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Stage 1 : Preliminary engagement activities: ........................................................................................................ 4
stage 2 : Planning: ............................................................................................................................................... 4
Stage 3 : putting audit -Plan and strategy - into action. ...................................................................................... 4
Stage 4 : Evaluate & conclude. ............................................................................................................................. 4

 
  


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Stage 1 : Preliminary engagement activities: ........................................................................................................ 5
(ii) stage 2 : Planning:........................................................................................................................................ 7

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DEFINITIONS: as per isa 315 .............................................................................................................................. 10
RISK ASSESSMENT PROCEDURES ....................................................................................................................... 10

  


  
          

  
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the risk Based approach to auditing................................................................................................................... 10
DEFINITIONS of AUDIT RISK: (see glossary in saica book) .................................................................................... 10
The components of audit risk: ........................................................................................................................... 10
Risk at financial statement level and at assertion level:...................................................................................... 11
Risk and materiality........................................................................................................................................... 11
Assessment of audit risk by the auditor ............................................................................................................. 12
levels of risk ...................................................................................................................................................... 12

  
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INTRO: .............................................................................................................................................................. 15
the nature of materiality ................................................................................................................................... 15
planning materiality and final materiality .......................................................................................................... 16
planning materiality .......................................................................................................................................... 16
Final materiality ................................................................................................................................................ 17
CONCLUSION .................................................................................................................................................... 17

  
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THE ENTITY AND ITS ENVIRONMENT. see ias 315 : it gives all this in detail! bit by bit, also in the ͚a1 etc ͛ appendix
part of ias 315 ................................................................................................................................................... 17
Internal Control of Entity .( when understanding entity & environment) ............................................................ 18
Significant risks : .( when understanding entity & environment ) ........................................................................ 19
Communicating with ͚governance͛ and management .( when understanding entity & environment).................. 20
DOCUMENTATION : ( when understanding entity & environment) .................................................................... 20
  
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INTRO: .............................................................................................................................................................. 20
DEFINITIONS (LECTURER SAYS KNOW THESE WELL) ........................................................................................... 20
THERE ARE ONLY 2 KINDS OF FRAUD TO BE CONSIDERED IN AUDITS : ............................................................... 20
respoNsibility of management and those charged with governance: (exactly in IAS 240) .................................... 21
respoNsibility of the auditor (exactly in IAS 240) ................................................................................................ 21
OBJECTIVE OF THE AUDITOR: (exactly in IAS 240................................................................................................ 21
DURING ENGAGEMENT TEAM DISCUSSION AS PER IAS 315:............................................................................... 21
risk assesment procedures to do by auditor exactly put in ias 240 .16-24 .......................................................... 21
responses to the risk of material misstatement due to fraud (DO LEARN THIS as per lecturer) ........................... 22
Evaluation of Evidence: ..................................................................................................................................... 22
Management Representations to be gotten in writing : (in IAS240 EXACTLY vertabim!!!) ................................... 22
feel UNABLE TO CONTINUE ENGAGEMENT ........................................................................................................ 22
TO BE COMMUNICATED TO MNGMNT .............................................................................................................. 23
TO BE COMMUNICATED TO AUTHORITIES ......................................................................................................... 23

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4.1. discuss the preliminary engagement activities you would perform before accepting a
prospective client;
4.2. identify and assess the risks of material misstatements through understanding the entity and
its environment;
4.3. discuss/describe the audit risk/risk of material misstatement;
4.4. implement procedures to address the identified audit risk by using the risk indicator;
4.5. know the difference between risk at overall financial statement level and the assertion level;
4.6. know the difference between audit plan and audit strategy and discuss the details dealt with
in the audit plan and audit strategy;
4.7. calculate materiality in planning and performing an audit and apply planning materiality
calculated to a given scenario;
4.8. distinguish the difference between fraud and error;
4.9. identify and explain the fraud risk factors and circumstances that might indicate the possibility
of fraud;
4.10. identify, discuss and apply the principles contained in the IFAC Code of Ethics (SAICA) in a
given scenario; and
4.11. identify, discuss and apply the requirements of the Auditing Profession Act (IRBA) to a given
scenario.

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(1)Y  V'.c   : Performing Procedures to decide whether to Establish/Continue a Relationship.
1.Y Step 1 -c% V :Evaluate if -(1)- Firm can comply with ethical requirements if he were to accept the job ,
NAMELY THE 5 FUNDAMENTAL PRINCIPLES + EXTRA 1 IS INDEPENDENCE. : Eg: illegal operations, management is dishonest,
refusing to implement correct acc. policies , cannot pay, etc.
2.Y Step 2cVVc# :Establish if auditor has the Capacity / Resources / if Client can be appropriately serviced or not.

(2)Y "  V " :Formulate the terms of engagement.

V !V 
1)Y V V Y :Establish an overall audit strategy.
2)Y V V :develop one.to be in a position to develop one audit team must first do the next 3 things:
3)Y     : of   and  /   incl.   
c 

4)Y  "
"  :Assess risk of in the financial statements.
5)Y "
 Determine guidelines.

V $  V VVV # Vc 


1)Y   V% ('overall response') :Respond to assesed risk at financial statement level, eg:      
2)Y   V % :By carrying out  c 
0 / (to gather sufficient evidence to reduce risk to an
acceptable level.)
3)Y    cV : By carrying out  c 
0 /0 /   
 
 

V %V V1c c 


1)Y %V VVc c  :Evaluate and Conclude on Audit Evidence gathered.
2)Y V   :Formulate Audit Report.

 ,V V 


The preliminary stage is not really linked to the other stages , except for the fact that the info gathered here will be used in the rest of the audit in eg: evaluating the
client

The rest of the stages are closely linked


1-Y The planning stage is linked to Putting into action stage because the Nature/Timing /Extent of tests done in executing stage are determined in
planning stage
2-Y The executing linked to reporting because : all info gathered here is used in reporting + evaluate stage.
V 
  The stages are NOT standalone units and the activities within each stage do not fit neatly into the order presented.
Planning :is not standalone because \
1-as they execute current audit, next years audit is being planned.
2- if problems develop in audit then new planning must again be done to implement additional procedures / audit strategy if needed. ʹso if you
are in stage 3 , you must go and do some stage 2 things again, but you are already in stage 3.)
  V
V VVV V  
1)Y SA has adopted the IFAC (international federation of accountants) auditing standards : (ISA's).
2)Y Stipulate a standard& give explanatory comment how (does Not give a list of procedures)
3)Y Eg:V  = ISQC 210 -terms of engagement + ISA 220R Quality control for audits of historical fin. Info. V ! = ISA 300 etc.

V VcV  V  c


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aY This is only a stage to see if the client is trustworthy, and if you are big enoufh to take on the job It does NOT entail studying the manufacturing process
or making big audit plans.
aY The auditor needs to assess whether or not to act as an auditor for a new client or to continue acting as an auditor for an existing client. The auditor
should take into consideration the risks of legal liability or reputational damage, whether a quality audit can be conducted in terms of ISAs well as
regulatory and ethical requirements.
ISA ͚ S ETC :
(i)Y ISA200 ( A14-A17) for ͞ethical requirements for an audit of the fin.stats͟ in this ISA on ͚overall requirements for general audits͛ ,
just talks about the 5 fundamental principles + independence , not much else.
(ii)Y ͚IESBA͛ Code of Professional Conduct. : in the section on ͚new clients acceptance/continue͛ about just 1-independence 2-
fundamental principles 3- ask old accountant and permission stories 4-multiple ͞threats & safeguards͟ to be put in place before you
accept ,mentioned.
(iii)Y ISQC1 par A7 - in this standard of quality control in general, it is just a few words about compliance with ethics , only states the
͚fundamental principles͛ to be followed really .
(iv)Y ISA 220 para 12-14 & A8 ʹA12 in this ISA on ͟quality control in an audit of fin stats͟
(v)Y SAAPS 1 : used to apply but it has been withdrawn by SAIPA lately so it is gone.

