Exam (elaborations)
AUE2601 STUDY AND EXAM PACK
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- University Of South Africa (Unisa)
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Auditing Theory and practiceTopic 1: Introduc on to Audi ng
THE AUDITOR
1) Describe what an auditor does.
An auditor enhances the degree of confidence of the intended users in the financial statements.
2) Explain the different types of auditor.
*Registered external auditors: Are auditors who express an independent opinion on whether the annual
Financial statements o a company fairly present the financial posi on and results of the company’s opera ons. An external auditor
is not an employee of the company. Offer their service to the public.
*Internal auditors: Auditors who perform independent assignments on behalf of the board of the director’s f the company. Is an
employee of the company but is independent. Not required to be registered with a professional body. Evaluates efficiency,
economy and effec veness, risks and business ac vi es.
*Government auditors: Evaluate and inves gate the financial affairs of the country and increase the degree of confidence which
government has in its departments. Is an employee but must be independent.
*Forensic Auditors: Forensic Auditors concentrates on inves ga ng and gathering evidence where there has been alleged financial
mismanagement, the or fraud. Needs to be independent of the en ty under inves ga on.
*Special purpose auditors: To enhance the degree of confidence of the audit subject. Who specialize in a par cular field such as
environmental auditors, who audit compliance with environmental regula ons, and VAT auditor’s o work for the SARS and who
audit vendors VAT returns.
3) Explain the rela onship between the internal and external auditor.
Both the external and internal auditor has to be independent of the subject audited.
4) List and explain the fundamental ethical principles that all charted accountants are required to observe.
*Integrity – to be straigh orward ad honest in all professional and business rela onships.
*Objec vity – to not allow bias, conflict of interest or undue influence of others to override professional or business judgments.
*Professional Competence and due care – to maintain professional knowledge and skill at the level required to ensure that a client
receives competent professional services based on current developments in prac ce, legisla on and techniques and act diligently
and in accordance with applicable technical and professional standards.
*Confiden ality – to respect confiden al informa on acquired as a result of professional and business rela onships and not
discloses any such informa on to third par es without authority unless there is a professional or legal right or duty. Nor use
informa on for the personal advantage of the charted accountant.
*Professional Behavior – to comply with relevant laws and regula ons and avoid any ac on that discredits the accountancy
profession.
5) Why is there a need for auditors?
*There is a split between ownership and management
*To create or ascertain confidence in the financial informa on
*Accountability – Assess whether directors are mee ng their responsibili es.
6) Explain the purpose of an audit.
The purpose of an audit is to give assurance to the intended users.
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,ASSURANCE AND NON-ASSURANCE ENGAGEMENTS
1) Define an assurance engagement.
An assurance engagement is one n which an auditor expresses a conclusion designed to enhance the degree f confidence of the
intended users, other than the responsible party, about the outcome of the evalua on or measurement of a subject ma er against
criteria.
2) Explain what is meant by the outcome of the evalua on or measurement of subject ma er.
The outcome of the evalua on or measurement of a subject ma er is the informa on that results from applying the criteria to the
subject ma er.
3) Explain what is meant by subject ma er informa on.
Subject ma er informa on is informa on of the subject that is being audited.
4) Describe an asser on-bass engagement.
Is when, the subject ma er informa on is in the form of an asser on by the responsible party that is made available to the
intended users.
5) Describe a direct repor ng engagement.
To present whether directly or obtain a representa on from responsible party that has performed the evalua on or measurement
that is not available to the intended users.
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,6) Explain the elements of an assurance engagement.
Element Explana on
*Three party rela onship
-professional accountant -registered auditor
-responsible party -directors responsible for AFS
-Intended user -shareholders
*A Subject ma er *Financial posi on, results of opera ons etc.
*Suitable criteria *Interna onal Financial Repor ng Standards
*Sufficient appropriate evidence *The evidence the prac oner needs to be in a posi on to
conclude that the financial statements are free of
Material misstatements.
*A wri en assurance report *the audit report on fair presenta on
7) Define a reasonable assurance engagement.
It relates to the en re audi ng process, namely the collec on of audit evidence and the conclusions the auditor draws about the
evidence in order to express an audit opinion. Reasonable assurance engagement is a reduc on in assurance engagement risk to an
acceptably low level in the circumstances of the engagement as the basis for a posi ve form of expression of the prac oner’s
conclusion.
