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Module outline
Pre –engagement activities
Planning for an audit
Obtain audit evidence
Concluding an audit and reporting
Other engagements
Corporate governance (King 111)
The Companies Act
PAAB Act
Presented by : Kudakwashe Ndlovu (CA)Z 2
Admin issues
COURSE ASSESSMENT
Course work (Written) 30%
Examination 70%
Total 100%
At the end of the semester you are going to write a 3 hr
examination. Application exam (Scenario based)
NB// Audit risk does not include the risk that the
auditor expresses an opinion that the financial
statements are materially misstated when they are
not. This risk is ordinarily insignificant.
Presented by : Kudakwashe Ndlovu (CA)Z 15
Key definitions (Cont’d)
Risk of material misstatement (RMM):
Is the risk that the financial statements are
materially misstated prior to an audit being
performed on them. RMM consists of two
components which are ; Inherent risk and
Control risk
RMM
Audit risk = IR * CR
* DR
REQUIRED
Discuss fully the situation in which Renda finds himself in
relation to the Code of Professional Conduct (13 marks)
-
Presented by : Kudakwashe Ndlovu (CA)Z 48
CPC Illustrative Suggested Solution
There is no doubt that Renda has failed to comply with a number
of the fundamental principles on which the code is based.
• Objectivity - Section 120 - by allowing himself to get to a
situation where a large percentage of her professional fees come
from work referred by Robben, he has created a self-interest
threat to his independence. (2)
-
Presented by : Kudakwashe Ndlovu (CA)Z 50
CPC Illustrative Suggested Solution
2. Planning
(Establish audit strategy & plan)
1. Client investigation
Changes in the industry The AFS may be materially misstated as the entity
and management does not might not comply with the changes to the laws
want to comply. Companies Act, Banking Act etc., in the industry within
which it operates.
Expanding into new The AFS may be materially misstated as the control
locations/ decentralisation environment in other locations might not be operating
of the entity. effectively.
Lack of personnel with The AFS may be materially misstated as there might be
appropriate accounting errors occurring in the preparation of financial records.
and financial reporting
skills.
Management receives The AFS may be materially misstated as directors
bonuses driven by profits might engage in fraudulent financial reporting, i.e.
overstatement of revenue and understatement of
expenses to maximise bonuses.
Presented by : Kudakwashe Ndlovu (CA)Z 83
Risk at overall financial statement level
Risk Risk Description
Indicator
New client. The AFS may be materially misstated as the
opening balances might be incorrect since we were not auditors in
prior years.
• The AFS may be materially misstated as material misstatements
could go undetected as we are not familiar with the client.
• The AFS may be materially misstated by management due to the
fact that the new auditors have limited knowledge of the entity.
Management’s The AFS may be materially misstated as the control environment
integrity might be compromised by management who lacks integrity.
questionable.
Use of work of The AFS may be materially misstated as the third party might not
third party be competent and appropriately qualified in performing the work
(ISA 600, required for audit evidence.
610,620)
Presented by : Kudakwashe Ndlovu (CA)Z 84
Risk at overall financial statement level
Risk Risk Description
Indicator
Tight audit - The AFS may be materially misstated as management
deadline. might not have sufficient time to properly account and
disclose post balance sheet events (Subsequent
events).
- There is a risk that the auditor might not have sufficient time to
obtain the audit evidence resulting in material misstatement
going undetected.
Listed on the The AFS might be materially misstated as the company
ZSE. might not comply with ZSE regulations resulting in the delisting
of the company and affecting the going concern of the company.
Change of the The AFS may be materially misstated as the financial data might
accounting not be properly transferred from the old accounting system to the
software. new accounting system.
Required:
Required:
Discuss the risk of material misstatement at the
assertion level on revenue of MSU Ltd for the year
ended 31 December 2013.