WHAT TO DO IN THE PRELIMINARY ENGAGEMENT ACTIVITIES:


(vi)Y  V'.c   : Performing Procedures to decide whether to Establish/Continue a Relationship.
1.Y Step 1 -c% V :Evaluate if -(1)- Firm can comply with ethical requirements if he were to accept the
job , NAMELY THE 5 FUNDAMENTAL PRINCIPLES + EXTRA 1 IS INDEPENDENCE. : Eg: illegal operations, management is
dishonest, refusing to implement correct acc. policies , cannot pay, etc.
2.Y Step 2cVVc# :Establish if auditor has the Capacity / Resources / if Client can be appropriately serviced or not.

(vii)Y "  V " :Formulate the terms of engagement.

Y c,  c  .V' V!!02c  0V!0'Vc  c  c   V 

(a)Y CLIENT INVESTIGATION : FIRST OF ONLY 2 THINGS TO CHECK

(i)Y ETHICAL (OF YOURSELF) :Evaluate if Firm can comply with ethical requirements. Ie: independence + 5 principles : eg: client
director is family of auditor.
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Y  V"Vc
Y Per S210 Code of Prof.Conduct : make sure the engagement will complies with the FUNDAMENTAL
PRINCIPLES, if it does not then :
/
    V
!V
V V
 .  

/
 (eg obtain more knowledge of
enterprise, or secure client commitment to improve governance etc
ii.Y Fundamental Principles are : shall make sure all these principles are complied with before accepting /
continue with client
INTEGRITY;
OBJECTIVITY;
PROFESSIONAL COMPETENCE AND DUE CARE;
CONFIDENTIALITY
PROFESSIONAL BEHAVIOUR
b.Y cPer ISA 200 .14 : it says do the fundamental princilples above PLUS also make sure it complies
with requirement of ͟ INDEPENDENCE ͞ Add this to the fundamental principles because it is very important. It is
basicly ͚objectivity͛ , BUT just qute about it alone on its own ʹ it must be mentioned (appears in ISA 200, but not
in IESBA͛ Code of Professional Conduct., there it is called objectivity. Just REM to mention it A LOT) : ISA 200.a16 :
to be independent in (A) + mind (B) + appearance , It : enhances 1-integrity + 2-objectivity + 3-prof.scepticism , by
removing ͚influences͛ per ISA200..
i.Y     :of team,auditor,experts /or if adequate safeguards possible to stop threats.
ii.Y c
   : eg both offer same services to same market.\
c.Y V# cV V .V, of country that might add other things to the above

(ii)Y INTEGRITY OF THE CLIENT : The above factor will include integrity of principal owners, key management and those charged with
governance (ISA 220, par A8).
Y '   Client Unethical or lacks Integrity.
b.Y '  eg. Illegal : eg money laundering OR : Not wish to be assosiated with eg. Porn/tobacco.
c.Y V V    . : acceptable financial framework : 'Fairest' OR 'most favourable picture'
accounting standards
d.Y V  payment /if they will pay fair fees or not.
e.Y c
    V . Eg restrict access to information.
f.Y  c  V .; if suspect reasons
(iii)Y c1c #: other stuff trated separately by UNISA: V'#  c  V#
(iv)Y c1c #: other stuff trated separately by UNISA' V  : (what is this and what is ͚
illustration of good practice 10͛ referred to in tut 102 pg 8???)
½ Y a c1c #: other stuff trated separately by UNISA cVcV  
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(vii)Y c1c #: other stuff trated separately by UNISA%VcVc# c "VVc½*+'

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(b)Y CAPACITY :ESTABLISH IF AUDITOR HAS THE CAPACITY / RESOURCES / IF CLIENT CAN BE APPROPRIATELY SERVICED OR NOT. :ISA220 PARA A8-A11
Y # 
    
  
   
 
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1.Y  V+"   
       (c )VV 
(c )
V610: Using the work of internal auditors (par 8-9; par A4-45).
ISA 600: Special considerations ʹ Audits of group financial statements (including the work of component
auditors) (par 12-14; par A10-A21).
ISA 620: Using the work of an auditor͛s expert (par 7; 9; 12-13; par A10-A13l A32-A40)
Code of Conduct 210.8.

a.Y  "  use an expert if it is needed as a safeguard in upcoming audit, and if auditor wishes to use an
expert, he must determine if such reliance is warranted by using following Factors to Consider: per Code of
Conduct 210.8.
i.Y    
ii.Y   (member of an association)
iii.Y  ( expert has enough to be able to do the work)
iv.Y V

  
1
   to that kind of exerts work ʹ check if he fits in right with the
standards)

!Y   enough experienced managers etc.


3.Y  


 (own guys) -competence in firm or access to other auditors or experts who do have the skills.
4.Y  : - Enough Team Staff in relation to size of client.
5.Y  computers etc.
6.Y  ʹ Manage to finish by Audit deadline Necessary to complete within deadline.
7.Y 2
  
as per ISQC1
Y Per unisa: When you are required to discuss factors that you will consider prior to accepting the engagement, in
addressing quality control, we recommend that you write the following sentence in addressing compliance with
quality control: ͞ Ê 
   
         
 
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SAFEGUARDS EXAMPLES FOR BOTH OF THE ABOVE :
Y  V      
Y  
/   
/Y  
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/Y    
/Y V    
/Y c

  
 
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/Y V 
 

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(ix)Y 
  .  : enquiry if any family etc.relationships exist(regular written from staff)
(x)Y     .Discussion ; directors,senior financial personnel, (2 heads better than 1, + experienced).
(Analytical Procedures are for planning stage(risk assessment) , not here
(xi)Y    . : of firms bankers,legal council,etc (permission must be sought first)
(xii)Y / 1   of operations etc. and also of :
(xiii)Y / 1    
  /

 : by client eg: group reports.
(xiv)Y V  s : eg. internet
(xv)Y V  /V  : communicate with , in compliance with code of Professional Conduct.

REASONS WHY AUDIT FIRM MAY NOT WISH TO START RELATIONSHIP.


Y '   Client Unethical or lacks Integrity.
2.Y '  eg. Illegal : eg money laundering OR : Not wish to be assosiated with eg. Porn/tobacco.
3.Y V V    . : acceptable financial framework : 'Fairest' OR 'most favourable picture' accounting
standards
4.Y V  payment /if they will pay fair fees or not.
5.Y c
    V . Eg restrict access to information. (note: there is however nothing in any of the ISA͛s which
says this is a reason to not accept , if the client does not allow inspection at the preliminary stage., but if it is documents
needed to do the audit then it is not acceptable at all. Reasons: 1- could restrict info to a senior auditor to be confidential 2-
regard it as suspicious so treat with professional skepticism. 2- nothing in ISA͛s but is an indicator of a major problem here!
6.Y V  Client history of poor relationships with auditor.
7.Y c  not competence+ resources, not able to do it (eg too big)
8.Y 
 see standards below ,eg: client director is family of auditor.
REASONS WHY AUDIT FIRM MAY NOT WISH TO CONTINUE WITH EXISTING CIENT.
(xvi)Y Same as above exactly.

