. References:
 SAICA Student Handbook, Volume 2B (ISA 330: par 18 and A42−A47)
 Jackson & Stent (2014:5/28)
15. Reference: SAICA Student Handbook, Volume 2B (ISA 330: par 19 and
A48−A51)
16. References:
 SAICA Student Handbook, Volume 2B (ISA 330: par 8−9 and A20−A25 and
ISA330 par 18–19 and A42–A51)
 Jackson & Stent (2014:5/27−5/28)

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LEARNING UNIT 3.5: MATERIALITY

Introduction

Materiality is a fundamental concept in auditing (see Jackson & Stent 2014:7/21). It


means that misstatements, including omissions, are considered to be material if they,
individually or in aggregate, could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial statements (see ISA 320: par
2).

In this learning unit, the auditing principles relating to materiality are explained and
applied as required by International Standards on Auditing (ISAs).

3.5.1 The concept of materiality

Study
 Jackson & Stent (2014:7/21)
 SAICA Student Handbook Volume 2A, International Standards on Auditing (ISA)
320 – Materiality in planning and performing an audit: par 1−3 and 8
 SAICA Student Handbook Volume 2A, International Framework for Assurance
Engagements: par 67

Note the following in the study resources above:

 the relevance of materiality


 the explanation of materiality
 the auditor’s objective in applying the concept of materiality

There are several definitions of materiality in the prescribed study material. However,
the main elements that should be included in the definitions remain the same.

These are the following:


 an omission or misstatement
 the auditor’s perception of the influence of such omission or misstatement on the
economic decisions of users/shareholders
 based on the information in the financial statements

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3.5.2 Materiality in planning and performing an audit

3.5.2.1 Consideration of materiality by the auditor

Study
 Jackson & Stent (2014:7/21−7/22)
 SAICA Student Handbook Volume 2A, International Standards on Auditing (ISA)
320 – Materiality in planning and performing an audit: par 5 and A1
 SAICA Student Handbook Volume 2A, International Framework for Assurance
Engagements: par 67

Note the following in the study resources above:


The concept of materiality is applied by the auditor in the following:
 planning the audit
 performing the audit
 evaluating the effect of identified misstatements on the audit and of uncorrected
misstatements on the financial statements
 forming and expressing an opinion in the auditor’s report

3.5.2.2 The nature of materiality

Study
 Jackson & Stent (2014:7/22–7/24)
 SAICA Student Handbook Volume 2A, International Standards on Auditing (ISA)
320 – Materiality in planning and performing an audit: par 4
 SAICA Student Handbook Volume 2A, International Framework for Assurance
Engagements: par 67–70

Note the following in the above study resources above:


 Materiality is subjective.
 Materiality is relative, not absolute.
 Materiality is both quantitative and qualitative.

3.5.2.3 Determining materiality and performance materiality when planning


the audit

Study
 Jackson & Stent (2014:7/24–7/27)
 SAICA Student Handbook Volume 2A, International Standards on Auditing (ISA)
320 – Materiality in planning and performing an audit: par 6, 9−11 and A1 and
A12

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Note the following in the study resources above:


 The auditor first determines materiality for the financial statements as a whole
(this is determined when establishing the overall audit strategy).
 In specific circumstances the auditor may determine materiality levels for
particular classes of transactions, account balances or disclosure: This is
determined for particular classes of transactions, account balances or disclosures
for which misstatements of lesser amounts than for the financial statements as a
whole could be expected to influence the economic decisions of users. Hence the
auditor may or may not deem it necessary to determine separate materiality levels
to be applied.
 The auditor shall determine performance materiality, which is used for purposes
of assessing risks of material misstatement and determining the nature, timing
and extent of further audit procedures. Performance materiality is set by the
auditor at lower than materiality for the financial statements as a whole in order to
reduce to an appropriate low level the probability that the aggregate of undetected
and uncorrected misstatements exceeds materiality for the financial statements
as a whole (see ISA 320: par A12).

Activity 13

Required
Give reasons why it is important that the auditor shall determine materiality when
planning an audit.

Feedback on activity 13
References:
 SAICA Handbook, (ISA 320: par A1)
 Jackson & Stent (2014:7/2–7/27)

The auditor shall determine materiality to obtain reasonable assurance about


whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, thereby enabling him or her to express an opinion on
whether the financial statements are prepared in all material respects, in accordance
with an applicable financial reporting framework; and to report on the financial
statements, and communicate as required by the ISAs, in accordance with the
auditor’s findings.

Materiality and audit risk are considered throughout the audit, in particular, when
 identifying and assessing the risks of material misstatement
 determining the nature, timing and extent of further audit procedures
 evaluating the effect of uncorrected misstatements, if any, on the financial
statements and in forming an opinion in the auditor’s report

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3.5.2.4 Reasons why performance materiality differs from the auditor's


assessment of materiality for the financial statements as a whole

Study
 Jackson & Stent (2014:7/22–7/24)
 SAICA Student Handbook Volume 2A, International Standards on Auditing (ISA)
320 – Materiality in planning and performing an audit: par A12

Activity 14

Required
Answer the questions, if provided, in section 3.5 of Tutorial Letter 102 and compare
your answers with the solutions in section 3.5 of Tutorial Letter 103.

Summary

Information is material if its omission or misstatement could influence the economic


decisions of users taken on the basis of the financial statements.

Self-assessment

After having worked through the learning unit and the references to the prescribed
study material, determine whether you are able to answer the following questions:

1. Describe the concept "materiality".


2. Explain why it is important for the auditor to consider materiality.
3. Explain when the auditor should consider materiality.
4. Explain the nature of materiality.
5. Describe the materiality considerations during the audit planning process.
6. Describe materiality for the financial statements as a whole.
7. Describe materiality for classes of transactions, account balances or
disclosures.
8. Describe performance materiality.
9. Explain why performance materiality may differ from materiality for the financial
statements as a whole.

Feedback on self-assessment
1. Reference: SAICA Student Handbook, Volume 2B (ISA 320: par 2)
2. Reference: SAICA Student Handbook, Volume 2B (ISA 320: par 8 and A1)
3. Reference: SAICA Student Handbook, Volume 2B (ISA 320: par 8 and A1)
4. References:

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 SAICA Student Handbook, Volume 2B (ISA 320: par 4)


 Jackson & Stent (2014:7/22−7/24)
5. References:
 SAICA Student Handbook, Volume 2B (ISA 320: par 6, 10 and 11)
 Jackson & Stent (2014:7/24−7/27)
6. Reference: SAICA Student Handbook, Volume 2B (ISA 320: par A3−A9)
7. Reference: SAICA Student Handbook, Volume 2B (ISA 320: par A10−A11)
8. Reference: SAICA Student Handbook, Volume 2B (ISA 320: par 9)
9. Reference: SAICA Student Handbook, Volume 2B (ISA 320: par A12)

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LEARNING UNIT 3.6: AUDIT RISK

Introduction

One of the most important concepts in auditing is audit risk. This is the risk that the
auditor may express an inappropriate audit opinion when the financial statements
have been materially misstated (see ISA 200: par 13(c)) – in other words the risk that
the auditor will give an unmodified opinion when in fact a modified opinion should
have been given. Because the auditor only gives reasonable assurance in the
auditor’s report, there is always a risk that a material misstatement could be present
in the financial statements (see ISA 200: par 5). Therefore, the auditor must plan and
perform the audit in such a way that audit risk is kept to an acceptably low level.

3.6.1 The concept audit risk and its components

3.6.1.1 Audit risk

Study
 SAICA Student Handbook Volume 2A, International Framework for Assurance
Engagements (par 71-75) (Assurance engagement risk)
 SAICA Student Handbook Volume 2A, International Standards on Auditing (ISA)
200 – Overall objectives of the independent auditor: par 13(c) and (n) and
A32−A33, A37−A44 (Definition of audit risk and components)
 Jackson & Stent (2014:7/4–7/7)

Note the following in the study resources above:


 the definition of assurance engagement risk
 the definition of audit risk
 the existence of inherent and control risk prior to the audit
 the fact that audit risk is a function of the risks of material misstatement (inherent
risk and control risk) and detection risk
 the definition of inherent, control and detection risk

Inherent risk
Inherent risk, as a component of the risk of material misstatement, is defined in ISA
200: par 13(n).

