Slides - Chapter 1 - AFISAC - 2 Slides Per Page
Slides - Chapter 1 - AFISAC - 2 Slides Per Page
Slides - Chapter 1 - AFISAC - 2 Slides Per Page
Chapter 1
Introduction about
EXTERNAL AUDITORS
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❑ BoD:
• May delegate (next slide) the day-to-day finance function to the accounting
division headed by the chief financial officer (CFO) or Financial Director (FD)
• Must review and approve the accounting records and financial statements
compiled by the accounting division (under leadership of the CFO/FD)
• Remain ultimately responsible for preparing and approving the accounting
records and financial statements before publication
• Remain ultimately responsible for the fair presentation of transactions and
events that took place during the year in the financial statements
➢ Directors who knowingly misrepresent information in financial statements
are in contravention of section 29 of the Companies Act of 2008 and are
guilty of a criminal offence (may go to jail).
❑ The audit committee
• Is a subcommittee of the BoD
• Has an oversight function over the financial statements
➢ thereby assisting the BoD in discharging its responsibilities.
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Delegate
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Type 1: Type 2:
Classes of transactions, events Account balances and related
and related disclosures disclosures
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Example: Ntsimbi Piping’s Property Plant and Equipment (PPE) in the Statement of
Financial Position at 31 December 20X1 (see the financial statements of Ntsimbi
Piping at the beginning of the “Auditing Fundamentals in a South African Context”
textbook)
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Example: Ntsimbi Piping’s Property Plant and Equipment (PPE) in the Notes to
the Financial Statements (see the financial statements of Ntsimbi Piping at the
beginning of the “Auditing Fundamentals in a South African Context” textbook)
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Example: Ntsimbi Piping’s Property Plant and Equipment (PPE) in the Notes to
the Financial Statements (see the financial statements of Ntsimbi Piping at the
beginning of the “Auditing Fundamentals in a South African Context” textbook)
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Example: Ntsimbi Piping’s Property Plant and Equipment (PPE) in the Notes to
the Financial Statements (see the financial statements of Ntsimbi Piping at the
beginning of the “Auditing Fundamentals in a South African Context” textbook)
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Example: Ntsimbi Piping’s Property Plant and Equipment (PPE) in the Notes to
the Financial Statements (see the financial statements of Ntsimbi Piping at the
beginning of the “Auditing Fundamentals in a South African Context” textbook)
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Example: Ntsimbi Piping’s Property Plant and Equipment (PPE) in the Notes to
the Financial Statements (see the financial statements of Ntsimbi Piping at the
beginning of the “Auditing Fundamentals in a South African Context” textbook)
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Which assertions did the directors of Ntsimbi Piping make in the financial
statements about the company’s Property, Plant and Equipment (PPE)?
Take note: only the assertions for ACCOUNT BALANCES AND RELATED DISCLOSURES are
applicable to PPE (an ASSET with a balance at a specific date)
ASSERTIONS DESCRIPTION/EXPLANATION OF ASSERTION
• PPE (assets) represented by the balance of R43 169 987 in the Statement
of Financial Position (SFP) at 31 Dec 20X1:
Existence ➢ actually exist
➢ is not fictitious and
➢ is real.
• The carrying amount/value of R43 169 987 for PPE (assets) reflected in
the SFP at 31 Dec 20X1 is appropriate,
• meaning the assets were appropriately measured and described
➢ at recognition
Accuracy,
➢ after recognition
valuation and
❑ continuous measurement i.e. taking into account adjustments
allocation
for impairments, depreciation, etc.
➢ in disclosures
❑ e.g. gross carrying amount and accumulated depreciation at the
beginning and end of the year
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Which assertions did the directors of Ntsimbi Piping in the financial statements about the
company’s Property, Plant and Equipment?
Take note: only the assertions for ACCOUNT BALANCES AND RELATED DISCLOSURES are
applicable to PPE (an ASSET with a balance at a specific date)
ASSERTIONS DESCRIPTION/EXPLANATION OF ASSERTION
Rights (only • Ntsimbi Piping holds/controls ownership of the PPE (assets) represented
relevant to by the balance of R43 169 987 in the Statement of Financial Position (SFP)
assets) at 31 Dec 20X1
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Which assertions did the directors of Ntsimbi Piping in the financial statements about the
company’s Property, Plant and Equipment?