2)Y TERMS OF ENGAGEMENT SEE ISA 210 WHICH IS ON ͞AGREEING TERMS OF ENGAGEMENTS͟, PARA 9-12 AND APPENDIX 1 FOR EXAMPLE LETTER IN DETAIL
a)Y This is formalising terms of engagement into an engagement letter, and having it signed.
b)Y When answering questions on preliminary engagement activities, we recommend that when you arrive at step 3, list the following: ( the full
engagement letter is on page
Y  
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c)Y EXACTLY IS THE FOLLOWING :


d)Y Audit commitee of client must understand terms exactly
i)Y 'Expectation Gap' : Confused if objective is : find fraud / terminology misunderstand( eg compilation engagement,agreed upon procedure
engagements etc., Or if an opinion is to be given or NOT(eg for a review)
e)Y ISA 210 ʹauditor right to decide , but client must agree to how audit will be conducted.
Y Ê 8  $
  8   
    
i)Y 4/ :Implied or Stated :ie to express an opinion on the fin.stats.
Y "     

(1)Y     plus refer to basis of preparation ie: IFRS. international fin.reporting standards.
(2)Y V   "    
(3)Y V  


(4)Y     V
(5)Y   
 

iii)Y      0 
 V
outline of what is to be done.
iv)Y   that will be produced.
v)Y   
       sampling methods +internal controls
vi)Y V      auditor chooses tests + must be given access to all info needed.
vii)Y "      / 

 
0    
 
to Gov.
viii)Y ,    
    by client: auditor expects this from client.
ix)Y ,    
 
will be brought to mngmnts attention.
x)Y   /
/ experts, previous auditor, other auditors,internal audit.
xi)Y /   eg tax ʹ and if delivered late etc.- must state if clients fault for not providing documents , or if auditors fault , and
penalties etc
xii)Y  V   
 not just the firm, but person himself responsible.
xiii)Y   V  Stockcount dates, meetings dates to be held.
/Y V V 
 
xv)Y 
: basis of computation and invoicing arrangements.
xvi)Y " 
.

V !V 

The following standards are applicable to this section:
ISA 200 Overall objective of the independent auditor and the conduct of an audit in accordance with International Standards on Auditing.
ISA 300 Planning an audit of financial statements.
ISA 315 Identifying and assessing the risks of material misstatement through understanding the entity and its environment.
ISA 320 Materiality in planning and performing an audit.
ISA 330 The auditor͛s responses to assessed risks.
ISA 600 Audits of group financial statements (including the work of component auditors) par 15-31; par A22-A55) Appendix 2 and Appendix 3.

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Y +  
 all Audit Plan + Audit Strategy must be documented for:
Y '$4$'$$$
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i)Y V  -: Plan to give enough to important areas of audit.
ii)Y  

dentify & resolved.
iii)Y V  Properly assembled
iv)Y  / 0/ and proper review of their work ,of audit team , facilitated
v)Y  completion of work planned
Y V V #V'V %VV V # 


1)Y REM ͞Materiality ͞ is basicly officially done in THIS PHASE of the audit... strategy
2)Y PER unisa & IAS300 :In establishing the overall audit strategy, the auditor shall: (these+MANY examples are all shown very neatly in ISA300
appendix- and you marked it)
1.Y c : : Identify characteristics of the engagement that defines its scope;
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2.Y "    '5c% : Ascertain the reporting objectives of the engagement to plan the timing of the audit and nature
of communication required;
Ô 
i)Y companies # /interim reporting schedule
ii)Y " s
iii)Y timing +types of  
iv)Y Entity͛s reporting timetable for interim financial results and year-end financial results.
v)Y Meetings with management and those charged with governance.
vi)Y Communicating with auditors of components regarding the time deadlines.
3.Y c   V "V" : consider significant factors in directing engagement team;
'%!"'%
Y 0&
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Y !$
 Y  V"V# V "Vc% : Consider results of preliminary engagement activities;
5.Y  V cascertain nature, timing and extent of resources necessary to perform engagement. staff-
experience,+management of eg :meetings, quality control reviews,evaluations etc.

3)Y %V  VV   "VV"V"VVcVV"% one includes the


following in the V=+ÊÊ'VÊ$%> (not in audit plan) (ISA 330, par A1-A3).
ͻ
 
:Extend sample sizes.
ͻ    .Engage more experience staff.
ͻ

(
) /  : approach or to do a more ͚combined͛ approach (if there are deficiencies in the control
environment ʹ ie tests of controls OR substantive testing ?Which one more? ).
ͻ
 

   : Perform more tests of detail and less analytical procedures.
ͻ /  
Incorporate an element of unpredictability in testing-.
ͻ   
 Exercise professional sceptism.
ͻ    Consider the use of an expert.
ͻ      Put less reliance on management representations.
ͻ Perform procedures closer to year-end.
ͻ Lower materiality.

1)Y V V :
a)Y '5c%  V V The objective is to formulate an   and  
 which ensures that the audit will be
conducted in an  / .
b)Y The audit plan is far more detailed than audit strategy

(1)Y V V  cV''  ,   , V  :


(a)Y UNDERSTAND: :OF ENTITY AND ENVIRONMENT INCL. INTERNAL CONTROL. eg check if there is a risk of directors overstating stock, one cannot do
planning without first study Entity.
(b)Y UNDERSTAND: INTERNAL CONTROLS : understanding of internal controls to determine no. of samples to take
(c)Y UNDERSTAND : MATERIAL MISTATEMENT : assess risk of in the financial statements.
(d)Y UNDERSTAND: MATERIALITYdecide what is material, and what is not .
(e)Y FORMULATE AUDIT STRATEGY & AUDIT PLAN:

Y V V" c V


i)Y  V"
     :
(1)Y V of Procedures : make sure its sorted out ie :sufficient to asses risks of material misstatement
(2)Y " of Procedures : make sure its sorted out ie :sufficient to asses risks of material misstatement
(3)Y + of Procedures : make sure its sorted out ie :sufficient to asses risks of material misstatement.
ii)Y VV % 
         /
(i)Y V of Procedures : for each MATERIAL CLASS of Account Balance, &Transactions, &Disclosure. Refers to the type of audit
approach and further audit procedures.The auditor can decide to follow either of the following approaches:
1.Y A     which entails   
and  /  . This is normally when the
auditor intend to rely on the operating effectiveness of controls or substantive procedures alone cannot provide
sufficient appropriate audit evidence at the assertion level (ISA 330, par 8).
2.Y OR  /  which entail both   
and  

  . Irrespective of the assessed risks
of material misstatement, the auditor shall design and perform substantive procedures to each material class of
transactions, account balance and disclosure (ISA 330, par 18)
(ii)Y " of Procedures : either before yr-end (interim), OR at and after yr-end, or early verification just prior to yr-end and
roll forward at yr-end OR at interim and at end after yr-end.+ can incorporate Unpredictability element.
(iii)Y + of Procedures : Refers to how many or how detailed you will perform your tests or audit procedures.

iii)Y V#   c   : plus this , to comply with any ISA͛s

d)Y  c "V : ALL AUDIT PLAN + AUDIT STRATEGY : must be documented for: (to contain : 1-audit plan 2- audit strategy 3- signifiacnt
changes made to them)
i)Y REFERENCE FOR TEAM
ii)Y PROOF OF PROPER PLANNING BY TEAM
iii)Y RECORD OF KEY DECISION MADE
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1)Y ISA 315 :͟     V  /   V  "
"  : ͙is to obtain an understanding of
the entity ,its internal control and its environment, sufficient   
 
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   ,whether due to fraud or error , and      
    
  ͙.
!Y BUSINESS RISK : A Risk resulting from significant 1C   !/  $c  V     that could adversely affect an
entitys ability to /4/  , or from the setting     4/  
$Y Significant risk : A risk of "
"  that in the !")!"$ , is one that requires  
V c   
Y V 3   /     
  
 V
  
  
  

 
Y RISK ASSESSMENT PROCEDURES (5) :The V   designed to obtain an understanding od the 1-  incl. Its 2-  
c 
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its 3 /  , to identify and assess the   "
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 V 
!V /

-Y INTERNAL CONTROL : The Process designed and effected by those charged with /         

to provide
V V'V Vc about the achievement of an &#)  with regard to 1

    
  ,2 /  V 
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  with applicable laws and regulations.
&Y MATERIAL WEAKNESS: A weakness    
c 
that could have a "
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1
Y RISK ASSESSMENT PROCEDURES :The V   designed to obtain an understanding od the 1  incl. Its 2  
c 
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3 /  , to identify and assess the   "
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 V 
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Y 2 # legal personel (fraud,contracts interpretation),sales personnel(sales),production , marketing , key management .
b)Y c 1 '%V check records /assets etc /watch internal controls/ mnftring operation
Y VV#cV c ratio & trend,unusual, prior years etc
Y 

