AUE2601+MO+001 2017 4 e

MO001/4/2017
Auditing Theory and Practice

AUE2601
Department of Auditing
IMPORTANT INFORMATION
Please register on myUnisa, activate your myLife e-mail address and
make sure that you have regular access to the myUnisa module
website, [AUE2601-2017], as well as your group website.

© 2016 University of South Africa
All rights reserved
Printed and published by the

University of South Africa
Muckleneuk, Pretoria
AUE2601/MO001/4/2017
70525552

AUE2601/MO001/4/2017
Dear Student
You are receiving this document to provide you with insight as to what information is being
presented on myUnisa, the official learning management system of the university. We would like to
encourage you to set up your myLife account at https://my.unisa.ac.za/portal and join the online
learning environment, if at all possible.
myLife
FIGURE 1: myUnisa portal
Other information in this document includes:
 Getting Started Letter p 4
 Welcome message on the home page p 11
 Outcomes a nd assessment criteria p 13
 Frequently‐Asked Questions (FAQs) p 15
 Announcements p 27
 The Discussion Forums and discussions p 29
 Preface p 31
 Topic 1 p 41
 Topic 2 p 73
 Topic 3 p 117
 Topic 4 p 171
 Topic 5 p 193
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GETTING STARTED LETTER
Welcome to the module on Auditing Theory and Practice (AUE2601).

We hope that your experience of this module will be enjoyable and enriching.

This letter contains important information to get you started.

GOING ONLINE
USING THE NAVIGATION BAR AND myUnisa TOOLS
PLANNING AND MANAGING YOUR TIME
PARTICIPATING IN THE ONLINE LEARNING COMMUNITY
CLOSING REMARKS

GOING ONLINE

As a registered Unisa student you will have access to the myUnisa electronic portal.

EXAMPLE 1: myUnisa electronic portal home page
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From here you can access various online resources to assist you in your studies. Please ensure that
you have activated your myLife e‐mail and familiarise yourself with the Study @ Unisa brochure and
other guidelines.

You might also find it helpful to access the following links relating to studying online:
 Study @ Unisa (1) (2:58)
 Study @ Unisa (2): What does it mean to be an ODL student at Unisa? (1:12)
 Get connected before you start to register on myUnisa (6:10)

Once you have registered and have obtained your myUnisa login details, you will have access to the
module sites of all the modules you have registered for.

USING THE NAVIGATION BAR AND myUnisa TOOLS

You can use various navigation options to navigate the module sites you have enrolled for. These
options are displayed on the left‐hand side of the screen of all the sites. Click on the specific
navigation option, and it will open the page containing the information you are looking for. The first
page you will see when opening any site is the home page.

Example 2: Home page of module site

Remember, from the AUE2601 home page, your lecturers are just a click away! We will follow a
weekly schedule indicating what needs to be done for a specific week and thus the home page will be
updated regularly.

The following is an alphabetical list and accompanying explanation of other myUnisa tools that we
will use for this module:
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myUnisa tools Explanation

Additional Resources
This tool allows you to access different types of resources relevant to
your studies such as links to articles and videos discussing auditing
related content and PowerPoint presentations. The Additional
Resources tool contains a number of folders with files, links, graphs
and other information. These additional resources will support your
learning, and new resources might be uploaded during the semester.
Announcements
From time to time an announcement will alert you to important
information. You will sometimes also receive an e‐mail notification in
this regard. In addition, the most recent announcements will be
displayed on the home page.
Assignments
This tool allows you to submit assignments and monitor your
assessment results. We will provide clear guidelines on the submission
of assignments.
Discussions/Discussion
This tool is used mainly for interactive discussions and activities
Forums
relating to the various topics and themes associated with the auditing
topics covered in the module. The forums and learning activities are
created to assist and support you in mastering the learning outcomes.
Participating in the discussions will also help you to be better prepared
for the assignments.
The module site contains a variety of Discussion Forums. There are
forums where you can meet and chat with your fellow students
(Forum 1: Student Lounge) and ask questions to your lecturers (Forum
2: Queries to my lecturer). In some instances, your participation in the
discussion forums will be assessed and the mark awarded will form
part of your year mark. However, this will be clearly indicated to you.
In Forum 1: Student Lounge, you will be able to create your own
discussions should you wish to do so. To find out more about how to
create your own discussions, consult the category “Technical issues”
under the tool: FAQs (frequently asked questions).
FAQs (frequently asked
The FAQs tool provides questions and answers relating to the module.
questions)
These are grouped in various categories ranging from assessment
matters to technical issues. If you have any queries about the
module, start by consulting the FAQs. Should you not find an answer
to your question, you are most welcome to contact us.
Learning Units
This tool is the one that you will use most often. Here you will find
content supporting the learning outcomes. The Learning Units tool
also provides information on learning activities, assessments and links
to other valuable resources. Please note that the Learning Units tool
will be used in conjunction with your study guide.

Official Study Material
This tool allows you to access and download the official study material
such as the tutorial letters.
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Prescribed Books
This tool is used in all the modules to display the prescribed books for
the module.
Schedule
This tool displays the dates of the compulsory assignments and
examinations. The calendar on the home page will also display all the
dates of the various learning activities captured in the schedule. To
access the information on scheduled events, click on the date in the
calendar (which will be highlighted and underlined if activities are
scheduled for that day), or click on the Schedule tool in the navigation
bar, which gives you the option to view the calendar by week, month
or year. You can also use the schedule tool to help you plan and
manage your time so that you can keep up with the various learning
activities for this module. Unfortunately, you will not be able to add or
change schedule entries.
Self‐assessment
This tool allows you to access a variety of self‐assessment activities
related to the outcomes and various parts of the module. Some of the
self‐assessments will allow you to test your knowledge about a specific
theme or topic presented in the study guide and the Learning Units
tool. On such self‐assessments you will receive immediate feedback.
The assessments that will be graded and that count towards your year
mark will be clearly indicated.

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PLANNING AND MANAGING YOUR TIME
There are 24 hours,
1 440 minutes, and
86 400 seconds in each day.
Yet there never seems to be enough time to get everything done!

Does this sound familiar? Attempting to balance study, work, family life and extracurricular activities
is a challenge requiring you to manage ever‐increasing and competing demands. You therefore need
to plan an appropriate schedule that will suit your individual needs and circumstances. Apart from
the suggested study timetable (which you can access by selecting the Learning Units tool –
Overview), and the due dates for assignments (which you can access by clicking on the schedule
tool), we do not prescribe a study timetable. However, here are some recommendations. Given the
time constraints, you may want to follow some of these recommendations.

Browse through the Take time to browse through the module site and familiarise yourself
module site with the requirements and demands of the module. This will enable
you to see the “big picture” of the whole module. The FAQs tool (on
the navigation bar of the module site) is a valuable resource and
could be a useful starting point. Evaluate the demands, opportunities
and challenges of your personal circumstances and determine how
they relate to the assignment due dates and the other relevant
learning activities you need to attend to. It may be a good idea to
enter these dates in your personal diary immediately.

Compile a personal Decide on strategies for planning ahead and compile your personal
study timetable study timetable. We recommend being disciplined in keeping to your
schedule. Perhaps you could start with some preliminary reading and
exploring the recommended material. The amount of information
presented on the module site and the number of assignments to be
completed may seem overwhelming at first, but don’t be
disheartened!

Approach your Work your way systematically through the various learning activities,
studies reflective questions and assignments based on them. Make sure that
systematically you meet all the requirements for the learning activities. Use the
learning outcomes and assessment criteria, the supporting material
and learning activities (stipulated in the learning units tool) to give
you a foundation for the knowledge and skills you need to
develop. To help you approach your studies with confidence, you may
find it helpful to start by browsing through the module site and to
acquaint yourself with the learning outcomes and assessment criteria,
the additional resources, the study guide and learning units. The
learning units are designed and developed in the form of manageable
“chunks” to help you achieve the learning outcomes logically and
systematically.

Contact your Do not hesitate to contact us, your lecturers, if you experience any
lecturers difficulties with any aspects of the module. You can contact us either
via e‐mail, telephone or the discussions tool. Our contact details are
available on the home page of the module site. Remember, help is
just a click away.
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Contact your peers Please make regular contact with your peers (via the Student Lounge
and other forums accessible by means of the Discussions tool).
Engage with your fellow students to clarify and broaden your
understanding of challenging concepts and themes. You will find that,
by participating in discussions and continuously reflecting on your
learning, you will expand your knowledge base and develop new skills
that you can apply in the workplace. Most students find these
discussions with their lecturers or fellow students extremely useful

when preparing their assignments.

PARTICIPATING IN THE ONLINE LEARNING COMMUNITY

If you have taken online courses before, you may well be familiar with how to participate in online
environments. However, if this is the first time you are taking an online course, you may be
interested in how to go about communicating in cyberspace. An important issue of online
communities is how people relate to each other. As you may know, the internet – cyberspace – has
its own culture and accompanying conventions for e‐mails, social networks and more formal online
environments such as myUnisa, our educational learning management system.

When communicating electronically, people often forget that the person on the receiving end is
someone with feelings, facial expressions, gestures and a unique tone of voice. Without being able to
observe these communication cues it is quite possible to misinterpret participants’ meaning – in the
case of online communication, meaning is usually conveyed by written words only. Because online
communication tends to be less personal, it would be a good idea to familiarise yourself with
guidelines on netiquette (social codes/etiquette for the internet: available at
http://www.albion.com/netiquette/corerules.html). These guidelines will give you useful information
about participating in online discussions, such as how to address one another and making sure that
you “know what you’re talking about and make sense” (see rule 5).
Please note that when participating in the online discussions, we strongly recommend that you
direct your responses to your lecturers and fellow students by addressing them at the opening of
your response. Also, when you end your contribution, sign off by using your name (or title and
surname). This will serve as an indication of how you would like your lecturers and fellow students to
address you.
We urge you to make an effort and commit to following these guidelines to ensure that your
communication and actions online are respectful.
Now, to get started, please access Forum 1: Student Lounge and introduce yourselves to each other
(Discussion 1).

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CLOSING REMARKS

Familiarise yourself with the online environment before the module commences in January 2017.

We look forward to witnessing your progress at a personal and professional level during the year.

It is truly a pleasure having you as a student, and we would like to take this opportunity to wish you
every success with your studies.
Your lecturers

Mrs A Sukhari
Mrs P Kamolane
Mrs I Moatshe
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WELCOME MESSAGE ON THE HOME PAGE

Dear Student

It is with great pleasure that we welcome you to AUE2601: Auditing Theory and Practice. We trust
that you will enjoy your semester studying for this module and that after working through the study
material you will develop a keen interest in the field of auditing.

This module is intended to enable trainee accountants and auditors or such individuals in related
fields, for example, people who are interested in qualifying as chartered accountants or registered
auditors, to develop the necessary basic competencies. The purpose of this module is to provide you
with knowledge and skills in auditing theory and practice, which includes basic auditing concepts,
statutory requirements, guidelines and auditing standards.

Students credited with this module will know the basic auditing concepts, will be able to apply their
knowledge of the roles, duties and responsibilities of the registered auditor as well as apply the
International Standards on Auditing in the statutory audit of an ordinary company trading in goods
and services.

We will use a study guide to direct you through the various sections. Apart from the hard copy, there
is also an electronic version available under Additional Resources on myUnisa.
Please visit the module site regularly to keep up to date with all the learning activities.

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You might also find it helpful to access the following links related to studying online:
 Study @Unisa (1) (2:58) http://www.youtube.com/watch?v=j6QZrRF2iVU&feature=related
 Study @ Unisa (2): What does it mean to be an ODL student at Unisa? (1:12)
http://www.youtube.com/watch?v=fgO_NcxduGg&feature=related
 Get connected before you start to register on myUnisa (6:10)
http://www.youtube.com/watch?v=MAGvmgdSkEk&feature=related

Don't hesitate to contact us by means of Discussion Forum 2: Queries to my lecturer, via e‐mail or by
paying us a visit at our offices at Muckleneuk Campus in Pretoria. Should you wish to visit us on
campus, please remember to arrange an appointment beforehand (office hours: 08:00–16:00)

Our contact details are:

Mrs Aneetha Sukhari Mrs Phindiwe Kamolane Mrs Itireleng Moatshe
Office number: Office number: Office number:
Samuel Pauw Building 5‐20 Samuel Pauw Building 5‐19 Samuel Pauw Building 5‐21
Telephone number: Telephone number: Telephone number:
+27(0)12 429 6982 +27(0)12 429 3325 +27(0)12 429 6127
E‐mail address: sukhaar@unisa.ac.za E‐mail address: kubhepj@unisa.ac.za E‐mail address:
moatsip@unisa.ac.za

The next step
Please select the Discussion Forums tool (in the menu bar on the left), go to Forum 1: Student
Lounge and introduce yourself to your fellow students under Discussion 1.
It is truly a pleasure having you as a student, and we would like to take this opportunity to wish you
every success with your studies!
Mrs Sukhari, Mrs Kamolane & Mrs I Moatshe
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OUTCOMES AND ASSESSMENT CRITERIA
Outcomes Assessment criteria
Demonstrate detailed knowledge and  The auditing theory is explained by defining
understanding of the theory and philosophy of an auditor and explaining the need for
the accounting profession and the financial auditors.
statement audit engagement.  The auditing theory is explained by discussing
assurance and other engagements according
to the auditing pronouncements.
 The auditing theory is explained by discussing
statutory and non‐statutory engagements
according to the auditing pronouncements.
 The philosophy of auditing is explained by
describing the auditing postulates.
 The accounting profession is described by
giving the key elements which characterise
groups that are considered to have
professional status, the various accounting
bodies, as well as registration requirements
and pronouncements that regulate the
profession.
 The financial statement audit engagement is
explained by defining the objective of an
audit, explaining the roles of the various
parties and describing management’s
assertions.
Demonstrate detailed knowledge and  Knowledge of the regulatory process in the
understanding of the regulatory process in the auditing profession and the role of the
profession and the role of the professional professional auditor in the statutory audit is
auditor in the statutory audit and the ability to applied by referring to the Auditing Profession
apply the key terms, concepts, facts, Act, 2005, and auditing pronouncements.
principles, rules and theories thereof to  The duties, rights and responsibilities of
relevant contexts. auditors are explained and applied in terms of
the Companies Act of 2008.

