Chapter 1 Theory and Philosophy of Auditing ◦ ◦ ◦ ◦ What is an auditor? Why is there a need for auditors? Assurance and Non-Assurance Engagements Auditing postulates The Accounting Profession ◦ The nature of professional status ◦ Accounting Bodies in South Africa ◦ Pronouncements which regulate the profession Financial Statement and Audit Engagement ◦ Independent audit ◦ Roles of the parties and regulation ◦ Assertions The objective of the ordinary audit of financial statements by the independent auditor is the expression of an opinion on the fairness with which they present, in all material respects, financial position, results of operations, and its cash flows in compliance with generally accepted accounting principles. (ISA 200 Paragraph 3) Auditors are assurance providers ◦ There are different forms or types of auditing and different levels of assurance ◦ Providing assurance is to add value by improving the credibility of work performed by other people through evaluating the work and giving a conclusion. The auditor add assurance, trust or enhanced credibility to the worked performed by others ◦ The are many types of auditors but in this module we only focus on external auditing External auditors ◦ registered with IRBA ◦ Independently employed ◦ Comprehensive review of AFS ◦ Issue assurance Internal auditors ◦ Works for the management ◦ Looks more on internal controls (efficiency and effectiveness) Government auditors (AGSA) ◦ Forensic auditors (fraud allegation) ◦ Special purpose auditors The agency theory: split between management and ownership ◦ The owners are different from the managers and need assurance on the trustworthiness of the management’s reports Confidence in financial information Accountability ◦ The users of financial information need some assurance as to the reliability and credibility of the information to help guide future decisions ◦ At all levels in a businesspeople who are responsible are held accountable. The increased need for accountability lead to an increased need for assurance services, i.e. internal audit, government audit, forensic audit and environmental audit Levels of assurance ◦ Assurance granted differs depending on the type of engagement and range from limited assurance in a review engagement to reasonable assurance in an audit engagement Sum of: ◦ 1 point for each of the average employees ◦ 1 point for every R1mil of turnover ◦ 1 point for every R1 mil of 3rd party liability ◦ 1 point for every individual who directly or indirectly has a beneficial interest in the company’s shares Calculation <100 = review engagement, limited assurance 100 to 349 = Audit if AFS is internally compiled, Review if AFS is externally compiled 350< = Audit, reasonable assurance Application By law, the annual financial statements of public companies must be audited each year by independent auditors PTY LTD (Private) LTD (Public) Assurance engagements (Sufficient and appropriate evidence) Express a conclusion designed to enhance the degree of confidence of the intended user, other than the responsible party, about the outcome of the evaluation or measurement of a subject matter against the criteria” ◦ Criteria for an assurance engagement include: Three party relationship Subject Matter Suitable criteria Evidence Conclusion or report ◦ Audit of financial statements is the most common assurance engagement ◦ Other assurance engagements include a report on the effectiveness of the internal control, limited assurance on sustainability reports Engagements that does not meet the definition of an assurance engagement ◦ No third party ◦ No suitable criteria to use for reliable measurement ◦ An opinion is not expressed Examples include ◦ Prepare financial statements ◦ Secretarial services ◦ Tax advice Which of the following determine if a public company should have an audit? a. The company's public interest score b. The company’s PIS and whether the financial statements were independently complied or not c. The requirements of the industry d. None of the above Reasonable Assurance - ISA 200 – Overall Objectives of the Independent Auditor, defines reasonable assurance as a high but not absolute level of assurance. an only be given when the practitioner has gathered sufficient appropriate evidence to satisfy himself that the risk that he expresses an inappropriate opinion on the subject matter is acceptably low. o o o o o Why only reasonable assurance is given and not absolute assurance (limitations of audit) The nature of financial reporting (use of accounting judgements and accounting estimates for other items/ components of AFS. The nature of audit procedures is also a limitation due to inherent limitations of accounting and control systems, the use of sampling and the persuasive nature of audit evidence and the challenge of completeness of information Challenges to ensure timely financial