Objectives of audit?
To obtain reasonable assurance whether the financial statements as a whole are free from material misstatements, whether due to fraud or error enabling the auditor to express a opinion on whether the AFS as prepared in all material aspects in accordance with an applicable financial reporting framework
Materiality?
Can influence economic decisions of users
Professional opinion?
- opinion has to be supported by evidence
- opinion carries weight because of the profession of the auditor (professional bodies, academic knowledge, practical application knowledge)
- users trust auditor’s opinion because of professionalism and independence
What auditor needs to know?
- accounting knowledge: client prepares AFS usinf IFRS, thus auditor need to know IFRS
- auditing standards: ISA’s provide steps auditor must follow throughout audit process
- ethical requirements: all actions and decisions made by auditor to uphold the principles of SAICA and the CPC
Principles?
- audit strategy: establishes and documents in broad and general terms
- audit plan: establishes the nature, timing and extend of the audit procedures necessary to perform risk assessment procedures, respond to risk and comply with other requirements of the ISA
- auditing standards process
Audit process?
- Pre-engagement
- Planning
- Obtaining evidence
- Evaluation, conclusion, reporting
Pre-engagement steps?
1: client investigation (client)
2: knowledge and competence assessment (auditor)
3: terms of engagement and engagement letter (ethics)
Does auditor want to do the audit?
- prohibitions on performing the audit
- association with the industry
- nature of client-auditor relationship
- significant risk of material misstatement
- sound business decision
Prohibitions on performing the audit?
- must be aware of any pre-conditions not met or scope of limitations
- preconditions for an audit
Association with industry?
Nature of industry
Association with owners and management?
- consider whether directors and managers have competency to manage the company
- reputation, attitude towards good governance and indicators
Nature of client-auditor relationship?
- consider relationship with previous auditor
- reasons for change of previous auditor
Internal control
Financial reporting system and audibility
Import transactions
Complex calculations
Manipulate financial statements
Significant risks of material misstatements?
- identify any indicators
- “since the company uses an internal audit, proper internal controls will most likely be in place”
- “evaluate the entity’s financial reporting system and auditability - if business previously audited, it is likely that the reporting system is acceptable and that a significant audit trail exists”
- exposure to exchange rates causes complex accounting treatment - errors
- indications of profit manipulation (indicates risk): low inventory turnover speed, speed of inventory becoming obsolete & loss of income, going concern problems
Small business decisions (auditor’s perspective)?
- Potential users of the reports and the implications on them
- stability and cashflow pressure of the client
- client able to settle the audit fees on timely basis