ISA 200: A38 and Jackson & Stent 2014:7/5 cite a few examples of inherent risks.
The following are additional examples of inherent risks that the auditor may
encounter:
 Management may have a motive to misstate the financial statements in order to

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achieve budget targets or inflate profit or to influence the share price on the stock
exchange.
 Valuation of intangible assets can be subject to significant estimation uncertainty.

Control risk
Control risk is a function of the efficiency of the client's system of internal controls
(see ISA 200: A39). If the system of internal controls is functioning poorly, there is a
major risk of the occurrence of fraud and error, which could cause the financial
statements to be materially misstated (the system of internal controls is discussed in
learning unit 3.2.).

Examples of control risks are provided in the study reference to the prescribed book
and in ISA 200: A39 and include the following:
 the potential for management to override controls
 inadequate segregation of duties
 mistakes or errors made by personnel
 carelessness in performing duties
 the fact that internal control procedures may become inadequate because of
changes in conditions

Detection risk
Detection risk is the risk that the procedures performed by the auditor will not detect
a material misstatement that exists in the financial statements (see ISA 200:13(c)).
Detection risk is determined by the effectiveness of the audit procedures and how
well the auditor applies them.

Examples of detection risks are mentioned in the study reference to the prescribed
book, and the following are additional examples that the auditor may encounter:
 The audit team experiences time pressure or tight audit deadlines.
 The audit team member lacks competence and application.
 There is no consultation with senior staff when selecting and applying an audit
procedure and interpreting the results of the test.

Activity 15

Required
Describe assurance engagement risk and audit risk. Also explain the difference
between the two types of risk.

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Feedback on activity 15
References:

 SAICA Student Handbook, Volume 2A (Framework: par 71–72)


 SAICA Student Handbook, Volume 2A (ISA 200: par 13(c))

Assurance engagement risk is the risk that the auditor expresses an inappropriate
conclusion when the subject matter information is materially misstated.

Audit risk is the risk that the auditor expresses an inappropriate audit opinion when
the financial statements are materially misstated. Audit risk is a function of the risks
of material misstatement and detection risk.

Assurance engagement risk is thus a general definition and is applicable to all


assurance engagements, whereas audit risk is applicable to an audit of financial
statements and is the risk that an unmodified opinion will be expressed when in fact a
modified opinion is required.

3.6.1.2 Consideration of audit risk throughout the audit

Study
 SAICA Student Handbook, Volume 2A, International Standards on Auditing (ISA)
320 – Materiality in planning and performing an audit: par A1

Note the following in the study resources above:

Materiality (referred to in learning unit 3.5) and audit risk are considered throughout
the audit, and in particular when
 identifying and assessing the risks of material misstatement
 determining the nature, timing and extent of further audit procedures
 evaluating the effect of uncorrected misstatements on the financial statements
and in forming the opinion in the auditor’s report

3.6.2 The interaction between the components of audit risk

Study
 Jackson & Stent (2014:7/6−7/7)
 SAICA Student Handbook Volume 2A, International Standards on Auditing (ISA)
200 – Overall objectives of the independent auditor: par A37−A42
 SAICA Student Handbook Volume 2A, International Standards on Auditing (ISA)
315 – Identifying and assessing the risks of material misstatement: par 25–31 and
A118−A143

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As stated previously, the components of audit risk are the risk of material
misstatement (inherent risk + control risk) and detection risk (based on Jackson &
Stent 2014:7/6).

It is clear from the definitions of the components of audit risk that inherent and control
risks are independent of the audit, whereas detection risk is directly related to the
efficiency of the auditor's procedures.

The interaction between the components of audit risk can be expressed


mathematically as follows:

The audit risk model

As mentioned previously audit risk is a function of the risks of material


misstatement (RMM) and detection risk (DR).

Audit risk = RMM x DR


(RMM = IR x CR)

As stated in ISA 200: A42, there is an inverse relationship between detection risk and
the combined level of inherent and control risk. When inherent and control risk are
high, for example, the acceptable level of detection risk must be low in order to
reduce the audit risk to an acceptably low level (additional audit procedures must be
conducted).

However, if the inherent and control risks are low, the auditor could accept a higher
detection risk and still reduce the audit risk to an acceptably low level. Because the
client's internal controls, accounting and internal control systems are so efficient that
they should prevent/identify and timeously correct any material errors/omissions, the
auditor can accept a higher detection risk.

Activity 16

For a given level of audit risk, the acceptable level of detection risk bears an inverse
relationship to the assessed risks of material misstatement at the assertion level.

In this instance, the auditor believes there is a low risk of material misstatement at
the assertion level.

Required

Explain what detection risk the auditor may accept on the basis of the low estimate of
the risk of material misstatement.

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Feedback on activity 16

Reference: SAICA Handbook, (ISA 200: par A42)

The auditor has assessed the risk of material misstatement as being low and would
therefore be able to accept a higher detection risk. The audit procedures would be
less persuasive.

Activity 17

An auditor has assessed the risk of material misstatement as being high. Refer to the
table below:

Amount Inherent risk Control risk


(R)
Trade receivables 613 214 High High

Required
Explain the influence of the high assessment of the risk of material misstatement for
trade receivables on detection risk.

Feedback on activity 17
Reference: Jackson & Stent (2014:7/5–7/7)

Trade receivables

The result of the high assessment of the risk of material misstatement (inherent risk x
control risk) is that the auditor is compelled to accept a lower level of detection risk. In
order to achieve this, the auditor would have to increase the extent of his or her audit
procedures.

Activity 18

Required
Answer the questions, if provided, in section 3.6 of Tutorial Letter 102 and compare
your answers with the solutions in section 3.6 of Tutorial Letter 103.

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Summary

In this learning unit you have learned what audit risk entails, the different components
of audit risk and the interaction between the components of audit risk.

Self-assessment

After having worked through the learning unit and the references to the prescribed
study material, determine whether you are able to answer the following questions:

1. Define assurance engagement risk.


2. Define audit risk.
3. Describe the components of audit risk.
4. Give examples of inherent, control and detection risks.
5. Explain why audit risk is considered throughout the audit.
6. Explain how the components of audit risk interact.
7. Explain how an acceptable level of audit risk is determined.
8. Explain the relationship between the risk of material misstatement and detection
risk.

Feedback on self-assessment
1. Reference: SAICA Student Handbook, Volume 2B (Framework: par 71-72)
2. Reference: SAICA Student Handbook, Volume 2B (ISA 200: par 13(c))
3. References:
 SAICA Student Handbook, Volume 2B (Framework: par 74, ISA 200: par 13(n)
and A32−A33 and A37−A44
 Jackson & Stent (2014:7/5−7/6)
4. Reference: SAICA Student Handbook, Volume 2B (ISA 200: par A38, A39 and
A42−A44)
5. Reference: SAICA Student Handbook, Volume 2B (ISA 320: par A1)
6. References:
 SAICA Student Handbook, Volume 2B (ISA 200 par 42)
 Jackson & Stent (2014:7/6-7/7)
7. References:
 SAICA Student Handbook, Volume 2B (ISA 200: par A42)
 Jackson & Stent (2014:7/6−7/7)
8. Reference: Jackson & Stent (2014:7/6−7/7)

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LEARNING UNIT 3.7: AUDIT DOCUMENTATION

Introduction

Audit documentation provides evidence of the auditor’s basis for a conclusion about
the achievement of the auditor’s overall objectives and evidence that the audit was
planned and performed in accordance with ISAs and applicable legal and regulatory
requirements(see ISA 230: par 5).

In this learning unit you will learn what the purpose and requirements of proper
documentation of audit work entails in terms of the ISAs.

Study
 Jackson & Stent (2014:17/13−17/15)
 SAICA Student Handbook Volume 2A, International Standards on Auditing (ISA)
230 – Audit documentation: par 1−16 and A1−A24

As stated in ISA 230: par 5, the objective of the auditor is to prepare documentation
that provides a sufficient and appropriate record of the basis for the auditor’s report
and evidence that the audit was planned and performed in accordance with ISAs and
applicable legal and regulatory requirements.

The purpose of documenting audit work

Note the following in the study resources above:


 the auditor’s objective in preparing audit documentation
 the meaning of audit documentation, an audit file and an experienced auditor
 the additional purposes of audit documentation
 the significant matters in the audit that should be documented
 the form, content and extent of audit documentation
 the matters arising from the date of the auditors’ report
 the assembly of the final audit file

In practice the form and content of audit documentation may differ considerably,
since such papers are drawn up in accordance with the auditor's professional
judgment. The form, content and extent of audit documentation however, should
comply with the requirements as stated in ISA 230: par 8–11.