 
Y    
Y V  c trade journals,internet,lawyers,bankers.
Y     : 2 heads better than 1

2)Y Remember though : When using auditors toolbox ʹ substantive tests + tests of controls :same type procedures used

" V"V,cV Vc   '# V 


a)Y Risk in the audit ie : audit risk
b)Y Materialty concept
c)Y Understanding entity & environment
d)Y Auditors responsibility with fraud

" V" V  


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The auditor identifies the fin stat assertions at risk of misstatement and plans the audit in such a way that it reduces this risk to an acceptable level

  V    V#VcV' 


+Y V=+Ê'6"
Y As per    
 V     : Definition: V  is ͞ the risk that the practitioner expresses  
V Vc c   when the  1.
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b)Y As per V!    V  ʹ The risk that the auditor expresses an inappropriate audit opinion when the Ô 

  0 are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk (AR = IR x CR x DR).
c)Y So it is just the risk the auditor gives an UNQUALIFIED OPINION if he should have given a QUALIFIED OPINION.
2)Y Significant risk : A risk of "
"  that in the !")!"$ , is one that requires  
V c    (Also refer to
tutorial letter 103.)
3)Y '64&VÊ$'V &ÊVÊ$&$Ê ʹ The risk that the financial statements are materially misstated prior to audit. This consists of two
components, namely, inherent risk and control risk.
4)Y BUSINESS RISK : A Risk resulting from significant 1C   !/  $c  V     that could adversely affect an
entitys ability to /4/  , or from the setting     4/  (ISA 315, par
4(b))
.

c "  V  


+Y Per ISA 200 audit risk has 3 components
 
1)Y Is NOT controllable by auditor
2)Y The susceptibility of an assertion about a : 1-class of transaction, 2- acc. bal., or 3- disclosure
3)Y Built in risk eg: complex transaction calc͛s MORE than simple transaction calc͛s, or 4
 /
 
/
.
4)Y The risk ͞before͟ consideration of any controls.

!c   c


1)Y Is NOT controllable by auditor
1)Y If Internal controls do not do their job properly. Due to "V  Vc  

Y c %'
!Y   VVc 
$Y  "V 
Y c   
Y V' " " %
(6)Y cV  , V)

2)Y Overcome by put control activites in place: eg segregation duties, access control, control environment.

$c  


2)Y Is controllable by auditor ʹ if inherent + control risk is high , he must increase experience staff,or no. of samples, etc, to
reduce detection risk.
3)Y May arise because 3 reasons: auditor
a)Y 
 :an Inappropriate audit Procedure
b)Y "
 :an Appropriate procedure
c)Y "  results of a test

 VVcVV"%VVV %


1
ISA 315 gives all the following & says: must be assessed at 2 levels:
a)Y Financial Statement level:
b)Y Assertion level:
Y   
 
/

Y Possible reasons:
Y "   c 
Y "       .  
 

c)Y "    to perform : no capital,etc.
d)Y '   : technology/fashion (obsolescence) ,complexity of capital structure,no.of locations.
e)Y     :economic conditions(recession) , competition, consumer demand, accounting practices.
GY Possible solutions: (etc)
a)Y    staff
b)Y  / More
c)Y   
skepticism Emphasise team
d)Y   visits : add more unpredictability elements ʹ
e)Y c V make plan different to in past
!Y V 
/

1)Y Possible reasons:
a)Y V  : eg involve high degree of estimation: stock count fresh vegetables,or provision bad debts
b)Y c
Transaction: eg sale &leaseback , contract accounting
c)Y  /JudgementInvolved: bad debts provision
d)Y VVulnerability: eg cash
e)Y # :of fin period.Unusual OR Complex transactions : to manipulate transactions.
Y   /Unusual Transactionssale of old assets
Y  
/
( 
) 
 
/
 
   
     
   
  

. 
 
/
   /  
2)Y Possible solutions:
a)Y Address the risk relating to possible assertion directly eg: more samples , or get expert to valuation assertion for
technology stock.

 V"VV#
+Y V  : Is ͞ the risk that the practitioner expresses  V Vc c   when the subject matter info. 
"VV#"Vin theVcVV" ͟. 
2.Y ""VV : if auditor identifies a risk as immaterial, BUT finds a major internal control problem there ALSO, he must :
i.Y CAN ignore iot for purposes of fin stat reporting
ii.Y MUST report it to management
iii.Y SHOULD carefully re-consider if it was actually correctly classified (as a immaterial risk).
3.Y "VV# : When making a decision based on Fin. Stats. : the judgement of a reasonable person would be effected
a.Y Reasonable person/user =
i.Y Reasonable knowledge of Business and Economic Activities and Accounting.
ii.Y Willingness to study information with Reasonable Diligence
V" V  '#V  
1)Y Each account heading can have a different audit risk , if there is a higher misstatement risk then there is a higher AUDIT
RISK. Eg [complex transactions VS simple transactions] or [leased VS purchased assets.]
2)Y Eg : For a leased asset VS purchased asset : is there a difference in the audit risk? Answer = YES
Leased attracts more risk of misstatement than a bought item because:
(1)Y Assertion : %V V 
(a)Y V= complex ie may not be clear on the contract ʹ finance charges etc! need to check market values etc.
(b)Y  cV= simple ͙.where is the purchase invoice ?
(2)Y Assertion :  
(a)Y LEASE : is it a finance lease or operational lease, was it correctly capitalized?
(b)Y PURCHASED = simple receipt/licence
(3)Y Assertion : +c
(a)Y (easy IN BOTH CASES = physical inspection

%  
1)Y TYPES OF LEVELS:

Y ISA͛s only give ͚significant͛   ; ISA315 :risks that require :  

 
 
b)Y Some audit firms have : high,medium,low
c)Y Some have :pervasive
Y Some have increased or decreased risk

*Y "/ 


 c    V$!&


!Y  Riskʹto do with risk-
*!Y  $  : + Significant Related to in economic,acc,other ʹto do with risk-eg new IFRS standards, recession etc.
-!Y c
transactions Fromʹto do with risk-merger/acquisition/unbundling
3!Y 
 parties significant transactions with ʹto do with risk- eg: inter-company transactions
7!Y  /Subjectivity/ High degree: in measurement of fin. Info. ʹto do with risk-estimate provision bad debts.
@!Y  
  /unusual Transactions ʹto do with risk-eg: BEE transactions

!Y V   
1.Y    staff
2.Y  / More
3.Y   
skepticism Emphasise team
4.Y   visits : add more unpredictability elements ʹ
5.Y c V make plan different to in past

    ,  V''#  V V  VcVV" % ," 'V' V#c  " !  1$ VV, 


    ,  V''#  V V  V  %V+!  V$  "V#" +V"   ," 'V' V#
c  " !  1$ VV, 






" V"! c c "VV#V$!


 
+Y It is generally understood and accepted by users of fin.stats that NOT 100% and may contain margin of error or uncertianity.HOWEVER margin of
error must be acceptable to users otherwise are of little value.-ie : Materiality.
Y DEFINITION : "VV# : ( also in IAS 320 , one in begin of chaoter hodden , other for ͚performance materiality͛ is under ͚definition͛ heading
Y If omission or misstatement could affect users decisions
#Y Size of item judged from particular circumstances.
Y Threshold or cut-off point rather than a qualitative characteristic - to be useful.

