NAME: TONY NHLAWULEKO SITHOLE

STUDENT NUMBER: 202101821

MODULE: AUDITING 3B ASSIGNMENT

CAMPUS: DAMELIN BRAAMFONTEIN

SEMESTER: 2

DUE DATE: 1 SEPTEMBER 2023

MODULE CODE: AUD 320

pg. 1
Declaration of Authenticity

I, the undersigned declare that:

• I understand what plagiarism is and are aware of the Damelin’s policy in this regard.

• The work hereby submitted is my original work, gathered and utilised to fulfil the requirements of
this assignment except for source material explicitly acknowledged.

• I have not used work previously produced by another student or any other persons to hand in as my
own.

• I have not allowed and will not allow anyone to copy my work with the intention of passing it off as
their own work.

Signature of Student: Sithole Tony Date: 02 August 2023

Table of Contents
Introduction…………………………………………………………………………………………………………………………….3

Question 1………………………………………………………………………………………………………………………………4-7

Question 2……………………………………………………………………………………………………………………………….8-11

Question 3………………………………………………………………………………………………………………………………12-14

Conclusion…………………………………………………………………………………………………………………………….15

Bibliography………………………………………………………………………………………………………………………….16

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Introduction

Audit planning means the development of the overall strategy and an appropriate
approach for the expected nature timing and extent of the audit. In this assignment we
are going to discuss the procedures to be performed prior to acceptance of an
engagement. We are going to talk about pre-engagement activities and factors that
would impact our overall audit strategy. Later on, we are going to discuss the five main
components of internal control and also explain all the assertions applicable to
transaction and events.

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Section A

Question 1

Benefits of audit planning

• Audit planning helps the auditor to obtain audit evidence that is sufficient and
appropriate.
• It helps to manage the audit costs by keeping them at a reasonable level.
• Misunderstandings with the client are reduced as a result of audit planning.

• It helps to make sure that potential problems are quickly identified and
recognized.

• According to (Farnham, 2021), Auditing planning helps to Identify important

areas to ensure that the auditor focuses where it matters.

• It also helps the auditor manage and organizes the engagement so that it is
performed effectively and efficiently.

• The work carried out by specialists can be properly coordinated.

• Audit planning is compliant with ISA 300 for a financial audit.

1.2) 4 stages in the audit process

1. Preliminary engagement activities

Steps before an audit engagement is accepted to establish whether the audit firm
accepts a potential client or accepts to continue the relationship with an existing client.

Client investigation- This investigation goes in depth to evaluate the risk, reputation
and implications before accepting a potential client. There is also an ethical
consideration with regards to conflict of interests that may arise in the engagement.

Having considered the risks, implications and ethics concerning the potential
engagement, and should the auditor wish to accept the engagement then the audit
firm will have to agree on the terms of engagement with the entity’s management. The

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terms of engagement will need to be documented in an engagement letter. The
engagement letter subsequently becomes the contract between the audit firm and the
client.

2. Planning (ISA 300)

Gain some knowledge and understanding of the business and entity’s environment.

Understand the accounting and internal control system.

Perform risk assessment with consideration to inherent risk and control risk. There
have to be safeguards in order to reduce the risk to an acceptable level. The risk
assessment is to determine the degree to which the financial statements may contain
material misstatement.

Planning materiality which involves evaluating risks and significance

Formulate an audit strategy which outlines how the audit firm is going to approach
the audit. The audit strategy should include the scope, timing and direction of the audit.
According to (Ullah, 2014), Audit strategy identifies the characteristics of the
engagement that define its scope.

Determine resources, skills and staff needed.

The audit strategy should guide the development of the audit plan.

Audit plan This is essentially a detail of strategy. A description of the nature, timing
and extent of planned risk assessment procedures. A description of further audit
procedures and direction and supervision of the audit team with reviews done to their
work.

3.Gather sufficient and appropriate evidence

Audit approach: Tests of control

-Test client’s systems and controls in cycles to determine whether internal controls
implemented by management has its control objective.

Substantive procedures

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-According to (Hawk, 2021), Substantive procedures is a test that creates reliable
evidence regarding audit assertions of assets and other accounts in the financial
statements. Test client’s system output, financial statements and document evidence.

4. Evaluate, conclude and report

This is the final stage of the audit process. There will be an Overall review conducted.
During this stage, the auditor achieves his objective, which is to report on whether the
client’s financial statements are presented fairly in all material respects, and they are
presented in accordance with the appropriate reporting framework.

1.3 Contents of an engagement letter

The engagement letter begins with an introduction, including the names of the auditing
firm and the client, along with the purpose and objectives of the engagement.

1.The objective and Scope of Audit: This particular section defines the specific
services to be provided by the auditing firm. It also outlines the areas to be audited,
such as financial statements, internal controls, compliance agreed, or other-upon
procedures. This includes reference to appropriate legislation, regulations, or
pronouncements of professional bodies to which the auditor adheres.

