ACC 218 - Introduction to Audit theory : Lecture notes summary

Audit – term derived from Latin word “Audire” meaning “to hear”.
- An independent examination and expression of opinion by a duly appointed auditor on whether
the financial statement are true and fair
 Independent – auditor shld be remote/ independent from enterprise he is reviewing
 Opinion – an auditor gives an opinion on financial statement. Does not certify or
guarantee fin states are accurate or free from error or irregularity
- Misconception that auditor detects or prevents fraud or error. (not correct)
 Duly appointed auditor – appointed according to legal rules of the country.

The need for auditing services

- Shareholders appoint board of directors to run the entity on their behalf hence principal agent
relationship created
- Differences in interest
- Distance of separation
- Information asymmetry
- Need to verify reports made by management to shareholders and other users of fin states
- Hence need for independent party to audit and express an independent opinion
- Independent review increases confidence in fin states.
- both auditor and management of entity are agents of the shareholder

Types of Audits
Main catergories
- statutory audit
- non statutory

Other catergories
- external audit
- internal audit
- operational audit
- value for money
- social audit
- environmental audit
- compliance audit
- systems audit
- tax audit

Audit postulates
- Concepts observable to be relevant to a course of study
- Based on good practice

Postulates by Tom Lee (1973)

 Truth & fairness – auditor required by law to report whetehr in his opinion the fin states
give a true and fair view
  Independence – independence in act and in appearance – objective in his work. Ind.status
 Evidence – opinion is expressed based on systematically collected evidence that is
sufficient and appropriate
 Responsibility – of fin states & int. controls  management’s responsibility
- of audit report  auditor’s responsibility

Principles & postulates by Mautz & Sharaf

1) Fin states & fin data are verifiable
2) No necessary conflict of interest btwn auditor & mgment of entity under audit. Assumes
both are working together for common good
3) Fin states & infor submitted for verification are free from collusion & unusual
irregularities
4) Existence of satisfactory internal controls eliminates probability of irregularities
5) Consistant application of GAAP/IFRS/IASs results in fair presentation of fin states
6) What hekd true in the past for the entity will hold true again in the future
7) Wen examining fin data/infor for purposes of opinion expression, auditors act exclusively
in the capacity as auditors (shld provide one service)
8) Professional status professional obligations (if breached auditor is sued)

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Audit Regulation

3 sets of rules
- code of ethics
- ISAs
- co. law

IFAC
- IFAC code of ethics
- IAASB - ISAs & ISQCSs

Auditor's duties
- form an audit opinion whether finstats true & fair, prepared in accordance with applicable
reporting framework
- issue an audit opinion

Who may act as an auditor

- member of regulatory body, e.g. PAAB & PAAB certified as an auditor
- allowed by rules of professional body e.g. ACCA & ICAZ to conduct an audit

Auditor eligibility
- professional body membership - ACCA, ICAZ
- PAAB registration

Exclusion
- director
- employee
- business partner

Exclusion by ethics
- business relationship
- personal relationship
- long association with client
- fee dependency
- non audit services provided

Auditor appointment
- by SH
- by directors but require SH approval at AGM

Tenure
- AGM until next AGM
- automatic annual renewal

Auditor responsibilities re appointment

- obtain clearance from client to write to existing auditor, if declined decline appointment
- write to existing auditor asking if there are reasons why appointment can't be accepted

Auditor removal
make arrangements that ensure:
- auditor has sufficiently secure tenure of office
- incumbent auditor removed where doubts exist about their continuing ability to discharge their
duties effectively

NB. Auditor usually resign where working relationship becomes difficult, submit statement of
circumstances surrounding their resignation

Auditor responsibilities re removal

- deposit at registered office of client statement of circum.
- statement that no such circum.
- deal promptly with request for clearance from new auditors

Auditor rights
During audit / continued appointment
- access to records, bks
- receive infor. & explanations necessary for audit
- receive AGM notice
- be heard at such mtgs on matters of concern
On resignation
- request EGM to explain circum. of resignation
- require co. to circulate circum. of resignation

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Ethics

for assurance services, prof. ethics incr. confidence, reduce risk for client.