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Activity 19

Required
Answer the questions, if provided, in section 3.7 of Tutorial Letter 102 and compare
your answers with the solutions in section 3.7 of Tutorial Letter 103.

Summary

Documentation for audit work includes all the working papers drawn up in relation to
the conduct of the audit. These working papers should be sufficiently complete and
detailed to provide an overall picture of the audit, which will ultimately enable the
auditor to express an audit opinion in the auditor's report.

Self-assessment

After having worked through the learning unit and the references to the prescribed
study material, determine whether you are able to answer the following questions:

1. Explain the purpose of audit documentation.


2. Explain the auditor’s objective in preparing audit documentation.
3. Explain the additional purposes of audit documentation.
4. Describe the requirements for audit documentation.
5. Describe the form, content and extent of audit documentation.
6. Explain the requirements relating to the documentation of matters arising after
the date of the auditor’s report.
7. Explain the requirements relating to the assembly of the final audit file.

Feedback on self-assessment
1. References:
 SAICA Student Handbook, Volume 2B (ISA 230: par 2)
 Jackson & Stent 2014:17/13−17/14
2. Reference: SAICA Student Handbook, Volume 2B (ISA 230: par 5)
3. Reference: SAICA Student Handbook, Volume 2B (ISA 230: par 3)
4. Reference: SAICA Student Handbook, Volume 2B (ISA 230: par 7 and A1)
5. Reference: SAICA Student Handbook, Volume 2B (ISA 230: par 8−11 and
A2−A11)
6. Reference: SAICA Student Handbook, Volume 2B (ISA 230: par 13 and A20)
7. Reference: SAICA Student Handbook, Volume 2B (ISA 230: par 14−16 and
A21−A24)

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LEARNING UNIT 3.8: ASSURANCE REPORTS

Introduction

At the conclusion of the audit, the auditor provides a written report stating the
conclusion of the assurance obtained on the relevant audit (see Framework: par 83-
84).

Study
 SAICA Student Handbook Volume 2A, International Framework for Assurance
Engagements: par 84–86

Note the following in the study sources above:


 the types of reports to be issued in
 an assertion-based engagement (see learning unit 1.2)
 a reasonable assurance engagement
 a limited assurance engagement (see learning unit 1.2)
 the conditions that result in the auditor not being able to express an unmodified
opinion

Activity 20

Required
Answer the questions, if provided, in section 3.8 of Tutorial Letter 102 and compare
your answers with the solutions in section 3.8 of Tutorial Letter 103.

Summary

The auditor’s report should include management’s responsibility for the financial
statements, the auditor’s responsibility and the auditor’s opinion. The auditor’s report
will be dealt with in greater detail in topic 4.

Self-assessment

After having worked through the learning unit and the references to the prescribed
study material, determine whether you are able to answer the following questions:

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1. Explain the wording of the conclusion in the assurance report for the different
types of engagements.
2. Explain the situations that may prevent the auditor from issuing an unmodified
auditor’s report.

Feedback on self-assessment
1. Reference: SAICA Student Handbook, Volume 2B (Framework: par 84–88)
2. Reference: SAICA Student Handbook, Volume 2B (Framework: par 89–92)

Conclusion

In this topic, General Principles of Assurance Engagements, we explained and


applied the auditing principles of assurance engagements, internal control, audit
evidence, risk assessment and audit procedures, materiality, audit risk, audit
documentation and assurance reports.

In topic 4, the audit process and the various stages of the audit process will be
explained and applied.

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TOPIC 4: THE AUDIT PROCESSTOPIC 4


Topic overview

The aim of this topic is to explain and apply the different stages of the audit
process to the statutory audit of an ordinary company trading in goods and
services.

This topic is divided into the following learning units:

Learning unit Title Page


4.1 STAGES OF THE AUDIT PROCESS 173
4.2 THE PRELIMINARY ENGAGEMENT STAGE 175
4.2.1 Preconditions for an audit 175
4.2.2 Prospective clients/continuance with an existing client 175
4.2.3 Compliance with standards 176
4.2.4 Procedures to gather preliminary engagements 176
information on the client’s business
4.2.5 Establishing an understanding of the terms of the 177
engagement
4.3 THE PLANNING STAGE 179
4.3.1 Identifying and assessing the risks of material 179
misstatement
4.3.2 The objective of audit planning 179
4.3.3 The overall audit strategy, the audit plan and audit 180
documentation
4.4 PUTTING THE AUDIT STRATEGY AND PLAN INTO 184
ACTION
4.4.1 The auditor’s response to risks at the financial 184
statement level and at the assertion level
4.5 THE EVALUATING, CONCLUDING AND 189
REPORTING STAGE
4.5.1 Evaluation of audit findings 189
4.5.2 Drawing conclusions on the audit results 190
4.5.3 Auditor’s opinion 190

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Learning outcomes

Learning unit In this topic we focus on the Level


following learning outcomes:
4.1 Stages of the audit • Explain the different stages
process of the audit process. 1

4.2 The preliminary • Explain the preliminary


engagement stage engagement stage of the
1
audit process.

4.3 The planning stage • Explain the planning stage


of the audit process. 1
4.4 Putting the audit • Explain putting the audit
strategy and plan into strategy and plan into
action 1
action in the audit process.

4.5 The evaluating, concluding • Explain the evaluating,


and reporting stage concluding and reporting stage 1
of the audit process.

This topic refers to the following information in the prescribed textbooks:


 Jackson & Stent (2014:6/6−6/23)
 References to the International Framework for Assurance Engagements
 References to the ISAs

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LEARNING UNIT 4.1: STAGES OF THE AUDIT PROCESS

Introduction

In this learning unit, the different stages of the audit process are explained according
to the statutory audit of an ordinary company trading in goods and services.

In ISA 200: par 5 you learnt that as the basis for the auditor’s opinion, ISAs require the
auditor to obtain reasonable assurance on whether the financial statements as a
whole are free from material misstatement whether due to fraud or error.

In order to obtain reasonable assurance, the ISAs, taken together, provide the
standards for the auditor’s work in fulfilling the overall objectives of the audit (see ISA
200:par A53). According to Jackson & Stent (2014:6/6), the ISAs are directly
applicable to each of the stages of the audit process.

Diagram 1: Stages of the audit process

Preliminary stage

Planning stage

Responding to assessed risk


stage

Concluding stage

Study
 Jackson & Stent (2014:6/6–6/8)

Note the following in the study resource above:


 the four stages of the audit process
 how the ISAs relate to the different stages of the audit process

ISA 200:par 21 also states that to achieve the overall objectives of the auditor, the
auditor shall use the objectives stated in relevant ISAs in planning and performing the
audit, having regard to the inter-relationship among the ISAs.

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Activity 1
Required
Answer the questions, if provided, in section 4.1 of Tutorial Letter 102 and
compare your answers with the solutions in section 4.1 of Tutorial Letter 103.

Summary

In this learning unit we explained the various stages of the audit process.

Self-assessment

After having worked through the learning unit and the references to the prescribed
study material, determine whether you are able to answer the following questions:

1. Describe the four stages of the audit process.


2. Explain how the ISAs relate to the different stages of the audit process.

Feedback on self-assessment
1. Reference: Jackson & Stent (2014:6/6–6/8)
2. Reference: Jackson & Stent (2014:6/8)

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LEARNING UNIT 4.2: THE PRELIMINARY ENGAGEMENT


STAGE

Introduction

In this learning unit, the preliminary engagement stage of the audit process is
explained.

We will deal with a number of key factors that are relevant during the preliminary
engagement stage, but the detailed information, as contained in the ISAs regarding
the preliminary engagement stage, will be dealt with in your further auditing studies.

Diagram 2 depicts the preliminary engagement activities. As stated in Jackson &


Stent (2014:6/6), the stages of the audit are not “stand-alone units” and the activities
in each stage do not always fit neatly into the order presented.

Diagram 2: The activities involved in the preliminary engagement stage

Assess firm’s
Prospective clients/
competence and Consider ethical Formulate terms 
continuance with an
availability of requirements of engagement
existing client
resources

4.2.1 Preconditions for an audit

Study
 Jackson & Stent (2014:6/9)

4.2.2 Prospective clients/continuance with an existing client

You have learnt in learning unit 1.2 that the “responsible party” is part of the three-
party relationship as an element of an assurance engagement. In the context of an
assurance engagement, the prospective or existing client is the responsible party
(International Framework for Assurance Engagements:par 28).