 The ethical principles regulating the auditing
and accountancy profession are explained
and applied by reference to the SAICA Code of
Professional Conduct for chartered
accountants, the IRBA Code of Professional
Conduct for registered auditors and the IRBA
Rules regarding improper conduct.
 The auditing firm’s responsibilities for its
system of quality control and quality control
for audits and reviews are explained and
applied in terms of International Standards on
Auditing (ISA) and International Standards on
Quality Control (ISQC 1).

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Demonstrate detailed knowledge and  The auditing principles with regard to
understanding of auditing principles as assurance engagements are explained and
required by the International Standards on applied as required by the International
Auditing (ISA) and be able to apply these Standards on Auditing (ISA).
principles to the statutory audit of an ordinary  The auditing principles with regard to internal
company trading in goods and services. control are explained and applied as required
by the International Standards on Auditing
(ISA).
 The auditing principles with regard to audit
evidence are explained and applied as
required by the International Standards on
Auditing (ISA).
 The auditing principles with regard to risk
assessment and audit procedures are
explained and applied as required by the
International Standards on Auditing (ISA).
 The auditing principles with regard to
materiality are explained and applied as
Auditing (ISA).
risk are explained and applied as required by
the International Standards on Auditing (ISA).
documentation are explained and applied as
Auditing (ISA).
 The auditing principles with regard to
assurance reports are explained and applied
as required by the International Standards on
Auditing (ISA).
Demonstrate detailed knowledge and  The different stages of the audit process are
understanding of the different stages of the explained according to the statutory audit of
audit process and be able to apply these an ordinary company trading in goods and
stages to the statutory audit of an ordinary services.
company trading in goods and services.  The preliminary engagement stage of the
audit process is explained and applied
according to auditing theory.
 The planning stage of the audit process is
explained and applied according to auditing
theory.
 The putting the audit strategy and plan into
action stage of the audit process is explained
and applied according to auditing theory.
 The evaluating, concluding and reporting
stage of the audit process is explained
according to auditing theory and applied.

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FREQUENTLY‐ASKED QUESTIONS (FAQS)
CATEGORY QUESTIONS AND ANSWERS
Tutorial letters Question 1: What information do the tutorial letters contain?
Answer:
The tutorial letters contain important information about the scheme of work,
resources and assignments for this module. We urge you to read them
carefully and to keep them at hand when working through the study material,
preparing the assignments, preparing for the examination and addressing
questions to your lecturers.

More specifically, in Tutorial Letter AUE2601/101/3/2017, you will find the
assignments and assessment criteria as well as instructions on the
preparation and submission of the assignments. This tutorial letter also
provides all the information you need with regard to the study material, other
resources and how to obtain it.

Tutorial Letter AUE2601/201/1/2017 contains feedback on Assignment 01;
while Tutorial Letter AUE2601/202/1/2017 contains feedback on Assignment
02.
Tutorial Letter AUE2601/102/3/2017 contains references to additional
questions that you must attempt and AUE2601/103/3/2017 provides the
solutions to these questions.

Right from the start, we would like to point out that you must read all the
tutorial letters you receive during the semester, as they always contain
important and, sometimes, urgent information.
Please make sure that you work through the tutorial letters before you
embark on any work in the study guide or assessment tasks.

Question 2: Will I receive all my tutorial matter when I register?
Answer:
Please note that not all of your tutorial matter may be available when you
register.

Tutorial matter that is not available when you register, will be posted to you
as soon as possible.

Please note: It is not possible to fax outstanding tutorial letters to students. It
is, however, possible to download them from the module site under the tools
Official Study Material and Additional Resources.

It is therefore to your benefit to register as an online student so that you can
access and obtain your study material immediately.

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Student support Question 1: Whom should I contact regarding administrative queries?
services
Answer:
There is a Student Information Hub that will be able to assist you with your
queries:
Contact e‐mail: CASenquiries‐Undergraduate@unisa.ac.za
Contact telephone number: 012 429 4211

Question 2: Whom should I contact regarding academic queries?
Answer:
All queries about the content of this module (AUE2601) should be directed to
your lecturers.

Telephone calls should be made during office hours (08:30–16:00). Lengthy
problems should rather be dealt with by e‐mail.

You are welcome to visit your lecturers at their offices on the Muckleneuk
Campus, but please make sure that you have made an appointment
beforehand. Appointments should be made at least three days in advance.
The lecturers cannot guarantee that they will be able to attend to you if you
arrive at the Department of Auditing without an appointment.
The contact details of your lecturers are:

Mrs Aneetha Sukhari Mrs Phindiwe Kamolane Mrs Itireleng Moatshe
Office number: Office number: Office number:
Samuel Pauw Building 5‐20 Samuel Pauw Building 5‐ Samuel Pauw Building 5‐21
Telephone number: 19 Telephone number:
+27(0)12 429 6982 Telephone number: +27(0)12 429 6127
E‐mail address: +27(0)12 429 3325 E‐mail address:
sukhaar@unisa.ac.za E‐mail address: moatsip@unisa.ac.za
kubhepj@unisa.ac.za

Question 3: What support can I expect from my lecturers?
Answer:
Your lecturers will use the home page to post regular messages to guide you
through the semester. Furthermore, you will receive regular announcements
to draw your attention to important learning events and assessment tasks.
We have also prepared supporting learning resources and various discussion
forums and topics which you will be able to access through myUnisa. You can
thus expect regular communication from us (your lecturers). Remember, help
is just a click away.

Question 4: What resources will I be able to access via myUnisa?
Answer:
We realise that, as a distance education student, you cannot always visit the
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library when you are searching for information. Therefore we have included
online resources on our module site which you can access at any time.

On this site, you will find the following material:

 electronic copies of the study guide and tutorial letters (under Official
Study Material)
 past exam papers (under Official Study Material)
 past tutorial letters (under Additional Resources)
 additional resources to assist with your studies (under Additional
Resources)
 a direct link to the Unisa library (from the menu bar on the left of your
module site)
 summaries of discussion forums (in the relevant forums)
Please note: There are no prescribed books or books reserved via the
electronic e‐reserves system.

Question 5: What other support services are available regarding general
student matters?
Answer:
If you need to contact the university about matters not related to the content
of this module, please consult the publication Study @ Unisa which you
received with your study material. This booklet contains information on how
to contact the University (e.g. to whom you can write for different queries,
important telephone and fax numbers, addresses and details of the times
certain facilities are open).
Always provide your name, student number and module code when you
contact the university.

Question 6: Are there any study groups for this module?
Answer:
There are no official study groups for this module. However, we strongly
recommend that you form your own study groups with fellow students living
in your area.

To form study groups, you can share your contact details with your fellow
students in the Student Lounge forum in Topic 2: Fellow student contact
detail. Contact students who live near to you and invite them to form a study
group.
Online learning Question 1: Is it easier to learn online than through print‐based material?
Answer:
No. The course content of an online class is usually identical to that of a print‐
based distance learning course on the same topic. Compared to regular face‐
to‐face classes, some people think the workload is even more demanding,
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because you have to be a self‐directed learner and stay motivated to keep on
top of your work.
The most successful online students tend to share the following
characteristics. They:
 are self‐motivated and are self‐starters
 have good organisational and time‐management skills
 are fairly familiar with computers and the internet
 are resourceful and actively seek answers and solutions
to questions and problems

Question 2: What are the benefits of learning online?
Answer:
In the online world you can study anytime, anywhere and at a pace that suits
your individual learning style. Remember, though, that you will still have to
meet the required deadlines for assignment submissions.

Question 3: What internet skills would be useful for online learning?
Answer:
The most successful students tend to have the following skills:
 Familiarity with their web browser
 Familiarity with an e‐mail program (including attaching documents and
reading attachments)
 Some familiarity with web‐based interactions – e‐mail, social networks,
learning management systems
 Familiarity with word processing (MS Word)
 Experience in successful internet searches, using a variety of browsers
and search engines

Question 4: How important is attitude to achieve success in my studies and
in an online learning environment?

Answer:
Your attitude is very important to ensure success.
We want to encourage you to develop a positive attitude towards your
studies and online learning environment. To achieve this, there are a number
of things to bear in mind.
TIME is important for a distance education student. You must be in control of
your time and manage it effectively. Draw up a study programme at the
beginning of the semester. This requires discipline, but will ensure that you
 have sufficient time to work through all the relevant study
material
 are able to submit the relevant tasks and assignments on the due dates
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 have sufficient time for revision and preparing for the
assignments and examination

We would like to encourage you to follow the guidelines below:

 Do NOT fall behind in your planning.
 Work regularly and consistently.
 Make sure that you understand the work as you go along.
 Do NOT give up on difficult work; rather seek help as soon as
possible.

We hope that this information will make your studies easier, and that you will
do well.

Question 5: How should I approach my online learning?
Answer:
We all have different learning styles and preferences. However, consider the
following pointers/guidelines:

 Allocate enough time to work through each study unit and do the
activities.
 Allow extra time for work that seems difficult or with which you
know you have a problem.
 When you compile a study plan, allow time for personal
responsibilities (e.g. family responsibilities, work obligations,
social obligations, leave).
 Make use of your most productive time for study (e.g. late
evening after the children have gone to bed or early morning
before the rest of the family wake up).
 Remember that it is more effective to study for one hour on a
regular basis (e.g. every day) than for ten consecutive hours every
two weeks. Decide now how many hours you are going to spend
on your studies per week. We recommend that you put one to
two hours aside each day.
 Keep a record of your progress. It will be gratifying to see what
you have accomplished, and it will inspire you if you fall behind.
Be prepared for disruptions to your study programme due to
unforeseen circumstances. You should therefore monitor your
progress so that you can catch up immediately if you fall behind.
Remember that it is easier to catch up one week's lost hours than
an entire month's.
Technical issues Question 1: How do I create a new topic, using the Discussion Forum tool?
related to
Answer:
myUnisa
To create a new topic in a forum, you need to do the following:
1. Select and access the Student Lounge forum from the list of forums in
the Discussion Forum tool.
2. Now, at the top of the page select the option Add a New Topic.
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3. Give your topic a descriptive name in the Topic Title box.
4. In the Message box, write down the instructions for the discussion.
5. Click on the Submit button to create your topic for discussion.

Question 2: What is expected of me when I participate in discussion forums?
Answer:
Remember, online discussion forums are not the same as e‐mail messages, or
a letter to the lecturer, or a chat room. Therefore, the myUnisa discussion
forums must not be used for personal messages to your lecturers or to one
another. You are, however, welcome to use the forum marked Student
Lounge to introduce yourself to your fellow students, to form study groups
and to create your own topics.

In this module, we will be using the online discussion forum for academic
purposes. For this reason, the discussions will be based on topics related to
module outcomes, the assessments and the supporting content.

Online discussion forums are more like class discussions in a face‐to‐face
classroom, where the lecturers raise discussion points and ask questions. All
the students can respond to the lecturer's questions as well as to one
another's responses. The lecturer can then clarify uncertainties and perhaps
provide a summary at the end of a discussion.

Participating in discussion forums provides you with opportunities to

 discuss and clarify issues in the subject area
 share experiences and ideas with peers and lecturers
 solve problems collaboratively
 debate topical issues
 raise questions about the topic under discussion
 introduce the most recent developments in the subject area
 receive immediate feedback on assignments
 have access to additional resources related to relevant topics in this
subject/discipline

Question 3: How do I set up my own blog?
Answer:
The Blogs tool is a useful way of sharing your views and thoughts on this
module with your fellow students. What we would like you to do is to create
your own blog in this site and to use it as a place where you reflect on your
progress in this module. You can also read and write comments on your
fellow students' blogs, as long as they are positive and uplifting!
To get your own blog started, follow these instructions:
1. Go to the Blogs tool.
2. Click on the Add blog entry link at the top to start your blog.
3. Give your blog entry a title.
 You could use something like "Reflections on my learning
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experience in this module." This is just an example of a title.
 Your name will automatically show next to this blog entry.
4. Type your message inside the text box provided.
5. After the text box, you are asked to "choose who can see this entry".
6. The default setting of the blog is ticked: This entry is publicly
viewable.
 You should NOT change this, because this is the only way that
anyone can read your reflections and leave comments.
 If you have not quite finished, you can click on the Save Draft
button. No one else will be able to read your blog until you
click on Publish entry. [Note: if you save a draft, you need to
click on this entry is publicly viewable when you have
finished and want to publish.]
7. If you want to add a comment to someone's blog, just click on the link
Leave a comment at the bottom of the blog you are reading.
You can add links, bullets, lists and colour, and so forth, by using the editing
buttons. You can also go back, delete and edit your blogs. You can create new
blogs on different topics under your name by just clicking on Add blog entry
again.
Self‐evaluation Question: How can I find answers for the activities and self‐evaluation
questions questions?
Answer:
Your study guide is a valuable reference resource, because you can refer to it
to perform the activities included in the study units, and when answering the
self‐evaluation questions at the end of each theme. This means that you must
use the study guide to find answers for the activities and self‐evaluation
questions.
The following approach might assist you in finding answers to the questions:
While you are reading and analysing the text in the study units, look for the
main points by highlighting or underlining them. You can also make notes in
the margin of a printed guide. You should do the activities only after you have
thoroughly studied the content of the study guide. When looking for an
answer, review the preceding sections by noting only the main points, or
picking out words in capital letters, bold or underlined.