NB. Tripartite arrangement - user / client / practitioner.

- IFAC code of ethics then Prof. Body Code of Ethics

- conceptual framework
- fundamental principles NB. principles not rule based
(ACCRONYM – PICCO)
> Objectivity & independence - bias, impartiality 2 Tim1.7 - sound mind
> Professional behavior - compliance with regulations, avoid actions that discredits profession
> Competence & due care
- continuing duty to maintain professional knowledge, ensure clients receive competent
professional service based on current dvpts in practice, legislation & techniques
- proper professional due diligence
> Integrity NB. Job 1.8, Job 2.3, Prov 10.9
- straightforward & honest in all professional business relationships
> Confidentiality
- shd not disclose client info. to 3 parties without proper & specific authority, unless there's legal
& professional duty
- client consent
- obligation - suspected money laundering, terrorism, drug trafficking
- requirement by regulatory body
- court order
- member defending self in litigation case / public hearing
- in public interest

threats
NB. for each threat, explain how indep. compromised, offer safeguards

> self interest

- fee dependence
- lowballing
- loans, guarantees, overdue fees
- hospitality
- contingent fees
- financial / business interest
- financial interest in shares
- cross selling

> self review

- accting services
- IT
- valuation services
- tax services
- corporate finance services
- IA services
- former client employee joining EA team

> advocacy
- legal services
- corporate finance services
- contingent fees
- dealing in client shares

> familiarity
- family & personal relationships
- audit partner leaving firm to join client
- acting for prolonged periods > 5 yrs

> intimidation, being harassed or bullied

- close business, family, personal relationships
- litigation
- assurance staff join clients

> mgt - taking mgt role

- undertaking work which involves judgements / decisions that are responsibility of mgt

safeguards
- created by profession - edn, training, experience requirements to practice, CPD, CG
regulations, prof. stds, monitoring, external review of work & reports
NB. discipline thru fines, membership suspension / withdrawal
- in work environment - oversight structures, strong ICE, strong ethical leadership, policies &
procedures to promote QC
- by individuals - keeping broader perspective, complying with CPD requirements, close contact
with prof. body

Other proposals to improve indep.

- compulsory rotation,
- decline engagement
- removal from engagement team
- ban on offering assurance & advisory services to same client
- govt appoints auditors for listed co.s
- state auditor for major corporations
- E.T.C

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Internal Audit & External Audit

IA = assurance service
Ensure that
- ICS operating effectively
- IC effective
- agreed procedures being followed
- non financial & financial infor. produced = sound & reliable

Provided:
- IA fn = sufficiently resourced
- IA fn well organized
> uses well dvped practices
> uses competent staff
- IA fn = indep. & objective

NB. IA fn can be outsourced.

IA fn: Limitations
- reporting system, where CIA reports to FD, instead of AC
- scope of work - where FD decides scope of IA work
- audit work - FD interference in IA work
- length of service of IA staff - long engagements causes familiarity threat to indep.
- CIA appointment - by CEO instead of AC

NB:
- variation of stds - use ISAs
- expectations gap - IA fn role vs perceived role
- people don't understand IA role - watch dog

IA fn

Scope: Cares principle

- compliance
- accomplishment of obj
- reporting accuracy & completeness
- 2 Es
- safeguard assets

IA fn
Considerations
- scale of operation
- diversity of business
- complexity of business
- staff compliment size
- CBA
- compliance with regulatory requirements

IA fn - Outsourcing

Adv.
- greater focus on cost & efficiency
- broader source of expertise
- reduce staff turnover risk
- provide specialist & expensive skills usually difficult to retain
- skills required temporarily at reasonable cost
- contracting incr. indep.
- less mgt time re approval, training, dvpt
- access to new techn. without significant investment

Disadv.
- conflict of int. where EA = IA
- pressure on indep. arising from cost, intimidation threat
- lack of business knowledge, objectives, culture,
- increased cost over time
- inflexibility due to lack of permanent presence
- compromised std of performance once contract secured
- unclear, overlapping roles with EA
- lack of mgt training & dvpt