reporting, while considering regulatory compliance and going concern considerations No conflict of interest between the auditor and management (both have the same objective for fair presentation) Act exclusively as auditor to be able to offer an independent opinion on the fair presentation of the financial information Professional status imposes commensurate professional obligations Financial data is verifiable Internal control reduces the probability of errors and irregularities Application of GAAP result in fair presentation That which held true in the past will hold true in the future Financial statements are free from collusive and other unusual irregularities A statutory audit is a legally required review of the accuracy of a company's or government's financial statements and records. It is an audit that is required by laws and regulations. The non-statutory audit is the audit of financial statements that are not required by law. It is different from the statutory audit that the entity needs to engage with an audit firm to perform its review in financial statements. For the non-statutory audit, the entity may exempt from the law’s requirement, but the entity still engages with the firm. This is because of shareholders’ requirements, the board of director’s requirements. Professional status ◦ Highly specialised skills and services ◦ Quality of the services cannot be easily evaluated by the public ◦ Ethical and intellectual commitment that transcends the desire for monetary gain Accounting bodies in South Africa ◦ SAICA – www.saica.co.za ◦ ACCA – www.accaglobal.com ◦ CIMA – www.cimaglobal.com Auditing bodies in South Africa ◦ IRBA – www.irba.co.za Compliance with appropriate standards and ethical requirements are critical Important pronouncements ◦ Auditing Professions Act, 2005 ◦ Companies Act, 2008 and its regulations ◦ SAICA’s constitution, bylaws and Code of Professional Conduct ◦ IFAC’s Code of Ethics ◦ IRBA’s Code of Conduct and the Disciplinary rules ◦ International standards on Auditing (ISA) Review engagements (ISRE) Assurance engagements (ISAE) Related services (ISRS) International Auditing Practice Statements (IAPS) South African Auditing Practice Statements (SAAPS) Auditors External audit of financial statements Conducted by a Registered Auditor (RA) Issue Audit report AFS – assertions Directors External audit or Audit Appoint Shareholders Independent audit model Shareholders Directors Auditor ◦ ◦ ◦ ◦ Fund the business Appoint directors to manage the business Appoint auditors to provide assurance on the AFS Receive AFS ◦ Responsible to manage the business ◦ Account for their stewardship in the AFS ◦ Prepare AFS in terms of a framework (IFRS) ◦ Gather evidence to render an independent opinion on whether the financial statements issued by the Directors fairly present the financial position and results of the operations of the company according to the financial reporting framework ◦ Report the audit opinion to the shareholders Recognise the importance of assurance Audits compulsory for public companies Other companies can either: ◦ Independently reviewed ◦ Voluntary audit Some larger private companies could be required to be audited ◦ ◦ ◦ ◦ Annual turnover Size of the workforce Nature and extent of its activities Depending on their Public Interest Score Regulate appointment of directors and auditors with obligations and rights Prohibits non-RA from performing audits Designated auditor must be identified Can only express an unqualified opinion when: ◦ Audit is free from restrictions ◦ Complied with applicable auditing pronouncements ◦ Satisfied of the existence of all assets and liabilities shown in the FS ◦ Proper accounting records have been kept in an official language ◦ All necessary information was obtained ◦ No reportable irregularity was reported to IRBA ◦ Auditor complied with all laws relating to the entity under audit ◦ Auditor is satisfied as to the fairness of the financial statements ISA provide standards which the auditor must attain and provide guidance on how it should be done ISA cover the entire audit process Completeness – all events, elements and transactions Occurrence – took place at the entity Existence – elements exist at the date Cut off – recorded in the correct period Accuracy – amounts and other data is appropriately recorded Classification –recorded in the proper accounts Rights and Obligations – hold or control the rights to assets and liabilities are its obligation Valuation and allocation – elements included at appropriate amounts Presentation and disclosure – all events occurred and pertain to the entity, financial information is appropriately presented and clearly expressed, and financial information is fairly disclosed at appropriate amounts Auditors are professional people who strengthen the credibility of financial information Questions???????