V  "VV#


1)Y  '5c% : Materiality is very :1 auditor will get a different answer to another auditor, but many similarities.
2)Y V%  V'  : Materiality is very : material to small firm is maybe not material to large firm.
a)Y  0.   6  6  

$6 
V$6 /6
b)Y     mostly used alone, none of others , so cross-mix ups do not occour.(most important one)
3)Y 2 VV%V2 VV% Materiality is very :Quali= non-figure eg a ͚law͛ or disclosure / Quanti= figures.
,V, 2  V  cVc V "VV#V VV : ,
follow the following steps:

1. Determine which figures to use: You are least likely to use the budgeted figures and/or figures that entail material misstatements, like
unaudited figures.
(1)Y budgeted figures;
(2)Y un-audited figures of current year; or
(3)Y prior year audited figures.
2. Consider the indicators and perform the calculations:
i)Y Turnover ½ - 1%
ii)Y Gross profit 1 ʹ 2%
iii)Y Net income 5 ʹ 10%
iv)Y Total assets 1 ʹ 2%
v)Y Equity 2 ʹ 5%
The above percentages are obtained from DP6. (The DP6 has, however, been withdrawn and we only use it to serve as a guide on which to base the
materiality calculation.

Remember to consider the nature of the business. In entity that is capital incentive you are likely to use total assets for your materiality calculation. The
materiality calculation bases will differ from audit firm to audit firm.
3. Determine the materiality Remember there is an inverse relationship between materiality and audit risk. Always substantiate your materiality figure
selected. Marks will be awarded for this, even if your calculations are wrong.

V "VV#VV"VV#
+Y ISA320 says Auditor must consider materiality at 2 places:
Y PLANNING STAGE: DURING the ͞ STRATEGY STAGE ͞when determining nature,extent + timing of testing (planning materiality) 
#Y FINAL STAGE :when evaluating the effect of any misstatement (final materiality)

V "VV#

VcV "  ,# "VV#V     , 


a)Y V,V# In a: just take the biggest money accounts, less for smaller money accounts.
Y cV Va % : of account balances 
Y  " Vuse a

 V "VV#%


Y "
 
Y 
  
 
/
%  : ie Low Materiality Level =1% High Materiality level = 10 % so if level is
high ,( ie 10% of revenue of 1000 is R100, so only things above 100 not below, BUT 1% of 1000 is 10, so ALL things above 10 ʹ that͛s
a lot more stuff to be checked! That is why it is INVERSE) risk is low and visa-versa.
(c)Y V     you get an idea of disclosures to look out for and plan accordingly.eg:litigation,licences , economic
conditions,attention focused, key disclosures- eg R&D costs for pharmaceutical, asset intensive then assets etc. .see IAS 320 for
MANY.
(d)Y There are 3 kinds of Planning materiality and Final materiality :
2.1.Y 1) Financilal Statement as a Whole MATERIALITY
(i)Y Decide which item to use as the overall major indivcator, mostly profit for profit companies, or revenue for non-profit
companies, or assets for asset heavy public entities or profit before remuneration& tax for small owner salaried business.
2.2.Y 2) Assetion level transaction/balance/presentation MATERIALITY
(i)Y If there are any transactions/balances that are special due to following reasons, then materialty for each one can be
measured individually as well, in addition to overall materiality.
1.Y V,. V  : eg JSE rules
2.Y #c   : eg key disclosures- eg R&D costs for pharmaceutical
3.Y V  c  : on fin stat separately disclosed item eg: newly acquired business
2.3.Y 3) PERFORMANCE MATERIALITY :
(i)Y Copied fron Unisa : ͞Please note that the performance materiality calculated will be lower than the materiality calculated
during the planning phase of the audit. This enables the auditor to minimise the risk of expressing an incorrect audit opinion. ͞
(ii)Y This is where you add up the materialites of EITHER :
1.Y , VcVV"% small materialites making up the WHOLE FIN STAT materiality , choosing
those that where many IMMATERIAL materialites could all together cause a MATERIAL materiality.
2.Y #V cc'VVc.VVc % : same as for above, you add smaller ones that make up the
whole, using prof judgement to choose which to add up ʹ which could together cause a material thing- but individually
would be immaterial at thye same levels.
Vc  'c ,2 V# V "VV#
Y   eg % or formulas
Y cc "V its importance to users (special additional info. Eg conditions of loans)
c)Y  V. V #2 "eg special figures for JSE must be carefully audited
Y "V#.V  if clients final figures differ a lot, materiality might have to be adjusted a bit


V"VV#
V  "    ,  "V VV"VV#c 
Y VV  V   if he finds more problems with some area than he thought would happen when he
decoded on his first materiality level, then he must re-calclate the materiality again and carry out extra procedures as required by the
ne level he now sets. The final level he ends up with is at the end of the audit , where "V#.V  if clients final
figures differ a lot, materiality might have to be adjusted a bit , can happen, and he will finally end up with the final figure that will not
change again. This must be documented.
Y VV#V4the errors in sample over population specified
Y c should be carried out or whether client should be asked to check the population in detail for further
errors.
Y c ,c" "all misstatements in detail with management in order to attempt to have them rectified .If client
does NOT correct them , it could be for following reasons: (then auditor will have to qualify his report IF it is material )
Y  V  eg client says stock is not obsolete, or something is not a financial lease per IAS 17 so not to be
capitalized etc.
!Y    "
client says it would not influence a user
$Y c ' want some ratio, so get stubborn
Y   (
) all the fin stats
Y    V2
  stuff you

Vc  'c %V V   %V c'     


V
Y   

known = sales invoices wrong period(strong ground) Likely= provision bad debts(weak ground for
auditor)
Y " 
     
 seek patterns
Y    

  eg directors emoluments,contractual obligation need keep fixed ratio 
/Y    eg: IFRS standards important, misallocate expense less, director cheat more,
/Y      
on Popular figures & ratios eg :EPS (earnings per share)
/Y 
 
/  if 1 milllion is Relatively ʹ unimportant , But Absolutely ʹ just too much , then
auditor takes action anyway.
Basicly , to overlook some misstatement because client will be unhappy is Unprofessional.

c c  
1)Y No magic formula, takes years of experience , confidence grows as experience increases.

" V"$  V #V% "


#V% "V$ %VV7''#' V 
(Vc)V+V V$
1)Y KNOW THIS ONE ONLY ,JUST READ THE REST :As per ISA 315 , the auditor should obtain an understanding of (pg6/8)
a)Y INDUSTRY Relevant  #  V #, and other +VVc . (of whole industry)
Y #V of the Entity. (of just entity itself)
Y Vcc   cThe Entitys selection of
Y '5c%1V     
    of Entity
e)Y VcV "Vcof Entity
2)Y As per ISA 315 , the auditor should obtain an understanding of (IN DETAIL,SAME AS ABOVE):
a)Y of whole industry #  V #, and other +VVc  that are Relevant
i)Y  #
(1)Y cyclical/seasonal
(2)Y Risk Profile : high eg fashion /technology ʹOBSOLETE etc, labour volatility, boom/recession, competativeness.
(3)Y Gov.Mometary Policy. : incentives,restrictions,foreign exchange
ii)Y  V #
(1)Y Tax,health, environmental
(2)Y Accounting policies.
Y of just entity itselfV of the Entity.
Y   c "V     V 
(1)Y Products & Markets: key customers/suppliers , export/import , market share , pricing policies and margins 
(2)Y Retailer/wholesaler/service
(3)Y Internet trading
(4)Y Key Suppliers
(5)Y Location addresses
(6)Y Labour : unions, pension commitments,regulated eg: minimum wages etc.
(7)Y R&D
(8)Y Franchisees,licences,patents
(9)Y Stock :Quantity,types,location
Y ,1 %Vc
(1)Y Structures : corporate,organizational,capital
(2)Y BEE
(3)Y BoD : governance adherence ,risk management, reputations, committees, meetings
(4)Y Management Operational : pressures to perform/deadlines , performance based remuneration , capabilities etc
(5)Y Internal Audit dept.
Y %"VVc Vc%
(1)Y V . 
(2)Y  / other entities(joint ventures,partnerships) , plant & Equipment, technology
(3)Y    
(4)Y  8
(5)Y 
Y c/  
Y  
Y 
 