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Study
 Jackson & Stent (2014:6/9–6/10)
 SAICA Student Handbook Volume 2A, International Framework for Assurance
Engagements (Framework: par 22-25)

Note the following in the study resources above:


 the considerations relevant to the auditor’s decision on whether or not to accept an
audit engagement
 the reasons why an auditor may not wish to accept an engagement
 the preliminary engagement activities for the continuance with an existing client
 the standards (ISAs) the auditor should comply with regarding integrity,
competence and ethical requirements (see learning unit 2.4 to revise the quality
control of audit work)

4.2.3 Compliance with standards

Study
 Jackson & Stent (2014:6/9)

4.2.4 Procedures to gather preliminary engagements information


on the client’s business

Study
 Jackson & Stent (2014:6/10–6/11)

Note: In the study resource above that before the auditor accepts the audit
engagement, he or she should acquire preliminary engagement information on the
client’s business which can then be extended once the engagement has been
accepted.

Also note the following in the study resource above:


 the procedures the auditor can perform to gather preliminary engagement
information

It is vital for the auditor to gain an adequate knowledge of the client’s business by
performing the preliminary engagement activities because this will assist the auditor
to identify and evaluate events or circumstances that may adversely affect his or her
ability to plan and perform the audit engagement (see ISA 300:par A5).

Activity 2

Required
Draw up a list of sources and outline the procedures the auditor could follow to
acquire preliminary information on the client’s business.

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Feedback on activity 2
Reference: Jackson & Stent (2014:6/10–6/11)

The sources and procedures the auditor could use to obtain preliminary information
on the business are the following:

 The previous auditor: communication with the previous auditor (in compliance
with the Code of Professional Conduct)
 Those charged with governance: inter alia, discussion with the client’s
directors, senior financial personnel, audit committee
 External sources: inquiries from the firm’s bankers, legal counsel and so on
(permission would have to be sought)
 External information: background searches of relevant databases (e.g. the
internet)
 Internal documentation: review of any documentation, either public or made
available by the prospective client (e.g. group or management reports)
 The auditor’s firm: regarding independence, inquiry and analysis of the status of
the firm and its employees in relation to the potential client
 The financial press: searches in financial magazines for relevant information

4.2.5 Establishing an understanding of the terms of the


engagement

When an auditor accepts an audit engagement from a client, a contractual


relationship arises between the auditor and the client. As stated in ISA 210:par A22,
it is in the interests of both the entity and the auditor that the auditor sends an audit
engagement letter prior to commencing the audit to help avoid any
misunderstandings in the audit.

Study
 Jackson & Stent (2014:6/11–6/13).
 SAICA Student Handbook in Volume 2A, International Standards on Auditing (ISA)
210: Agreeing the Terms of Audit Engagements (par 3 and 10)

Note the following in the study resources above:


 the objective of agreeing on the terms of the engagement
 what to include in the audit engagement letter
 the fact that the audit engagement letter should be a written document that
 includes at least the elements indicated in ISA 210:par 10

The in-depth information regarding “Agreeing the Terms of Audit Engagements” will
be dealt with in your further auditing studies.

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Activity 3

Required

Answer the questions, if provided, in section 4.2 of Tutorial Letter 102 and compare
your answers with the solutions in section 4.2 of Tutorial Letter 103.

Summary

In this learning unit we explained the auditing principles relating to the preliminary
engagement stage.

Self-assessment

After having worked through the learning unit and the references to the prescribed
study material, determine whether you are able to answer the following questions:

1. Explain the considerations that apply to the auditor’s decision whether or


not to accept an engagement to carry out audit work.
2. List the factors the auditor should consider when acquiring preliminary
information on the business.
3. Describe the various sources and procedures the auditor could use to
acquire preliminary engagement information on the client’s business.
4. Describe the purpose of audit engagement letters and the elements to be
included in the audit engagement letter.

Feedback on self-assessment
1. Reference: Jackson & Stent (2014:6/9–6/10)
2. Reference: Jackson & Stent (2014:6/6–6/7)
3. Reference: Jackson & Stent (2014:6/9–6/11)
4. Reference: Jackson & Stent (2014:6/1–6/13)

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LEARNING UNIT 4.3: THE PLANNING STAGE

Introduction

Planning an audit involves establishing the overall audit strategy for the engagement
and developing an audit plan (ISA 300:par 2). The objective of audit planning by the
auditor is to ensure that the audit will be performed in an effective manner (see ISA
300:par 4).

The auditor establishes an overall audit strategy that sets the scope, timing and
direction of the audit and guides the development of the audit plan (see ISA 300:par
7).

This learning unit explains the planning stage of the audit process.

4.3.1 Identifying and assessing the risks of material


misstatement
Once an auditor has issued an audit engagement letter to a client, a contractual
relationship exists between the auditor and the client. The auditor can then start to
gain an understanding of the entity and its environment, including the entity’s internal
control.

See learning unit 3.4 in which identifying and assessing the risks of material
misstatement was dealt with.

In recurring audit engagements, the auditor would have to update and re-evaluate
previously collected information. Significant changes that may have occurred since
the last audit would have to be investigated and the information updated (see ISA
210:par A28).

4.3.2 The objective of audit planning

Study
 Jackson & Stent (2014:6/13)

Note the following in the study resource above:


• the auditor’s objective in planning an audit
• the importance for an auditor of planning an audit adequately

Activity 4

Required
Name the ways in which adequate planning benefits the audit of financial statements.

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Feedback on activity 4
 Reference: Jackson & Stent (2014:6/13)
 It helps to ensure that the appropriate attention is focused on the important
areas of the audit (e.g significant risks are identified and addressed).
 It helps to ensure that potential problems are identified and resolved timeously.
 It helps the auditor to properly organise and manage the audit engagement so that
it is performed effectively and efficiently.
 It assists in the selection of engagement team members with appropriate levels of
capabilities and competence to respond to anticipated risks, and the proper
assignment of work to them.
 It facilitates the direction and supervision of engagement team members and
review of their work.
 It helps with the coordination of work done by other auditors and experts.

Planning is not a discrete phase of an audit, but rather a continual and iterative
process that often begins shortly after the completion of the previous audit and
continues until the completion of the current audit engagement (ISA 300:par A2). It
may also be necessary to modify the planned audit work as a result of changes in
circumstances or unforeseen problems that may have arisen after the completion of
the initial planning work (see ISA 300:par A13).

4.3.3 The overall audit strategy, the audit plan and audit
documentation

Study
 Jackson & Stent (2014:6/13–6/15)

Diagram 3: Planning activities

OVERALL AUDIT STRATEGY

• Sets the scope, timing and direction of the audit that guides the
development of the audit plan (ISA 300:par 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 ISAs (ISA 300: par 9)

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4.3.3.1 The overall audit strategy

 The auditor must establish an overall audit strategy that sets the scope, timing
and direction of the audit that guides the development of the audit plan (ISA
300:par 7).
 When establishing the overall audit strategy, the auditor should do the following
in terms of ISA 300:par 8:

 Identify the characteristics of the engagement that define its scope (e.g.
whether the company is listed or whether industry-specific regulations govern
the audit). 
 Ascertain the reporting objectives of the engagement to determine the timing
of the audit (e.g. reporting deadlines) and the nature of the communication
required.
 Consider the factors that are significant in directing the engagement team’s
efforts (e.g. materiality levels and risk factors).
 Consider the results of the preliminary engagement activities which may affect
the audit plan.
 Ascertain the nature, timing and extent of resources necessary to perform the
engagement (e.g. the use of experts, the number of staff, the level of staff
experience, and the procedures to be performed at an interim stage, meetings
and quality reviews).

 Scope refers to the range of activities to be performed by the auditor.

4.3.3.2 The audit plan

In the study reference to the prescribed book, it is stated that the audit plan is more
detailed than the audit strategy (also see ISA 300:par A12). Many of the factors
which will influence the audit strategy will also influence the audit plan (see ISA
300:par A10).

In terms of ISA 300:par 9, the audit plan shall include the following:

 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 conducted in order to
comply with the ISAs

4.3.3.3 Audit documentation

In terms of ISA 300:par 12, the auditor should include the following in the audit
documentation:

 the overall audit strategy


 the audit plan

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 any significant changes made during the audit engagement to the overall audit
strategy or the audit plan, and the reasons for such changes

4.3.3.4 Changes to the overall audit strategy and audit plan

As a result of unexpected events, changes in conditions, or the audit evidence


obtained from the results of audit procedures, the auditor may need to modify the
overall audit strategy and audit plan and thereby the resulting planned nature, timing
and extent of further audit procedures, based on the revised consideration of
assessed risks (see ISA 300:par 10 and A13).