2. Responsibilities of Auditor and responsibility of management: The engagement

letter should clearly state the responsibilities of both the auditing firm and the client.
This includes the client’s duty to provide accurate and complete information, access
to necessary records, and cooperation throughout the audit process. The auditing
firm’s responsibilities, such as performing the audit in accordance with professional
standards, maintaining confidentiality, and issuing an audit report, are also outlined.

3.Timing and reporting: The engagement letter specifies the timeline for the audit,
including the start and end dates, as well as any interim reporting requirements. It also
mentions the expected format and timing of the final audit report.

4.Fee structure: This section outlines the fee structure for the audit services, including
the basis for calculating fees, payment terms and any additional costs or expenses
that may be incurred.

5.Independence and ethical considerations: The engagement letter highlights the

importance of independence and ethical behaviour for both the auditing firm and the

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client. It may include a statement on the firm’s compliance with relevant professional
an ethical standard.

6. Limitations of the Audit: The engagement letter clarifies the limitations of the audit,
emphasizing that it not intended to detect all errors, fraud, or illegal activities. It also
mentions that the audit opinion is based on the information provided by the client.
Because of the test nature and other inherent limitations of an audit, together with the
inherent limitations of internal control, there is an unavoidable risk that even some
material misstatement may remain undiscovered during the audit.

7.Acceptance and signature: The engagement letter concludes with a section for both
parties to accept and sign the agreement, demonstrating their understanding and
agreement to the terms and conditions outlined.

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Question 2

a) Pre-engagement activities
Performed a client investigation.

-Determine our independence as auditors

-Determine the nature of the business and the integrity of management
- the previous auditors resigned as a result of a disagreement with management –
possible indication has questionable integrity
-Determine whether the previous auditor has been informed of our appointment
-Determine whether management has given us permission to communicate with the
previous auditors
-If client refuses to give us permission, consider not accepting appointment as auditors

-If permission granted, write a letter to previous auditors to determine whether or not
there are any professional reasons not to take on the position as auditors.
-If no response, try another means to contact previous auditors, if still no response,
assume no professional reasons not to take on position as auditor
-Determine whether the client has the financial ability to pay the audit fee.
-Determine whether a casual vacancy exists

Determine skills and competence.

-Determine whether or not, we as auditors have the necessary knowledge, skills and
competence to take on the engagement – we are a small to medium sized audit firm

Determine terms of engagement

-Issue an engagement letter that sets out the responsibility of both management as
well as that of us as auditors

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b) 5 components of internal control:

1) Control environment – This refers to integrity and ethical values, Competence of

employees, Management’s philosophy and operating style, Assignment of authority,
Staff development

2) Risk assessment – According to (Farnham, 2023), To successfully manage risk,

businesses need to detect their potential risks, then apply relevant internal controls to
mitigate these risks. Management to ID evaluate and manage risks, estimate
likelihood of occurrence, decide to terminate, transfer, mitigate or accept risks.

3)Information and communication –Communication with management about any

failures in internal control is the best way to mitigate risks effectively. There should be
systems to have clear audit trails and clear communication to employees.

4) Control activities -Control activities are aimed at ensuring that the proper controls
are implemented and using accounting systems and automation to check that controls
are working as intended. This can include regular controls testing or inventory audits,
all of which should follow the internal audit strategy. Some control activities may
include Segregation of duties, CIS controls, Physical controls, operating reviews,
Reporting.

5) Monitoring- Audit teams should monitor internal controls on a regular basis. This will
identify Deviations from actual to expected, rectify weaknesses, confidential reporting
process.

c) Inherent risk:

According to (Tuovila, 2022), Inherent risk is the risk caused by an error or

misstatement in a financial statement due to a factor other than a failure of internal
control. The susceptibility of an account balance or class of transaction to

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misstatement that could be material, individually or when aggregated with
misstatements in other balances or classes, assuming that there were no related
internal controls.

Control risk:

This is the risk that the controls implemented will fail to detect financial misstatement.
Risk that a misstatement will occur in an account balance or class of transaction and
that could be material, individually or when aggregated with misstatements in other
balances or classes, will not be prevented or detected and corrected on a timely basis
by the accounting and internal control system.

Inherent risk and control risk together, has an effect on detection risk. If the overall
assessment of inherent risk and control risk combined, is assessed as high, detection
risk must be set as low, in order to reduce overall audit risk to an acceptable level.