This will assist you to find the relevant paragraphs that address the question.
Should this skimming technique not be successful, scan more thoroughly
through the content for important information.

Should you still be unable to find answers to the activities and self‐evaluation
questions, it is recommended that you break down the study units into smaller
parts that are easy to understand. You can do this by summarising each study
unit in your own words.

Here you have to remember to separate main ideas from supporting
information. Try to find keywords, as the keywords will help you to recall an
entire idea.
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You can also draw a mind map to summarise the content. A mind map is your
easiest method of summarising. With a mind map, you follow the same
procedures as for any other summary, but the mind map resembles a diagram.
Examinations Question: Do you provide any general examination tips?
Answer:
We would like to draw your attention to your preparation for the May/June
examinations and we offer the following tips:
Read and understand the instructions
ALWAYS read the instructions carefully. Many students do not take the time to
do this and then discover that they answered the exam questions incorrectly.

Preview the exam paper and plan your time accordingly.

Note the number of questions and how many marks each is worth. Quickly
reading over the questions will assist in activating your memory. Decide which
questions will be easier to do and which ones will take longer and budget your
time accordingly. Allocate time to review the exam and make corrections. If
you think of something while you are previewing the exam, write it down
immediately.

Tackle each question systematically
Read each question carefully and underline key words. Is it a one‐part or two‐
part question? What are you being asked to do? Identify what you have and
what you need. Decide how you plan to get to the answer and make a few
notes on the steps you will take. This will provide you with some guidelines –
and the person marking the exam with an idea of how you attempted the
question. This will also assist you with finding and correcting mistakes.

Write down something for every question
If all you can do is to provide a definition, then do so. Write down anything
you know that is related to the question, especially if you do not know the
answer. Do not leave a question unanswered. Try!

If you “draw a blank”
First, do not panic and allow anxiety to take control of how you are going to do
on the exam. Ask yourself, “What do I need to know to answer this question?”
and start writing down your thoughts. Avoid negative self‐talk – focus on the
task instead of on yourself.

Review and make corrections
Take the time to go over the exam and check your answers. Do not change
anything unless you are 100% sure it is correct.

Stay until the end
Do not leave until the exam invigilators throw you out! Sometimes, it takes a
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little more time for information in your memory to “surface”, so use all the
time you are given.
Assignments Question: Are there any assignments in the module?
Answer:
You are required to submit the compulsory assignments for the module
AUE2601, namely Assignments 01 and 02. Admission to the examination will
be obtained by submitting Assignment 01 and the admission will not depend
on the marks you obtain for it. Please note that, although both Assignments 01
and 02 are compulsory, admission to the examination will be based on the
submission of Assignment 01. Therefore, please ensure that Assignment 01
reaches the University before or on the due date. Although you will be
admitted to the examination on the basis of submission of Assignment 01,
your marks for both Assignments 01 and 02 will be used to determine your
semester mark.
Examinations Question: When does the exam take place?
Answer:
AUE2601 is a semester module. If you are registered for the first semester, this
means you will be writing exams in May/June 2017 and the supplementary
examination will be written in October/November 2017. If you are registered
for the second semester, you will write the examination in October/November
2017 and the supplementary examination will be in May/June 2018.
Course content Question: What is this course about?
Answer:
This module is intended for trainee accountants and auditors or such
individuals in related fields, for example, people who are interested in
qualifying as chartered accountants or registered auditors, to enable them to
develop the necessary basic competencies. The purpose of this module is to
provide you with knowledge and skills in auditing theory and practice, which
includes basic auditing concepts, statutory requirements, guidelines and
auditing standards.
Course material Question: Where do I obtain my course material?
Answer:
Go to Official Study Material and find the PDF files for your tutorial letters and
your study guide. Any other documents provided by your lecturer will be
available in the Additional Resources tool. Prescribed textbooks must be
purchased.
Discussion classes Question: Will there be discussion classes this semester?
Answer:
There will not be any discussion classes for this module.

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Prescribed Question: I have Graded Questions for Auditing 2016. Would this be
textbooks sufficient for this course?
Answer:
Unfortunately, it would not be sufficient as the questions change every year,
and the questions in your tutorial letter refer to graded questions 2017.
Prescribed Question: Must I purchase all the prescribed textbooks?
textbooks
Answer:
Please refer to section 4 of your Tutorial Letter 101. The prescribed textbooks
are listed as:

 Jackson, RDC & Stent, WJ. 2014. Auditing notes for South African students.
9th edition or later edition. Durban: LexisNexis.
 South African Institute of Chartered Accountants (SAICA). SAICA Student
Handbook 2016/2017 – Volume 2. Durban: LexisNexis.
 Gowar, H & Jackson, RDC. Graded Questions on Auditing 2017. Durban:
LexisNexis.

For AUE2601 you will need Volume 2 only. However, the SAICA handbooks
and legislation can be downloaded from the links provided below.

Volume 2A contains:

 ISQC1, ISA 200, ISA 210, ISA 230, ISA 300, ISA 315, ISA 320, ISA 330, ISA
500, ISA 700, International Framework for Assurance engagements:

http://www.irba.co.za/index.php/auditing‐standards‐functions‐55/252‐
international‐clarity‐pronouncements‐adopted‐and‐i/831‐2014‐auditing‐
standards

 The IRBA Rules Regarding Improper Conduct:

http://www.irba.co.za/index.php/legal‐functions‐49
 The IRBA Code of Professional Conduct:


Volume 2B contains:

 The SAICA Code of Professional Conduct

Conduct:https://www.saica.co.za/Portals/0/Technical/Discipline/Code%20of%
20Prefessional%20Conduct.pdf

Volume 2C contains:

 The Companies Act

https://www.saica.co.za/Portals/0/Technical/LegalAndGovernance/Act%2071
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%202008%20Companies%20Act.pdf

 The Auditing Profession Act:
Prescribed Question: Which chapters and sections of the prescribed books will I
textbooks be using?
Answer:
You will make use of the following:
1. SAICA Handbook 2016/2017:
Volume 2 contains:
‐ ISQC1
‐ ISA 200, 210, 230
‐ ISA 300, 315, 320, 330
‐ ISA 500
‐ ISA 700
‐ International Framework for Assurance engagements
‐ The IRBA Rules regarding improper conduct
‐ IRBA Code of Professional conduct
‐ The SAICA Code of Professional Conduct
‐ The Companies Act, 2008
‐ The Auditing Profession Act, 2005
3. Auditing Notes for South African Students
We make use of the following chapters:
‐ 1 to 3
‐ 5 to 7
‐ 18 and 19
4. Graded questions on Auditing
We make use of the following chapters:
‐ 1
‐ 3 to 6
‐ 13
Past exam papers Question: Do the lecturers supply memorandums of past exam papers?
Answer:
It is a departmental policy that we do not supply past exam memorandums. If
you experience difficulty with a question you may contact one of your
lecturers to assist.
Examinations Question: Are we permitted to take textbooks into the examination venue?
Answer:
The exam is not an open book exam and you are not allowed to bring any
study material into the examination venue.
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Assignments Question: Do you mark the entire Assignment 2?
Answer:
Please refer to section 8.2 and 8.4, point number 4 in TL 101. Only selected
questions will be marked.
It is very important that you make sure that you answer all sections of the
assignment as you do not know which sections we are going to choose to
mark.
Assignments Question: Which topics are covered in Assignment 1?
Answer:
Assignment 1 covers topics 1 and 2.
Assignments Question: Which topics are covered in Assignment 2?
Answer:
Assignment 2 covers topics 1 to 3.
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ANNOUNCEMENTS
Announcement 1: Message:
Welcome and
getting started Dear Student
9 January 2017
Welcome to AUE2601. We are happy to announce that this module will be presented
online in 2017. This means that you can download study materials and assignments to
print them for yourself. You should have received a Getting Started tutorial letter in the
mail explaining what is expected of you as an online student. If you have not received
this letter, you can go to Official Study Material and you should find the PDF file.
But for now, we would like you to first go to the Discussion Forums link on the left‐
hand side of your screen and access General Subject Related Discussions: General
Discussions.
In this topic you can correspond with your fellow class members on any issues
regarding this course. Use the Your Message box to add your message to the list. If you
want to start a totally new topic of discussion, use the Add New Topic link which you
will find in the Topics List.
We want you to participate in your first online activity where you are expected to
discuss the proposed assessment plan and how you will plan your time so that you are
able to stick to the AUE2601 assessment plan/schedule.
Please participate actively in these discussions during the first semester of 2017.
We are looking forward to meeting you online!

6 February 2017 Dear Student
We strongly encourage all AUE2601 students to participate in the Discussion Forums by
way of posting questions, answers, comments and examples. Remember that e‐
learning is informal and there is no formal or specific sequence in which the questions
should be posted.
Please use the Discussion Forum as a platform for more interactive learning during
your preparations for the exam.

6 February 2017 Dear Student
Please note that Frequently Asked Questions have been added under FAQs.
Ensure to visit the FAQs during your preparations for the exam.

1 March 2017 Dear Student
It is important that you prepare assignments and submit them before the closing date.
Remember that both Assignments 1 and 2 are compulsory and earn you marks.

You are reminded that Assignment 1 is due on 6 March 2017. Group work will not be
marked.

Second semester: 25 August 2017
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5 April 2017 Dear Student
The due date for Assignment 2 is on 10 April 2017.
Second semester: 15 September 2017

1 May 2017 Dear Student
We trust that you are all studying hard and that you are on track with your
preparations for the upcoming exam. Remember that you have to study the entire
study guide.
You are reminded to participate in the Discussion Forum in preparation for
examination. Please refer to the FAQs and the new discussions added under Discussion
Forums on the myUnisa during your preparations.
All the best with your preparations for the exam.

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THE DISCUSSION FORUMS AND DISCUSSIONS
Forums Topics
Forum 1: Discussion 1: Welcome
Student Lounge
 Welcome to Auditing Theory and Practice, alternatively known as AUE2601.
Use this forum Hope you find this module very interesting.
to discuss
 Please actively participate in these discussions during the first semester of
general matters
2017.
amongst
yourselves  We are looking forward to meeting you online!

Your lecturers

Discussion 2: Introduce yourself

Dear Student
Use this space to get to know your fellow students.
Tell each other about your current work situation, professional background and
anything else you would like to share (± 250 words).
Your lecturers
Discussion 3: Fellow student contact details
Dear Students

Use this space to share your contact details with your fellow students and to form
study groups.

Your lecturers

Discussion 4: Study plan for AUE2601
Forum 2 Discussion 1: Introduction to auditing
Discussion on
Discuss difficulties experienced with Tutorial Letter 102, Questions 1–2.
topic 1 and
prescribed
questions
Forum 3 Discussion 1: Regulation of the auditor
Discussion on
Discuss difficulties experienced with Tutorial Letter 102, Questions 3–6.
topic 2 and
prescribed Complete Assignment 1.
questions
Forum 4 Discussion 1: General principles of assurance engagements
Discussion on Discuss difficulties experienced with Tutorial Letter 102, Questions 7–12.
topic 3 and
prescribed Complete Assignment 2.
questions

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Forum 5 Discussion 1: The audit process

Discussion on
Discuss difficulties experienced with Tutorial Letter 102, Questions 13–15
topic 4 and
prescribed
questions

Forum 6 Discussion 1: Revision

Work through past exam papers online and discuss exam techniques.

