These are important revision notes to be studied in conjunction with the other study materials. Once understood your chances of passing this module is greatly enhanced.
TOPIC 1
An auditor enhances the degree of confidence of the intended users in the financial statements.
Auditors of all types provide assurance pertaining to information prepared by one party to another
party with the intention of inspiring confidence in the fairness of the information which is being
prepared or presented. An assurance engagement is one in which a practitioner expresses a
conclusion designed to enhance the degree of confidence of the intended user.
1. Types of auditors
a. Registered auditor – auditors who express an independent opinion on whether the annual
financial statements of a company, fairly present the financial position and results of the
company’s operations. They are described as being in public practice and must be registered
with the Independent Regulatory Board for Auditors (IRBA).
b. Internal auditors – auditors who perform independent assignments on behalf of the board
of directors of the company. These assignments are varied but usually relate to the
evaluation of the efficiency, economy and effectiveness of the company’s internal control
systems and business activities and to the evaluation of whether the company has identified
and is responding to the business risks faced by the company. The internal auditor is an
employee of the company, but must be independent of the department, division or
subsidiary in which the assignment is being carried out. An individual is not required to be
registered with a professional body to be employed as an internal auditor, but may choose
to register with the Institute for Internal Auditors.
c. Government auditors - government auditors perform a role similar to that of the internal
auditor but within government departments. They will evaluate and investigate the financial
affairs of government departments, reporting their findings to senior government. The
government auditor (called the Auditor General), is an employee of the government but
again his status and organisational positioning makes his office independent of the
government departments in which assignments are carried out.
d. Forensic auditors - forensic auditors concentrate on investigating and gathering evidence
where there has been alleged financial mismanagement, theft or fraud. Forensic audits may
be carried out in any government or business entity, but it should be obvious to you that the
forensic auditor needs to be independent of the entity under investigation
e. Special purpose auditors – these are auditors who specialise in a particular field such as
environmental auditors, who audit compliance with environmental regulations and VAT
auditors who work for the South African Revenue Services and who audit vendors’ VAT
returns. The conclusion presented by the special purpose auditors enhances the degree of
confidence.
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Difference between internal and external auditors
Internal auditors External auditors
Perform independent assignments on behalf of Perform an attestation function (audit or review
the board of directors. engagements).
Provide independent information about the Provide an independent opinion on the financial
company’s operations. information examined.
Are contracted by the company they are working Work for an independent audit firm.
with. In some cases the internal audit function is in-
house and the internal auditors are employees of the
company.
Report to management (including the audit Report to the shareholders.
committee).
Function independently in the organisation, but Function independently from the organisation.
remain part of the organisation.
Obtain a mandate from management/the audit Obtain a mandate through legislation.
committee.
The common characteristic to these various audit (assurance) activities is the characteristic of
independence. The external auditor is independent of the company; the internal auditor is
independent of the department being audited.
The major difference between an audit engagement and a review engagement is the nature and
extent of the work done and consequently the level of assurance which is given by the registered
auditor
Registered auditors are individuals who are “professional accountants in public practice” and who
offer their services in auditing, accounting, taxation etc, to the public. Such individuals must, in terms
of the Auditing Profession Act 2005, be registered with the Independent Regulatory Board for
Auditors (IRBA). The authority to conduct an audit of financial statements or financial information as
defined, is restricted to registered auditors.
WHY IS THERE A NEED FOR AUDITORS?
a. The split between ownership and management
The people who own a business are not necessarily the managers of the business. The external
auditor is appointed to evaluate the reports of the managers and provide an opinion in his/her
report to the owners.
b. To create Confidence in financial information
In order to maintain the confidence of those who invest in business, whether they are members of
the general public or investment companies, assurance is required that the financial information
produced by business organisations is reliable and credible. It is the auditor of the financial
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information who provides this assurance (credibility). The economy is aided by the availability of
reliable financial information.
c. Accountability
Directors must be held accountable for the way in which they run their businesses, the government
must be held accountable for the way it spends taxpayers’ money, and companies whose activities
affect the environment must be held accountable for the way in which they adhere to environmental
regulation and legislation.
Independence and fundamental ethical principles
Independence is the characteristic that is common to all the assurance engagements.
Fundamental ethical principles that all professional accountants are
required to observe:
Integrity: being straightforward and honest in all professional and business relationships
Objectivity: not allowing bias, conflict of interest or undue influence of others to override
professional or business judgements (impartial, independent)
Professional competence and due care: maintaining professional knowledge and skill at the
required level and performing work diligently in accordance with applicable technical and
professional standards
Confidentiality: respecting the confidentiality of client information
Professional behaviour: complying with laws and regulations and avoiding actions which
discredits the profession.
MORE ABOUT ASSURANCE ENGAGEMENTS
Assurance engagements
An assurance engagement is one in which the professional accountant “expresses a conclusion
designed to enhance the degree of confidence of the intended users, other than the responsible
party (e.g... management) about the outcome of the evaluation or measurement of a subject matter
against the criteria”. At the conclusion of an assurance engagement, an auditor is expected to give
the client a degree of assurance that the information that was subjected to the audit is free of
material misstatements.
The outcome of the evaluation or measurement of a subject matter is the information that results
from applying the criteria to the subject matter. Subject matter information is information of the
subject that is being audited. An assertion-bass engagement is when the subject matter information
is in the form of an assertion by the responsible party that is made available to the intended users.
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Elements of an assurance engagement
Element Example- audit Example - review
1. Three party relationship registered auditor registered auditor
professional accountant directors responsible for AFS directors
responsible party shareholders shareholders
intended user
2. A subject matter * financial position, results of * financial position, results of operations
operations etc etc
3. Suitable criteria * International Financial Reporting International Financial Reporting
Standards Standards for SMEs
4. Sufficient appropriate * the evidence the practitioner needs in The evidence the reviewer needs to
Evidence order to be in a position to form an express a conclusion on whether
opinion as to whether the financial anything has come to his attention which
statements are free of material causes him to believe the
misstatement and are presented fairly financial statements are not prepared in
in terms of IFRS accordance with IFRS for SMEs.
5. A written assurance report * the audit opinion report on fair The review conclusion
presentation (reasonable assurance) (limited assurance)
The audit engagement
The audit of financial statements is an assurance engagement in which the auditor gathers sufficient
appropriate evidence to form an opinion on whether the directors, who are responsible for the
financial statements, have applied IFRS appropriately in presenting the financial position, financial
performance, changes in equity, cash flows and disclosure notes/(subject matter). The audit
engagement provides reasonable assurance.
The review engagement
The review of financial statements is an assurance engagement and is very similar to an audit
engagement. In a review engagement the reviewer (who will very often be a registered auditor)
gathers sufficient appropriate evidence to form a conclusion on whether anything has come to his
attention which causes him to believe that the financial statements prepared by the directors are not
prepared in accordance with IFRS for SMEs (or IFRS)..
Types of assurance engagements
Reasonable assurance
Reasonable assurance is a high but not absolute level of assurance. Reasonable assurance can 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. A reasonable
level of assurance is conveyed by the use of the phrase, “In our opinion the financial statements
present fairly ………”.
Limited assurance
Limited assurance is a level of assurance which is lower than reasonable assurance but which is still
meaningful to users (ISRE 2400). Limited assurance is given when the practitioner has gathered
enough evidence to satisfy himself that the risk that he expresses an inappropriate conclusion on the
subject matter is greater than for a reasonable assurance engagement, but still at an acceptably low
level for the particular engagement.
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