Auditing Theory and practice
Topic 1: Introduction to Auditing
THE AUDITOR
1) Describe what an auditor does.
An auditor enhances the degree of confidence of the intended users in the financial statements.
2) Explain the different types of auditor.
*Registered external auditors: Are auditors who express an independent opinion on whether the annual
Financial statements o a company fairly present the financial position and results of the company’s operations. An external
auditor is not an employee of the company. Offer their service to the public.
*Internal auditors: Auditors who perform independent assignments on behalf of the board of the director’s f the company. Is an
employee of the company but is independent. Not required to be registered with a professional body. Evaluates efficiency,
economy and effectiveness, risks and business activities.
*Government auditors: Evaluate and investigate the financial affairs of the country and increase the degree of confidence which
government has in its departments. Is an employee but must be independent.
*Forensic Auditors: Forensic Auditors concentrates on investigating and gathering evidence where there has been alleged
financial mismanagement, theft or fraud. Needs to be independent of the entity under investigation.
*Special purpose auditors: To enhance the degree of confidence of the audit subject. Who specialize in a particular field such as
environmental auditors, who audit compliance with environmental regulations, and VAT auditor’s o work for the SARS and who
audit vendors VAT returns.
3) Explain the relationship between the internal and external auditor.
Both the external and internal auditor has to be independent of the subject audited.
4) List and explain the fundamental ethical principles that all charted accountants are required to observe.
*Integrity – to be straightforward ad honest in all professional and business relationships.
*Objectivity – to not allow bias, conflict of interest or undue influence of others to override professional or business judgments.
*Professional Competence and due care – to maintain professional knowledge and skill at the level required to ensure that a
client receives competent professional services based on current developments in practice, legislation and techniques and act
diligently and in accordance with applicable technical and professional standards.
*Confidentiality – to respect confidential information acquired as a result of professional and business relationships and not
discloses any such information to third parties without authority unless there is a professional or legal right or duty. Nor use
information for the personal advantage of the charted accountant.
*Professional Behavior – to comply with relevant laws and regulations and avoid any action that discredits the accountancy
profession.
5) Why is there a need for auditors?
*There is a split between ownership and management
*To create or ascertain confidence in the financial information
*Accountability – Assess whether directors are meeting their responsibilities.
Page 1 of 44
,6) Explain the purpose of an audit.
The purpose of an audit is to give assurance to the intended users.
ASSURANCE AND NON-ASSURANCE ENGAGEMENTS
Engagement
Assurance Non-assurance
engagement engagement
Limited Agreed upon
Audit Compilation
assurance/review procedures
Reasonable Moderate
No assurance No assurance
assurance assurance
1) Define an assurance engagement.
An assurance engagement is one n which an auditor expresses a conclusion designed to enhance the degree f confidence of the
intended users, other than the responsible party, about the outcome of the evaluation or measurement of a subject matter
against criteria.
2) Explain what is meant by the outcome of the evaluation or measurement of subject matter.
The outcome of the evaluation or measurement of a subject matter is the information that results from applying the criteria to
the subject matter.
3) Explain what is meant by subject matter information.
Subject matter information is information of the subject that is being audited.
4) Describe an assertion-bass engagement.
Is when, the subject matter information is in the form of an assertion by the responsible party that is made available to the
intended users.
Page 2 of 44
,5) Describe a direct reporting engagement.
To present whether directly or obtain a representation from responsible party that has performed the evaluation or
measurement that is not available to the intended users.
6) Explain the elements of an assurance engagement.
Element Explanation
*Three party relationship
-professional accountant -registered auditor
-responsible party -directors responsible for AFS
-Intended user -shareholders
*A Subject matter *Financial position, results of operations etc.
*Suitable criteria *International Financial Reporting Standards
*Sufficient appropriate evidence *The evidence the practitioner needs to be in a position to
conclude that the financial statements are free of
Material misstatements.
*A written assurance report *the audit report on fair presentation
7) Define a reasonable assurance engagement.