Activity 5

Required
Answer the questions, if provided, in section 4.3 of Tutorial Letter 102 and compare
your answers with the solutions in section 4.3 of Tutorial Letter 103.

Summary

In this learning unit we explained the auditing principles relating to planning.

The auditor’s objective in planning is to plan the audit to ensure that it will be
performed effectively.

Self-assessment

After having worked through the learning unit and the references to the prescribed
study material, determine whether you are able to answer the following questions:

1. Describe the auditor’s objective in planning the audit.


2. Explain the importance of adequate audit planning for the auditor.
3. Describe the steps of the audit planning stage.
4. Describe the matters the auditor should consider when formulating the overall audit
strategy.
5. Explain the elements that should be included in the audit plan.
6. Explain what should be included in audit documentation relating to audit planning.
7. Explain why changes may have to be made to the overall audit strategy and audit
plan.

Feedback on self-assessment:
1. References:

 Jackson & Stent (2014:6/13)


 SAICA Student Handbook Volume 2A (ISA 300:par 2)

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2. References:

 Jackson & Stent (2014:6/13)


 SAICA Student Handbook Volume 2A (ISA 300:par A2)

3. References:

 Jackson & Stent (2014:6/9–6/12)


 SAICA Student Handbook Volume 2A (ISA 300:par 6)

4. References:

 Jackson & Stent (2014:6/14)


 SAICA Student Handbook Volume 2A (ISA 300:par 8)

5. References:

 Jackson & Stent (2014:6/15)


 SAICA Student Handbook Volume 2A (ISA 300:par 9)

6. References:

 Jackson & Stent (2014:6/15)


 SAICA Student Handbook Volume 2A (ISA 300:par 10)

7. References:

 Jackson & Stent (2014:6/15)


 SAICA Student Handbook Volume 2A (ISA 300:par 10 and A13)

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LEARNING UNIT 4.4: PUTTING THE AUDIT STRATEGY AND


PLAN INTO ACTION

Introduction

As stated in ISA 200:par 11, in conducting an audit of financial statements, the overall
objectives of the auditor are the following:

 to obtain reasonable assurance about whether the financial statements as a


whole are free from material misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether the financial statements are
prepared, in all material respects, in accordance with an applicable financial
reporting framework
 to report on the financial statements and communicate as required by the ISAs, in
accordance with the auditor’s findings
See learning unit 1.5 for a detailed discussion of the above.

We have already discussed the auditor’s objectives in auditing the financial


statements and have also dealt with the nature of the assurance provided by an audit
of financial statements to the users of the financial statements (see learning unit 1.2).
You also learnt about the importance of obtaining sufficient appropriate audit
evidence to form a basis for the audit opinion (see learning unit 3.3). If you are still
unsure about any of the important concepts, revise the relevant learning units.

In this learning unit, the stage of putting the audit strategy and audit plan into action
of the audit process is explained.

4.4.1 The auditor’s response to risks at the financial statement


level and at the assertion level

You learnt in learning unit 3.4 (sec 3.4.2) that in terms of ISA 315, the auditor
should assess the risks of material misstatement at the financial statement
level and at the assertion level. In learning unit 3.4 (sec 3.4.3), you learnt that
the auditor responds to the assessed risks of material misstatement by
conducting further audit procedures (test of controls and substantive
procedures).

Refer to the learning units above to refresh your memory.

In this learning unit you will learn more about the auditor’s overall responses to
address the assessed risk of material misstatements at the financial statement
level and to design and perform further audit procedures (test of controls and
substantive procedures) whose nature, timing and extent are based on and are
responsive to the assessed risk of material misstatement at the assertion level
(see ISA 330: par 5 and 6).

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Diagram 4: Auditor’s response to assessed risks


 
 
  Auditor’s response to assessed risks 
 
 
 
 
 
 
 
  Overall responses  Response to assessed risks 
 
 
•   Auditor to design and implement  •   Auditor to design and perform further 
 
  overall responses to address the  audit procedures (test of controls and 
  assessed risks of material  substantive procedures) whose nature, 
  misstatement at the financial  timing and extent are based on the 
 
statement level  assessed risks of material misstatement 
 
  at the assertion level for each class of 
  transaction, account balance or 
  disclosure 
 
 
 
 
 
  General actions include the following:  Audit procedures 
     
  •   assign more experienced staff with  •   The auditor must respond to the risks by 
 
special skills  ensuring that the nature, timing and 
 
•   assign experts  extent of tests of control and 
 
  •   emphasise to the audit team the  substantive tests are correct to reduce 
  importance of professional  audit risk to an acceptable low level 
  scepticism   
  •   incorporate elements of 
  unpredictability 
  •   make general changes to the nature, 
  timing and extent of audit 
 
Test of control  Substantive 
procedures 
  procedures
 

4.4.1.1 Overall response at financial statement level

The auditor must design and implement overall responses to address the assessed
risks of material misstatement at the financial statement level (ISA 330:par 5).

Study
 Jackson & Stent (2014:6/20)
 SAICA Student Handbook Volume 2A, International Standards on Auditing (ISA)
330: The Auditor’s Responses to Assessed Risks (par 5 and A1–A3)

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Note the following in the study resources above:


 auditor’s overall response to address the assessed risks of material
misstatement at the financial statement level

4.4.1.2 Audit procedures to respond to the assessed risks of material


misstatement at the assertion level

Study
 Jackson & Stent (2014:6/20–6/21)
 SAICA Student Handbook in Volume 2A, International Standards on Auditing (ISA)
330: The Auditor’s Responses to Assessed Risks (par 6–7 and A4–A19)

Note the following in the study resources above:


the nature, timing and extent of audit procedures to respond to the assessed risks
of material misstatement at the assertion level

4.4.1.3 Audit procedures carried out to satisfy the requirements of the ISAs

The auditor obtains audit evidence by carrying out a number of audit procedures.

Study
 Jackson & Stent (2014:6/21)

In learning unit 3.4 you were introduced to the types of audit procedures that can be
performed. To ensure that you have mastered the required information, complete
the following activity:

Activity 6

Required

Identify the type of procedures (substantive procedures) that the auditor carries out to
obtain audit evidence in each of the following instances:

6.1 The auditor sends out debtors’ letters of confirmation to confirm outstanding
balances.
6.2 The auditor calculates the tax payable by the enterprise and compares this with
the figure calculated by the client.
6.3 The auditor calculates the monthly gross profit percentage of the enterprise and
makes inquiries about any deviations.
6.4 The auditor attends the annual stocktake to take note of stock-taking procedures.
6.5 The auditor checks a calculation of a rebate on an invoice received from a
creditor.
6.6 The auditor asks the financial manager of an enterprise whether there were any
strikes during the year.

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Feedback on activity 6
Reference: Jackson & Stent (2014:6/20–6/21)

6.1 External confirmation (sends out debtors’ letters of confirmation)


6.2 Re-performance (calculation of tax payable)
6.3 Analytical procedures (calculation of the monthly gross profit percentage)
6.4 Observation (attending the annual stocktake)
6.5 Recalculation (calculation of the rebate on the invoice)
6.6 Inquiries (inquiring about any strikes during the year)

Activity 7

Required

Answer the questions, if provided, in section 4.4 of Tutorial Letter 102 and compare
your answers with the solutions in section 4.4 of Tutorial Letter 103.

Summary

In this learning unit we explained the auditing principles relating to implementing the
overall audit strategy and audit plan.
The next learning unit deals with the final stage of the audit process.

Self-assessment

After having worked through the learning unit and the references to the prescribed
study material, determine whether you are able to answer the following questions:

1. Describe the auditor’s overall response to assessed risks of material


misstatement at the financial statement level.
2. Describe the auditor’s procedures to respond to assessed risks of material
misstatement at the assertion level.
3. Explain 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.
4. Explain the various audit procedures used to gather audit evidence and apply
them to practical scenarios.

