BLOCK 1: FOUNDATIONS OF AUDITING
CHAPTER 1
What Is Auditing?
The Language of Trust in Business
“An audit is not about looking for mistakes—it is about providing confidence in financial information.”
Real-Life Scenario
Imagine you have saved R250 000 over many years and are ready to invest it in a growing South African
company.
The company provides you with impressive financial statements showing strong profits and healthy cash
flows. The directors assure you that the business is performing exceptionally well.
Would you invest immediately? Probably not.
Before risking your money, you would want independent confirmation that the financial statements
present a true and fair picture of the company’s financial performance and financial position. This is
precisely why auditing exists.
An independent auditor examines the financial statements and expresses an opinion on whether they have
been prepared, in all material respects, in accordance with the applicable financial reporting framework.
This independent opinion gives confidence to investors, lenders and other users when making important
economic decisions.
Auditing is therefore not about helping management; it is about serving the public interest.
Learning Outcomes
After studying this chapter, you should be able to:
✓ Define auditing.
✓ Explain why auditing is necessary.
✓ Identify the users of audited financial statements.
✓ Distinguish between accounting and auditing.
✓ Explain the objective of an audit.
✓ Describe reasonable assurance.
✓ Explain professional scepticism.
✓ Apply these concepts to examination questions.
1.1 Introduction
Every organisation records financial transactions. These transactions are summarised and presented in
financial statements, which communicate the financial performance and financial position of the
organisation.
Many different people rely on these financial statements, including shareholders, banks, investors,
suppliers, employees, government departments and regulators.
However, users are usually not involved in preparing the financial statements. As a result, they need
confidence that the information presented is reliable. Auditing provides that confidence.
By independently examining financial statements and obtaining sufficient appropriate audit evidence, the
auditor enhances the credibility of financial information and reduces the information risk faced by users.
1.2 What Is Auditing?
, An audit is an independent examination of financial statements performed to enable the auditor to express
an opinion on whether the financial statements are prepared, in all material respects, in accordance with
the applicable financial reporting framework.
Although this definition appears technical, its meaning is straightforward. An auditor does not prepare the
financial statements. The auditor evaluates evidence supporting those financial statements before
expressing an independent opinion. The audit therefore enhances confidence in financial reporting.
CONCEPT MADE EASY
Think of buying a second-hand vehicle. The seller tells you that the engine is in excellent condition. Would you
rely only on the seller’s word?
Most people would ask a qualified mechanic to inspect the vehicle before buying it. The mechanic is
independent, gathers evidence by inspecting the vehicle, and then provides an opinion about its condition.
An auditor performs exactly the same function for financial statements: management prepares them, the auditor
independently evaluates them, and users rely on the auditor’s opinion when making decisions.
1.3 Why Is Auditing Necessary?
Auditing exists because there is a separation between those who prepare financial information and those
who use it. Management prepares the financial statements; investors, banks and creditors use them.
Without an independent audit, users would have to rely entirely on management’s representations.
Auditing reduces this information risk by providing independent assurance. Audits also:
• improve confidence in financial reporting;
• enhance the credibility of financial statements;
• support investment decisions;
• improve access to finance;
• strengthen corporate governance; and
• promote accountability.
1.4 Users of Audited Financial Statements
Many different groups rely on audited financial statements.
User Why They Need the Audit
Shareholders To evaluate their investment.
Investors To decide whether to buy or sell shares.
Banks To assess loan applications.
Creditors To evaluate the organisation’s ability to repay debts.
Suppliers To determine whether to provide goods on credit.
Employees To assess job security and organisational stability.
Government To support taxation and regulatory oversight.
Although their decisions differ, all users require reliable financial information.
1.5 Accounting versus Auditing
Students often confuse accounting with auditing. Understanding the distinction is fundamental.
Accounting Auditing
Records financial transactions. Examines financial information.
Prepares financial statements. Expresses an independent opinion.
CHAPTER 1
What Is Auditing?
The Language of Trust in Business
“An audit is not about looking for mistakes—it is about providing confidence in financial information.”
Real-Life Scenario
Imagine you have saved R250 000 over many years and are ready to invest it in a growing South African
company.
The company provides you with impressive financial statements showing strong profits and healthy cash
flows. The directors assure you that the business is performing exceptionally well.
Would you invest immediately? Probably not.
Before risking your money, you would want independent confirmation that the financial statements
present a true and fair picture of the company’s financial performance and financial position. This is
precisely why auditing exists.
An independent auditor examines the financial statements and expresses an opinion on whether they have
been prepared, in all material respects, in accordance with the applicable financial reporting framework.
This independent opinion gives confidence to investors, lenders and other users when making important
economic decisions.
Auditing is therefore not about helping management; it is about serving the public interest.
Learning Outcomes
After studying this chapter, you should be able to:
✓ Define auditing.
✓ Explain why auditing is necessary.
✓ Identify the users of audited financial statements.
✓ Distinguish between accounting and auditing.
✓ Explain the objective of an audit.
✓ Describe reasonable assurance.
✓ Explain professional scepticism.
✓ Apply these concepts to examination questions.
1.1 Introduction
Every organisation records financial transactions. These transactions are summarised and presented in
financial statements, which communicate the financial performance and financial position of the
organisation.
Many different people rely on these financial statements, including shareholders, banks, investors,
suppliers, employees, government departments and regulators.
However, users are usually not involved in preparing the financial statements. As a result, they need
confidence that the information presented is reliable. Auditing provides that confidence.
By independently examining financial statements and obtaining sufficient appropriate audit evidence, the
auditor enhances the credibility of financial information and reduces the information risk faced by users.
1.2 What Is Auditing?
, An audit is an independent examination of financial statements performed to enable the auditor to express
an opinion on whether the financial statements are prepared, in all material respects, in accordance with
the applicable financial reporting framework.
Although this definition appears technical, its meaning is straightforward. An auditor does not prepare the
financial statements. The auditor evaluates evidence supporting those financial statements before
expressing an independent opinion. The audit therefore enhances confidence in financial reporting.
CONCEPT MADE EASY
Think of buying a second-hand vehicle. The seller tells you that the engine is in excellent condition. Would you
rely only on the seller’s word?
Most people would ask a qualified mechanic to inspect the vehicle before buying it. The mechanic is
independent, gathers evidence by inspecting the vehicle, and then provides an opinion about its condition.
An auditor performs exactly the same function for financial statements: management prepares them, the auditor
independently evaluates them, and users rely on the auditor’s opinion when making decisions.
1.3 Why Is Auditing Necessary?
Auditing exists because there is a separation between those who prepare financial information and those
who use it. Management prepares the financial statements; investors, banks and creditors use them.
Without an independent audit, users would have to rely entirely on management’s representations.
Auditing reduces this information risk by providing independent assurance. Audits also:
• improve confidence in financial reporting;
• enhance the credibility of financial statements;
• support investment decisions;
• improve access to finance;
• strengthen corporate governance; and
• promote accountability.
1.4 Users of Audited Financial Statements
Many different groups rely on audited financial statements.
User Why They Need the Audit
Shareholders To evaluate their investment.
Investors To decide whether to buy or sell shares.
Banks To assess loan applications.
Creditors To evaluate the organisation’s ability to repay debts.
Suppliers To determine whether to provide goods on credit.
Employees To assess job security and organisational stability.
Government To support taxation and regulatory oversight.
Although their decisions differ, all users require reliable financial information.
1.5 Accounting versus Auditing
Students often confuse accounting with auditing. Understanding the distinction is fundamental.
Accounting Auditing
Records financial transactions. Examines financial information.
Prepares financial statements. Expresses an independent opinion.
