AUE3702 Revision slides October 2018

1. AUE3702 Revision slidesOctober 2018 Lecturer contact details: AUE3702@unisa.ac.za

2. WHAT IS THE OBJECTIVE OF THESE REVISION SLIDES?

3. TO MAKE YOU GO FROM THIS…

4. TO THIS…

5. ROADMAP

6. Theoretical reference • International Standard on Auditing professional standards for the performance of financial audit of financial information • Why are ISAs important Guides the auditor to add value to the audit in methodology and approach Makes the audit process uniform • How do you approach your studies using ISA’s Apply them in your study per learning unit and the activities for your assignment e.g. Learning Unit 1.1 – ISA 500 Audit Evidence e.g. Learning Unit 1.7 – Audit Sampling • Familiarise yourself Don’t be intimidated, go through the ISA activities from Assignment 2.

7. What is this module about? • Explain an Audit? An external audit is an independent examination of the financial statements prepared by the organization. It is usually conducted for statutory purposes (because the law requires it). An audit results in an audit opinion about whether the financial statements give a ‘true and fair’ view of the: • Income for the period • Financial Position for the period • Cash Flows for the period Remember: directors of a company make assertions to the shareholders concerning the financial position and results of operations of the company that they are managing. • What are the assertions? The auditor should gather evidence to support the assertions (made by directors) in order to express an opinion on whether the financial statements are fairly presented.

8. Assertions • Classes of transactions Occurrence Completeness Accuracy Cut-off Classification Presentation • Account balances Existence Completeness Accuracy, valuation and allocation Rights and Obligations Classification Presentation

9. We follow a structured audit process to audit: 1. Preliminary Engagement Activities 2. Planning 2.1 Establish the overall audit strategy 2.2 Develop an audit plan 3. Obtain audit evidence 3.1 Tests of control 3.2 Substantive procedures 4. Evaluation, Conclusion and Reporting

10. Audit evidence & procedures • Sufficient and appropriate audit evidence • Types of audit evidence & reliability thereof • Procedures consist of: • Risk assessment procedures • Further audit procedures • Tests of controls • Substantive procedures- test of detail & substantive analytical procedures • ISA 500 par A14 to A25

11. Topic 1: Audit evidence • These learning units cover the concepts of audit evidence and can be incorporated in formulating substantive procedures, for example the case study may indicate that management use the work of an expert to value work-in-progress of inventory. • Can you see that you need to formulate, as part of your substantive procedures, procedures that you, as the auditor, will carry out to ascertain that you could rely on the expert’s work. • These learning units could also be asked in isolation, for example, learning unit 1.5 (Initial engagements: opening balances): Formulate the audit procedures you would apply to verify the opening balance of property, plant and equipment.

12. Topic 1: Audit evidence Sufficient vs Appropriate audit evidence (ISA500) Sufficiency=Quantity Sufficiency is affected by: • Risk-the higher the risk, the more evidence is required • Quality- the higher the quality of evidence, the less may be required Appropriateness =Quality Appropriateness is affected by: • Relevance (ISA 500 par A27 to A30) • Reliability – source & nature (ISA500 par A31 to A33)

13. Topic 2 & 3: Substantive procedures • Substantive procedures comprise of: • test of details • analytical procedures • Procedures for obtaining audit Evidence (substantive audit procedures) {ISA500 par A14 to A25}: • Inspect • Observe • Inquire • External Confirmation • Recalculate • Reperform • Analytical procedures NOT CHECK, DETERMINE, CONSIDER Etc..

14. Topic 2 & 3: Substantive procedures • Audit procedures need to address the identified assertions audit risk • Assertions fall into two (2) categories (ISA 315 par A124- A125 & adjusted in Conforming amendments par A124 ) : • Classes of transactions and events and related disclosures • Account balances and related disclosures

15. Topic 2 & 3: Formulate substantive procedures as an instruction • How (verb)? (Topic 2) • Inspect (E.g. recon as evidence of signature for authorisation) • Observe • Re-calculation • Inquiry and external confirmation • Analytical procedures • Re-performance • What? (Topic 3) • Source document (recon) (Topic 3) • Why? (Topic 2 &3) • Reason/objective of the substantive procedure

16. Topic 2 & 3: Substantive procedures: Direction of testing Completeness = is something missing from the books? therefore select source docs and the trace to recorded information. Occurrence = is that which is recorded real? Therefore select the recorded entries and then verify with source docs.

17. Topic 2 & 3: CAATs • Use computer as auditing tool • Assist in obtaining audit evidence • Highly sophisticated computer environments • Substantive procedures- extract & manipulate data to support substantive procedures

18. Topic 4: Evaluating, concluding and reporting • These learning units could be integrated, for example: going concern and audit report could be combined in one question: • Write an appropriate auditor’s report on given practical situations with respect to the going concern assumption. • These learning units could also be asked in isolation, for example, learning unit 4.3 (Subsequent events): • Formulate the audit procedures relating to subsequent events.

19. Topic 4: Audit Reports and Opinions In terms of ISA 200, the overall objectives of the auditor are to: • Obtain reasonable assurance about whether the AFS are free from material misstatement, thereby enabling the auditor to express an opinion; and • To report on the AFS in accordance with the auditors findings

20. Topic 4: Audit Opinions and Reports ISA 700 • Deals with the auditors responsibility to form an opinion on the AFS including the form and content of the auditors report • This ISA promotes consistency in the auditors report • Deals with an unmodified (unqualified) opinion (i.e. The AFS are fairly presented in all material respects)

21. Topic 4: Audit Opinions and Reports • Deals with the auditors responsibility to issue an appropriate report where the auditor concludes that a modification to the opinion is necessary • This ISA establishes 3 types of modified opinions, namely “Qualified” “Adverse” and “Disclaimer” of opinion.

