Exam (elaborations)
AUE2601 EXAM PACK 2023.
- Course
- Auditing Theory and Practice
- Institution
- University Of South Africa
AUE2601 EXAM PACK 2023.
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ADMIN[COMPANY NAME]
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QUESTIONS AND ANSWERS WITH SUMMARISED NOTES
INTRODUCTION TO AUDITING THEORY & AUDIT PRACTICE
PART A – INTRODUCTION TO AUDITING THEORY
Study Topic 2 (text book pg 1/2)
2.1 The need for Auditing Services
Jackson & Stent Chapter 1
ISA 200 – Objectives and general principles governing an audit
ISA 610
International Framework for Assurance Engagements
External auditors – express an independent opinion if the AFS’s of a company fairly present the financial position and
results of the company’s operations. NOT an employee of the company. Basically enhances the degree of confidence
which users of the financial statements will have of the information they received from the financial statements.
Internal auditors – perform independent assignments on behalf of senior management of the company – normally to
evaluate the efficiency, economy and effectiveness of the company’s internal control systems and business activities.
Enhances management’s degree of confidence that the company’s systems are functioning as intended. Employee of
the company, but should be independent of the department, division or subsidiary which they are auditing.
Government auditors – evaluate and investigate the financial affairs of government departments and report their
findings to senior government therefore increasing the degree of confidence which they have in their departments.
Employee of the government, but must be independent of the government department they are auditing.
Forensic auditors – concentrate on investigating and gathering evidence where there has been alleged financial
mismanagement, theft or fraud. Work independent of the entity under investigation and increases the degree of
confidence the investigating body has in the evidence which is presented.
22 Special purpose auditors – specialise in a particular field such as environmental auditors and VAT auditors.
Enhance the confidence people have in the “correctness” of the information that is being presented.
MUST BE INDEPENDENT OF THE ENTITY BEING AUDITED.
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Auditor required to observe the fundamental ethical principles of : ·
integrity (straightforward, honest, moral)
· objectivity (impartial, fair, non-biased and non-prejudicial)
· professional competence and due care – maintaining professional knowledge and skill at the required level and
performing work diligently
· professional behavior – comply with laws and regulations and avoid action which discredits the profession
· confidentiality – respecting the confidentiality of client information.
Financial reporting system is the entire process by which the management of a business entity compiles and discloses financial
information concerning their financial position and the results of the entity’s operations.
All this information is communicated to external parties in the entities financial statement at the end of each accounting
period and the financial reporting process must address the needs of users of the financial information (investors,
lenders, suppliers and employees). Information must be understandable, relevant, and reliable and prepared on a basis
that is comparable with that used by other business entities.
Objective of financial statements = to provide information about the financial position, performance and changes in financial
position of an enterprise that is useful to a wide range of users in making economic decisions. (From the conceptual
accounting framework in the International Standard – IAS).
Auditing vs. accounting :
Management responsibility to prepare the financial statements in accordance to International Financial Reporting
Standards (IFRS’s) and also to :
· maintain an appropriate accounting system and
· design and implement adequate internal controls to ensure the reliability and integrity of the accounting system
Accounting = the series of tasks and records of an entity by which transactions are processed as a means of
maintaining financial records.
Auditing = examining audit evidence to find sufficient evidential matter to support the comments of management contained in the
financial statements, in order to express an opinion in the auditor’s report as to whether or not the financial statements fairly
present the affairs of the entity in accordance with International Financial Reporting Standards and the relevant statutory
requirements.
AUDITOR THEREFORE EXPRESSES AN OPINION ON MANAGEMENT’S FINANCIAL STATEMENTS.
Engagement of auditing can either be because of statutory requirements (e.g. companies) or on a voluntary basis :
Statutory audits – audits required in terms of an Act – e.g. Companies Act which state that all companies must be
audited on an annual basis. These acts normally spell out the statutory duties and responsibilities of the auditor.
Non-statutory audits – audits that are requested by clients but are not obligatory in terms of legislation – e.g. if
member wants audit of a CC.
Either engaged for :
Audits – auditing engagements
Related services – review engagements or engagements where agreed-upon procedures are carried out and
compilation engagements.
Objective of :
Audit engagement – to enable the auditor to express an opinion as to whether the financials statement are prepared
(in all material respects) in accordance with an applicable financial reporting framework
Review engagement – to enable the auditor to state whether or not anything has come to the auditor's attention that
causes the auditor to believe that the financial statements are not prepared (in all material respects) in accordance with
an identified financial reporting framework. A review engagement is conducted on the basis of procedures that do not
provide all the evidence that would be required in an audit.
Agreed-upon-procedures engagement – for the auditor to carry out procedures of an audit nature to which the auditor and
the entity and any appropriate 3rd parties have agreed and to report on the factual findings
Compilation engagement – to use accounting expertise as opposed to auditing expertise to collect, classify and
summarise financial information.
OBJECTIVE OF A FINANCIAL AUDIT (AUDIT OF FINANCIAL STATEMENTS) – to provide users of the financial statements of
companies with a high degree of assurance about the creditability of the assertions made by the management of the company
in its financial statements. The assurance is in the form of an expression of an opinion in the auditor’s report as to
whether or not the financial statements are a fair presentation of the company’s operating activities.
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The determination of fair presentation relates to the financial statements taken as a whole. Fair presentation is
determined based on the auditor reporting on the information on the financial position (balance sheet), performanc
(income statement) and any changes in the financial position of the company (cash flow statement).
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