 Y  
Y 
 
 Y //
/Y VcV   
rd
(1)Y    /  deadlines, profit share/remuneration based on financials, 3 party reliance(bank lend etc),
shareholders expectations, pressure to perform from holding company/overseas affiliates.
(2)Y   


/ V  /        /
    
Y Vcc   c the Entitys selection of
i)Y If appropriate or not
ii)Y If consistent with that Type Industry standard.
Y cc V  
(1)Y 
   Accounting for unusual transactions
(2)Y V  
V/

)"Accounting Policies adopted for controversial or ͚/issues, for which there is no
standard
(3)Y c V  
 :Reasons and appropriateness of changes client has made to accounting policies
(4)Y c V  
 :If New Standards Adopted :How client adopts & implements new standards in accounting.
Y '5c%1V ( )of Entity . : eg Risk=Sales on credit to customers who will not pay. Potential Misstatement: bad debts
/////or //// Risk=import regulation contraventions,,overestimate demand, product liability Potential Misstatement: overstate
inventory(cannot legally sell products) , Underprovision for legal claims. 
e)Y VcV "Vc   of Entity.
i)Y After considering the following things in Evaluation of Performance, a unusual result may indicate mngmnt manipulation from
pressure from holding company.
(1)Y Ratios/trends ,
(2)Y comparable info mnth-mnth / division-division / industry- industry.
(3)Y Budgets/forecasts
(4)Y Employee Incentive/performance schemes. Or. Holding company pressures to perform.

Vc   #, V #1% "


ISA 315 gives a more formal approach to internal control than chapter 5, and requires the auditor to have understanding of following 5
components of internal control:

c " c  % "


Sets the tone of organization and influences control consciousness of staff, positive audit risk factor if good, fraud less
c 
 /   : Attitude and awareness of managers & directors to internal controls and their importance to entity.
(a)Y  : fin accountant does not bother to check recon of creditors ledger to creditors statements made by creditors clerk
PROPERLY ,only HALF,before paying ,.So soon clerk wont bother to actually reconcile properly.
(b)Y V$: says good control environment characterised by:
(i)Y Mngmnt Commitment/implements/employ : Integrity and Ethical values and Sound Performance.
(ii)Y Mngmnt Commitment/implements/employ : Competent staff
(iii)Y Mngmnt Acts/displays : Leadership , Sound judgement , (+Ethical behaviour).
(iv)Y Mngmnt Inluence Positive: Acts/displays : Integrity & Ethical.
(v)Y Organisation Structure/policies promotes this : Authority + Responsibility + Reporting : relationships
(vi)Y Organisation Structure/policies promotes this : Planning + Execution +Control + Review
(vii)Y Good HR policies : Training & development , Compensation fair & benefits ,get competent ethical staff.

c " !# V" c


Y  c #Vc 
(i)Y    Business Risks:
Y significance of each Risk:
Y Vlikelihood of its occourance
/Y   to risk.
!Y In larger organizations : 
Y Committees hold regular meetings.
Y Appoint chief Risk Officer and/or Compliance Officer
$Y Smaller organizations & generally: managers job
Y Audit by Inspecting:
Y Documentation eg;
Y Minutes of special committee meetings.
Y Inter-office memos on rectifying problems/ rectifying risks.


c " $c  Vc%Vc  


1)Y Info. Is Gathered on this by auditor in same way as for I.T. above (iv)
2)Y Ensure mngmnts objectives carried out- policies & procedures which
3)Y Auditor ONLY concerned with those ones where MATERIAL MISSTATEMENT likely. EG:
a)Y Authorisation of transactions
b)Y Segregation of duties
c)Y Physical control over assets
d)Y Comparison + reconciliation
e)Y Access controls
f)Y Custody controls over eg: blank cheques
g)Y Good document design etc etc etc

c " "    c  


1)Y How internal controls are monitored, to ensure they are actually done.
2)Y If no monitoring, not be long before employees order goods for themselves,write off friends debt,steal stock etc)
a)Y Eg:\
i)Y Regular employee performance reviews
ii)Y Weekly IT manager srutinises logs+exeption reports
iii)Y Telesales manager replays recordings check procedure
3)Y Info. Is Gathered on this by
a)Y    :Documents on ͚monitoring activities͛ /͛performance reviews͛.
b)Y  :Internal auditors discuss with

c "  "V #"


1)Y Auditor wants info on RELEVANT info ie: fin stat , not nonsense, he wants info on:
a)Y FINANCIAL REPORTING and COMMUNICATION.
i)Y ͞Classes of transactions͟ that are relevant to Fin.Stats.
ii)Y Procedures : Manual + IT for A-Z ͚initiate transaction to fin stat͚͛ process.
iii)Y Capturing of NON-FINANCIAL info: eg contingent liabilities.
iv)Y Accounting Estimates + Disclosures
v)Y Controls over Unusual transaction Journal Entries
vi)Y Manner fin. Info. Is conveyed to board, audit committee, JSE etc.
b)Y COMPUTERISED INFORMATION SYSTEM.
i)Y V   c   V 
(1)Y Computerised applications
(a)Y Which? Eg payroll / acquisitions & payments.
(b)Y Environment : bureau,micro/network/centralized
(c)Y Application software : purchased or inhouse ,input sources,important masterfiles etc.,new/old
(2)Y Hardware
(a)Y Makes +types (establish compatability with auditors own system)
(b)Y Location - factory,branches etc
(3)Y Software
(a)Y O.s,utilities,DBms,access control software etc.
(4)Y Organisation + Control
(a)Y Internal controls+ personnel structure
(5)Y Complexities of the System
(a)Y Complex databases,internet,EFT,LANS,WANS,EDI(electronic data interchange),
(6)Y Level of Dependence (on system by client) : eg wages , if broken - disruption
ii)Y   
c 
:
(1)Y Programming Errors : eg calc.vat incorrectly.
(2)Y Unauthorized Access to data : could delete/contaminate entire masterfile etc!
(3)Y Unauthorised Changes to data:
(4)Y IT personell fiddling data eg salaries.
(5)Y Instantaneous Fraud Processing: eg eg funds transfer.
(6)Y Data non-access from system failure.
Y  
Y New employees
!Y Rapid growth
$Y New technology
Y Introducing new business models
Y Corporate restructuring
/Y      
Y / 
(2)Y   (+questionaires)
(3)Y  (past auditor, mngmnt,outsiders,software providers)
(4)Y Discussion (Internal Auditor + review their workpapers)
(5)Y Trace info through system.
(6)Y Flowcharts inspection

 cV , V #1% "


1
Y    ; ISA315 :risks that require :  

 
 
*Y c
    /    
  / 
  
 
-Y "/ 


 c
!Y  Riskʹto do with risk-
*!Y $  :Recent + Significant Related to in economic,acc,other ʹto do with risk-eg new IFRS standards, recession etc.
-!Y c
transactions Fromʹto do with risk-merger/acquisition/unbundling
3!Y 
 parties significant transactions with ʹto do with risk- eg: inter-company transactions
7!Y  /Subjectivity/ High degree: in measurement of fin. Info. ʹto do with risk-estimate provision bad debts.
@!Y  
  /unusual Transactions ʹto do with risk-eg: BEE transactions
!Y V   
1.Y    staff
2.Y  / More
3.Y   
skepticism Emphasise team
4.Y   visits : add more unpredictability elements ʹ
5.Y c V make plan different to in past

c "" cV ,( %Vc)V"VV ", V #


1% "
Y V " VV     /    

 
    
 
   

 c "V , V #1% "


V "   

$  


  

" V" V   '# c V VV 
VcVV"
 
+Y Due to increase in fraud worldwide eg: enron.parmalat,leisurenet ,auditing profession responded by amending ISA.͛s In past objective of
audit NOT to discover fraud(see postulates of auditing) but to express opinion on fin stats to increase confidence.The primary objective is
still not to discover fraud, but more emphasis has been placed on this.
!Y   /
   V    
a)Y ISA 200 : ͚Emphasise   
 )
b)Y Isa315 ͚assesses the risk of fraud͛
c)Y Isa330 ͚respond to assessed risk ͚
d)Y THE MAIN ONE:
i)Y V! Title: ͞The auditors responsibility to consider fraud in an audit of fin stats.͟ States objective of auditor is to:
(1)Y I.D. risk of material misstatement due to fraud
(2)Y Gather sufficient appropriate evidence regarding  
(3)Y To respond appropriately to fraud or suspected fraud in the audit

 c V#  ,,


Y  an     
 which results in   in the  $(eg calc. interest wrongly,mistake in journal entry,not by
auditor but by client , not on purpose) 
!Y V : an   
 involving   to obtain an 

 
 /  $
$Y V  Vc  /  or c   that show an   / oror provide   to commit fraud. 2/5
Y "VV "V : fraud involving one or more members of     OR    /  
Y " #V  fraud involving 
 ,  management or those charged with governance.

