This is a simple and effective notes to help you understand the concepts and principles taught in the 3rd year of Auditing.
The summary is guaranteed to give you a good indication of what usually comes out in the tests and exams. There is an in-depth analysis of each topic studied in the 1st sem...
Auditing ultimate summary
PI score
- Calculation made at company level not consolidation level
- Belt, beneficiary, employees, liability of 3rd party, turnover, 1 point for every 1 Mil and for
employees take average
-Include temporary employees (worked 40 hours over 3months)
- Provisions only included if deemed to be payable and 3rd party is identified
- deferred tax excluded
- Loans within group should be included
- Trust should be counted as individual beneficiary interest (5 members of trust is 5 points)
- Exclude Liability from shareholders
- Exclude loans from directors
-Don’t round off, unless say part thereof
- All public companies must have external audit
- vesting rights is beneficial interest
- sometimes must extrapolate figures
-3rd party liability (NCL plus all current, look for additional info e.g. This amount was included is
a hint to exclude it)
-Directors and employees counted twice as beneficiaries and employees of comp
- look for any services rendered on credit as it can be added to turnover
- shareholders hide sometimes in scenario look if it is implied that someone is a shareholder
(Gary and 3 other shareholders, therefore there is 4)
-If PI score above 500, must have social ethics committee
-Integrity, RMAFLIC (Bus Reputation, Money Laundering, Attitude of Individual, Attitude to pay
fees, limitations imposed, identity, sound corporate governance)
-Ethical requirements (threats and safeguards)
-Competence, KSRPD (knowledge, Tech skills, Resources, Personnel, Deadline)
-Procedures to gather info, BADSRS (inquire with Banks, Prev auditors, discuss with directors,
status of firm, review of docs, background searches)
Application
The following considerations should be made prior to accepting engagement:
-Consider our independence and are there any threats that affect our judgement
-Consider the conflict of interest with existing client and reputation of client
- Have the previous auditors been informed of engagement and can they communicate client’s
affairs
- obtain permission to contact prev auditors and determine if any ethical reasons to reject
-Do we understand the industry in which the client operates, Is it dubious (porn or anything
with violence)
- Can the client pay audit fee (maybe he’s in financial difficulty)
-Are there any limitations imposed by client that would result in going concern problems
-Different opinions is an indication of a difficult client
- Do we have necessary resources and staff to conduct audit (be aware of how many auditors
available and how many diff locations to audit)
- Do we have experienced and skilled staff
- Is there a tight audit deadline (e.g., req statements in 2 weeks), would entity have enough
time to gather sufficient appropriate evidence.
- Does Client have audit committee (shows good corporate governance)
- Are financial Reporting standards complied with, relevant framework selected
,Be aware that valuation problems can indicate company uses standards that show favorable
picture not the correct representation.
-Is it a sound corporate decision to accept.
- Is the engagement partner in charge (client continuance)
-Threats, apply safeguards
-engagement letter, address king4, responsibilities of auditor, management and other issues)
JUICY SOURCES
Solomon and Phillips
Scenario
They got offices in Pretoria, Bloem, and East London
The client is Zondi
Prev. auditors resigned as they couldn’t provide Zondi with quality audit service
The client supplies paper (industry)
They have distribution outlets in 10 major cities
The CEO is a qualified CA, highly regarded in industry
Prev ous resigned due to insufficient staff
Zondi awarded SH handsome dividends
The partner in our firm has 7.5% SH in Zondi
Solution
The industry
Not a dubious industry, manufactures paper (our year must have sufficient knowledge of the
client’s industry)
Client’s mgnt
The CEO of Zondi appears to have integrity as highly qualified CA
Communication with prev auditor
Contact the prev auditors in order to identify whether or not there is a reason why we
shouldn’t accept the engagement
It is unlikely there is a reason not to accept as prev ous resigned due to insufficient staff
, The ability to pay the audit fee
They can pay since handsome dividends
The ethical consideration
The partner in charge of the engagement has 7.5% in SH company, this might create a self-
interest threat to objectivity/ independence (mind and appearance)
The threat is regarded as significant
Safeguards to be applied – declare Financial interest to superiors or dispose of it
Auditors skill competence and resources
Consider whether you have adequate skills, competence and resources while taking in to
account the prev ous resigned shortage staff
There are 10 distribution outlets
The engagement letter
When it’s comfortable to accept the engagement, consider the responsibility of mgnt, auditors
and RI if it exists
Accept as long as threat reduced to an acceptable lvl
RISK OF MATERIAL MISSTATEMENTS AT FINANCIAL STATEMENT LEVEL
-Name (Intercompany)
International (Laws)
King4(corporate governance)
Bonus (Motivate)
New client (Familiarity)
Companies Act
JSE (requirements)
Overseas (Gas)
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