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PREFACE
1. Welcome
Dear Student
It is with great pleasure that we welcome you to module AUE2601: Auditing Theory
and Practice. Please take the time to familiarise yourself with this preface and refer
to it as often as you need to, since it will make studying this module a lot easier.
The preface outlines the purpose of this module, serves as a link to other auditing
modules, explains our teaching strategy and gives useful hints that will help you to
experience a positive learning experience.
We trust that you will enjoy your studies of this semester’s module and that you will
have developed a keen interest in this field of auditing after having worked through
the study material.
2. Purpose of this module
This module is intended for trainee accountants and auditors or individuals in related
fields, for example, people who are interested in qualifying as chartered accountants
or registered auditors, to enable them to develop the necessary basic competencies.
The purpose of this module is to provide you with knowledge and skills in auditing
theory and practice, which includes basic auditing concepts, statutory requirements,
guidelines and auditing standards.
Students credited with this module will know the basic auditing concepts, be able to
apply their knowledge of the role, duties and responsibilities of the registered auditor,
as well as apply the International Standards on Auditing in the statutory audit of an
ordinary company trading in goods and services.
3. Link to other modules

It will become clear from this overview that this introductory module forms the basis
for a range of further auditing modules. Therefore, the purpose of and learning
outcomes for this module are aimed at developing your expertise and abilities in the
field of auditing.
A brief outline of Auditing modules 200, 300 and 400, offered by the Department of
Auditing, is provided below:
Auditing 200
AUE2601: Auditing theory and practice
The purpose was discussed under point 2 above.
AUE2602: Corporate governance and the auditor
The purpose of this module is to provide students with knowledge and
skills in the principles of corporate governance, statutory matters and
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internal controls in the accounting cycles from the auditor’s perspective,

including evaluating internal controls.
Auditing 300
AUE3701: Audit planning and tests of controls
skills in audit planning and the performance of tests of control, which
includes auditing concepts, statutory requirements, guidelines and
international standards on auditing.
AUE3702: Substantive procedures and finalising the audit
skills in the performance of substantive procedures and the finalisation
of an audit, which includes auditing concepts, statutory requirements,
guidelines and international standards on auditing.
Auditing 400
AUE4861: Advanced auditing
The aim is to ensure that students meet 70% of the auditing knowledge
requirements of the prescribed syllabus of the South African Institute of
Chartered Accountants (SAICA) in order to produce competent
professional accountants. It will also provide a foundation of auditing
knowledge that enables students to continue to learn and adapt to
change throughout their professional lives. In particular, this module
aims to develop core competence (the acquisition of auditing
knowledge and skills) in the field of auditing.
AUE4862: Applied auditing
The aim is to ensure that students meet the other 30% of the auditing
knowledge requirements of the prescribed syllabus of the SAICA in
order to produce competent professional accountants. It will also
provide a foundation of auditing knowledge that enables students to
continue to learn and adapt to change throughout their professional
lives. In particular, this module aims not only to develop core
competence in the field of auditing, but also to integrate the knowledge
obtained in module AUE4861. Both of these modules will enable a
student to adhere to the SAICA requirements for auditing.
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4. Framework of the module

Diagram 1 below is a schematic representation of the content of the module:
5. Teaching strategy
The focus of our teaching role is on facilitating your learning experiences towards
achieving specific assessment criteria. Furthermore, for each of the topics in this
module, these learning experiences are designed to help you master the learning
content at a predetermined competence level.
5.1 The study package
The teaching strategy we have adopted to enable you to complete this module
involves utilising all the elements of the study package in an integrated manner.
The study package for mastering this module consists of the following:
 the prescribed book(s)

 the study guide in which study material is grouped into learning units on the
basis of topics
 the Tutorial Letters 101, 102, 103, 201 and 202 which contain information that
we wish to draw your attention to
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 questions and answers which relate to the various learning units and are made
available in the form of tutorial letters
 assignments which are contained in Tutorial Letter 101
When you commence with this module, a relationship begins by which you and your
lecturers interact primarily through the study material included in the study package.
A vital implication of this arrangement is that while your lecturers take responsibility
for the appropriateness of the study material, which they place at your disposal for
this module, you have the sole responsibility to ensure you make the most of each
component of the study package.
5.2 Learning outcomes and levels of mastery
Each topic dealt with in this module contains a statement of the learning outcomes
that we wish to achieve for the particular topic. In broad terms, these statements
indicate the knowledge and skills we expect you to have mastered by the time you
have completed your studies of each topic. These learning outcomes and the
required levels of mastery specified per topic indicate the required end result, which
is what you will be assessed on in this module.
In this introductory auditing module, we emphasise the acquisition of knowledge and
understanding of various topics and subtopics. To a somewhat lesser degree, we
expect you to be able to apply the knowledge and understanding that you have
acquired in given situations, for example, hypothetical situations in brief practical
scenarios and short case studies.
The level of mastery that you are required to attain in the various study topics is
indicated alongside each specified assessment criterion. The first two levels as
defined in the Education Requirements of the South African Institute of Chartered
Accountants (SAICA:2014) are distinguished for the purposes of this module:
Level 1: Basic
At this level, the candidate is required to obtain knowledge and an understanding of
the core/essence of the subject matter, which includes the fact that the subject matter
exists, and its significance, relevance and defining attributes.
Level 2: Intermediate
At this level, the candidate is required to obtain detailed knowledge and an
understanding of the central ideas and issues that form the substance of the subject
matter.
Level 3: Advanced
At this level, the candidate is required to obtain thorough knowledge and a rigorous
understanding of the subject matter. This level of knowledge and understanding
extends beyond a sound understanding of central issues, and includes complexities
and unusual/exceptional aspects of the subject matter.
You will not be confronted with level 3 (advanced) material in this module, since it will
be covered in your further auditing studies. The level of knowledge and
understanding that will be required of you regarding the various topics/learning units
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covered in this study guide, are indicated next to the learning outcome(s) formulated
for each learning unit of the topic.
Note the following points regarding the level of mastery indicated for the various
learning outcomes for each learning unit:
 The highest level of mastery that applies to a learning unit is indicated. In other
words, a learning unit indicated as being level 2 (intermediate) implies that you
should also be able to deal with the topic at level 1 (basic).
 Your mastery of the study material in terms of the specified learning outcomes will
be tested in the final examination paper, which you will have to pass in order to
successfully complete the module. Questions at both levels 1 and 2 will be
included in the examination paper.
A variety of learning activities and self-evaluation questions are included in each

learning unit to encourage your active participation in the learning process. These are
a combination of reading, studying, doing of and reflecting on activities that are
presented in a variety of ways throughout the study guide. They have been designed
to enable you to absorb the knowledge content of the topic, to practise your
understanding and to direct your thoughts.
This is a vital aspect of our learning approach, because as you encounter these
learning activities and perform them, you will become directly involved in controlling
the extent and quality of your learning experience. In short, how much and how well
you learn will depend on the extent of your progress through the learning activities,
and the quality of your efforts.
5.3 Meaning of words
Throughout this module, we communicate learning outcomes and self-assessment
criteria phrased in terms of what you should be able to do. This process involves the
use of action words, which are typically verbs or phrases containing verbs, describing
what you are expected to do in the learning activity. It is our objective to ensure that
the words we use to indicate a requirement clearly state what you have to do, and
you should ensure that you clearly understand the requirements that are conveyed
by the range of words that we will use in the study material for this module.
We list below (in alphabetical order) examples of some of the action words that you
will encounter in this module, together with their meanings for the purpose of this
module.
Advise Give advice; express an opinion as an expert.

Apply Make use of in a practical sense; use where relevant or
appropriate.
Calculate Ascertain by mathematical procedure/exact reckoning.
Compare Examine in order to observe resemblances, relationships and

differences.
Complete Finish/add what is required.
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Define State precisely the meaning/scope/total character of; make

clear (especially the outline of); give a concise description of
the distinguishing features of something.
Describe Clearly indicate the distinguishing details or essential
characteristics of something.
Determine Decide; draw a conclusion/make a decision based on
reasoning.
Discuss Examine/consider the opposing arguments.
Draft Prepare a preliminary version of something.
Examine Investigate carefully/in detail.
Explain Set out the meaning of something; clarify the meaning, provide
supporting evidence; argue the truth of something.
Identify Establish by considering, selecting and recognising something.
Illustrate Explain and clarify by means of an example to illustrate the
nature, meaning and importance of something (see "explain").
Interpret Convey/explain/set out in detail the nature/meaning/
significance of something.
List Record/itemise names or things belonging to a class.
Mention/name/ Specify by name; cite names, characteristics, items, elements
state or facts.
Motivate Cite facts/reasons in support of a viewpoint or argument.

Organise Arrange in an orderly structure/sequence; place into
classes/groups according to certain criteria.
Prepare Make ready/complete; make something ready on the basis of
a previous study.
Record Put in writing; set down for reference and retention.
Summarise Give a condensed version of; state the key aspects of
something.
Tabulate Arrange/organise in table form.
6. Study approach
The following are vital considerations that you should bear in mind when approaching
your studies in auditing, and also some useful hints and aids that will help you to
improve your learning experience:
6.1 Time required for academic studies in this module
The study material for this module has been developed on the basis of the
assumption that you will have a total period of 15 weeks available to study the
module. You will need to use the final three weeks before the examination to revise
and prepare for it.
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You should devote a minimum of eight hours a week to your studies for this module.
The breakdown of the estimated time required to work through the different topics
contained in the study material, including the completion of assignment work, is
provided below. You can use it to compile your own study schedule for this Auditing
module. Bear in mind that it is only a guideline. However, you may find certain topics
to be more difficult and, therefore, require more hours to master them.
Topic Number of
study hours
Preface Overview of the module 3
1 Introduction to auditing 21
2 Regulation of the auditor 23
3 General principles of assurance engagements 23
4 The audit process 10
5 Completion of assignments 16
6 Revision and final examination preparation 24
Total time 120 hours
6.2 Mastering the study material

This study guide has been compiled to guide you through your studies of this
module. With reference to the explanation of the composition of your study package,
you should bear in mind that the prescribed books, including the International
Standards on Auditing, the Auditing Profession Act, the IRBA Rules regarding
Improper Conduct and the SAICA/IRBA Codes of Professional Conduct are the
primary sources of information that you must study. These are supplemented in the
study guide where necessary with additional information, explanations, examples and
questions, aimed at making the study content of the module more accessible and
easy to understand. The study guide also indicates the level of mastery at which you
are required to master the various learning units included in the study material. Use
the study guide to help you to get the best out of the prescribed books.
You will be required to complete assignments for this module. Details relating to the
completion and submission of assignments are provided in Tutorial Letter 101.
 Creating your personal list of key ideas and terms
As you progress through your study of auditing topics, you will become aware of the
extent to which particular terminology is used to convey specific meanings in the
auditing context. Over time we have realised that this often poses problems for
students. You need to make a conscious effort to understand the technical
terminology used throughout the study texts and other study material for this module,
and apply it when doing the activities and assignments. Also note the glossary of
terms included in the SAICA Handbook (one of your prescribed books) which can be
used to clarify certain auditing terms. Your understanding of the auditing terms used
will have a direct impact on your performance levels in the assignments and
examinations.
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We provide a convenient aid in this study guide to help you to get to grips with
auditing terms as you encounter them while progressing through each auditing topic.
At the end of each topic, we provide a blank page on which you can make a record of
technical words/terms/phrases that you encounter. It is useful to summarise these on
a single page with details of each term. For example:
 a brief definition or explanation of the meaning

 page reference(s) where the term or phrase occurs in the text
 cross-references to other related topics
 any other special element that will help you master the term or phrase, possibly
even a small explanatory diagram
In this way you can accumulate a personal dictionary of technical auditing terms.
Each page should concentrate on the words/terms/phrases you feel you need to
remember and that are important to you. Different students would probably record
different terms on these pages.
6.3 Self-study and self-assessment
Self-study and self-assessment are key components of distance education teaching
methods. Always begin by trying to solve your own study problems by making sure
that you are completely familiar with all aspects of the study material. This approach
will ensure that you derive the greatest possible benefit from your studies.
Various activities are included in this study guide for you to complete. In addition to
the activities and assignment(s), additional questions and answers are provided. Use
these learning opportunities constructively by doing the activities and completing the
questions independently, without referring to the activity feedback and suggested
solutions beforehand. You must mark and analyse your own attempt against the
suggested solution.
Having said this, your lecturers are always available to help you solve problems you
may experience with the subject. The various ways in which you can contact the
lecturers are explained in the University’s official publications. Read this information
carefully and note other possible opportunities that exist to improve the quality of
your learning experience, which are brought to your attention in these publications.
6.4 Communication skills
You should view the learning outcomes for the Auditing 200 study level, provided at
the beginning of this preface, as a tool to enable auditing graduates to communicate
effectively in real situations, whether in the public practice environment or the general
business environment. A further aim associated with the Auditing 200 study level is
also to develop and enhance students’ ability to communicate effectively. While this
is an area that primarily involves personal skills, we have purposefully designed the
study material for this module to afford students the opportunity to exercise their
communication skills in elementary practical situations.
The teaching approach, therefore, involves demonstrating various aspects of the
syllabus content in practical contexts, such as written memoranda, working papers,
reports, letters, and many other appropriate written forms of communication.
You are encouraged to develop and display your communication skills as you
progress through the study activities. Your ability to communicate effectively and
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appropriately will continually form part of our assessment of your overall level of
mastery of this module.
6.5 Opportunities for effective learning
You have the opportunity to form working groups with other auditing students with
whom you are acquainted, for instance, by meeting in person from time to time, or by
participating in the discussion forums on myUnisa. We encourage you to actively
pursue these opportunities whenever you are able to, since it can help you in various
ways.
The formation of such groups will create opportunities for shared learning to reinforce
your knowledge base of auditing topics and simultaneously promote your personal
development in areas of other important skills, such as communication and study
techniques
7. What the student can expect from Unisa
You can expect us to do the following:
 We will provide you with up-to-date and relevant learning material.