EA vs IA responsibilities re fraud detection

- objectives
- Materiality
- identification of fraud
- reporting to
- scope
- authority
- limitations

IA fn approach to audits
- ID key risk areas
- determine risk mitigation strategies
- test of controls
- determine effectiveness of controls
- conclusion & recommendation

VFM audits
- economy re resources
- efficiency re cost
- effectiveness re attaining objectives

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Risk based & procedural approaches to auditing

2 broad approaches
1. Procedural
- use of std procedures & tests regardless of particular nature of client
2. Risk-based
- auditor plans audit around risks that client finstats may contain mat. misstatement, whether due
to fraud or error.
- audit involve diff. priorities, tests, require diff. time lengths.

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Audit Assurance

a) Either
Reasonable - statutory - free from material misstatements - true ((not factually incorrect)) & fair
((clear, distinct, plain, unbiased, impartial, just, equitable))
result = +ve assurance,
Or

b) Ltd - review engagement, extensive use of ARP, enquiries

result = -ve assurance,
i.e. nothing came to our attention that causes us to believe that the finstats are not prepared, in all
material respects, in accordance with applicable IFRSs & IASs

Why assurance: for users

- increase confidence - enhances credibility,
- indep. verification - theres more value in scrutiny
- reliable information circulates in mkt - improves mkt reputation
- deficiencies highlighted in RTM
- reduce risk of mgt bias, fraud & error

Tripartite engagement
- user - intended user of reports
- responsible party - BoD - {subject matter = co. perf., subject infor. = annual finstats}
- practitioner - auditor - issues: competence, independence,
suitable criteria = IASs, IFRSs, ISAs.
professional scepticism
sufficient audit evidence
audit report
NB. Examines

e.g. types - assurance services

- audit of finstats
- review of finstats
- risk assessment reports
- perf. measurement reports
- ICS reliability reports
- social & envir. reports
- vfm reviews in govt

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Audit Evidence ISA 500

- Auditor to obtain SUFFICIENT, APPROPRIATE audit evidence

- Sufficient – Quantity - Enough
-Appropriate – Quality - Good

- Any information gathered by Auditor for use to reach conclusion.

- Skill & judgment used to decide quantity, quality or source of evidence to be used
 Audit
Evidence

Appropriate Sufficient

Relevent Reliable Enough

Sufficiency considerations
M – Materiality
E- Effectiveness of controls
R- Results from other procedures
R - Risk assessment
E – Experience
R – Reliability of source

Reliability considerations
1) External vs internal – independence, on letterhead (external more reliable than internal)
2) Documented vs Oral – minutes, title deeds, receipts, contracts (documented more reliable)
3) Original vs copies – (original more authentic than copies)
4) Auditor generated vs Client generated – (auditor generated more reliable than client
generated)
5) Effectiveness of Internal controls – (i.e. comparison of Econet vs GMB Int. Controls)
Relevance considerations
- Evidence gathered should contribute to the ultimate obj. of the audit
- Evidence gathered to address fin states assertions.

Theory of AE
Authoritarianism – evidence based on testimony of others, ie. 3rd parties, subsidiary etc.

Mysticism – evidence built through intuition. After goin through documented work, auditor gains
insight
Rationalism – evidence built from acceptance of reason as source. Eg recalculations to confirm
value or process.

