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Summary Pre-engagement Activities & Knowledge of Business Auditing 288/388 R150,00
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Summary Pre-engagement Activities & Knowledge of Business Auditing 288/388

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This is an in-depth document detailing pre-engagement activities and knowledge of business in the Auditing process.

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  • August 31, 2020
  • 16
  • 2020/2021
  • Summary

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PRE-ENGAGEMENT
ACTIVITIES
& KNOWLEDGE OF THE BUSINESS
Learning outcomes
• Provide an overview of the audit process- not in detail ist a practically discuss the
considerations before accepting an engagement (20 marks)
• Explain the purpose of an engagement letter- not in detail (tutorial in question pack)
• List the content of an engagement letter- not in detail (tutorial in question pack)


Objectives of an 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 (professional) opinion whether the AFS as
prepared in all material aspects
• In accordance with an applicable financial reporting framework (IFRS)

Materiality: can influence economic decisions of users.


Professional opinion
• The opinion has to be supported by evidence.
• The opinion carries weight because of the profession of the auditor
o Professional bodies (SAICA, IRBA)
o Academic knowledge (PGDA, ITC, APC)
o Practical application of knowledge
• Users "trust" auditor's opinion
o Why? Professionalism, independence.
o Code of Ethics: live by fundamental principles.


What the auditor needs to know
• Accounting knowledge (IFRS)
o Client prepares the AFS using IFRS, thus auditor need to know IFRS, i.e. know
what you are checking.
• Auditing Standards (ISA's)
o ISA's provide steps auditor must follow throughout the audit process.
• Ethical Requirements (CPC)
o All actions and decisions made by the auditor to uphold the principles of SAICA
and the CPC.

,Principles
• Audit strategy - establishes and documents in broad and general terms (big
picture); scope. timing, direction.
• Audit plan - establishes the nature (what), timing (when) and the extent (how much)
of the audit procedures necessary to perform risk assessment procedures, respond
to risk and comply with other requirements of the ISA. (Detailed execution of the
strategy)
• Audit process - see below.



audit process overview




PLANNING
Obtain an updated knowledge of the
PRELIMINARY ENGAGEMENT business
ACTIVITIES Consider audit risk
Investigate client Obtain an understanding of the
accounting and internal control systems
Requirements for skills and ability Determine materiality
Formulate an audit strategy and audit
Terms of the engagement and the plan
engagement letter (ISA 210) Coordination and control
Consider other matters that may affect
the audit procedures




OBTAINING EVIDENCE
Test of Controls (ToC) (combined EVALUATION, CONCLUSION AND
approach) REPORTING
General review of financial information
Evaluate results of ToC and adapt and evaluate audit evidence
planned substantive procedures (SP)
Conclusion and formulation of audit
Substantive procedures opinion


Evaluate results of SP and perform Reporting
further SP




2

, OVERVIEW OF THE AUDIT PROCESS
4.
1. PRE- 3. OBTAINING EVALUATION,
2. PLANNING
ENGAGEMENT EVIDENCE CONCLUSION,
REPORTING

Preliminary • Knowledge & Audit approach Evaluate, conclude &
engagement understanding of (Combination report
activities: the business (ISA depends on audit • Overall review
1. Investigate client 315) approach) (audit differences)
2. Requirements for • Understanding of • Test of Control • Conclusion
skills and ability the accounting & (ToC) • Reporting
3. Terms of the internal control • Substantive
engagement and system Procedures (SP) Audit report and
the engagement • Risk evaluation management letter -
letter (ISA 210) o Inherent risk (IR) Results of procedures opinion
(ISA 330) and plan for further
o Control risk (CR) work if needed
o Auditor’s reaction
on risk
assessment (ISA
330) Audit risk = IR + CR x DR
• Planning materiality
(ISA 320)
• Formulate
o Audit strategy
(Scope, timing,
direction Big
picture)
o Audit approach
(Substantive OR
Combined
Approach)
o Audit plan (List of
audit procedures)
INTERNATIONAL STANDARDS ON AUDITING
• Terms of the audit • Knowledge of the • Auditor’s response • Evaluation and
engagement (ISA business (ISA 315) to risks (ISA 330) reporting (ISA 450)
210) • Risk assessment • Audit evidence
• Quality control of (ISA 315) (ISA 500) (control
the audit of F/S • Materiality (ISA tests and/or
(ISA 220 & ISQC 1) 320) substantive tests)
• Formulate audit • Audit sampling
approach (ISA 530)

Terms of engagement Audit approach & Results of Audit report and
audit plan procedures and plan management letter
for further work if
needed



3

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