 We will keep the learning material in line with the needs of industry and
commerce by consulting regularly with the profession.
 We will assist you by affording you the opportunity to develop competencies and
skills at a certain level. The outcomes correspond to the National Qualifications
Framework (NQF) level 6. You will be assessed on the basis of the NQF level
descriptors.
 We will support you whenever you require assistance. You may contact your
lecturers by making personal appointments, telephoning them or emailing them.
We understand that studying through distance education is more challenging than
attending lectures at a residential university.
 We will provide you with clear indications of what we expect from you in terms of
your assessment.
 We will give you timeous feedback on your assignments. We will return your
assignment and our feedback within three weeks after the due date, if you
submitted the assignment on or before the due date.
8. Conclusion
We trust that you will find your studies both rewarding and enjoyable. The effort you
put into this module will provide you with a solid basis for the rest of your studies in
the auditing field.
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TOPIC 1: INTRODUCTION TO AUDITING

Topic overview
The aim of this topic is to explain the theory and philosophy of auditing, assurance
and non-assurance engagements, the auditing postulates, the accounting
profession and the financial statement audit engagement.
This topic is divided into the following learning units:
Learning unit Title Page
1.1 THE AUDITOR 43

1.1.1 The definition, types and characteristics of auditors 43
1.1.2 The need for auditors 46
1.2 ASSURANCE AND NON-ASSURANCE
49
ENGAGEMENTS
1.2.1 Assurance engagements 49
1.2.2 Non-assurance engagements 55
1.2.3 Statutory and non-statutory assurance engagements 56
1.3 AUDITING POSTULATES 59
1.4 THE ACCOUNTING PROFESSION 61
1.4.1 Professional status 61
1.4.2 Accounting bodies in South Africa 61
1.4.3 Pronouncements regulating the auditing profession 63
1.5 THE FINANCIAL STATEMENT AUDIT ENGAGEMENT 66
The overall objectives of the auditor and the conduct of an
1.5.1 66
audit in accordance with ISAs
1.5.2 The roles of the various parties 67
Management’s assertions regarding
1.5.3 68
the financial statements
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Learning outcomes
Learning unit In this topic we focus on the Level

following learning outcomes:
1.1 The auditor  Describe the various roles of 1

auditors
1.2 Assurance and non-  Describe assurance and other 1

assurance engagements engagements
1.3 Auditing postulates  Explain and discuss the 1

auditing postulates
1.4 The accounting  Describe the accounting 1

profession profession
1.5 The financial statement  Explain the financial statement 1

audit engagement audit engagement
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LEARNING UNIT 1.1: THE AUDITOR
Introduction
Auditing firms are often engaged to verify the vote count at major events, such as
the Idols competition. Why do you think that the organisers arrange for these firms
to audit the results of such competitions?
The organisers require an independent verification by a reputable profession which

is perceived by the public and contestants as being independent and technically
competent. They also want assurance that the results are accurate and that no
“fixing” of the results has taken place. An auditing firm can therefore add credibility.
The auditing firm can also add value by making recommendations to ensure the
smooth running of the event and avoidance of problems.
We are certain that you will find the concepts and techniques covered in this study
guide and related references useful. However, our experience is that students often
fall into the trap of memorising definitions, objectives, rules and techniques without
first understanding what an auditor does and what an audit of an entity actually
entails.
In this study unit, auditing theory is explained by defining an auditor, describing the
different types and characteristics of auditors and explaining the fundamental ethical
principles and the need for auditors.
1.1.1 The definition, types and characteristics of auditors

In the workplace there are various types of auditors and differences in the types of
audits they perform. One thing that they all have in common is that the auditor is
independent and provides assurance.
1.1.1.1 What is an auditor?
Study
 Jackson & Stent (2014:1/2)
 SAICA Student Handbook, Volume 2A, ISA 200: Overall objectives of the
independent auditor and the conduct of an audit in accordance with International
Standards on Auditing (ISA 200: par 3 and 13[d])
Note the following in the study resources above:

 the definition of an auditor
 the meaning of the auditor “giving assurance”
 the purpose of an audit of financial statements
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1.1.1.2 Types, characteristics and classification of auditors
Study
 Jackson & Stent (2014:1/2–1/4)
Although this module focuses mainly on the independent external audit function, this
learning unit also discusses the internal auditing function and other kinds of auditing
services.
Note the following in the study resource above:

 the different types of auditors and the duties they perform
 characteristics of auditors
Activity 1
Required
Name the different types of auditors and describe the objectives of each type of
audit.
Feedback on activity 1
Reference: Jackson & Stent (2014:1/2–1/4)
See the reference in the prescribed textbook above regarding the types and
objectives of the different types of auditors.
The focus of this module will be on the external auditor. External auditors express
an opinion about the financial statements. However, you are required to understand
the differences between the different types of auditors, for example the differences
between internal and external auditors (see the table below).
Table 1: Differences between internal and external auditors
The following are important principles that distinguish internal auditors from external
auditors (see Jackson & Stent 2014:1/2–1/4):
Internal auditors External auditors

 Perform independent assignments  Perform an attestation function
on behalf of the board of directors. (audit or review engagements).
 Provide independent information  Provide an independent opinion on
about the company’s operations. the financial information examined.
 Are contracted by the company  Work for an independent audit firm.
they are working with. In some
cases the internal audit function is
in-house and the internal auditors
are employees of the company.
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 Report to management (including  Report to the shareholders.

the audit committee).
 Function independently in the  Function independently from the
organisation, but remain part of the organisation.
organisation.
 Obtain a mandate from  Obtain a mandate through
management/the audit committee. legislation.
As mentioned in the prescribed textbook, the different types of auditors have one
characteristic in common, namely “independence”. If the person performing the
audit cannot be independent of the entity that is being audited, then the result on the
audited entity is not necessarily a valid audit. Note that when internal auditors are
part of the organisation, they should still maintain independence of the specific
department that is being audited.
1.1.1.3 Independence and fundamental ethical principles
Study
 Jackson & Stent (2014:1/0–1/11)
 SAICA Student Handbook, Volume 2A: International Framework for Assurance
Engagements (Framework: par 6)
 SAICA Student Handbook, Volume 2B: Code of Professional Conduct, Part A
(section 100.5)
Independence is the characteristic that is common to all the assurance

engagements, but it is not the only essential characteristic. The International
Federation of Accountants (IFAC) lays down the fundamental ethical principles
(characteristics) that all auditors, as professional accountants, are required to
observe. The South African Institute for Chartered Accountants (SAICA) has
adopted the IFAC code in its entirety.

 fundamental ethical principles that all professional accountants are required to
observe
Activity 2
David Prince has just started his academic studies in Auditing and is asked to
comment on whether and how the following scenario could influence the ethical
principles an external auditor should comply with.
While the external auditor was performing his audit he was unable to confirm that
the vehicles owned by the company were actually registered in the company’s
name, but decided not to mention the matter to the shareholders in his report and
accepted the inclusion of the vehicles in the financial statements.
The external auditor also documented that there was a serious threat to the going
concern of the business, because the business had lost 60% of its tenders for new
contracts. However, he decided not to mention the matter to the shareholders of the
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company in his report. He was also aware that his father-in-law held shares in the
company being audited, and over dinner one evening he commented that it would
be in his father-in-law’s best interest to urgently dispose of his shareholding in the
company.
Required
List and discuss the fundamental ethical principles that the external auditor has not
complied with according to the SAICA Code of Professional Conduct.
References:
 Jackson & Stent (2014:1/0–1/11)
 SAICA Student Handbook, Volume 2B: Code of Professional Conduct, part A
(section 100.5)
Integrity
The external auditor has not acted with integrity. Because he failed to confirm
whether the vehicles were actually owned by the company and did not report this to
the shareholders, he was dishonest.
Confidentiality
The external auditor should have respected the confidentiality of client information.
Chartered accountants are not allowed to disclose confidential information and by
advising his father-in-law to dispose of his shareholding he has contravened a
fundamental ethical principle.
Professional competence and due care

Because the external auditor knew that there was a very serious threat to the going
concern of the business (there was a threat that the business would not be able to
continue trading) and he failed to report this to the company’s shareholders, he did
not act with professional competence and due care as required by applicable
technical and professional standards when providing professional services.
Professional behaviour
By being dishonest and not acting with professional competence and due care the
external auditor did not comply with the relevant laws and regulations and thus
discredits the profession.
Note: Objectivity is the fifth fundamental ethical principle. However, it is not

applicable to the scenario above.
1.1.2 The need for auditors
Study
 Jackson & Stent (2014:1/5–1/6)
You may ask: “Why do entities require an audit?”
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Many people answer this question by saying that audits are required by law.
However, audits are often used in situations that do not require a compulsory audit.
Reliable financial statements are vital for many different parties. These include
managers, directors, shareholders, investors, financial institutions (banks), the
South African Revenue Service (SARS) and the creditors of the entity. They all
require reliable information to make informed decisions.
Why is there a need for auditors?
As stated in Jackson & Stent (2014:1/5–1/6), the need for auditors arose out of the
natural development of businesses managed by people other than the owners
(shareholders). The owners supply the start-up funding for the business and then
appoint managers to manage these funds on their behalf. The owners expect the
managers to report to them on a regular basis on how the owners' money is being
managed. Many owners are not involved in their businesses and do not have the
necessary time or money to determine whether the reports they receive from their
managers are a fair reflection of the actual state of affairs in the business.
This has given rise to the need to appoint an independent person (the external
auditor) to evaluate the financial reporting system introduced by management and
form an opinion about the fairness of the management's presentation (including the
company’s profit/loss) in the annual financial statements.
Investors are people who wish to invest money in business entities. To make it
attractive for individuals to invest in businesses, the investors and general public
need to feel assured that the financial statements supplied by business entities
contain reliable financial information. It is the external auditor who supplies this
assurance.

 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.
 Confidence in financial information

Auditors inspire confidence of the users by expressing opinions on whether the
financial information produced by the business is reliable and credible.
 Accountability
Users require accountability and auditors provide an independent service which
assesses and evaluates whether the directors are in fact meeting their
responsibilities.
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Activity 3
Required
Answer the questions, if provided, in section 1.1 of Tutorial Letter 102 and compare
your answers with the solutions in section 1.1 of Tutorial Letter 103.
Summary
In this learning unit we focused on what an auditor does, the different types of
auditors and the need for auditors, which included the objective of an audit.
Self-assessment
After having worked through the learning unit and the references in the prescribed
study material, determine if you are able to answer the following questions:
1. Describe what an auditor does.

2. Explain the different types of auditors.
3. Explain the relationship between the internal and the external auditor.
4. List and explain the fundamental ethical principles that all chartered accountants
are required to observe.
5. Explain why there is a need for auditors.
6. Explain the purpose of an audit.
Feedback on self-assessment
1. Reference: Jackson & Stent 2014:1/2
2. Reference: Jackson & Stent 2014:1/2–1/3
4. Reference: SAICA Student Handbook, Volume 2B, Code of Professional
Conduct: Part A (section 100.5)
6. Reference: Jackson & Stent 2014:1/7
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LEARNING UNIT 1.2: ASSURANCE AND NON-

ASSURANCE ENGAGEMENTS
Introduction
Clients can engage auditors to perform various services. These services can be
classified as assurance and non-assurance engagements.
In this study unit, auditing theory is explained by discussing assurance and non-
assurance engagements according to the auditing pronouncements.
We will also deal with the concept of reasonable assurance and explain statutory
and non-statutory engagements.
An auditing pronouncement is an official or authoritative statement, for example the

International Standards on Auditing (ISA) or the SAICA Code of Professional
Conduct.
Diagram 1: Types of assurance and non-assurance engagements (based on

Jackson & Stent 2012:19/2)
Engagement
Assurance Non-assurance
engagement - engagement -
learning unit 1.2.1 learning unit 1.2.2
Limited Agreed-upon
Audit Compilation
assurance/Review procedures
Reasonable Moderate
No assurance No assurance
assurance assurance
1.2.1 Assurance engagements

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. Engagements where the auditor is required to give
assurance are referred to as assurance engagements.
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1.2.1.1 Definition of an assurance engagement and the scope of the

framework
Study
Engagements (Framework: par 10–11 and 17–19)

 The definition and objective of an assurance engagement (Framework: par 10–
11)
 An assurance engagement is one in which an auditor expresses a conclusion
designed to enhance the degree of confidence of the intended users, other than
the responsible party, about the outcome of the evaluation or measurement of a
subject matter against a criteria (Framework: par 10).
 The above definition can be broken down into various elements which will be
dealt with below:
1.2.1.2 Elements of an assurance engagement
Study
 Jackson & Stent (2014:1/6–1/7)
Engagements (Framework: par 26–49)

 the elements of an assurance engagement
To ensure that you understand what is meant by the different elements of an

assurance engagement, do the following activity:
Activity 4
You are a third year trainee auditor, employed by DCM Chartered Accountants (SA),
who is busy with the audit of the annual financial statements of Bukuban Ltd. This is
an audit engagement.
Required
Your training partner has asked you to give examples of the elements of the above-
mentioned assurance engagement to your junior trainee auditors who are assisting
you with the audit.
Reference: SAICA Student Handbook, Volume 2A: International Framework for
Assurance Engagements (Framework: par 26–49)
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The three-party relationship
The practitioner is DCM Chartered Accountants (SA).