Take note: only the assertions for ACCOUNT BALANCES AND RELATED DISCLOSURES are
applicable to PPE (an ASSET with a balance at a specific date)
ASSERTIONS DESCRIPTION/EXPLANATION OF ASSERTION
• All PPE assets of Ntsimbi Piping have been appropriately
➢ presented
➢ aggregated (combined → into less detail) or disaggregated (split-up
→ into more detail)
❑ e.g. additions to PPE, disposals of PPE, revaluations of PPE,
depreciation and any other movements are shown in the
reconciliation of carrying amount from beginning of the year to
Presentation the end of the year
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• Section 29(2) requires that if a company provides its financial statements to any
person for any reason these financial statements may not be
➢ false or misleading in any material respect,
➢ or incomplete.
Will NOT be asked as long questions
• It is an offence (sec 29(6)) for any person to (more than three marks). Can be
➢ prepare, asked as short questions.
➢ approve,
➢ disseminate (distribute),
➢ or publish
• any financial statements knowing that these financial statements are
➢ false,
➢ misleading,
➢ incomplete,
➢ or do not comply with the requirements of section 29(1) (previous slide).
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❑ A director’s report
❑ Disclosures about directors’ remuneration (only for
companies that have to be audited)
➢ Approved by the board of directors
➢ Signed off by an authorised director
➢ Presented at the first shareholders’ meeting after the
financial statements have been approved.
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1.1 Background & 1.4 Why are external auditors needed and what is the purpose of
an external audit?
Very
important –
❑ The legal requirements (e.g. according to the Companies Act of 2008) for certain
should be
organisations to be audited, able to
➢ not the main and only reason why external auditors are needed discuss
o (take note: audits required because of law are called statutory audits)
❑ Principal-agent theory also relevant reason why external auditors are needed
➢ Split/separation between principals/owners/shareholders and
agents/managers/stewards/directors
o Owner/Shareholders ≠ Managers/Directors
o Modern day → companies are OWNED by shareholders who do NOT
MANAGE these companies
o Shareholders (owners) provide finance/capital (in form of buying/owning
shares)
o Shareholders (owners) appoint directors
❖ delegate some decision-making powers to directors
❖ Entrust directors to act in company’s and shareholders’ best interest
o Directors (management) are salary earners/employees of shareholders
(not owners)
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1.1 Background & 1.4 Why are external auditors needed and what is the purpose of
an external audit?
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1.1 Background & 1.4 Why are external auditors needed and what is the purpose of
an external audit?
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1.1 Background & 1.4 Why are external auditors needed and what is the purpose of
an external audit?
Expresses an independent
External independent auditor opinion on the fair presentation
of the financial statements
FINANCIAL
REPORTING
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1.4 Why are external auditors needed and what is the purpose of an external audit?
Very
1.4.1.1 External audit can add value important
❑ Improves legitimate tax collection, thereby lowering the tax burden on society
➢ Reduces the need for SARS to perform detailed inspections on company’s tax
returns
➢ Provide assurance that companies carry proper share of tax burden
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1.4 Why are external auditors needed and what is the purpose of an
external audit?
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1.4 Why are external auditors needed and what is the purpose of an external
audit?
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1.4 Why are external auditors needed and what is the purpose of an external
audit?
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1.4 Why are external auditors needed and what is the purpose of an
external audit?
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1.4 Why are external auditors needed and what is the purpose of an external audit?
1.4.5.2 Inherent limitations of an external audit (reasonable assurance, not absolute because):
• Nature of financial reporting
Very important –
➢ Management must should be able to discuss
o Apply (human) judgment
o Make estimates (e.g. useful lives of PPE, depreciation, allowance for doubtful
debts/credit losses, allowance for obsolete inventory)
• Nature of audit procedures
➢ practical and legal limitations on auditor’s ability to obtain audit evidence supporting
management’s assertions in FS
o Nature of audit evidence gathered by auditor
❖ Directors/management are asked to provide documentation and explanations to
the auditor → forms part of audit evidence gathered
❖ Auditor uses these to come to conclusions about the transactions, balances and
disclosures being audited.
