Introduction to Auditing
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 (Attorney General)
- 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
- specialise in specific fields where provisions in a contract, such as a loan
agreement, have been complied with
Characteristics of Auditors
Independence
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behaviour
The Need for Auditors
Split between ownership and management
Confidence in financial information
Accountability
Objective of an Audit: The objective of an audit is:
1
,To express an opinion on the financial statements
that they are free of material misstatement, and that they are a fair representation in all
material aspects of the financial position and performance of the company in accordance
with the appropriate financial reporting framework. 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:
the use of testing
the inherent limitations of accounting and internal control systems
audit evidence is persuasive rather than conclusive
subjectivity in the financial statements and the auditor’s approach to the audit
The auditors’ opinion:
· Enhances the credibility of the financial statements, but
· Does not warrant the future feasibility of the business; and
· Does not warrant the capability and effectiveness with which management manages the
operations of the entity.
Duties and responsibilities of an auditor
To communicate opinion;
to investigate annual financial statements;
to ensure that appropriate accounting records have been kept in accordance with the
Company’s requirements
that minute books + attendance registers in respect of company, directors’ and managers’
meetings have been kept in the appropriate form as required by the Companies Act
to acquire all the information and explications that to his knowledge and conviction are
necessary for the performance of duties;
to ascertain that annual financial statements, agree with his accounting records and
accounts;
to investigate accounting records of company and to perform tests and other audit
procedures he finds necessary to ensure that annual financial statements
reasonably reflect the financial position of the company and
the results of its operations
o in accordance with generally accepted accounting practice, applied on a basis
that is compatible with that of the previous year;
directors’ report: is not in breach of or its meaning distorted with a reasonable
interpretation of the annual financial statements and accompanying notes; to adhere to
any appropriate requirements of the Auditing Profession Act always.
Reasonable Assurance:
An audit is performed in accordance with IAS’s and provides reasonable assurance that the
statements are overall free from material misstatement. The inherent limitations of an audit
may however be the cause of material misstatements not being traced.
These inherent limitations include:
2
, o The nature of financial reporting where management use judgement in preparing
financial statements when applying of IFRS and making estimates.
o The nature of audit procedures performed when considering practical and legal
limitations on audit.
o The fact that management provides documentation and explanation on which to
base conclusions which may be intentionally or unintentionally incorrect.
o Management may try to hide fraud.
o Timeliness of financial reporting and balance between benefit and cost
o Reliability of evidence versus cost.
o Time and resources available and the use of sampling and not 100% testing when
performing the audit.
Definition of an Audit
An audit is a systematic process
to gather and evaluate evidence and information objectively to make an evaluation
to evaluate the assertions about economic actions and situations (made by management
of the entity)
determine correlation (of assertions) with predefined criteria (qualitative and
quantitative)
communicate results in writing
to users
Types of Audits
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
Compliance audit
Operational or Performance audit
Assurance engagements reporting on whether operational activities comply with rules
and regulations
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 in the financial statements
Non-assurance Engagements
No opinion or conclusion is expressed
A task is simply completed
Different types of services
Assurance
- Reasonable assurance - Audit
- Moderate assurance – Independent review
Non-assurance
3
, - Consultation services:
• Technology
• International
• Financial planning
• Taxation
- Compilation
- agreed upon procedures
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
Companies Act Requirements
o Directors/Company:
o Fin year-end date
o Accounting Records
o Compile Annual Financial Statements (AFS)
o Approve & AGM
o (section.27-30)
o Auditor:
→every public co must appoint AND PI Score
o with inception- members or directors
o otherwise Registrar
o annual appointment
o access to records, books, documents, info & explanations
o report to members
o other responsibilities
o (section 90-93)
4
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 (Attorney General)
- 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
- specialise in specific fields where provisions in a contract, such as a loan
agreement, have been complied with
Characteristics of Auditors
Independence
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behaviour
The Need for Auditors
Split between ownership and management
Confidence in financial information
Accountability
Objective of an Audit: The objective of an audit is:
1
,To express an opinion on the financial statements
that they are free of material misstatement, and that they are a fair representation in all
material aspects of the financial position and performance of the company in accordance
with the appropriate financial reporting framework. 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:
the use of testing
the inherent limitations of accounting and internal control systems
audit evidence is persuasive rather than conclusive
subjectivity in the financial statements and the auditor’s approach to the audit
The auditors’ opinion:
· Enhances the credibility of the financial statements, but
· Does not warrant the future feasibility of the business; and
· Does not warrant the capability and effectiveness with which management manages the
operations of the entity.
Duties and responsibilities of an auditor
To communicate opinion;
to investigate annual financial statements;
to ensure that appropriate accounting records have been kept in accordance with the
Company’s requirements
that minute books + attendance registers in respect of company, directors’ and managers’
meetings have been kept in the appropriate form as required by the Companies Act
to acquire all the information and explications that to his knowledge and conviction are
necessary for the performance of duties;
to ascertain that annual financial statements, agree with his accounting records and
accounts;
to investigate accounting records of company and to perform tests and other audit
procedures he finds necessary to ensure that annual financial statements
reasonably reflect the financial position of the company and
the results of its operations
o in accordance with generally accepted accounting practice, applied on a basis
that is compatible with that of the previous year;
directors’ report: is not in breach of or its meaning distorted with a reasonable
interpretation of the annual financial statements and accompanying notes; to adhere to
any appropriate requirements of the Auditing Profession Act always.
Reasonable Assurance:
An audit is performed in accordance with IAS’s and provides reasonable assurance that the
statements are overall free from material misstatement. The inherent limitations of an audit
may however be the cause of material misstatements not being traced.
These inherent limitations include:
2
, o The nature of financial reporting where management use judgement in preparing
financial statements when applying of IFRS and making estimates.
o The nature of audit procedures performed when considering practical and legal
limitations on audit.
o The fact that management provides documentation and explanation on which to
base conclusions which may be intentionally or unintentionally incorrect.
o Management may try to hide fraud.
o Timeliness of financial reporting and balance between benefit and cost
o Reliability of evidence versus cost.
o Time and resources available and the use of sampling and not 100% testing when
performing the audit.
Definition of an Audit
An audit is a systematic process
to gather and evaluate evidence and information objectively to make an evaluation
to evaluate the assertions about economic actions and situations (made by management
of the entity)
determine correlation (of assertions) with predefined criteria (qualitative and
quantitative)
communicate results in writing
to users
Types of Audits
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
Compliance audit
Operational or Performance audit
Assurance engagements reporting on whether operational activities comply with rules
and regulations
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 in the financial statements
Non-assurance Engagements
No opinion or conclusion is expressed
A task is simply completed
Different types of services
Assurance
- Reasonable assurance - Audit
- Moderate assurance – Independent review
Non-assurance
3
, - Consultation services:
• Technology
• International
• Financial planning
• Taxation
- Compilation
- agreed upon procedures
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
Companies Act Requirements
o Directors/Company:
o Fin year-end date
o Accounting Records
o Compile Annual Financial Statements (AFS)
o Approve & AGM
o (section.27-30)
o Auditor:
→every public co must appoint AND PI Score
o with inception- members or directors
o otherwise Registrar
o annual appointment
o access to records, books, documents, info & explanations
o report to members
o other responsibilities
o (section 90-93)
4