The responsible party is the Directors of Bukuban Ltd.
The intended users are the shareholders of Bukuban Ltd.
The subject matter
The annual financial statements (statement of financial position, statement of

comprehensive income and cash flow)
Suitable criteria
International Financial Reporting Standards (IFRS) – suitable criteria is the

benchmark used to evaluate or measure the subject matter.
Sufficient appropriate evidence
The evidence that the practitioner (DCM Chartered Accountants (SA)) needs to be
in a position to conclude that the financial statements are free of material
misstatements
A written report
The audit report on fair presentation of the annual financial statements
1.2.1.3 Types of assurance engagements, public interest and public

interest scores
Study
 Jackson & Stent (2014:1/6–1/8 )
Engagements (Framework: par 14-16, par 73 and 77-80)
 SAICA Student Handbook, Volume 2A: International Standards on Auditing (ISA)
200: Overall objectives of the independent auditor and the conduct of an audit in
accordance with International Standards on Auditing (ISA 200: par 5)
Now that you understand what an assurance engagement is, as well as the
elements involved, we can explain the various types of assurance engagements.
As indicated in diagram 1, there are two categories of assurance engagements:
Reasonable assurance engagement

As stated in Jackson & Stent (2014:1/8) in this type of assurance engagement, an
external auditor gathers sufficient appropriate evidence to be in a position to
express an opinion on whether the directors, who are responsible for the financial
statements, have applied the International Financial Reporting Framework
appropriately in presenting fairly, the financial position, financial performance and
cash flow information of the company for the financial year.
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The auditor is not able to provide absolute assurance, in other words, the auditor
cannot provide 100% assurance. Reasonable assurance relates to the entire
auditing process, namely the collection of audit evidence and the conclusions the
auditor draws about the evidence in order to express an audit opinion (Framework:
par 73).
Limited assurance engagements
As is indicated in diagram 1, review engagements are classified as assurance

engagements and sub-classified as limited assurance (as opposed to reasonable
assurance) engagements in terms of the International Framework for Assurance
Engagements.
Public Interest Score
The Companies Act 71 of 2008 introduced a new method of determining which

entities require an audit or an independent review of financial statements based on
the level of public interest. An entity’s public interest score will be the sum of:
 the number of points equal to the average number of employees during the
financial year
 1 point for every R1 million of turnover/revenue
 1 point for every R1 million of third party liability (creditors, loans, debt)
 1 point for every individual who directly or indirectly has a beneficial interest in
any of the company shares/member interest (number of shareholders/investors)
Public Interest Score Decision Tree (in terms of Regulation 28 of the

Companies Act)
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 the meaning of reasonable assurance
 the objective of a review engagement
 the term "assurance" and the various levels of assurance that can be provided
by an auditor with regard to a reasonable assurance engagement and a limited
assurance engagement
 how to calculate the public interest scores and determine whether audit or review
engagement is required
1.2.1.4 Distinction between reasonable and limited assurance engagements
Study
Engagements (Framework: par 14–16)

 the differences between reasonable assurance engagements and limited
assurance engagements
1.2.1.5 Advantages to having an audit of financial statements
As stated in Framework (par 10) an audit enhances the degree of confidence of the
intended users in the company’s financial statements. Examples of the general
public or investing entities that may have a direct interest in the audited financial
statements include the following (Jackson & Stent 2014:1/5–1/6):
 banks and other institutions that the company may approach for loans
 SARS for the collection of taxes
 investors who base investment decisions on audited information
 employers who rely on audited information when taking decisions affecting
employee benefits
 creditors for decisions about extending trade credit
 the settlement of claims, such as insurance claims
1.2.1.6 The inherent limitations of an audit
Study
 SAICA Student Handbook, Volume 2A: ISA 200: Overall objectives of the
Standards on Auditing (ISA 200: par A45–A52)
 Jackson & Stent (2014:1/8–1/9)

 the inherent (inbuilt) limitations of an audit
Inherent – existing as an essential constituent or characteristic. In other words, it

exists permanently and will therefore always be a limitation.
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Activity 5
At a conclusion of an audit a junior trainee accountant of the audit team assigned to
the audit of Kos Ltd was requested to make sure that the audit working papers were
all properly filed and finalised.
He was struck by how much information/evidence had been gathered on the audit.
Having seen all of the evidence he felt strongly that the audit team should certify the
financial statements as being 100% correct. Having completed all his work, he
asked his senior why the financial statements had not been certified as correct.
Required
Explain in detail to your junior, why the financial statements cannot be certified.
Include in your answer an explanation of the inherent limitations of an audit.
References:
 SAICA Student Handbook, Volume 2A: ISA 200: Overall objectives of the
Standards on Auditing (ISA 200: par A45–A52)
Engagements (Framework: par 73)
 Jackson & Stent: 2014:1/8–1/9
The auditor is unable to provide absolute assurance and can only provide
reasonable assurance. Inherent limitations of an audit prevent the auditor from
certifying or confirming 100% correctness of the financial statements.
ISA 200 provides the following explanation for the inherent limitations of an audit:
The nature of financial reporting
The preparation of financial statements involves judgement by management in

applying the requirements of the entity’s applicable financial reporting framework to
the facts and circumstances of the entity. In addition, many financial statement items
involve subjective decisions or assessments or a degree of uncertainty (estimates),
for example, allowance for credit losses. Consequently some financial statement
items are subjected to an inherent level of variability which cannot be eliminated by
the application of additional audit procedures.
The nature of audit procedures
There are practical and legal limitations on the auditor’s ability to obtain audit
evidence. For example:
 There is the possibility that management or others may not provide, intentionally
or unintentionally, the complete information that is relevant to the preparation of
the financial statements or that has been requested by the auditor.
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 Fraud may involve sophisticated and carefully organised schemes designed to

conceal it. Therefore, audit procedures used to gather audit evidence may be
ineffective for detecting an intentional misstatement that involves, say, collusion
to falsify documentation which may cause the auditor to believe that audit
evidence is valid when it is not. The auditor is neither trained as, nor expected to
be an expert in the authentication of documents.
 An audit is not an official investigation into alleged wrongdoing. Accordingly, the

auditor is not given specific legal powers, such as the power of search, which
may be necessary for such an investigation.
Timeliness of financial reporting and the balance between benefit and cost
The matter of difficulty, time or cost involved is not in itself a valid basis for the
auditor to omit an audit procedure for which there is no alternative or to be satisfied
with audit evidence that is less than persuasive. The relevance of information, and
thereby its value, tends to diminish overtime and there is a balance to be struck
between the reliability of information and its cost.
Other matters that affect the inherent limitations of an audit are the following:
 fraud, particularly fraud involving senior management or collusion between

employees
 the existence and completeness of related party relationships and transactions
 the occurrence of non-compliance with laws and regulations
 future events or conditions that may cause an entity to cease to continue as a
going concern
Related party relationships

A related party relationship exists when there is a relationship between two parties
in which one of the parties has influence over the other. For example, a company
may do substantial business with a firm owned by one of its directors. Related party
transactions offer the possibility of a conflict of interest.
1.2.2 Non-assurance engagements
The main characteristic of a non-assurance engagement is that no opinion or

comment is given by the auditor in his or her report (see diagram 1).
Study
 Jackson & Stent (2014:1/7–1/8, 19/17 par 2 and 19/19 par 2)
Engagements (Framework: par 17 and 20–21)
What are non-assurance engagements?
These are engagements that do not meet the definition of an assurance

engagement. The defining characteristic is that the practitioner does not express an
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opinion on the subject matter of the engagement (Jackson & Stent 2014: 1/7–1/8,
19/17 par 2 and 19/19 par 2).
They include the following:

 agreed-upon procedures engagement
 compilation engagement

 the objective of an agreed-upon procedures engagement
 the objective of a compilation engagement
 the level of assurance that can be provided by an auditor with regard to an
agreed-upon procedures engagement and a compilation engagement
Activity 6
Required
Explain the objective of an agreed-upon procedures engagement and a compilation
engagement and give an example of each.
Reference: Jackson & Stent (2014: 19/1–19/18 and 19/19–19/22)
Agreed-upon procedures engagement

Objective: See the reference in the prescribed textbook for a discussion of the
objectives of an agreed-upon procedures engagement.
Example: The practitioner is requested to report on his or her factual findings on the
validity of accounts payable at year-end.
Compilation engagement
Objective: See the reference in the prescribed textbook for a discussion of the
objectives of a compilation engagement.
Example: The practitioner is requested to prepare the accounting records and the
financial statements of a client at year-end but not to perform any audit procedures.
1.2.3 Statutory and non-statutory assurance engagements

An auditor can be given an engagement for auditing services either in terms of
statutory requirements or because of another obligation or requirement.
A statutory audit is an assurance engagement that must be conducted in terms of

the Companies Act 71 of 2008. A non-statutory audit is an audit that arises from
another obligation or a request by the client.
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Activity 7
Required
Summary
In this learning unit we focused on assurance engagements, non-assurance
engagements, reasonable assurance, public interest and public interest scores, as
well as statutory and non-statutory engagements.
Self-assessment
After having worked through the learning unit and the references to the prescribed
study material, determine whether you are able to answer the following questions:
1. Define an assurance engagement.

2. Explain what is meant by the outcome of the evaluation or
measurement of subject matter.
3. Explain what is meant by subject matter information.
4. Explain the elements of an assurance engagement.
5. Define a reasonable assurance engagement.
6. Define a limited assurance engagement.
7. Explain the difference between a reasonable assurance engagement
and a limited assurance engagement.
8. Explain the term "assurance" and the various levels of assurance that
can be provided by an auditor with regard to an audit engagement
and a review engagement.
9. Explain the advantages of having an audit of financial statements.
10. Explain the inherent limitations of an audit.
11. Describe a non-assurance engagement.
12. Define the objective of an agreed-upon procedures engagement.
13. Define the objective of a compilation engagement.
14. Describe the level of assurance that can be provided by an auditor
with regard to an agreed-upon procedures engagement and a
compilation engagement.
15. Describe and give an example of a statutory and non-statutory
assurance engagement.
16. Explain public interest and public interest scores.
1. Reference: Jackson & Stent (2014:1/6)
2. Reference: SAICA Student Handbook, Volume 2A, (Framework: par 11)
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8. Reference: Jackson & Stent (2014:1/6–1/7)
14. References:
 SAICA Student Handbook, Volume 2A (Framework: par 14–16, 73 and 77–

80)
 SAICA Student Handbook, Volume 2A: (ISA 200: par 5)
15. A statutory audit is an assurance engagement that must be conducted because

of the Companies Act 71 of 2008. A non-statutory audit is an audit that arises
from other obligation or request by the client.
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LEARNING UNIT 1.3: AUDITING POSTULATES

Introduction
According to Jackson & Stent (2014:1/21), the word “postulate” is best explained by
considering the following definitions from the Oxford dictionary: “…a postulate
provides a basis for thinking about problems and arriving at solutions…a starting
point fundamental condition…”. A postulate is a foundation on which a discipline is
built and there are certain underlying principles or postulates, which serve as the
basis of auditing theory. These will be dealt with in this study unit.
The postulates are not theories but basic assumptions, logical principles and
requirements which serve the auditors in forming their opinions. The postulates
provide guidance for the auditor that helps to determine the extent of audit
procedures that should be applied in the audit.
Postulates are useful to auditors as they can provide answers to problems that may
seem difficult.
In this study unit, the philosophy of auditing is explained by describing the auditing
postulates.
Study
 Jackson & Stent (2014:1/21–1/24)

 the term “postulate”
 the eight postulates as suggested by Mautz and Sharaf (note the postulate, the
explanation, and the discussion of each of the postulates)
Activity 8
Required
8.1 Explain the term “postulate“ in the context of auditing.
8.2 Explain what is meant by the following postulate and then discuss its
applicability as a basis for an audit in current times, remembering that the
postulates were formulated more than 40 years ago (based on Gray and
Manson 2005:33). ‘
Postulate – no necessary conflict of interest exists between the auditor and

management/employees of the enterprise under audit.
Reference: Jackson & Stent (2014:1/7)
8.1 A postulate provides a basis or framework for thinking about problems and
arriving at solutions. A postulate is a starting point for thinking about a
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discipline. In the context of auditing the postulates are the foundations on

which the subject Auditing is built.
8.2 Explanation: It means that both the auditor and the management of a
company want to ensure that the financial statements achieve fair
presentation. It assumes that management will not want to manipulate the
financial statements.
Discussion: In recent times there has been increase in theft, fraud and
financial mismanagement, and this could result in any auditor wondering
whether management do in fact want to report honestly and fairly. An auditor
plans and performs an audit with professional scepticism. Hence, the auditor
cannot accept that this postulate holds true when performing an audit of
Activity 9
Required
Answer the questions, if provided, in section 1.3 of Tutorial Letter 102 and
compare your answers with the solutions in section 1.3 of Tutorial Letter 103.
Summary
In this learning unit the philosophy of auditing was explained by describing the
auditing postulates.
Self-assessment
1. Explain the term “postulate” in an auditing context.