Empericism – evidence built through sense experience. Use of all 5 senses during audit ie. Smell
of meat inventory during a stock take

Pragmatism – evidence gathered when issues viewed from practical point of view

Storage of evidence
Disc, cd, dvd, flash, hard drive, hard copy or any format it comes in

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Materiality, ISA320
ie. information is material if its omission / misstatement could influence econ. decisions of users
taken on basis of those finstats
- NB. Concerns finstats as whole as opposed to TE which concerns ppltn being tested

By size
By nature
- triggers a threshold
- indicates future dvpts / other significant events
- disclosure compulsory

Why key
- true & fair argument
- need to reduce risk of mat. misstatement
- decide on materiality b4 audit procedures

Implications of materiality
- examine all items material
- design test to ensure nothing material omitted
- NB. Immaterial errors put together add up to material misstatement

Calculation - NB. Require auditor judgement, flexible

- 1/2 - 1% turnover
- 5-10% PBT
- 1-2% net assets

TE,
ISA 530 para 12
ie. max. error in ppltn that auditor is willing to accept
- auditor will accept certain #of instances of failure to apply control procedure & still conclude
that procedure = operating properly
- considered at planning stage, & for substantive procedures, = related to auditor's judgement
about materiality

The Plan stages = 9

- KoB
- prelim. AR
- risk assessment
- materiality calc.
- TE calc
- audit approach
- auditor indep. assessment
- budget & staffing
- timetable & deadlines

Audit working papers (ISA30)

- Prepared by auditor or
- Prepared by client or 3rd party BUT obtained by Auditor for audit purposes
-

- Classified into two (1) permanent files and (2) current files, updated annually
- or summarized in separate memorandum

Permanent file - (Files of continuing importance from year to year. Long term documents)
Contents of file:
- Details of those charged with governance & Shareholders of co.
- Systems info
- co. & ind. background info
- Directors service contracts
- Investments
- Title deeds
- Copies of founding documents
- Copies of statutory and legal regulations
- Contacts & agreements
- Etc
NB. cross ref.

Current file – (contains files & Audit Evidence for current year audit)
Contents of file:
- Current year financial statements
- Extract of minutes
- External confirmation letters
- Management representations
- Internal control tests working papers
- Risk assessment
- Materiality
 - Audit planning infor
- Staffing budgets
- Audit program
- Audit procedures
- Audit evidence
- Conclusions
- Etc

Ownership & custody of working papers

- Infor on working papers relate to the client
- BUT working papers are the property of the auditor
- Auditor maintains confidentialty of infor obtained
- Auditor keeps working papers safe for as long as permited by pratice, legal &
professional requirements (@ least 6 years)

PS: more working papers does not mean a better file. The thicker the file the more challenging.

Storage of working papers

- Soft copy
- Hard copy

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Risk

Professional Skepticism
||
Risk Assessment
||
CR. ||. IR. ||. DR

Risk based & procedural approaches to auditing

2 broad approaches
1. Procedural
- use of std procedures & tests regardless of particular nature of client
2. Risk-based
- auditor plans audit around risks that client finstats may contain mat. misstatement, whether due
to fraud or error.
- audit involve diff. priorities, tests, require diff. time lengths.
Professional skepticism
- an attitude that includes a qtning mind & critical assessment of evidence
NB. What could go wrong????

Why risk assessment = key

- ID potential areas of error & misstatement
- plan audit work that addresses those possible mistakes
- discover errors early
- perform efficient audit
- minimize chance of issuing an inappropriate opinion
- reduce chance of being sued
- dvp good understanding of fraud, ML risk
- critically assess GC

NB.
- risk can be uncovered at planning stage
- risk can be reappraised
- review & completion phase can confirm that risk of mat. misstatement has been reduced to
acceptable level

Types of risk

Audit Risk
ie. risk that auditor expresses an inappropriate audit opinion when finstats are materially
misstated - stating finstats are true & fair opinion when in fact they aren't

AR = IR by CR by DR

IR - entity risk
- risk due to nature of co. & it's transactions
NB. Requires thorough KoB, how business affects finstats, discuss matters in planning mtg
- at acct bal. & assertion level
- assets susceptible to misappropriation
- complex accting process
- accting bal. derived thru estimation, judgement
- unsettled transactions
- unusual complex transactions
- accruals
- fraud & error

CR - entity risk
- risk due to co.'s IC not strong enough to prevent, detect, correct risk of errors & misstatement
DR
- risk that auditor's procedures don't pick up material misstatements

Control thru
- efficient, proper audit planning
- use of well trained personnel
- efficient program of substantive testing
- proper scrutiny
- adequate review

Sampling risk,
ISA 530 par 7
- risk that sample not representative
- sub set of DR
ie. risk arising from possibility that auditor's conclusion, based on sample may be different from
conclusion reached if entire ppltn were subjected to same audit procedure.