If the combined level of inherent and control risk is assessed as low, detection risk
may be set at a higher level.

d) Audit strategy:
-Performed after risk assessment and materiality
-Comprises scope, direction and timing
-Refers to audit strategy at a higher level – contains no detailed procedures

Audit plan:

-performed based on the audit strategy

-Puts strategy into detailed procedures and determines the nature, timing and extent
of procedures

e) Overall risk assessment at financial statement level should be assessed as HIGH,

with the following risk factors having contributed to this assessment:

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-Diving is a high-risk activity and the potential for liability for negligence on the part of
the company is a high-risk item.
-Company is listed on the JSE which has more stringent and complex compliance and
disclosure requirements.
-The company is reliant on foreign trade, and this may pose a going concern risk where
the SA environment may not be deemed to be safe for travel by the foreigners
-Business operates on a largely cash basis which brings inherent risk due to the nature
of cash.
-The company has a wide geographical dispersement which may make the control
environment less effective.
-The company’s financial system was inadequate, and transactions may have been
omitted / misstated / corrupted.
-Staff are not familiar with the new system which could lead to errors being made and
remaining undetected
-The IT manager does not appear to have the right level of skill and experience to
manage the IT risks
-The company was found guilty by a court which indicates management is unethical
in its business practices
-The company lost damages claim and this may give rise to further claims and losses.

pg. 11
Question 3

Pre- engagement activities:

1.New client investigation. In favour of engagement:

-Client has good reputation
-Client is successful
-Good business decision (client would pay audit fee)
-Client has good audit record
-Management integrity appears good
-Industry is one we would be associated with.
-Consider any litigations or lawsuits.

2.Skills and competence

-No information provided in question about the skills therefore there is no answer on
skills
-Competence:

• Potential use of CAATS experts and need for audit software to audit in
electronic environment.
• Budget and means to travel internationally.

3.Letter of engagement
-Mention ISA 210 and the need to agree the terms of engagement via a written letter
of engagement signed by both auditor and client

4.Ethical requirements as per SAICA Code of Professional Conduct are adhered to.
There is no threat to the firm’s independence or self-interest threats.

-Consider reason for previous auditors leaving and consider if a vacancy exists in
accordance with s90 of Companies Act.

b) Factors which would impact audit strategy

1.Matters affecting the scope:

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-It is a statutory audit, being a (Pty) Ltd
-The number of locations of warehouses would require travel and/or use of other
auditors
-Consider the different legislation required due to the fact that there are different
warehouses in different countries.
-The accounting system requires specialized knowledge
-Use of CAATS and related experts.
-Information technology will impact greatly on the performance of audit procedures
-Due to foreign exchange transactions and inventory valuation issues, the application
of IFRS may be complex

2.Matters affecting the timing:

-Timing of conducting of year end stock counts
-Timing of gathering audit evidence from debtors (eg circularisations – when to
perform?)
-Timing of audit deadline – 6 weeks after year end
-Meetings with management
-Contact previous auditors and hold discussions with them.

3. Matters affecting the direction:

-Volume of transactions – appear to be low based on information about debtors
-Volume of material balances – low in number based on information about debtors
-Management’s system of internal controls – sound and highly technical
-Significant business developments – changes in industry (references to being highly
specialized etc)
-Consideration of contingent liability from the fire in Tokyo.
-Assign more experienced staff to deal with high-risk account balances.

c) Specialized audit evidence to be obtained

1.Inventory
-Attendance at stock counts will require international travel and/or use of experts.
Refer ISA 501.

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2.Bank and cash
-Send out bank confirmation to gather evidence of FEC Contracts, bank balances,
commitments, obligations etc

3.Debtors Circularisation
-Due to revaluation requirements of foreign debtors, obtain external confirmation of
foreign currency balances outstanding at year end and re-perform calculation of year
end valuations

4.Attorneys Confirmation
-Obtain attorneys confirmation due to litigation by client

d) Assertions applicable to transactions and events

1. Occurrence – transactions and events that have been recorded have occurred and
pertain to the entity.

2. Completeness – all transactions and events that should have been recorded have
been recorded

3. Accuracy – amounts and other data relating to recorded transactions and events
have been recorded appropriately

4. Cutoff – transactions and events have been recorded in the correct accounting
period

5. Classification – transactions and events have been recorded in the proper accounts

pg. 14
Conclusion

In summary, an audit plan is a crucial step in the Audit process as it ensures that
sufficient and appropriate evidence is obtained. It was found that the audit process
consisted of 4 stages with pre-engagement activities being the beginning stage and
planning activities being the second stage, both being crucial steps in the conducting
of an audit. We also discussed the 5 main components of internal control and the audit
risks that may arise when conducting an audit. We concluded the assignment by
explaining the assertions applicable to transactions and events.

Bibliography
Farnham, K., 2021. Diligent. [Online]
Available at: https://www.diligent.com/insights/grc/audit-planning/
[Accessed 31 July 2023].

Farnham, K., 2023. Diligent. [Online]

Available at: https://www.diligent.com/resources/blog/components-of-internal-controls
[Accessed 11 August 2023].

Hawk, D., 2021. Study. [Online]

Available at: https://study.com/academy/lesson/substantive-procedures-in-auditing-definition-
lesson-quiz.html
[Accessed 11 August 2023].

Tuovila, A., 2022. Investopedia. [Online]

Available at: https://www.investopedia.com/terms/i/inherent-risk.asp
[Accessed 11 August 2023].

Ullah, A., 2014. leaccountant. [Online]

Available at: https://leaccountant.com/isa-300-summary/
[Accessed 11 August 2023].

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