2. Explain and discuss the eight auditing postulates.
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LEARNING UNIT 1.4: THE ACCOUNTING PROFESSION

Introduction
The accounting profession has followed an evolutionary path in the development of
the functions and services it performs, the responsibilities its members assume in
relation to its role, and its structure and regulatory processes.
It is essential for the accounting profession to uphold a high standard of

professionalism. In 2013/2014 The World Economic Forum’s Global
Competitiveness Survey ranked South Africa first out of 148 countries in the world
for its strength of auditing and reporting standards.
In this study unit, the accounting profession is described by listing the key elements
that characterise groups that are considered to have a professional status,
explaining the various accounting bodies, as well as dealing with the registration
requirements and pronouncements that regulate the profession.
The elements covered in this learning unit are fundamental to the concept of
auditing as a professional activity.
1.4.1 Professional status

Jackson & Stent (2014:1/10) explains the words "profession" and "professional".
Professional status is achieved when there is public acceptance that such a body of
practitioners is worthy of recognition as a profession.
On the basis of this assumption about the underlying nature of professional status,
attributes and elements that generally characterise a profession can be
distinguished.
Study
 Jackson & Stent (2014:1/10–1/11)
Professionalism refers to the conduct, aims or qualities that characterise a

profession or professional person. A profession is characterised by certain
attributes.

 the characteristics that distinguish a profession
1.4.2 Accounting bodies in South Africa

Jackson & Stent (2014:1/11–1/12) identify the Independent Regulatory Board for
Auditors (IRBA) and the South African Institute of Chartered Accountants (SAICA)
as the dominant accounting bodies in South Africa.
Study
 Jackson & Stent (2014:1/11–1/12)
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 membership requirements of SAICA
 the difference between chartered accountants in public practice and those in
business
 the role and responsibility of the IRBA
 membership requirements of the IRBA
The South African Institute of Chartered Accountants (SAICA)
Refer to SAICA website for additional information on how to become a chartered

accountant: https://www.saica.co.za/training/becomingaca/tabid/157/language/en-
za/default.aspx
Independent Regulatory Board for Auditors (IRBA)

Refer to the IRBA website for additional information on how to become a registered
auditor: http://www.paab.co.za/index.php/education-training-a-professional-develop-
ment/67?task=view
The IRBA has the following goals as contained in the IRBA Manual of Information
(in status and corporate mission of the IRBA):’
 Develop and maintain auditing and ethical standards which are internationally
comparable.
 Provide an appropriate framework for the education and training of properly
qualified auditors as well as their on-going competence.
 Register auditors who meet the registration requirements.
 Monitor compliance with reportable irregularities and money laundering.
 Monitor the compliance of registered auditors with professional standards.
 Investigate and take appropriate action against registered auditors in respect of
improper conduct.
 Develop and maintain stakeholder relationships to enhance performance,
accountability and public confidence.
 Strengthen the IRBA’s organisational capability, capacity and performance to
deliver on its mandate in an economically efficient and effective manner, in
accordance with the relevant regulatory frameworks.
Activity 10
Required
A chartered accountant is registered only with the South African Institute of

Chartered Accountants (SAICA). Which one of the following codes or legislation
would regulate the chartered accountant in this instance?
10.1 Parts A and B of the Code of Professional Conduct of the Independent

Regulatory Board for Auditors (IRBA)
10.2 Parts A and C of the Code of Professional Conduct of the South African
Institute of Chartered Accountants (SAICA)
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10.3 The rules regarding Improper Conduct of the Independent Regulatory Board
for Auditors (IRBA)
10.4 The Auditing Profession Act 26 of 2005
Option 10.2: Parts A and C of the Code of Professional Conduct of the South
African Institute of Chartered Accountants (SAICA)
The Auditing Profession Act 26 of 2005, The Rules regarding Improper Conduct and
the Code of Professional Conduct of IRBA all relate to the registered auditor in
public practice. SAICA is applicable to all chartered accountants in South Africa, but
the question only stipulated part A and C, not B which applies to chartered
accountants in public practice.
1.4.3 Pronouncements regulating the auditing profession
Professional regulation is necessary to ensure that high standards of ethics, conduct

and skill are set for and maintained by its members (Jackson & Stent 2015:1/12).
Legal and professional requirements have therefore been developed over the years
to ensure that the appropriate standards are set and adhered to.
Study

 SAICA Student Handbook, Volume 2A: International Framework for assurance
engagements (Framework: par 6–8)
accordance with International Standards on Auditing (ISA 200: par 14 and A14–
A17)
 the ethical principles and quality control standards (Framework: par 6–8)
 the ethical requirements relating to an audit of financial statements.(ISA 200: par
14 and A14–A17)
 the pronouncements regulating the auditing profession in South Africa and
international auditing standards:
o The Auditing Profession Act 26 of 2005

o The Companies Act 71 of 2008
o The Constitution and By-Laws of the South African Institute of Chartered
Accountants (SAICA)
o The International Federation of Accountants (IFAC) Code of Ethics for
Professional Accountants
o The Code of Professional Conduct and the Rules regarding Improper
Conduct of the Independent Regulatory Board for Auditors (IRBA)
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o International Standards on Auditing (ISA)

o International Standards on Review Engagements (ISRE)
o International Standards on Assurance Engagements (ISAE)
o International Standards of Related Services (ISRS)
o International Standard on Quality Control (ISQC)
o International Auditing Practice Statements (IAPS)
o South African Auditing Practice Statements (SAAPS)
The Auditing Profession Act 26 of 2005, the Companies Act 71 of 2008, IFAC Code
of Ethics for Professional Accountants, the SAICA Code of Professional Conduct,
the Rules Regarding Improper Conduct of the IRBA, ISA and the ISQC will be
covered in the remaining topics of the study guide.
Activity 11
Required
Summary
In this learning unit we focused on the key elements that characterise groups that
are considered to have a professional status, the various accounting bodies in
South Africa, the registration requirements of the auditing profession, and
pronouncements regulating the profession.
Self-assessment
1. Describe the key elements which characterise the auditing function as a

profession.
2. List and describe the dominant accounting bodies in South Africa.
3. Describe the requirements to register as a member of SAICA.
4. Describe the registration requirements of the IRBA.
5. Explain the goals of the IRBA in South Africa.
6. List the pronouncements that regulate the auditing profession in South
Africa.
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LEARNING UNIT 1.5: THE FINANCIAL STATEMENT AUDIT

ENGAGEMENT
Introduction
As was mentioned previously, in this module we will be focusing mainly on the
external audit function. In this study unit the financial statement audit engagement is
explained by dealing with the auditor’s overall objectives, explaining the roles of the
various parties and describing management’s assertions.
1.5.1 The overall objectives of the auditor and the conduct of an

audit in accordance with ISAs
In performing an audit, the auditor has certain objectives that must be attained
before the audit can be concluded. This learning unit will deal with the auditor’s
overall responsibilities in conducting an audit.
Study

accordance with International Standards on Auditing (ISA 200: par 1–13 and A1-
A13)
1.5.1.1 An audit of the financial statements
The purpose of an audit was dealt with in Learning Unit 1.1. Refer to this learning
unit to ensure that you understand the purpose of an audit.
Note the following in the study information regarding the preparation of the
financial statements and the formation of the auditor’s opinion:
 the scope of the ISA 200

 what management acknowledge and understand in accepting responsibility for
the preparation of financial statements
 what is required by management in the preparation of the financial statements
 the meaning of an applicable financial reporting framework
 what an applicable financial reporting framework may encompass
 the formation of the auditor’s opinion
 the requirements of the auditor when reasonable assurance cannot be obtained
and a qualified opinion in the auditor’s report is insufficient
1.5.1.2 Auditor’s responsibility
ISA 200: par 7 requires that the auditor exercise professional judgment and maintain
professional scepticism throughout the planning and performance of the audit and,
among other things the following:
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 Identify and assess risks of material misstatement, whether due to fraud or error,
based on an understanding of the entity and its environment, including the
entity’s internal control.
 Obtain sufficient appropriate audit evidence regarding the existence of material
misstatements by designing and implementing appropriate responses to the
assessed risks.
 Form an opinion on the financial statements based on conclusions drawn from
the audit evidence obtained.
1.5.1.3 Overall objectives of the auditor
In conducting an audit of financial statements, the overall objectives of the auditor in

terms of ISA 200: par 11 are:
 to obtain reasonable assurance about whether the financial statements as a

whole are free from material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on whether the financial
statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework; and
 to report on the financial statements, and communicate as required by the ISAs,
in accordance with the auditor’s findings
1.5.1.4 Definitions
Note the following in the study resources:
 the meanings of the terms in ISA 200: par 13
1.5.2 The roles of the various parties

There are various parties involved in an audit engagement, namely the auditors,
directors and the shareholders.
Study
 Jackson & Stent (2014:1/15–1/16)

 the roles of the shareholders, directors and auditors of a company
Activity 12
You are a trainee auditor and your audit manager has requested that you answer
the following questions regarding the responsibilities of the various parties to an
audit.
Required
12.1 Identify the three parties involved in the audit process.
12.2 Describe the duties of each of the parties identified above.
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Reference: Jackson & Stent (2014:1/16)
12.1 Shareholders
Directors/Management
Auditor
12.2 Shareholders
To provide finance for the business; appoint directors to manage the

business; appoint auditors; and receive the annual financial statements.
Directors/Management
They are responsible for running the company and reporting the results of
their operation to the shareholders. They also prepare the financial
statements in terms of an appropriate financial reporting framework
Auditor
He or she is responsible for gathering sufficient appropriate audit evidence to

be in a position to give an independent opinion on whether the financial
statements prepared by the directors to the shareholders, fairly present the
financial position and results of the operations of the company, in terms of the
applicable financial reporting framework.
1.5.3 Management’s assertions regarding the financial

statements
As stated in Jackson & Stent (2014:1/17–1/19), management are responsible for the
fair presentation of the financial statements (management of a company report to
the shareholders in the annual financial statements). Management make
representations about the company’s assets, equity, liabilities, transactions and
events. These representations are termed assertions of management. This
learning unit will deal with management’s assertions.
Study
 Jackson & Stent (2014:1/17–1/19)

315: Identifying and assessing the risks of material misstatement through
understanding the entity and it’s environment (ISA 315: par 4(a) and A123–
A124)
What are assertions?
Assertions are representations by management, explicit or otherwise, that are

embodied in the financial statements, as used by the auditor to consider the
different types of potential misstatements that may occur (ISA 315: par 4(a)).
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 the three categories under which management assertions falls

 assertions about classes of transactions and events for the period under audit
 assertions about account balances at the period end
 assertions about presentation and disclosure
The assertions will be dealt with in more detail later in the study guide.
In order to have a better understanding of the auditor’s role with regard to the
assertions, do the following activity:
Activity 13
13.1 You are a trainee auditor employed at the audit firm DCM Chartered
Accountants (SA). You are currently performing the audit of Pretty-in-Pink
Limited, a clothing retail company.
The following are extracts from the financial statements of the company for the
year ended 28 February 20XX:
20XX
R ’000
Statement of financial position
Property, Plant and Equipment 1 550
Required
List the assertions which are implied by management with the inclusion of the
following item in the financial statements: (for purposes of this question, you are not
required to list the assertions relating to presentation and disclosure)
 Property, Plant and Equipment
13.2 The statement of comprehensive income (detailed income statement) of RLM

Limited contains the following account heading which is classified as a class
of transactions:
Salaries R1 244 361
Your fellow trainee auditor is under the impression that the assertions
pertaining to salaries are as follows:
Valuation: Salaries are presented at the gross amount less

deductions.
Completeness: All salaries paid by the company in respect of the financial
year are included in the amount.
Obligation: The company has an obligation to pay the amounts
making up the R1 244 361.
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Disclosure: The names of all salary earners have been disclosed in

the financial statements.
Required
13.2.1 Indicate and explain for each assertion whether you agree with your fellow
trainee auditor regarding the applicability of the mentioned assertions to
salaries.
13.2.2 List and describe four assertions pertaining to salaries in the statement of
comprehensive income (income statements).
Reference: SAICA Student Handbook, Volume 2A: International Standards on
Auditing (ISA) 315: Identifying and assessing the risks of material
misstatement through understanding the entity and its environment
(ISA 315: par A123–A124)
13.1 Property, Plant and Equipment
Reference: SAICA Student Handbook, Volume 2A: International Standards

on Auditing (ISA) 315: Identifying and assessing the risks of material
misstatement through understanding the entity and its environment (ISA 315:
par A124)
13.2 Salaries
13.2.1 Assertions
 Valuation – Do not agree
This is an assertion about account balances at period end/presentation.
 Completeness – Agree
All transactions that should have been recorded have been recorded.
 Obligation – Do not agree
This is an assertion about account balances at period end.
 Disclosure – Do not agree
This is an assertion about presentation and disclosure.

Not all salary earners names need to be disclosed.
13.2.2 Assertions pertaining to salaries
 Occurrence: All salary expenses are genuine expenses and pertain to the
entity.
 Accuracy: Salary amounts have been recorded appropriately.
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 Cut-off: Salaries have been recorded in the correct accounting period.

