Summary Auditing 288

Chapter 1: Introduction

What is an Auditor?

Auditors are assurance givers. They express a conclusion designed to enhance the degree of confidence
of the intended user. They assure and attest to the truth of financial statements

Types of Auditors

 External Auditors
- Express an independent opinion on the whether the financial statements fairly present the
financial position and results of a company.
- Not an employee of the company

 Internal Auditors
- perform independent assignments on behalf of senior management.
- Enhances managements degree of confidence that internal systems are functioning properly
- Is an employee of the company

 Government Auditors
- Evaluate and investigate financial affairs of government departments
- Auditor General, SARS

 Forensic Auditors
- investigate and gather evidence where there has been alleged financial mismanagement,
theft, or fraud

 Special Purpose Auditor
- specialize in specific fields

Characteristics of Auditors

 Independence
 Integrity
 Objectivity
 Professional competence and due care
 Confidentiality
 Professional behavior

The Need for Auditors

 Split between ownership and management
 Confidence in financial information
 Accountability

Purpose of an Audit

 To ensure the financial statements fairly present the financial position of the company in all material
aspects
 Audit NOT meant to – detect fraud or guarantee continued existence of business
 Auditor provides reasonable assurance that the financial statements are free of material error. Cannot
provide 100% guarantee because of following factors:
a. the use of testing (samples)
b. the inherent limitations of accounting and internal control systems
c. audit evidence is persuasive rather than conclusive
d. subjectivity in the financial statements and the auditor’s approach to the audit
e. timeliness of financial reporting and the balance between benefit and cost

,Definition of an Audit

An audit is a systematic approach of collecting and evaluating evidence and information objectively
pertaining to assertions made on economic actions and happenings by management to determine the
agreement to the criteria, and communicating the results to users

Types of Audits

1. Financial Statements Audit
 Registered auditor collects information and evidence to pass an opinion whether financial
statements fairly present the financial position, financial performance and cash flow of company.
Distributed to shareholders, creditors, SARS, Public, Bank
2. Other
i. Assurance engagements reporting on whether operational activities comply with rules and
regulations. E.g., whether it complies with the companies act.

Assurance and Non-Assurance Engagements

 Assurance Engagements
 Provide a conclusion or opinion about information which enhances the level of
assurance of the users of the information
 Non-assurance Engagements
 No opinion or conclusion is expressed
 A task is simply completed

Types of Services

Services differ according to:

 nature of service
 level of assurance
 report provided

 Audit services
- reasonable assurance
- free from material misstatement

 Relates Services
- review
- agreed upon procedures
- compilation

(no assurance)

Accounting Bodies

 IFAC – International Federation of Accountants
 IAASB – International Auditing and Assurances Board
 SAICA – South African Institute of Chartered Accountants
→ improve interests of CAs in SA
 IRBA – International Regulatory Board of Auditors
→ Must register with IRBA to offer auditing services
Roles of parties concerned

 Shareholders
- provide finance
- appoint directors
- appoint auditors

, - receive annual financial statements

 Directors
- Management company and report results

 Auditors
- provide independent opinion on whether directors’ reports to shareholders fairly present
the financial position and results of the company

, Chapter 1: Introduction

Audit Process

Overview of the audit process




1. Pre-engagement
Client investigation (new and existing)
Determine skills and competence requirements
Determine engagement terms and engagement letter (ISA 210)
2. Planning
Knowledge & understanding of the business (ISA 315)
Understanding of the accounting & internal control system
Risk evaluation (ISA 315)
• Inherent risk (IR)
(ISA 330)
• Control risik (CR)
• Auditor’s reaction on risk assessment (ISA 330)
Planning materiality (ISA 320)
Formulate audit approach
• Audit strategy (Scope, timing, direction  Big picture)
• Audit approach (Substantive OR Combined Approach)
• Audit plan (List of audit procedures)
3. Gathering audit evidence
Audit approach
(Combination depends on audit approach)
• Test of Control (ToC)
• Substantive Procedures (SP)
• Evaluation and reporting (ISA 450)
Auditor’s response to risks (ISA 330)
Audit evidence (ISA 500)
Audit Sampling (ISA 530)
4. Evaluation and reporting (ISA 450)
Evaluate, conclude & report
• Overall review (audit differences)
• Conclusion
• Reporting