Non-sampling risk
- misinterpreting test results
- using inappropriate procedures
- auditor mislead by client representation
- failing to investigate transaction / bal.

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Internal Controls

ICS
I.e. whole network of systems est. in orgn to provide reasonable assurance that orgn.al assets are
protected & obj. are achieved

- components
- control activities
- how controls operate
- testing controls
- RTM

IC obj.
- orderly & efficient conduct of business
- safeguard business assets, optimal use, protection from misappropriation , fraud, misuse, theft
- fraud prevention & detection
- completeness, accuracy, validity of accting records
- timely presentation of fin. info for effective decision making
Why ICS matter for auditor
- assess their reliability for prep. of fin stats
- design suitable audit precedures

Mgt obligations re ICSs

- effective business mgt
- timely, accurate fin stats
- safeguard business assets
- prevent & detect fraud

System - purposes
- data collection
- summarization
- fin stats & mgt info production

Auditor perspective
- more reliable ICS >>>>>>>>>> reduced Audit Risk

Determining reliability of ICS

- understand Controls & System
- test effectiveness of controls

IC components
ISA 315
>> control activities
- approval, authorization
- validity - authorization, real transactions
- completeness - all transactions, timely recording, correct cut off
- accuracy - correct amt, allocation, summarization, posting
- computer controls - passwords, backup, anti- virus
- comparisons - budget v actual, benchmarking, variances review & investigation
- arithmetic controls - seq. checks, recalc.
- maintain & review control accts
- acct reconciliations
- physical control - safes, restricted access
- segreg. of duties

>> risk assessment

- periodic risk assessment

>> info sys

- imperative not optional
NB. ISA 315 para 81 - auditor shd obtain an understanding of IS, incl. business processes, rel. to
fin reporting
- understanding IS = compulsory

>> monitoring
- to ensure continually effective

>> environ
- right mgt attitude
- commitment to competence
- participation by those charged with governance
- mgt philosophy & operating style
- mgt awareness & action
- organizational structure
- assignment of responsibility
- HR policies & practices

Test of Controls
ie. compliance testing
- contrast with substantive procedure - trying to gain assurance directly about accuracy of figure
in fin stats

Est. system
- previous exp. / knowledge
- client representation
- systems manuals
- walk-thru tests

Documenting system
- narrative notes
- flow charts
- organogram - depicts roles, responsibilities, reporting lines
- IC qtnnaire
- ICE qtnnaire

IC - limitations
- human error in use of judgement
- processing errors & mistakes
- staff collusion in circumventing controls
- mgt override of controls

Reliance on internal controls

- Test of controls would have been done & found reliable
- more reliable ICS >>>>>>>>>> reduced Audit Risk
 - Substantive tests are reduced

Where auditor decides not to rely on ICs in place

>> determine alternative source of assurance
- AEIOU
>> incr. extent of audit procedures as risk of mat. misstatement incr.
- ISA 330, para 81,
e.g. incr. sample sizes to compensate for ineffective ICs

Controls - Nitty Gritty

for an accting system
>> control objectives
>> control procedures - to ensure control objectives achieved
>> test of control - audit work done to generate AE that ICs are effective
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Overview of Audit Process

Pre-Engagement Activities
Audit Strategy

Audit strategies
> Balance sheet
Planning > System based
> Transaction cycle
> Risk based
Test of Controls Audit Plan

Evidence

Risk Assessment

Substantive tests
Evaluation Risk Response

Conclusion
Pre-engagement Activities

 Relationship analysis
 Is auditor willing to accept client
 Risk associated with accepting the client, (professional risk, reputational risk &
financial risk)
 Clarity on responsibilities of each party
 Contractual obligations (of client & of auditor)
 Expectation (of client and of auditor) (expectations gap to be addressed)
 Pre-conditions for an audit ISA210-para6
 Fin. Reporting framework – is it acceptable? (IFRSs & ISAs)
 Management to acknowledge responsibility for
- Preparation of fin states
- Internal controls
 Management to provide auditor with information or access to info
 Contact previous Auditor
 Request permission from client
Denied decline audit nomination