❖ This information persuades/convinces auditor to draw conclusion on whether FS
are fairly presented or not
❖ information supplied by directors/management could be
(intentionally/unintentionally) incorrect/incomplete/misrepresented to the
auditor
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1.4 Why are external auditors needed and what is the purpose of an external audit?
Very important –
should be able to discuss
1.4.5.2 Inherent limitations of an external audit (reasonable assurance, not absolute because):
• Nature of audit procedures
➢ practical and legal limitations on auditor’s ability to obtain audit evidence supporting
management’s assertions in FS
o Fraud committed by management/directors
❖ Involve clever schemes
❖ Auditor not expected to be a forensic expert on authentication of supporting
documents
• Timeliness (benefit vs cost)
➢ expectation of users of FS → auditor complete audit within reasonable time frame (as
soon as possible after financial year-end) and at a reasonable cost
o Thus limited time and resources available to auditor
o Auditor must balance extent and quality of audit evidence gathered against cost to
obtain it
o Auditor cannot verify every single transaction that occurred in company during
financial year
❖ auditor selects a sample of transactions/events → conducts audit procedures
❖ entire population not investigated by auditor → risk that fraud or errors go
undetected
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1.4 Why are external auditors needed and what is the purpose of an external audit?
❑ Two types:
➢ Reasonable assurance engagements
o Example: External audit of financial statements
➢ Limited assurance engagements
o Example: Independent review of financial statements
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1.4 Why are external auditors needed and what is the purpose of an external audit?
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1.4 Why are external auditors needed and what is the purpose of an external audit?
Very important –
should be able to discuss
1.4.5.3 Assurance (International Framework for Assurance
Engagements) and non-assurance engagements
Five elements that must always be present in an assurance engagement:
❑ Suitable criteria:
➢ Benchmarks used to evaluate/measure subject matter against
o Suh as:
❖ IFRS or IFRS for SMEs, if the subject matter is FS
❑ Evidence:
➢ Practitioner obtains sufficient appropriate evidence when planning and
performing engagement
o to support opinion expressed
❑ Assurance report:
➢ Practitioner provides written report to intended users
o report contains opinion/conclusion
o expresses assurance obtained
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1.4 Why are external auditors needed and what is the purpose of an external
audit?
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1.4 Why are external auditors needed and what is the purpose of an external
audit?
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1.4 Why are external auditors needed and what is the purpose of an external
audit?
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1.4 Why are external auditors needed and what is the purpose of an external
audit?
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1.4 Why are external auditors needed and what is the purpose of an external
audit?
Take note:
The details of what tests of controls
and substantive procedures are, are
discussed during a later stage of
your studies
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1.4 Why are external auditors needed and what is the purpose of an external
audit?
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1.4 Why are external auditors needed and what is the purpose of an external
audit?
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1.4 Why are external auditors needed and what is the purpose of an
external audit?
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1.4 Why are external auditors needed and what is the purpose of an external
audit?
Systematic process
Objectivity
Communicate results
To users
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1.4 Why are external auditors needed and what is the purpose of an external
audit?
SYSTEMATIC PROCESS
• External auditor follows organised and logical process → referred to as “the
audit process” and is prescribed by the International Standards on Auditing
(ISAs).
OBTAINING AND CONSIDERING EVIDENCE AND INFORMATION
• External auditor must gather sufficient and appropriate audit evidence about
director’s assertions in the FS
• Consider this evidence to determine the nature/type of the audit opinion to
be expressed (see “COMMUNICATE RESULTS” for the 4 types of auditor
opinions).
OBJECTIVELY
• External auditor has no significant personal interest in or ties (relationships or
financial investments) with the entity (or persons associated with the entity)
that is being audited.
• Allows an objective, professional approach to work.