Feedback on self-assessment
1. References:

 SAICA Student Handbook in Volume 2A, International Standards on Auditing


(ISA) 330: The Auditor’s Responses to Assessed Risks (par 5 and A1–A3)
 Jackson & Stent (2014:6/20)

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2. References:

 SAICA Student Handbook in Volume 2A, International Standards on Auditing


(ISA) 330: The Auditor’s Responses to Assessed Risks (par 6–7 and A4–A19)
 Jackson & Stent (2014:6/20–6/21)

3. Reference: Jackson & Stent (2014:6/19)


4. Reference: Jackson & Stent (2014:6/20–6/21)

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LEARNING UNIT 4.5: THE EVALUATING, CONCLUDING AND


REPORTING STAGE
Introduction

In this stage of the audit process, the achievement of the auditor’s overall objectives in
conducting an audit of financial statements is evaluated (see learning unit 1.5:sec
1.5.1.3 and ISA 200:par 11). These objectives are as follows:

 to obtain reasonable assurance about whether the financial statements as a whole


are free from material misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether the financial statements are
prepared, in all material respects, in accordance with an applicable financial
reporting framework
 to report on the financial statements and communicate as required by the ISAs, in
accordance with the auditor’s findings

Based on ISA 700:par 11, the auditor should form an opinion on the financial
statements based on an evaluation of the conclusions drawn from the audit evidence
obtained (see also Jackson & Stent 2014:6/21).

This learning unit deals with the evaluating, concluding and reporting stage of the
audit process.

4.5.1 Evaluation of audit findings

Study
 Jackson & Stent (2014:6/21–6/23)

Note: The auditor has to evaluate and conclude whether or not


 sufficient appropriate audit evidence has been obtained
 uncorrected misstatements are material, individually or in aggregate
 the financial position, financial performance and cash flows are fairly presented in
all material respects in accordance with the applicable financial reporting
standards
 all material events occurring after the financial year-end and the date of the audit
report, have been identified and appropriately dealt with

Make sure that you understand what is meant by a misstatement in the financial
statements (see ISA 200:par 13(i)). An example of an uncorrected misstatement
would be the disclosure of trade and other payables in the financial statements as
R950 680, whereas the auditor corroborated the value of trade and other payables as
R1 065 890 by means of the substantive procedures he or she carried out. Therefore,
the misstatement is R1 065 890 – R950 680 = R115 210.

The actual evaluation of audit findings and conclusions drawn by the auditor will be
dealt with in your further auditing studies.

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4.5.2 Drawing conclusions on the audit results

For the purposes of this module it is sufficient for you to know the following: The
auditor must form an audit opinion about whether the financial statements are
prepared, in all material respects, in accordance with the applicable financial reporting
framework (see ISA 700:par 10).

In order to form that opinion, the auditor must conclude whether or not he or she has
obtained reasonable assurance that the financial statements as a whole are free from
material misstatement, whether due to fraud or error (see ISA 700:par 11).

The actual evaluation of audit findings and conclusions drawn by the auditor will be
dealt with in your further auditing studies.

4.5.3 Auditor’s opinion

For the purposes of this module, it is sufficient for you to know what an unmodified
audit opinion means and be aware of the elements that should be contained in the
auditor’s report (the structure of the audit report).

An unmodified opinion will be expressed when the auditor concludes that the
financial statements are prepared in all material respects, in accordance with
the applicable financial reporting framework (see ISA 700:par 16).

4.5.3.1 The auditor’s report

Study
 Jackson & Stent (2014:18/2–18/5)
 SAICA Student Handbook in Volume 2A, International Standards on Auditing (ISA)
700 (Revised): Forming an Opinion and Reporting on Financial Statements (par
20–49)
 SAICA Student Handbook in Volume 2B, South African Auditing Practice
Statement 3 (SAAPS 3) (Revised): Illustrative Independent Auditor’s Reports: Part
A, section 1 (Unmodified Independent Auditor’s Report)

Note the following in the study resources above:

 the elements that form the structure of the auditor’s report and what should be
included in each of the elements
 the example of an unmodified auditor’s report (including the introduction,
management’s responsibility for the financial statements, the auditor’s
responsibility and the auditor’s opinion)

You will not be expected to write an unmodified auditor’s report, but you must be able
to explain all the elements of an unmodified auditor’s report.

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4.5.3.2 Dating of the auditor’s report

Study
 SAICA Student Handbook in Volume 2A, International Standards on Auditing (ISA)
700: Forming an Opinion and Reporting on Financial Statements (par 41)

Note: In the study resource above that the auditor’s report should be dated no earlier
than the date on which the auditor has obtained sufficient appropriate audit evidence
on which to base his or her opinion.

Also note that, before an auditor can sign the auditor’s report, all the statements
comprising the financial statements, including the relevant notes, must have been
prepared, and those with the recognised authority must have accepted responsibility
for the financial statements.

Activity 8

Required
Answer the questions, if provided, in section 4.5 of Tutorial Letter 102 and compare
your answers with the solutions in section 4.5 of Tutorial Letter 103.

Summary

In this learning unit we explained the evaluating, concluding and reporting stage of
the audit process.

Self-assessment

After having worked through the learning unit and the references to the prescribed
study material, determine whether you are able to answer the following questions:

1. Explain what is expected of the auditor in evaluating the audit evidence


obtained.
2. Define the term “misstatements”.
3. Describe and explain the basic elements that form part of the auditor’s unmodified
report.
4. Describe the dating of the auditor’s report.

Feedback on self-assessment
1. Reference: Jackson & Stent (2014:6/21–6/23)
2. Reference: Jackson & Stent (2014:6/22–6/23)
3. References:

 Jackson & Stent (2014:18/2–18/5)


 SAICA Student Handbook Volume 2A, International Standards on Auditing
(ISA) 700: Forming an Opinion and Reporting on Financial Statements (par 20–
42)

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 SAICA Student Handbook Volume 2B, South African Auditing Practice


Statement 3 (SAAPS 3): Illustrative Independent Auditor’s Reports: Part A,
section 1 (Unmodified Independent Auditor’s Report)

4. Reference: SAICA Student Handbook Volume 2A, International Standards on


Auditing (ISA) 700: Forming an Opinion and Reporting on Financial Statements
(par 41)

Conclusion

In this topic, “The Audit Process”, you learnt the different stages of the audit
process in the statutory audit of an ordinary company trading in goods and services.

You also learnt about the commencement of the audit, planning the audit, putting the
audit strategy and plan into action in relation to audit evidence and evaluating,
concluding and reporting on the audit. In your third-year studies, you will be dealing
with all the stages of the audit process in greater detail.

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TOPIC 5: ENGAGEMENTS TO REVIEW


HISTORICAL FINANCIAL STATEMENTSPIC 4
Topic overview

The aim of this topic is to explain and apply the general principles of review
engagements in accordance with the International Standards on Review
Engagement (ISRE) 2400.

This topic is divided into the following learning units:

Learning unit Title Page


5.1 The auditing principles with regard to review 195
engagements
5.1.1 Ethical requirements, professional scepticism and 197
engagement level quality control
5.2 Preliminary engagement activities 199
5.2.1 Agreeing terms of the engagement 199
5.3 Performing the engagement 201
5.3.1 Determining materiality 201
5.3.2 Obtain an understanding of the entity 201
5.3.3 Designing and performing procedures 201
5.3.4 Subsequent events 203
5.3.5 Written representation 203
5.3.6 Evaluating evidence obtained from the procedures 203
performed
5.4 Conclusion and reporting 205
5.4.1 Forming and expressing a practitioner’s conclusion on 205
the financial statements

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Learning outcomes

In this topic we focus on the following


Learning unit Level
learning outcomes:
5.1 The auditing  Describe and apply the ethical
principles with principles regulating the auditing and
regard to accountancy profession by referring to
review the IFAC Code of Ethics for
engagements Professional Accountants, the SAICA
Code of Professional Conduct for
Chartered Accountants, the IRBA Code
of Professional Conduct for Registered
2
Auditors and the IRBA Rules regarding
Improper Conduct.

 Describe and apply the auditing firm’s


responsibilities for its system of quality
control and quality control for audits and
review of financial statements.

5.2 Preliminary  The preliminary engagement


engagement activities of the review engagement
activities are explained and applied according
to auditing theory.
 The terms of engagement of the 2
review engagement is explained
according to auditing theory.

5.3 Performing the  The principles of performing of the


engagement review engagement are explained and
2
applied according to auditing theory.

5.4 Evaluating,  The evaluating, concluding and reporting


concluding and stage of the review engagement is
reporting explained according to auditing theory 2
and applied.