If permission

Grantedwrite to prev auditor, discuss relevant info to

apointmnt

 Engagement letter
 Sent by auditor to client
 Indication of acceptance of engagement by auditor
 Specifics – auditor’s duties & responsibilities
- Terms of the audit engagement
- scope
- stds
- not absolute assurance
- mgt letter
- fees
- audit objective
- mgt responsibilities
- deadlines
- complaints procedures

>> key considerations

- done, finalized b4 audit
- specifies nature of contract
- minimize risk of misunderstanding of auditor's role
- annual review
 - new engagement for any change in scope / context of assignment

 Opening balances / Balance sheet review (ISA510)

 Check accuracy of take-on balances
 Are balances fairly stated
- Check predecessor auditor’s working papers
- Examine current period events that support the opening balances e.g.

Past accounts receivables current cash receipts

- Examine records underlying specific opening balances e.g schedule of

investments

Considerations for new audit engagement

 Know the client (knowledge of business) (KoB)

 Business operations
 Nature of products & services produced by client
 Client market
 Risks
 Governance
 Business cycle
 Org.nal culture
 Assess Auditor’s capacity to audit client
 Size
 Location
 staff competence
 Current commitments
 Nature of business & industry
 Timing of audit
 Assess auditor independence
 Explore possible grounds for turning down appointment
 Opening balance verification

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Planning & Risk Assessment

NB. why plan???

- planning process
- assess risk
- audit strategy
<<<materiality TE>>>
- audit plan
- design audit procedures

Need for planning - to assess & reduce risk of material misstatement of finstats
- people resources - require right team for the assignment
- timing - work fully completed in time for review process, deadlines met
- focus - work focused on material risk areas
- ID potential problem areas
- amt & nature of work - appropriate for the assignment

Planning process, involves:

- risk assessment
- audit strategy dvpt
- audit team selection
- materiality assessment
- appropriate audit procedures selection

NB. Auditor's risk assessment underpins the whole audit.

>>> risk assessment determines
- audit strategy
- audit team composition
- potential impact of fraud
- nature of audit procedures
- quantum ofAE required

Risk assessment - how???

- knowledge of business
- AP

Risk & materiality

- inverse relationship - greater risk of material misstatement & lower materiality level

Audit strategy
KoB>>>>>>>>Risk Assessment<<<<<<<<<<<<AP

Scope | Timing >> Audit Strategy & Direction

Team Selection | Deadlines & Budgets | Audit Approach

Scope
- what's applicable financial reporting framework?
- IFRSs, IASs
- ind. special reporting requirements - listed corporations, banks, insurance co.s
- group audits

Timing
>> deadlines for
- final reporting
- interim reporting
- RTM
- reports to those charged with governance
>> timing of
- interim & final audit visits
NB.
- early enough not to interfere with client y/e procedures & to afford adequate warning of
specific problems
- late enough to enable sufficient work to be done to ease pressure on final audit

Interim audit focus

- systems doc.
- IC evaluation
- test of details - income & expenditure, capex
- interim inventory count
- interim receivables circ.

NB. Roll fwd results to SoFP date

Final audit focus

- SoFP
- finalisation of finstats & audit report

Direction
- preliminary materiality assessment
- preliminary ID of high risk areas
- preliminary ID of material components & acct bal.