It relates to the entire auditing process, namely the collection of audit evidence and the conclusions the auditor draws about the
evidence in order to express an audit opinion. Reasonable assurance engagement is a reduction in assurance engagement risk
to an acceptably low level in the circumstances of the engagement as the basis for a positive form of expression of the
practitioner’s conclusion.
8) Define a limited assurance engagement.
The objective of a limited engagement is a reduction in assurance engagement risk to a level that is acceptable in the
circumstances of the engagement, but where that risk is greater than for a reasonable assurance engagement, as the basis for a
negative form of expression of the practitioner’s conclusion.
9) Explain the difference between a reasonable assurance engagement and a limited assurance engagement.
A reasonable assurance engagement is a reduction in assurance engagement risk as the basis for a positive form of expression of
the practitioner’s conclusion and a limited assurance engagement is a reduction in assurance engagement risk, but where the
risk is greater than reasonable assurance engagement, as a basis for a negative form of expression of the practitioner’s
conclusion.
*Reasonable assurance - audit engagements where a positive form of expression of opinion is given
- Extensive procedures carried out
*Limited assurance -review engagements where a negative form of expression of opinion is given.
-less extensive procedures carried out.
10) Explain public interest and public interest scores.
Public interest: The need for auditing in its various forms is a response to the needs of society and therefore of public
Interest. Society and business are totally interlinked and rely on each other for their survival.
The business world and society runs on financial information and depends on that information being
accurate, fair and credible. Therefore it is in the public interest that there be a mechanism to achieve
this.
Public interest scores: The score is based on factors which generally determine the level of interest the public has in
the entity.
Will be the sum of: *a number of points equal to the average number of employees during the financial year
*One point for every R1 million (or portion thereof) of turnover.
*One point for every R1 million (or portion thereof) of 3rd party liability at year end.
*One point for every individual who directly or indirectly has a beneficial interest in any of the
Page 3 of 44
, Company’s shares.
11) Explain the term “assurance” and the various levels of assurance that can be provided by an auditor with regard to an
audit engagement and a review engagement.
At the conclusion of an assurance engagement, an auditor is expected to give the client a degree of assurance that the
information that was subjected to the audit is free of material misstatements. Assurance is the professional opinion of the audit.
*Reasonable assurance - audit engagements where a positive form of expression of opinion is given
- Extensive procedures carried out
*Limited assurance -review engagements where a negative form of expression of opinion is given.
-less extensive procedures carried out.
12) Explain the advantages of having an audit of financial statements.
*To provide an independent service which assesses and evaluates whether directors, governments etc are meeting their
responsibilities.
*To provide assurance (credibility).
*Auditors (professional accountants) play a crucial role in inspiring this confidence by expressing opinions as to the fair
presentation of financial information.
Independently audited financial information assist in:
*directing individual investors towards investments that suit their needs eg .risk, return.
*developing the economy as a whole, by ensuring that funds are directed towards those entities which provide evidence of
sound management, high productivity and strong financial positions.
*enabling the government to collect axes on an equitable basis.
*Inspiring confidence in how the government handles its finances.
13) Explain the inherent limitations of an audit.
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the
financial statements are fee from material misstatement due to fraud or error. This is because there are inherent limitations of
an audit, which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion eng
persuasive rather than conclusive. The inherent limitations of an audit arise from:
*The nature of financial reporting
*The nature of audit procedures
*The need for the audit to be conducted within a reasonable period of time and at a reasonable cost.
14) Describe a non-assurance engagement.
These are engagements that do not meet the definition of an assurance engagement. The defining characteristic is that the
practitioner does not express an opinion on the subject matter of the engagement.
They include the following:
-Agreed-upon procedures engagement
-Compilation engagement
15) Define the objective of an agreed-upon procedures engagement.
The auditor is engaged to carry out procedures which have been agreed upon by the parties involved, e.g. the auditor, the client
and any interested third party. Auditor reports only facts based on the agreed-upon procedure. No opinion or assurance is
given; the users are required to draw their own conclusions from the facts presented.