22. Topic 4: Audit Opinions and Reports ISA 705 Qualified Audit Opinion • Auditor concludes that misstatements, individually or in aggregate are material but not pervasive • Except for the matters described in the basis for qualified opinion paragraph, the financial statements are fairly presented

23. Topic 4: Audit Opinions and Reports ISA 705 Qualified Audit Opinion • Take note that an additional paragraph has been included “ Basis for qualified opinion” after the opinion paragraph which results in the modification to the standard audit report as seen in ISA 700

24. Topic 4: Audit Opinions and Reports ISA 705 Adverse Audit Opinion • The auditor concludes that misstatements, individually or in aggregate are both material and pervasive. • Thus the auditor concludes that the AFS as a whole are not fairly presented (Remember that the misstatements are pervasive)

25. Topic 4: Audit Opinions and Reports ISA 705 Adverse Audit Opinion • Again take note that an additional paragraph has been included “ Basis for Adverse opinion” after the opinion paragraph which results in the modification to the standard audit report

26. Topic 4: Audit Opinions and Reports ISA 705 Disclaimer Audit Opinion • The auditor shall disclaim an opinion when the auditor is unable to obtain audit evidence or where multiple uncertainties exist it is not possible to form an opinion. • NB: Misstatements are both material and pervasive. • A disclaimer ultimately means that the auditor expresses no opinion on the financial statements

27. Topic 4: Audit Opinions and Reports ISA 705 Disclaimer Audit Opinion • Again take note that an additional paragraph has been included “ Basis for Disclaimer opinion” after the opinion paragraph which results in the modification to the standard audit report

28. Topic 4: Audit Opinions and Reports ISA 706 • Deals with additional communication in the auditors report when the auditor considers it necessary such as: • Emphasis of matter paragraph • Other matters paragraph • This ISA deals with a modification to the auditors report but not a modification to the auditors opinion as in ISA 705

29. Topic 4: Audit Opinions and Reports ISA 706 Emphasis of matter paragraph: • Is included below the opinion paragraph • Used to draw users attention to a matter disclosed or presented in the AFS that in the auditors judgement is fundamental to a users understanding. • Only emphasis information disclosed in the AFS

30. Topic 4: Audit Opinions and Reports ISA 706 Emphasis of matter paragraph • Must indicate that the audit opinion is not modified in respect of the matter emphasized

31. Topic 4: Audit Opinions and Reports ISA 706 Other matter paragraph: • Is included below the opinion and emphasis of matter paragraph if included • It emphasizes information not required to be disclosed in the AFS, but in the auditors judgement is relevant to a users understanding of the audit

32. Financial statements fairly presented in all material respect No Yes Unmodified audit opinion Modified audit opinion Misstatement material AND pervasive Misstatement material but NOT pervasive Limitation of scope Disagreement with management Limitation of scope Disagreement with management Disclaimer of opinion Adverse opinion Qualified audit opinion

33. A typical exam layout • Topic 1: Audit Evidence Approximately 10-15 marks (Can be asked in isolation or integrated with topics 2 & 3) • Topic 2 & 3: Formulating Substantive Procedures for the Cycle Substantive procedures (Weighs the most, approximately 40-55 marks) • Topic 4: Evaluating, Concluding and Reporting Argument, Specific Question, Integrated question (Approximately 20 - 35 marks)

34. Typical question Formulate the substantive procedures to audit the sales (This type of question means that you are required to address ALL assertions) Or Formulate the substantive procedures to audit the occurrence of sales (This type of question means that you are required to address ONLY the occurrence assertion)

35. Alert: Incorporate ISAs • Inventory is a heap of coal Would the valuation require expertise? ISA 500 What are the qualities of an expert that I can rely on? ISA 620 • New appointment = opening balances ISA 510 • Internal audit dept = can we rely? ISA 600 • External confirmations ISA 505 • Written representations from management • Analytical procedures ISA 520

36. Mistakes made:Formulate substantive procedures • Student do not formulate substantive procedures properly (how, what, why? • The basic principles of internal control are often not mentioned • Information given in the question are often not used-remember to base your answer on the information given in the question Inspect (how) minutes of directors’ meetings (what) to confirm that the purchase of motor vehicles was authorised. (why) VERSUS Check minutes to see if transactions were approved by management.

37. Mistakes made:Formulate substantive procedures • Common/General substantive procedures are often not mentioned. (these can be found in your study guide, topic 2.11, point 11) For example: • Obtain a schedule • Cast and cross-cast the schedule • Agree opening balance on the schedule to previous year WP • Agree closing balance on the schedule to the TB and FS • Obtain management representation letter (be specific) • Perform analytical procedures • Overall review for abnormal items/exceptions and discuss it with management • Etc.

38. Mistakes made:Formulate substantive procedures • Formulate generic substantive procedures without making it applicable to the scenario • Address one issue and neglect all other relevant issues • Knowledge of the cycles are insufficient • Battle to link substantive procedures to the relevant assertions

39. Exam technique • Refer to exam technique broadcast – the link can be found under announcements • 3 – 5 weeks before the exam • The night before the exam • The day of the exam • During the exam • After the exam • Mu Choice Questions