Possible strategies
- interim / final
- substantive / controls
- AR / test of details

NB. it's horses for courses, tailor strategy to client

Audit Plan

Audit plan - what to do & how

KoB >>>>>>>>>>Risk Assessment
|| Analytical Review
Materiality Assessment
||
What AE?
||
Design Audit Procedures

KoB – Knowledge of Business

Audit plan
= fn ( risk, materiality)

Decision required
- what audit procedures
- who does them
- how much AE
- when AE required

Relationship ||| strategy & plan

NB. Strategy sets averall approach to audit, plan fills in operational details of how strategy is to
be achieved.
Strategy
|||
Plan
|||
Procedures

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Management assertions

- Declaration, affirmation, asserting

- Management responsible for preparation of fin states. (Prepared in compliance with accounting
frameworks i.e. IFRS & IAS)
-by presenting fin states for audit, management is making assertion regarding recognition,
measurement, presentation and disclosure

-objective of auditor is to check whether management assertions implied in the fin states are correct/ in
compliance with IFRS & IASs (Auditor complies with audit frameworks ISAs)

Assertions classified either as Account balance (balance sheet) assertion or Transaction balance (Income
statement) assertion or both.

ACCRONYM – ACCA COVER

A- Accuracy – absence of error

- relates to both Acc balances & Trans balances

C- Completeness – absence of omission

- all transactions, events, assets, liabilities, equity, interests & disclosure have bn
recorded

- relates to both Acc balances & Trans balances

C- Cut off – transactions accounted for in the period in which they relate

- relates to both transaction balances and accounting balances

A- (LEAVE BLANK)

C- Classification – information is in their respective categories/ accounts

- relates both to transaction balances and account balances

O- Occurance – transactions recorded shld have taken place & shld relate to the entity

- works closely with validity (of transactions)

- relates to only to transaction balances

V- Valuation – proper valuation of account balances

- Cost // Adjustment factor // NBV (Carrying amount)

- valuation considered fair when PPE has been adjusted (impaired)

 - assets shld show condition on the ground

- relates only to transaction balances

E- Existence – physical existence of assets

- physical count to verify existence

-relates only to accounting balances

R- Rights & Obligations – relates to assets and obligations (commitments)

- Entity hold or controls rights to assets & liabilities recorded

- relates only to accounting balances

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Obtaining Audit Evidence

Audit procedures are applied to assertions to obtain audit evidence. Eg evidence on EXISTANCE of stock
can be obtained by OBSERVING a stock count & INSPECTION of quality.

Audit procedures include:

ACCRONYM – AEIOU

A- Analytical procedures – statistical, mathematical and ratio analysis. Review plausible relationships,
check consistence, comparisons, helps understand the business, overview review after completing audit
etc… eg insolvency rations, gearing ratios etc

E- Enquiry – systematic investigation/ search for knowledge esp from 3rd party external to the org i.e
bank balance confirmations, asset valuators, debtors confirmations. etc

I- Inspection – examination, review of documents/ assets etc

O- Observation – witnessing an operation, event or accounting procedure taking place

U- RecalcUlations – re-computations/ recalculations/ re-performance

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Reporting

Internal reporting
Reporting to those charged with governance
- material weaknesses
- form, timing, recipients agreed at engagement time
- Report To Management (RTM) - weakness, consequence, recommendation in tabular format
Reporting on controls
- report not comprehensive list of weaknesses
- no responsibility to 3 parties
- pvt & confid.
- not for external circulation,

External reporting

Reporting to Shareholders ISA 700

- audit report produced
- audit opinion expressed in report
- attached to fin states for external publication

Passing an opinion – 2 modes of opinion

1) Unmodified/ unqualified opinion  Standard – fin states are true & fair

 Emphasis of matter – F.S true and fair but matter of importance

disclosed

2) Modified opinion  Ordinary qualification - bad

 Adverse qualification - worse

 Disclaimer – worst

Ordinary Qualification Adverse Disclaimer

Sufficient Appropriate Yes Yes No SAAE

Audit Evidence (SAAE)

Inadequacy Yes Yes No SAAE

materiality Yes Yes Yes

pervasive No Yes Yes

Pervasive implies issue has multiple repercussions e.g affect PBT, Tax, PAT

Qualification reasons

1) Insufficient, inappropriate audit evidence

2) Material misstatement
3) Inappropriate use of accounting policies
4) Inappropriate use of estimates
5) Inconsistent use of accounting policies