Page 4 of 44
Topic 1: Introduction to Auditing
THE AUDITOR
1) Describe what an auditor does.
An auditor enhances the degree of confidence of the intended users in the financial statements.
2) Explain the different types of auditor.
*Registered external auditors: Are auditors who express an independent opinion on whether the annual
Financial statements o a company fairly present the financial position and results of the company’s operations. An external
auditor is not an employee of the company. Offer their service to the public.
*Internal auditors: Auditors who perform independent assignments on behalf of the board of the director’s f the company. Is an
employee of the company but is independent. Not required to be registered with a professional body. Evaluates efficiency,
economy and effectiveness, risks and business activities.
*Government auditors: Evaluate and investigate the financial affairs of the country and increase the degree of confidence which
government has in its departments. Is an employee but must be independent.
*Forensic Auditors: Forensic Auditors concentrates on investigating and gathering evidence where there has been alleged
financial mismanagement, theft or fraud. Needs to be independent of the entity under investigation.
*Special purpose auditors: To enhance the degree of confidence of the audit subject. Who specialize in a particular field such as
environmental auditors, who audit compliance with environmental regulations, and VAT auditor’s o work for the SARS and who
audit vendors VAT returns.
3) Explain the relationship between the internal and external auditor.
Both the external and internal auditor has to be independent of the subject audited.
4) List and explain the fundamental ethical principles that all charted accountants are required to observe.
*Integrity – to be straightforward ad honest in all professional and business relationships.
*Objectivity – to not allow bias, conflict of interest or undue influence of others to override professional or business judgments.
*Professional Competence and due care – to maintain professional knowledge and skill at the level required to ensure that a
client receives competent professional services based on current developments in practice, legislation and techniques and act
diligently and in accordance with applicable technical and professional standards.
*Confidentiality – to respect confidential information acquired as a result of professional and business relationships and not
discloses any such information to third parties without authority unless there is a professional or legal right or duty. Nor use
information for the personal advantage of the charted accountant.
*Professional Behavior – to comply with relevant laws and regulations and avoid any action that discredits the accountancy
profession.
5) Why is there a need for auditors?
*There is a split between ownership and management
*To create or ascertain confidence in the financial information
*Accountability – Assess whether directors are meeting their responsibilities.
Page 1 of 44
,6) Explain the purpose of an audit.
The purpose of an audit is to give assurance to the intended users.
ASSURANCE AND NON-ASSURANCE ENGAGEMENTS
Engagement
Assurance Non-assurance
engagement engagement
Limited Agreed upon
Audit Compilation
assurance/review procedures
Reasonable Moderate
No assurance No assurance
assurance assurance
1) Define an assurance engagement.
An assurance engagement is one n which an auditor expresses a conclusion designed to enhance the degree f confidence of the
intended users, other than the responsible party, about the outcome of the evaluation or measurement of a subject matter
against criteria.
2) Explain what is meant by the outcome of the evaluation or measurement of subject matter.
The outcome of the evaluation or measurement of a subject matter is the information that results from applying the criteria to
the subject matter.
3) Explain what is meant by subject matter information.
Subject matter information is information of the subject that is being audited.
4) Describe an assertion-bass engagement.
Is when, the subject matter information is in the form of an assertion by the responsible party that is made available to the
intended users.
Page 2 of 44
,5) Describe a direct reporting engagement.
To present whether directly or obtain a representation from responsible party that has performed the evaluation or
measurement that is not available to the intended users.
6) Explain the elements of an assurance engagement.
Element Explanation
*Three party relationship
-professional accountant -registered auditor
-responsible party -directors responsible for AFS
-Intended user -shareholders
*A Subject matter *Financial position, results of operations etc.
*Suitable criteria *International Financial Reporting Standards
*Sufficient appropriate evidence *The evidence the practitioner needs to be in a position to
conclude that the financial statements are free of
Material misstatements.
*A written assurance report *the audit report on fair presentation
7) Define a reasonable assurance engagement.