Presented by : Kudakwashe Ndlovu (CA)Z 92
Risk at assertion level
,
Risk factor Risk description
Foreign receipts Sales might not have been translated at the correct
exchange rates as required by IAS 21(Accuracy)
Commission paid Revenue might be overstated by Japu Solutions by recording
to Japu Solutions fictitious sales so as to increase the commission
(Occurrence)
Japu Soltuions Revenue might be recognised net of the commission paid
paid commission (accuracy, completeness).
based on sales
Performance Management might recognise fictitious revenue in order to
related bonus receive increase their bonus(occurrence)
Trade There is a risk that the trade receivables account Rights and
receivables does not belong to NUST Ltd since debtors have obligation
are factored. been factored.
Necessity
Substantive procedures alone will not result in sufficient audit
evidence
Possibility`1`
• the necessary softwares are there
• the control environment is sound
•Electronic data is there
Desirability
The combined approach is very efficient (less time is consumed
Presented by : Kudakwashe Ndlovu (CA)Z 112
Substantive tests – Factors to consider
It is ideal to perform substantive procedures when
the following factors are available:
Tips 43.0%
Management review 14.6%
Internal Audit 14.4%
By Accident 7%
Account reconciliation 4.8%
Document examination 4.1%
External Audit 3.3%
Notified by police 3.0%
Surveillance/ Monitoring 1.9%
Confession 1.5%
IT controls 1.1%
Other 1.1%
Presented by : Kudakwashe Ndlovu (CA)Z 119
How occupational Fraud is commited
Asset misappropriation schemes, in which an employee steals
or misuses the organization’s resources (e.g., theft of company
cash, false billing schemes or inflated expense reports)
Corruption schemes, in which an employee misuses his or her
influence in a business transaction in a way that violates his
or her duty to the employer in order to gain a direct or
indirect benefit (e.g., schemes involving bribery or conflicts
of interest)
Financial statement fraud schemes, in which an employee
intentionally causes a misstatement or omission of material
information in the organization’s financial reports (e.g.,
recording fictitious revenues, understating reported expenses
or artificially inflating reported assets)
1. Substantive procedures
- Substantive analytical procedures
- Test of detail
2. Test of controls
Presented by : Kudakwashe Ndlovu (CA)Z 131
Reliability of Audit Evidence
The reliability of audit evidence is increased when it is
obtained from independent sources outside the
entity.
• The reliability of audit evidence that is generated
internally is increased when the related controls,
including those over its preparation and
maintenance, imposed by the entity are effective.
• Audit evidence obtained directly by the auditor (for
example, observation of the application of a control)
is more reliable than audit evidence obtained
indirectly or by inference (for example, inquiry about
the application of a control).
Presented by : Kudakwashe Ndlovu (CA)Z 132
Reliability of Audit Evidence
• Audit evidence in documentary form, whether paper,
electronic, or other medium, is more reliable than
evidence obtained orally (for example, a
contemporaneously written record of a meeting is
more reliable than a subsequent oral representation of
the matters discussed).
• Audit evidence provided by original documents is
more reliable than audit evidence provided by
photocopies or facsimiles, or documents that have
been filmed, digitized or otherwise transformed into
electronic Presented by : Kudakwashe Ndlovu (CA)Z 133
Analytical procedures (ISA 520)
•Suitability
•Reliability of data
•Develop an expectation
•Determine the acceptable difference from the
expected amount
How : This is the verb that describes the action to the performed.
Why : This describes the reason for performing a test of control. What
are the internal control objectives?
Introductory Paragraph
The introductory paragraph should:
(a) Identify the entity whose financial statements have been audited;
(b) State that the financial statements have been audited;
(c) Identify the title of each statement that comprises the financial
statements;
(d) Refer to the summary of significant accounting policies and other
explanatory information; and
(e) Specify the date or period covered by each financial statement
comprising the financial statements.
Presented by : Kudakwashe Ndlovu (CA)Z 175
The Auditor’s report
• Management’s responsibility
•Auditor’s responsibility
•Auditor’s opinion
•Signature of the Auditor’s
•Date of the Auditor’s report
•Auditor’s address
No material uncertainty
GC status Opinion
Going concern Going concern Adverse opinion
assumption inappropriate assumption inappropriate
in the auditor’s judgement
and financial statements
are prepared on a going
concern basis
Audit standards
and theory
Audit
assumptions