V #!  V  'c V 


Y V  VcV   Fraudulent Financial Reportinginvoves   
  ,including  ,in
financial statements,to / of the financial statements.It is normally perpetrated by those charged with governance or
management (they have the most control over fin stats/prepare them)
Y  
   

 
Y     c " 
    
 "  
 
  V

Y Change balance on a debtors account to reflect a higher value
!Y Inflate cost price of inventories
$Y Include fictitious sales

Y VcVV""     /          
(1)Y NOTES , OMIT in NOTES a significant contingent liability from the NOTES.
(2)Y UNDERPROVIDE /or do not :for all known future losses.
(3)Y SALE Failing to reflect the SALE of material assets.

Y
Vcc  c   

   
        

Y failing to CAPITALIZE FINANCIAL LEASES.
(2)Y INAPPROPRIATE POLICYto inflate profits
KNOW ALL OF (iv) below per lecturer
/Y "VV " % 

 
    /

Y FICTITIOUS JOURNAL ENTRIES ʹeg fictitious sales in journal
(2)Y JUDGEMENTS/ESTIMATES - eg understate asset impairments
$Y #VV .V / .
      
    
  
    
 
  

       


(
) '#
  #VVV,  VV c " # cVcc  "' 
V,V
(4)Y DISCLOSURE of FACTS : Hide disclosable facts ; eg a claim for damages against company
(5)Y COMPLEX TRANSACTIONS : structured to MISREPRESENT financial PERFORMANCE /POSITION of company. Eg manipulate
inter-company balances in a group to ͚reallocate profits͛.
(6)Y ALTERING RECORDS /or TERMS relating to significant or unusual transactions.

Y  directors deliberately understate liabilities and overstate assets to secure a loan, or manipulate earnings to reduce taxation , or to
get performance bonus͛s. 

!Y "V V  V of companies  , by employees or mngmnt,harder to detect with mngmnt they can conceal it
easier.includes:
Y 
 
Y Stealing cash sales 
Y Stealing cash received from debtors, and then writing debtor off as bad.
Y  
 


   Theft ofor
Y      / / Causing entity toficticious employees- keep the money,or pay a ficticious company set up by
management for goods never received.buy things for own use through company
Y       
 hire out equip on weekends, keep cash.

Eg: if you sign on delivery invoice for goods received ,it is easy to commit fraud, just slip in a false delivery note.stop this by using a ͚goods
Receiving Note͛ : sequential numbering hard to slip in a duplicate.If no numbering though- just print a new document then slip it in ,+ must use
special printing & special paper, to stop photocopying.

 '# "VV "V cV , %Vc+Vc#V


!
1
1)Y Responsibility for the 1- Prevention 2-Detection of fraud lies with those charged with 1-governance 2- management
(a)Y Strong control environment ʹ responsibility also rests with those charged with 1-governance 2- management .
(b)Y Management responsible for Concious assessment of of risk of fin stats materially misstated.

 '# V  +Vc#V!


1
Where does that leave the auditor?
1)Y The auditor͛s responsibility is to conduct the audit in accordance with ISAs and obtain reasonable assurance that financial statements taken
as a whole are free from material misstatements, whether caused by fraud or errors.
2)Y /  
    $ 

(a)Y   
  {even mngmnt with integrity can be tempted to fiddle fin stats to meet group performance targets}
(b)Y Consider mngmnt override
(c)Y Recognize fact internal controls for detecting errors not enough to detect fraud

'5c% V  +Vc#V!


1)Y ID & assess risks of material misstatement
2)Y Obtain sufficient appropriate evidence to respond to these risks
3)Y To respond appropriately to any detected/suspected fraud

   V "V"c  VV$


1)Y V  { auditor must $($%of duty to watch out for fraud}

 V" c   '#V  +Vc# V!-!


Y cc#V "VV "
Y V V"  V "V"  V 
Y      c # V  cV# # VV#
Y     c    V 8  


   




/Y c   ," "c "" cVVc cV'V%  " #
/Y V 
Y V
 1     /  
 .     
!Y V  
   /  
 .    
!Y %Vcobtain an understanding of how those charged with governance , unless they are also management ,exercise their
responsibility by: 
Y / 
Y V 
 
 .  
$Y VV#cV c unusual or unexpected relationships eg unusual fluctuations in gross profit percentage.
Y  ceg: from previous audit engagement at client
Y V  Vc if any are present from assessing Entity and Environment.

6)Y  

    


 1V 
/
: Identify and Assess Risk of Material Misstatement due to FRAUD at level of
    "VV"V"  V  VV
c 
1½  2 3
4  1 05 5 5 

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Y V    
1.1.Y Strongly Independent /Strong Willed
1.2.Y Competent
1.3.Y Experienced
1.4.Y That adopt Professional Scepticism
2.Y V  
 :Consider those adopted by mngmnt :Appropriate & Properly applied OR indicative of possible
fraudulent earnings manipulate/influence users etc
3.Y 
    
 : nature ,timing,extent : surprise vistis etc.

VV %V!+Vc#%V'"777


1.Y      :consider of tests to minimize risk of misstatement in assertions
2.Y      ;
2.1.Y Remember difficult to detect  
 things
2.2.Y  /   : must get strong, not weak, evidence for any serious allegations.
3.Y c  ' V%"

 : experts+observation+inspection+analytical review +element of Unpredictability.
+CAATS(find duplicate bank acc. No. for fake employee payroll scam)

"VV " %V!+Vc#%V'"777


2.4.Y CHARACTERISTICS OF FRAUDULENT JOURNAL ENTRIES:
1.1.Y 
V  :entries made to unusual,unrelated,or seldom used acc͛s
1.1.1.Y 0c  : eg not reconciled regularly ,or acc .with no specific purpose eg slush funds.
1.1.2.Y 
  : ie non- recurring ,not subject to standard internal controls.
1.2.Y 
 :passed (entered/done)by people who normally do not do journal entries.
1.3.Y  : Not supported by adequate reasons,explanations or descriptions
1.4.Y   :Not posted to ledger, but direct to fin stats(loss of audit trail.)
1.5.Y  V  : Or Consistent Ending Numbers only.
2.Y Journal Internal ControlEntries authorisation : concentrate on entries where controls are weaker
3.Y End Year adjustments:procedures to check journal entries & adjustments.
4.Y Fraud Risk Factors : consider these, eg if there is already an assessed risk debtors payment embezzeled & written off as
bad debt.
5.Y Weak Internal Controls Unusual transactions :Significant transactions outside normal course of business eg: purchase firm
which makes different products.