8) Define a limited assurance engagement.
The objec ve of a limited engagement is a reduc on in assurance engagement risk to a level that is acceptable in the circumstances
of the engagement, but where that risk is greater than for a reasonable assurance engagement, as the basis for a nega ve form of
expression of the prac oner’s conclusion.
9) Explain the difference between a reasonable assurance engagement and a limited assurance engagement.
A reasonable assurance engagement is a reduc on in assurance engagement risk as the basis for a posi ve form of expression of
the prac oner’s conclusion and a limited assurance engagement is a reduc on in assurance engagement risk, but where the risk is
greater than reasonable assurance engagement, as a basis for a nega ve form of expression of the prac oner’s conclusion.
*Reasonable assurance - audit engagements where a posi ve form of expression of opinion is given
- Extensive procedures carried out
*Limited assurance -review engagements where a nega ve form of expression of opinion is given.
-less extensive procedures carried out.
10) Explain public interest and public interest scores.
Public interest: The need for audi ng in its various forms is a response to the needs of society and therefore of public
Interest. Society and business are totally interlinked and rely on each other for their survival.
The business world and society runs on financial informa on and depends on that informa on being
accurate, fair and credible. Therefore it is in the public interest that there be a mechanism to achieve
this.
Public interest scores: The score is based on factors which generally determine the level of interest the public has in
the en ty.
Will be the sum of: *a number of points equal to the average number of employees during the financial year
*One point for every R1 million (or por on thereof) of turnover.
*One point for every R1 million (or por on thereof) of 3rd party liability at year end.
*One point for every individual who directly or indirectly has a beneficial interest in any of the
Company’s shares.
11) Explain the term “assurance” and the various levels of assurance that can be provided by an auditor with regard to an audit
engagement and a review engagement.
At the conclusion of an assurance engagement, an auditor is expected to give the client a degree of assurance that the informa on
that was subjected to the audit is free of material misstatements. Assurance is the professional opinion of the audit.
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, *Reasonable assurance - audit engagements where a posi ve form of expression of opinion is given
- Extensive procedures carried out
*Limited assurance -review engagements where a nega ve form of expression of opinion is given.
-less extensive procedures carried out.
12) Explain the advantages of having an audit of financial statements.
*To provide an independent service which assesses and evaluates whether directors, governments etc are mee ng their
responsibili es.
*To provide assurance (credibility).
*Auditors (professional accountants) play a crucial role in inspiring this confidence by expressing opinions as to the fair presenta on
of financial informa on.
Independently audited financial informa on assist in:
*direc ng individual investors towards investments that suit their needs eg .risk, return.
*developing the economy as a whole, by ensuring that funds are directed towards those en es which provide evidence of sound
management, high produc vity and strong financial posi ons.
*enabling the government to collect axes on an equitable basis.
*Inspiring confidence in how the government handles its finances.
13) Explain the inherent limita ons of an audit.
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the
financial statements are fee from material misstatement due to fraud or error. This is because there are inherent limita ons of an
audit, which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion eng
persuasive rather than conclusive. The inherent limita ons of an audit arise from:
*The nature of financial repor ng
*The nature of audit procedures
*The need for the audit to be conducted within a reasonable period of me and at a reasonable cost.
14) Describe a non-assurance engagement.
These are engagements that do not meet the defini on of an assurance engagement. The defining characteris c is that the
prac oner does not express an opinion on the subject ma er of the engagement.
They include the following:
-Agreed-upon procedures engagement
-Compila on engagement
15) Define the objec ve of an agreed-upon procedures engagement.
The auditor is engaged to carry out procedures which have been agreed upon by the par es involved, e.g. the auditor, the client
and any interested third party. Auditor reports only facts based on the agreed-upon procedure. No opinion or assurance is given;
the users are required to draw their own conclusions from the facts presented.
16) Define the objec ve of a compila on engagement.
Accountant is engaged to use accoun ng exper se as opposed to audi ng exper se to collect, classify and summarize financial
informa on. No tes ng is conducted and no assurance is given in the report. The principals rela ng to this type of engagement will
apply were any financial informa on is compiled on behalf of a client.
17) Describe the level of assurance that can be provided by an auditor with regard to an agreed-upon procedures engagement and
a compila on engagement.
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