This topic refers to the following information in the prescribed textbooks:

 Jackson & Stent (2014:19/2–19/16)


 References to the International Standard on Review Engagements (ISRE) 2400

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LEARNING UNIT 5.1: THE AUDITING PRINCIPLES WITH


REGARD TO REVIEW ENGAGEMENTS

Introduction

As stated in Jackson & Stent (2014:19/2) the Companies Act of 2008 resulted in a
marked increase in the number of review engagements performed by auditors. A
review of financial statements is a limited assurance engagement, where the
practitioner expresses a conclusion in a negative form. You learned in learning unit
1.2 that there are two types of assurance engagements: a reasonable assurance
engagement and a limited assurance engagement. Differences between the two
engagement types were explained in that learning unit. It is worthwhile to revise the
principles learned in that learning unit before commencing your studies of this learning
unit.

In this learning unit you will learn about the objectives of the review engagement,
client continuance and acceptance for an independent review engagement, ethical
requirements of a practitioner and quality control of the independent review of
financial statements.

Study
 Jackson & Stent (2014:19/2–19/3)
 SAICA Student Handbook, Volume 2A: International Standards on Review
Engagements (ISRE 2400 par 14)

Note the following in the study resource above:

 companies which qualify for an independent review in terms of the Companies


Act requirements
 description of a review engagement
 practitioner’s objectives in conducting a review of financial statements

Activity 1

Thabo’s Kota (Pty) Ltd calculated its public interest score for the current
financial year to be 200 points.

Required
Discuss which assurance engagement will be applicable to Thabo’s Kota
(Pty) Ltd in the current financial year.

Feedback on activity 1
Reference: Jackson & Stent (2014:1/13–1/14)

As Thabo’s Kota (Pty) Ltd public interest score is between 100 and 349, the company

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will first have to decide on whether its annual financial statements will be internally or
externally complied. If compiled internally the company’s financial statements will
have to be audited and if complied externally the financial statements can be
independently reviewed.

The review engagement process has been outlined below.

Diagram 1: Stages of the review process

Professional Skepticism 

 Preliminary engagement 
Client 
activities 
acceptance   Terms of engagement 

 Determine materiality 
 Obtain understanding of entity 
 Designing and performing procedures  
 
o inquiries of management  
o analytical procedures 

Quality Control 
Perform the   
Ethical principles 

engagement   Procedures to address specific 
circumstances:  
 
o  related parties 
o  fraud considerations 
o  going concern 
 
 Reconciling the financial statement to 
underlying accounting records 
 Subsequent events 
 Evaluating whether sufficient 
appropriate evidence has been 
obtained 

Concluding 
and reporting   Form a conclusion and report 

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5.1.1 Ethical requirements, professional skepticism and


engagement level quality control

The diagram above illustrates that the practitioner should always and throughout the
review engagement comply with the relevant ethical principles; plan and perform the
engagement with professional skepticism and implement policies and procedures to
ensure the review engagement is in accordance with the firm’s quality control
procedures.

Jackson & Stent (2014:19/5) states that the practitioner must be independent in mind
and appearance. Likewise, the other fundamental principles of ethical/professional
behaviour cannot be compromised because the engagement is a review and not an
audit. These fundamental principles were covered in detail in learning unit 2.3.

ISA 200 par 13(l) refers to professional skepticism as an attitude that includes a
questioning mind, being alert to conditions which may indicate possible misstatement
due to error and fraud and a critical assessment of audit evidence. It is important that
a practitioner displays this quality throughout the review engagement.

The engagement partner is responsible for the implementation of the firm’s quality
control procedures at the engagement level.

Study

 Jackson & Stent (2014:19/5)


 SAICA Student Handbook, Volume 2A: International Standards on Review
Engagements (ISRE 2400 par 21–25)

Note the following in the study resources above:

 fundamental ethical principles that an practitioner is required to observe


 examples of circumstances that a practitioner should be alert to when exercising
his or her professional skepticism
 the engagement partner’s responsibility with regards to review engagement
quality control.

Activity 2

 Answer the questions, if provided, in section 5.1 of Tutorial Letter 102 and compare your
answers with the solutions in section 5.1 of Tutorial Letter 103.

 
Summary
In this learning unit we focused on objectives of the review engagement, client
continuance and acceptance for an independent review engagement, ethical
requirements of a practitioner and quality control of the independent review of
financial statements.
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Self-assessment
After having worked through the learning unit and the references in the prescribed
study material, you should determine if you are able to answer the following
questions:

1. Define a limited assurance engagement.


2. Explain which companies qualify for an independent review in terms of
Companies Act requirements.
3. Define the objective of an independent review engagement.
4. Explain what is meant by professional skepticism.
5. Provide examples of circumstances that a practitioner should be alert to when
exercising his or her professional skepticism.
6. Explain the engagement partner’s responsibility with regard to review
engagement quality control.

Feedback on self-assessment
1. Reference: Jackson & Stent (2014:1/8)
2. Reference: Jackson & Stent (2014: 19/2)
3. References:

 Jackson & Stent (2014:19/5)


 SAICA Student Handbook, Volume 2A: International Standards on Review
Engagements (ISRE 2400 par 14)

4. Reference: SAICA Student Handbook, Volume 2A: Overall objectives of an


independent auditor and the conduct of an audit in accordance with International
Standards of Auditing (ISA 200 par 13(l))
5. Reference: Jackson & Stent (2014:19/5)
6. References:

 Jackson & Stent (2014:19/5)


 SAICA Student Handbook, Volume 2A: International Standards on Review
Engagements (ISRE 2400 par 21–25)

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LEARNING UNIT 5.2: PRELIMINARY ENGAGEMENT


ACTIVITIES
Assurance engagements may only be accepted when the engagement exhibits
certain characteristics that are conducive to achieving the practitioner’s objectives
specified for the engagement (ISRE 2400 par A35).

In the study resource below you will learn that before the practitioner accepts the
assurance engagement (audit or review), he or she should acquire preliminary
engagement information on the client’s business which can be extended once the
engagement has been accepted.

Study

 Jackson & Stent (2014:19/6)


 SAICA Student Handbook, Volume 2A: International Standards on Review
Engagements (ISRE 2400 par 29–30)

Note the following in the study resource above:

 factors affecting the acceptance or continuance of a client relationship for review


engagements
 pre-conditions for accepting a review engagement

5.2.1 Agreeing terms of the engagement

When a practitioner accepts a review engagement from a client, a contractual


relationship arises between the practitioner and the client. It is in the interests of both
management and those charged with governance as well as the practitioner, that the
practitioner sends an engagement letter prior to performing the review engagement,
to help avoid misunderstandings with respect to the engagement (ISRE 2400 par
A52). Much of what is covered in the pre-conditions for accepting a review
engagement will be recorded in an engagement letter (Jackson & Stent: 2014:19/6).

Study

 Jackson & Stent (2014:19/6)


 SAICA Student Handbook, Volume 2A: International Standards on Review
Engagements (ISRE 2400 par 36–37)

Note the following in the study resource above:

 items included in the review engagement letter

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Activity 3

 Answer the questions, if provided, in section 5.2 of Tutorial Letter 102 and
compare your answers with the solutions in section 5.2 of Tutorial Letter 103.

Summary
In this learning unit we focused on preliminary engagement information on the
client’s business which the practitioner is required to acquire before accepting or
continuing with the independent review engagement. You also learned of items that
are included in the engagement letter.

Self-assessment
After having worked through the learning unit and the references in the prescribed
study material, determine if you are able to answer the following questions:

1. List the factors that affect the acceptance or continuance of client relationships
for review engagements.
2. Describe the pre-conditions for accepting a review engagement.
3. List the items to be included in the review engagement letter.

Feedback on self-assessment
1. Reference:

 Jackson & Stent (2014:19/6)


 SAICA Student Handbook, Volume 2A: International Standards on Review
Engagements (ISRE 2400 par 29)

 References:

 Jackson & Stent (2014:19/6)


 SAICA Student Handbook, Volume 2A: International Standards on Review
Engagements (ISRE 2400 par 30)

 References:

 Jackson & Stent (2014:19/6)


 SAICA Student Handbook, Volume 2A: International Standards on Review
Engagements (ISRE 2400 par 36–37)

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LEARNING UNIT 5.3: PERFORMING THE ENGAGEMENT

5.3.1 Determining materiality

The concept of materiality for an audit engagement were discussed in learning unit
3.5. These concepts are similar to those of a review engagement. For a review
engagement, the practitioner is required to identify areas in the financial statements
where material misstatements are likely to arise and to provide limited assurance on
whether the financial statements are free from material misstatements (Jackson &
Stent: 2014:19/7).