• Audit evidence/facts are the only basis for expressing audit opinion→ not
based on potential personal (financial) gain or emotion (relationships).
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1.4 Why are external auditors needed and what is the purpose of an external
audit?
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1.4 Why are external auditors needed and what is the purpose of an external
audit?
COMMUNICATE RESULTS
• External auditor must communicate results (audit opinion) of audit process.
• Results (audit opinion) are reported in writing in auditor’s report (see page 2
of FS of Ntsimbi Piping for example).
• International Standards on Auditing (ISAs) prescribe 4 types of auditor’s
reports/opinions to be issued in various circumstances (see next slide – not
necessary to memorise next slide)
TO USERS
• The users of the FS are any stakeholders that would use the auditor’s report to
make more informed decisions.
• May include shareholders, employees, investors and providers of debt finance.
• For audits of RSA companies, the users specifically identified in the auditor’s
report are the company’s shareholders.
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1.4 Why are external auditors needed and what is the purpose of an external audit?
COMMUNICATE RESULTS
Type 2A
Type 2B Type 2C
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1.4 Why are external auditors needed and what is the purpose of an
external audit?
❑ Independence
• No conflict of interest - management and auditor
• Professional obligations
• Objectivity: In capacity of auditor.
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1.4 Why are external auditors needed and what is the purpose of an
external audit?
Govern-
External Internal Forensic
ment
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1.4 Why are external auditors needed and what is the purpose of an external
audit?
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1.4 Why are external auditors needed and what is the purpose of an external
audit?
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1.4 Why are external auditors needed and what is the purpose of an external
audit?
INTERNAL AUDITORS
❑ Designation: Certified Internal Auditor (CIA)
❑ Professional body: The Institute of Internal Auditors (IIA)
❑ Statutory body: None
❑ Works for any one of two parties:
1.) an internal auditing firm
➢ Internal auditor is not an employee of the entity under audit → is an
employee of an internal auditing firm that provides
contracted/outsourced internal audit services to an entity.
2.) the entity under audit
➢ Is a salary earning employee of the entity under audit
Ignore the rest of the information about internal auditors. It will be studied in
future from the “Internal Auditing: An Introduction” (green) textbook.
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1.4 Why are external auditors needed and what is the purpose of an external audit?
GOVERNMENT AUDITORS
• May work as government auditor, without registration with a professional body
(e.g. SAICA, IIA, etc.) or statutory body (IRBA)
• BUT highly advised/preferred if registered as CA(SA) (SAICA), RA(SA) (IRBA), CIA
(IIA) etc.
• The government auditor is an auditor who objectively performs evaluations of
local, provincial and national government departments FS and adherence to
specific government finance legislation.
• Issues audit reports to the government.
• These audits aim to increase the confidence of stakeholders (including the
public/voters) in government departments’ functioning and reporting.
• The government auditor in South Africa is called the Auditor-General (South
Africa) (AGSA).
• Works for/employee of government (but independent of government
departments it audits)
South Africa’s current AG:
Tsakani Maluleke CA(SA)
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1.4 Why are external auditors needed and what is the purpose of an external audit?
FORENSIC AUDITORS
❑ Designation: Certified Fraud Examiner (CFE)
❑ Professional body: The Association of Certified Fraud Examiners
❑ Statutory body: None
❑ The forensic auditor performs an independent investigation into financial fraud
or fraudulent activities.
❑ On completion of the engagement, the forensic auditor issues a report to the
party that appointed him or her.
❑ This report is often used in a court of law.
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Not
necessary to
memorise –
read only
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1.6 What are the structures of the accounting and auditing professions?
• Definition of a profession:
➢ An occupation that involves the attainment and the application of
specialised training and education and which also has a set of strict ethical
standards that need to be complied with.
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1.6 What are the structures of the accounting and auditing professions?
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1.6 What are the structures of the accounting and auditing professions?
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1.6 What are the structures of the accounting and auditing professions?
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1.6 What are the structures of the accounting and auditing professions?
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1.6 What are the structures of the accounting and auditing professions?
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1.6 What are the structures of the accounting and auditing professions?
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Any questions?
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