It relates to the entire auditing process, namely the collection of audit evidence and the conclusions the auditor draws about the
evidence in order to express an audit opinion. Reasonable assurance engagement is a reduction in assurance engagement risk
to an acceptably low level in the circumstances of the engagement as the basis for a positive form of expression of the
practitioner’s conclusion.
8) Define a limited assurance engagement.
The objective of a limited engagement is a reduction in assurance engagement risk to a level that is acceptable in the
circumstances of the engagement, but where that risk is greater than for a reasonable assurance engagement, as the basis for a
negative form of expression of the practitioner’s conclusion.
9) Explain the difference between a reasonable assurance engagement and a limited assurance engagement.
A reasonable assurance engagement is a reduction in assurance engagement risk as the basis for a positive form of expression of
the practitioner’s conclusion and a limited assurance engagement is a reduction in assurance engagement risk, but where the
risk is greater than reasonable assurance engagement, as a basis for a negative form of expression of the practitioner’s
conclusion.
*Reasonable assurance - audit engagements where a positive form of expression of opinion is given
- Extensive procedures carried out
*Limited assurance -review engagements where a negative form of expression of opinion is given.
-less extensive procedures carried out.
10) Explain public interest and public interest scores.
Public interest: The need for auditing in its various forms is a response to the needs of society and therefore of public
Interest. Society and business are totally interlinked and rely on each other for their survival.
The business world and society runs on financial information and depends on that information being
accurate, fair and credible. Therefore it is in the public interest that there be a mechanism to achieve
this.
Public interest scores: The score is based on factors which generally determine the level of interest the public has in
the entity.
Will be the sum of: *a number of points equal to the average number of employees during the financial year
*One point for every R1 million (or portion thereof) of turnover.
*One point for every R1 million (or portion thereof) of 3rd party liability at year end.
*One point for every individual who directly or indirectly has a beneficial interest in any of the
Page 3 of 44
, Company’s shares.
11) Explain the term “assurance” and the various levels of assurance that can be provided by an auditor with regard to an
audit engagement and a review engagement.
At the conclusion of an assurance engagement, an auditor is expected to give the client a degree of assurance that the
information that was subjected to the audit is free of material misstatements. Assurance is the professional opinion of the audit.
*Reasonable assurance - audit engagements where a positive form of expression of opinion is given
- Extensive procedures carried out
*Limited assurance -review engagements where a negative form of expression of opinion is given.
-less extensive procedures carried out.
12) Explain the advantages of having an audit of financial statements.
*To provide an independent service which assesses and evaluates whether directors, governments etc are meeting their
responsibilities.
*To provide assurance (credibility).
*Auditors (professional accountants) play a crucial role in inspiring this confidence by expressing opinions as to the fair
presentation of financial information.
Independently audited financial information assist in:
*directing individual investors towards investments that suit their needs eg .risk, return.
*developing the economy as a whole, by ensuring that funds are directed towards those entities which provide evidence of
sound management, high productivity and strong financial positions.
*enabling the government to collect axes on an equitable basis.
*Inspiring confidence in how the government handles its finances.
13) Explain the inherent limitations of an audit.
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the
financial statements are fee from material misstatement due to fraud or error. This is because there are inherent limitations of
an audit, which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion eng
persuasive rather than conclusive. The inherent limitations of an audit arise from:
*The nature of financial reporting
*The nature of audit procedures
*The need for the audit to be conducted within a reasonable period of time and at a reasonable cost.
14) Describe a non-assurance engagement.
These are engagements that do not meet the definition of an assurance engagement. The defining characteristic is that the
practitioner does not express an opinion on the subject matter of the engagement.
They include the following:
-Agreed-upon procedures engagement
-Compilation engagement
15) Define the objective of an agreed-upon procedures engagement.
The auditor is engaged to carry out procedures which have been agreed upon by the parties involved, e.g. the auditor, the client
and any interested third party. Auditor reports only facts based on the agreed-upon procedure. No opinion or assurance is
given; the users are required to draw their own conclusions from the facts presented.
Page 4 of 44