%V V  %c


1.Y V  
    : reconsider at end if anything in evidence might indicate fraud
1.1.Y V     :non-timeous recons, unauthorized trasactions eg travel expense,unneeded access to
records possible by eg foreman,tips /complaints
1.2.Y c
 /   : unexplained recon items,unusual ratios eg commission up but sales same,implausible
explanations from employees,excessive charges /payments to eg lawyers/suppliers
1.3.Y " /   missing purchase orders,
1.4.Y "    
 

     : deny access to
records,overd:one time pressures,intimidation of team,unwillingness to allow (reasonable)CAATS.etc
2.Y c      
  could be intentional ,esp. if their effect on fin. Stats. Is very significant.

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1.Y V         
1.1.Y    
 
Mngmnt responisible for design+implement Internal controls to prevent & detect fraud
1.2.Y 
   :Mngmnt has disclosed to auditor their assessment that misstatement due fraud in current
fin stats.
1.3.Y   : mngmnt has disclosed to auditor prior fraud by 1-employees 2-mngmnt
1.4.Y     : mngmnt has disclosed to auditor SUSPECTED fraud , esp communicated by others eg:
employees,analysts,regulators.

 V' c   V "


1)Y May question if should withdeaw,
2)Y Must consider report this to to client and authorities
3)Y IF YOU DO DECIDE TO WITHDRAW :
a)Y Discuss with mngmnt
b)Y Report to client + authorities as per law/regulations

 'c "" cV " "


1)Y IF found: To appropriate level mangmnt to deal with it
2)Y Governance : if separate from mngmnt :
a)Y Tell them if Real or suspected
b)Y Any other matters relating to fraud pertinent
3)Y "         
    
a)Y Confidentiality- it is inappropriate to simply inform all and sundry about it, ie SARS,creditor,trade union.
b)Y Management fraud : should always be reported 1 level higher,(+to section chief eg: to fin or other manager if needed) than suspect eg
paymaster to financial manager, financial manager to audit comitee/chairman (those charged with governance)If this is not successful it
may be necessary to report to IRBA as reportable irregularity.
c)Y Absolute evidence of fraud is not needed but at least sufficient appropriate evidence befor e wild accusations.
d)Y Entire matter should be documented
e)Y As per Auditing Professionact: to be a ͞reportable irregularity͟ the auditor only needs ͞reason to believe͟, not absolute evidence.
Y     
Y "  0
/
/ 
b)Y    /  V 09' is the ultimate level charged with governance}. + And Audit committees (law
says public companies must have one) Folowing matters MUST be reported to these ?2?:
i)Y INTERNAL CONTROL MATERIAL WEAKNESS (mngmnt is not doing their job)
ii)Y Questions regarding mngmnt integrity
iii)Y Mngmnt fraud
iv)Y Other fraud resulting in material misstatement of fin. Stats.
Y  
    
i)Y Confidentiality stops auditor from reporting to 3rd party exept:
(1)Y To IRBA as per Act(law)
(2)Y Court or statute requires certain disclosure
(3)Y Client gives permission
Y    
Y If permission not granted by client to discuss with proposed new auditor then old may not discuss with new auditor ,but he must say
permission has not been granted.

 'c "" cV V  


1)Y As per local laws ( see code of coduct SA part FOR IRBA RULES)
2)Y Reportable irregularites above 100 000 : The law says you must report any fraud over 100 000 must be reported, not dealt with in-house,or else
you are seen as being part of the fraud.

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V )V+! V , ,  *V V#
V+ V! , 
1

 
1.Y V!  fraud risk factors can be divided into 2 categories. And each of theses two categories can be further divided
into 3  

Y  
   
  
!Y  
 " 
 "    V
"
1.Y   /. : are there pressures eg: performance bonus͛s
2.Y   :are there any opportunities
3.Y V . 
 : does the attitude of employees&mngmnt suggest an environment
conducive to fraud.

V  VcV  


2.5.Y incentives/pressures
1.Y  V'#.VcVV'#           
1.1.Y Competition so declining margins
1.2.Y High Vulnerability to Change :rapid change eg interest rates, technology,eg electronics companies.
1.3.Y Operating losses : threaten going concern
1.4.Y New statutory/accountin/regulatory requirements : deliberate contravention.eg environmental
2.Y  "Vc /       $   


 
2.1.Y Debt or equity financing: eg need a loan, want to show good results to influence
2.2.Y Expectations :profitability or trend level, of investment analysts,significant creditors,institutional investors.
2.3.Y Debt repayment requirements: eg to maintain ratios specified in a loan agreement.
2.4.Y Pending transactions : significant,need specific performance. eg: merger or construction contract(cant show
bad losses)
3.Y  VVcV      
             
     

 
3.1.Y Mmngmnt Performance bonuses : eg 25% of net profit after tax.
3.2.Y Mngmnt Shares: :hold significant shares in firm
3.3.Y Personal debt guarantees: :by directors of firm.
4.Y +c%  VcVV  V  c% V   
/    

  
   / 

2.6.Y 2)opportunities
1.Y V   #. V 

1.1.Y   


    significant transactions  
1.2.Y    allowing firm to dictate conditions to suppliers resulting in inappropriate
transactions.
1.3.Y  where difficult to corroborate estimates could be used to manipulate results (assets, liabilities,
revenue, expenses)
1.4.Y 
 4   all business methods with ʹeg import through a neighbouring country.

2.Y c%"    "VV "

2.1.Y   ofmngmnt by small group/ or person without compensating controls.
2.2.Y   // by those charged with governance over the financial reporting process&internal
control.

3.Y c "+  V'  VV V c 


3.1.Y c 

  :Difficult to determine who has controlling interest in company


3.2.Y 
legal entities &managerial lines of authority in Overly complex organizational structure.
3.3.Y     /: senior mngmnt and legal council and those charged with governace.

4.Y Vc  c


4.1.Y     of internal controls.
4.2.Y   /.  /: either of for Accounting ,Internal Audit, or IT staff.
4.3.Y   /accounting and information systems.
2.7.Y 3)attitudes/rationalisations:
1.Y    neffective enforcement of firms values and ethical standards.
2.Y    "  V   
0non- financial managements excessive participation. In determining
3.Y   
.  

  anyregulations or fraud eg insider trading


4.Y  .   :Excessive interest by mangmnt in increasing /maintaining entitys share price/earnings trend
5.Y  :Interest by mngmnt in unappropriate means to minimize reported earnings for tax : eg understating sales.
6.Y  
.    : No interest in differentiating eg: takes holidays & charges company.

V  Vc V  "V"   ""V V  V
2.8.Y incentives/pressures
1.Y  
   
 
"  
2.Y V /
  with firm eg compensation /other dissatisfaction , anticipated retrenchments.
2.9.Y opportunities
$Y V 
3.1.Y clarge amounts on hand
3.2.Y  /   : eg small size high value ʹjewelry
3.3.Y V :Easily convertible : eg bearer bonds /diamonds
3.4.Y V: Characteristics : small, marketable,lacks ID ,eg power tools

4.Y Vc  :


4.1.Y Inadequate      
4.2.Y      / : eg goods into /out stores with no supervision.
4.3.Y   

  : screening for sensitive jobs (incl. storeman)


4.4.Y   inadequate record keeping for the coming recon of assets, or asset recon itself inadequate.
4.5.Y Lack proper  .
4.6.Y  
    : poor over assets
4.7.Y 
      for transactions: lack of eg: let customers take goods but do
paperwork later.
4.8.Y Mandatory vacations employees in key control positions: they normally do not want to take a holiday
because they cannot cover up in that time.
4.9.Y Senior management expenditures: inadequate authorization,review and control eg: travel claims.
4.10.Y IT personel ͚do what they want͛ : esp. if Mngmnt has inadequate understanding of IT: IT personell might
change debtors balances in masterfile.
4.11.Y attitudes/rationalisations
1.Y Factors which indicate employees have a relaxed attitude to control, or to misappropriation of assets.
1.1.Y c 
 /    eg Ignore theft incedents, Overriding controls.
1.2.Y  
  Mngmnt suddenly takes expensive holidays.
1.3.Y   '/: by employees indicating displeasure at treatment or at entity itself.