Study

 Jackson & Stent (2014:19/7–19/8)


 SAICA Student Handbook, Volume 2A: International Standards on Review
Engagements (ISRE 2400 par 43–44)

Note the following in the study resource above:

 concepts of materiality in a review engagement

5.3.2 Obtain an understanding of the entity

It’s important for the practitioner to obtain an understanding of the entity and its
applicable financial reporting framework as this enables the practitioner to identify
areas where material misstatements are likely to occur. This enables the practitioner
to design procedures to address these areas.

Study

 Jackson & Stent (2014:19/8–19/9)


 SAICA Student Handbook, Volume 2A: International Standards on Review
Engagements (ISRE 2400 par 45–46)

Note the following in the study resource above:

 benefits of obtaining an understanding of the entity in a review engagement


 matters that forms part of the practitioner’s understanding of the entity

5.3.3 Designing and performing procedures

As stated in Jackson & Stent (2014:19/9-19/10) the practitioner performs mainly


inquiries and analytical procedures in order to obtain sufficient appropriate
evidence as the basis for a conclusion on the financial statements. The practitioner
shall perform additional procedures to address circumstances/matters he or she
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becomes aware of that cause him or her to believe that the financial statements may
be materially misstated.

Study

 Jackson & Stent (2014:19/9–19/11)


 SAICA Student Handbook, Volume 2A: International Standards on Review
Engagements (ISRE 2400 par 47–49, 57)

Note the following in the study resource above:

 procedures performed by the practitioner to obtain sufficient appropriate


evidence
 matters included in the practitioner’s inquiries of management
 analytical procedures performed by the practitioner

 Procedures to address specific circumstances

In addition to the procedures performed above by the practitioner to obtain sufficient


appropriate evidence, ISRE 2400 lists three specific matters that a practitioner must
conduct procedures on. These are:

 related parties
 fraud and non-compliance with laws and regulation
 going concern

Study

 Jackson & Stent (2014:19/11)


 SAICA Student Handbook, Volume 2A: International Standards on Review
Engagements (ISRE 2400 par 50–54)

Note the following in the study resource above:

 procedures to be performed by the practitioner in addressing the three specific


matters raised in ISRE 2400

 Reconciling the financial statements to the underlying accounting


records

The practitioner shall obtain evidence that the financial statements agree with or
reconcile to the entity’s underlying accounting records (ledgers, summary records or
schedules such as the trial balance).

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Before expressing a conclusion the practitioner shall perform the following


procedures:

5.3.4 Subsequent events

 Request management to make the necessary adjustments or disclosure in the


financial statements as a result of events occurring between the date of the
financial statements and the date of the practitioner reports.
 Take appropriate actions to seek to prevent reliance on the practitioner's report
should the financial statements be subsequently issued without the necessary
amendments.

5.3.5 Written representation

 Request management to provide a written representation that management has


fulfilled its responsibilities described in the agreed terms of engagement (ISRE
2400 par 61).

5.3.6 Evaluating evidence obtained from the procedures


performed

 Evaluate whether sufficient appropriate evidence has been obtained from the
procedures performed. If not, the practitioner shall perform additional procedures
necessary in the circumstances to be able to form a conclusion on the financial
statements (ISRE 2400 par 66).

Study

 Jackson & Stent (2014:19/12)


 SAICA Student Handbook, Volume 2A: International Standards on Review
Engagements (ISRE 2400 par 58–67)

Activity 4

 Answer the questions, if provided, in section 5.3 of Tutorial Letter 102 and
compare your answers with the solutions in section 5.3 of Tutorial Letter 103.

Summary
In this learning unit we focused on the principles of performing a review
engagement.

Self-assessment
After having worked through the learning unit and the references in the prescribed

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study material, determine if you are able to answer the following questions:

1. Describe the concept of “materiality” in a review engagement and how it should


be applied in a review engagement.
2. Explain the benefits of obtaining an understanding of the entity in a review
engagement.
3. List the matters that will form part of the practitioner’s understanding of the
entity.
4. Describe the procedures performed in order to obtain sufficient appropriate
evidence.
5. Describe the matters included in the practitioner’s inquiries of management to
obtain sufficient appropriate evidence.
6. Describe the analytical procedures that practitioner will perform in order to
obtain sufficient appropriate evidence.
7. List the practitioner’s considerations and procedures performed in addressing
the specific matters raised in ISRE 2400: related parties, non-compliance with
laws and regulations and going concern.

Feedback on self-assessment
1. Reference: Jackson & Stent (2014:19/7–19/8)
2. Reference: Jackson & Stent (2014:19/8)
3. References:

 Jackson & Stent (2014:19/8–19/9)


 SAICA Student Handbook, Volume 2A: International Standards on Review
Engagements (ISRE 2400 par 45–46)

4. References: Jackson & Stent (2014:19/9)


5. References:

 Jackson & Stent (2014:19/9)


 SAICA Student Handbook, Volume 2A: International Standards on Review
Engagements (ISRE 2400 par 48)

6. References: Jackson & Stent (2014:19/9–19/10)


7. References:

 Jackson & Stent (2014:19/10–19/11)


 SAICA Student Handbook, Volume 2A: International Standards on Review
Engagements (ISRE 2400 par 50–54)

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LEARNING UNIT 5.4: CONCLUSION AND REPORTING


The practitioner’s objectives in a review of financial statements under this ISRE are to
(see ISRE 2400 par 14):

(a) obtain limited assurance, primarily by performing inquiry and analytical procedures,
about whether the financial statements as a whole are free from material
misstatement, hereby enabling the practitioner to express a conclusion on whether
anything has come to the practitioner’s attention that causes the practitioner to
believe the financial statements are not prepared, in all material respects, in
accordance with an applicable financial reporting framework; and
(b) report on the financial statements as a whole and communicate, as required by this
ISRE

In the previous learning units we learnt of the practitioner’s considerations in


determining materiality. We also learnt of the different procedures the practitioner will
perform in order to adhere to ISRE2400's requirements before expressing his or her
conclusion. This learning unit deals with concluding and reporting of a review
engagement.

5.4.1 Forming and expressing a practitioner’s conclusion on the


financial statements

Study

 Jackson & Stent (2014:19/12–19/16)

Note the following in the study resource above:

 factors to be considered by the practitioner in forming a conclusion on the


financial statements
 types of conclusions a practitioner can express for an unmodified or modified
conclusions
 items included in the practitioner’s report

Activity 5

 Answer the questions, if provided, in section 5.4 of Tutorial Letter 102 and
compare your answers with the solutions in section 5.4 of Tutorial Letter 103.

Summary
In this learning unit we focused on the principles of evaluating, concluding and
reporting of a review engagement.

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Self-assessment
After having worked through the learning unit and the references in the prescribed
study material, determine if you are able to answer the following questions:

1. Describe the factors to be considered by the practitioner in forming a conclusion


on the financial statements.
2. Describe the types of conclusion a practitioner can express for a unmodified or
modified conclusion.
3. List the items to be included in the practitioner’s report.

Feedback on self-assessment
1. Reference: Jackson & Stent (2014:19/12–19/13)
2. Reference: Jackson & Stent (2014:19/13)
3. References: Jackson & Stent (2014:19/13–19/14)

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Bibliography

Gowar, HR & Jackson, RDC. 2015. Graded Questions on Auditing. Durban: Lexis
Nexis.

Gray, I & Manson, S. 2005. The Audit Process. London: Thomson Learning.

Independent Regulatory Board for Auditors. Manual of Information: Guidelines for


Registered Auditors. Latest edition. Johannesburg: IRBA.

International Federation of Accountants. IFAC Code of Ethics for Professional


Accountants. www.ifac.org. Accessed on 5 October 2010.

Jackson, RDC & Stent, WJ. 2012. Auditing Notes for South African Students.
Durban: LexisNexis.

Jackson, RDC & Stent, WJ. 2014. Auditing Notes for South African Students.
Durban: Lexis Nexis.

South African Institute of Chartered Accountants. SAICA Student Handbook,


Vol 2A, 2B, 2C. Latest edition. Durban: Lexis Nexis.

wikipedia. http://en.wikipedia.org/wiki.Enron-scandal. Accessed: 20 April


2015.

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