 Classification: Salaries have been recorded in the proper accounts.
Note the following when attempting questions on management assertions:
When we ask a question about management assertions on either classes of

transactions and events or account balances we expect you to give all the relevant
assertions and only mention that the assertions relating to presentation and
disclosure will apply. If we expect you to give all the assertions relating to
presentation and disclosure we will clearly indicate this in the question.
Activity 14
Required
compare your answers with the solutions in section1.5 of Tutorial Letter 103.
Summary
In this learning unit we explained the objectives of an audit, the roles of the various
parties in a statutory audit and management’s assertions.
Self-assessment
1. Explain the scope of ISA 200.

2. Describe what management acknowledge and understand when it is said they
have a responsibility in the preparation of financial statements.
3. Describe what is required by management with regard to the preparation of the
4. Explain what is meant by an applicable financial reporting framework.
5. Describe what an applicable financial reporting framework can encompass.
6. Explain the form of the auditor’s opinion.
7. Explain the requirements of the auditor when reasonable assurance cannot be
obtained and a qualified opinion in the auditor’s report is insufficient.
8. Describe the auditor’s responsibility during the planning and performance of an
audit.
9. Explain the overall objectives of the auditor.
10. Give the meaning of the definitions in ISA 200: par 13.
11. Identify the various parties to an audit.
12. Explain the roles of the various parties in a statutory audit.
13. Explain the term “assertions”.
14. Describe and apply, to practical scenarios, management’s assertions relating to
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classes of transactions, account balances at year-end and presentation and

disclosure.
1. Reference: SAICA Student Handbook, Volume 2B, ISA 200: par 1
2. Reference: SAICA Student Handbook, Volume 2B, ISA 200: par A2
13. Reference: SAICA Student Handbook, Volume 2B, ISA 315: par 4(a)
Conclusion
In this topic, Introduction to Auditing, we explained the theory and philosophy of

auditing, the accounting profession and the financial statement audit engagement.
We dealt with the auditor, assurance and non-assurance engagements, statutory
and non-statutory assurance engagements, auditing postulates, the accounting
profession and the financial statement audit engagement.
In topic 2 we will be dealing with the regulation of the auditor.
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TOPIC 2: REGULATION OF THE AUDITOR

Topic overview
The aim of this topic is to explain and apply knowledge of the regulatory process in
the profession and to explain the role of the professional auditor in the statutory audit.
2.1 THE AUDITING PROFESSION ACT 26 OF 2005 (APA) 76

2.1.1 Chapter I: Objects of the APA 76
2.1.2 Chapter III: Registration of individual auditors and 77
auditing firms
2.1.3 Chapter IV: Conduct by and liability of registered auditors 80
2.2 THE COMPANIES ACT 71 OF 2008 86
(THE AUDITOR)
2.3 ETHICAL PRINCIPLES REGULATING THE 90
PROFESSION
2.3.1 The SAICA Code of Professional Conduct for Chartered 93
Accountants
2.3.2 The IRBA Code of Professional Conduct for Registered 106
Auditors
2.3.3 The IRBA Rules regarding Improper Conduct 106
2.4 QUALITY CONTROL OF AUDIT WORK 113
2.4.1 Auditing firms’ system of quality control 113
2.4.2 Quality control for the audit of financial statements 114
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Learning outcomes
Learning unit In this topic we focus on the following Level

learning outcomes:
2.1 The Auditing Profession  Describe and apply the duties, rights, 2
Act 26 of 2005 (APA) responsibilities and liability of auditors
in terms of the Auditing Profession Act
26 of 2005 (APA).
2.2 The Companies Act 71 of  Describe and apply the duties, rights 2
2008 and responsibilities of auditors in
terms of the Companies Act 71 of
2008.
2.3 Ethical principles  Describe and apply the ethical 2
regulating the profession principles regulating the auditing and
accountancy profession by referring to
the IFAC Code of Ethics for
Professional Accountants, the SAICA
Code of Professional Conduct for
Chartered Accountants, the IRBA
Registered Auditors and the IRBA
Rules regarding Improper Conduct.
2.4 Quality control of audit  Describe and apply the auditing firm’s
work responsibilities for its system of quality
control and quality control for audits
and review of financial statements.
The previous topic was an introduction to auditing where we dealt with the theory and
philosophy of auditing, the accounting profession and the financial statement audit
engagement. We will now move forward and deal with the regulation of the auditor.
Introduction
The regulation of auditors is necessary to ensure that auditors behave ethically and
professionally in the conduct of an audit. An example of auditors not behaving
ethically and professionally is the Enron Scandal, which took place in 2001. The
following is a brief summary of the scandal:
The Enron scandal, revealed in October 2001, eventually led to the bankruptcy
of the Enron Corporation, an American energy company based in Houston,
Texas, and the dissolution of Arthur Andersen, which was one of the five largest
audit and accountancy partnerships in the world. In addition to being the largest
bankruptcy reorganization in American history at that time, Enron was attributed
as the biggest audit failure.
Many executives at Enron were indicted for a variety of charges and were later
sentenced to prison. Enron's auditor, Arthur Andersen, was found guilty in a
United States District Court, but by the time the ruling was overturned at the U.S.
Supreme Court, the firm had lost the majority of its customers and had shut down.
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As a consequence of the scandal, new regulations and legislation were enacted

to expand the accuracy of financial reporting for public companies. One piece of
legislation, the Sarbanes-Oxley Act, expanded repercussions for destroying,
altering or fabricating records in federal investigations or for attempting to defraud
shareholders. The act also increased the accountability of auditing firms to
remain unbiased and independent of their clients.
(Wikipedia accessed on 25 March 2015 at http://en.wikipedia.org/wiki/Enron
scandal)
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LEARNING UNIT 2.1: THE AUDITING PROFESSION ACT 26

OF 2005 (APA)
Introduction
In South Africa the Independent Regulatory Board for Auditors (IRBA) is the statutory
body controlling the auditing profession and it functions in terms of the Auditing
Profession Act 26 of 2005 (APA).
The IRBA’s mission is to protect the financial interest of the South African public and
international investors in South Africa through the effective regulation of audits
conducted by registered auditors (RAs), in terms of internationally recognised
standards and processes.
In this learning unit, knowledge of the regulatory process in the auditing profession
and the role of the professional auditor in the statutory audit is described and applied
to practical scenarios by referring to the Auditing Profession Act 26 of 2005 (APA).
The Auditing Profession Act 26 of 2005 can be downloaded from the following link:
http://www.irba.co.za/index.php/legal-functions-49
Note: The Auditing Profession Act 26 of 2005, hereinafter referred to as the APA or
“the Act”, is contained in Volume 2C of the SAICA Student Handbook.
Structure of the APA
The Act comprises 60 sections which are subdivided into seven chapters.
Chapters II and III are further subdivided into various parts.
For study purposes in this module you will only be expected to know certain sections
of the APA. Bear in mind that you are only required to study the sections referred to
in the study guide.
2.1.1 Chapter I: Objects of the APA

This chapter provides the definitions and objects of the APA.
Study
 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005:

Chapter I (section 1 and 2)
 Jackson & Stent (2014:3/80−3/81)
 the definitions contained in the APA

 the objects of the APA
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Activity 1
Required
State the objects of the APA.
References:

Chapter 1 (section 2)
Objects
 to protect the public by regulating audits performed by registered auditors

 to provide for the establishment of an Independent Regulatory Board for Auditors
(IRBA)
 to improve the development and maintenance of internationally comparable
ethical standards and auditing standards for auditors
 to set out measures to advance the implementation of appropriate standards of
competence and good ethics in the auditing profession
 to provide for procedures for disciplinary action in respect of improper conduct
2.1.2 Chapter III: Registration of individual auditors and auditing

firms
This chapter is subdivided into two parts. You are only required to study Part 2 which
deals with the registration of individual auditors and audit firms.
Study

Chapter III, Part 2 (section 37–40)
 Jackson & Stent (2014:3/81–3/82)
Part 2 (section 37–40): Registration of individual auditors and auditing firms
 Section 37: Registration of individuals as registered auditors

 the requirements to be registered with the IRBA
 the situations in which the IRBA may not register an individual
 Section 38: Registration of firms as registered auditors
The only firms that may become registered auditors are
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 partnerships of which all the partners are individuals who are themselves
registered auditors
 sole proprietors where the proprietor is a registered auditor
 companies which comply with subsection 3
 Section 39: Termination of registration
 situations which present grounds for the cancellation of a member’s

registration
 Section 40: Renewal of registration
 A registered auditor must apply in the prescribed manner to the IRBA for the
renewal of his or her registration.
 A registered auditor whose registration was terminated or cancelled may apply
for reregistration at the IRBA in the prescribed manner.
Activity 2
Hashim and Wiseman is a small auditing firm in Durban. The two partners Dev
Hashim and Peter Wiseman are the only two registered auditors (RAs) in the practice
but they are assisted by Juanita Claasen who has passed both parts of her
professional examinations but has not yet completed her training contract. Neither of
the partners deal with tax matters; these are left to Ella Kotze, who is a qualified
lawyer but who has specialised in taxation. The practice also has a computerised
bookkeeping section, which keeps the books and records for numerous small
businesses, and this section is headed by Kieran Peterson who has a BCom degree.
The two partners have decided to convert the partnership into a company to engage
in public practice at the earliest opportunity.
(Based on Gowar & Jackson 2010:319. Graded Questions on Auditing)
Required
State whether the following actions/situations are true or false in terms of the APA
and give reasons for your answers:
2.1 Juanita Claasen may be appointed as a shareholder of the company.
2.2 Ella Kotze may be appointed as a shareholder of the company.
2.3 Kieran Peterson may be appointed as a director of the company.
2.4 The company to be formed must have at least seven shareholders.
2.5 By forming a company the shareholders will be protected from being liable for
the company’s debts in their personal capacities.
2.6 If one of the shareholders leaves the company, the company may purchase
his or her shares.
Reference: SAICA Student Handbook, Volume 2C, Auditing Profession Act of
2005: section 38
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2.1 False: Juanita Claasen cannot be registered because she has not yet
completed her training contract. Because she has passed her professional
examinations, she may register with the IRBA once she has completed her
training contract and may then become a shareholder.
2.2 False: Ella Kotze cannot be a shareholder of the company. Only persons
registered with the IRBA as registered auditors (RAs) may be shareholders in
an “auditing” company. She is a lawyer and therefore cannot register with the
IRBA because she does not possess the professional (training contract) or
academic qualifications.
2.3 False: Kieran Peterson may not be appointed as a director, because every
director must be a shareholder and he does not qualify as a shareholder
because he is not registered with the IRBA and does not possess the
necessary qualification.
2.4 False: Section 38 of the APA does not specify a minimum number of
shareholders. Even a sole practitioner may form a company.
2.5 False: The shareholders will not be protected. Section 38 of the APA requires
that the memorandum of association include a provision that the directors
(who must also be shareholders) will be liable jointly and severally with the
company for the debts of the company.
2.6 True: The company is permitted to buy back the shares of the departing
partner and the shares will be available for allotment in terms of the company’s
articles of association. It is not required that the shares be sold to the other
shareholders (section 38(d)(i) of the APA).
Activity 3
Deviya Naidoo recently passed her SAICA ITC and APC examinations. According to
her career planning, she expects to set up her own small practice as a registered
auditor once she has completed her training contract and has been admitted to public
practice.
You are Deviya’s younger brother registered for the Auditing AUE2601 module this
semester at Unisa. You are keen to show Deviya that you have a thorough
knowledge of the various aspects of professional auditing practice.
Required
3.1 Explain the statutory registration requirements that apply to persons who want
to enter public practice as an auditor.
3.2 Mention the situations which present grounds for the cancellation of a person’s
registration as a registered auditor (RA) by the IRBA.
Reference: SAICA Student Handbook, Volume 2C, Auditing Profession Act of
2005: Chapter III (section 37.1−3 and section 39.1−2)
3.1 Registration requirements for persons wishing to enter public practice as

an auditor (see the APA (section 37.1−2) for the registration requirements).
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3.2 Grounds for the cancellation of registration [see the APA (section 39.1−2
and 37.3) for information on the situations which present grounds for the
cancellation of a person’s registration].
2.1.3 Chapter IV: Conduct by and liability of registered auditors

This chapter deals with the conduct of registered auditors and registered auditors’
liability.
Study
 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005: Chapter
IV (section 41−46)
 Jackson & Stent (2014:3/83−3/90)
 Section 41: Practice (note section 1−10)

 Section 42: Compliance with Rules
 Section 43: Information to be furnished
 Section 44: Duties in relation to an audit (note section 1−6)
 Section 45: Duty to report on irregularities (note section 1−6)
 Section 46: Limitation of liability (note section 1−8)
Activity 4
Required
Name the requirements in terms of the APA that must be complied with before an
auditor is permitted to express an unmodified audit opinion.
References:
IV (section 44: 2−3)
 Jackson & Stent (2014:3/84–3/85)
See the above references in the prescribed book for the criteria that the registered
auditor has to be satisfied with to enable him or her to express an unmodified
opinion.
Activity 5
Your uncle is the managing director of a well-known manufacturing company. The

auditors of the company notified your uncle that they have reported a reportable
irregularity to the IRBA based on evidence that they have found relating to the
dealings of the company’s financial director. During the audit, they discovered that
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the financial director, who owns shares in the company, has been falsifying the
monthly value-added tax (VAT) returns by claiming VAT on purchases to which the
company is not entitled.
Required
Mention the requirements of a reportable irregularity in terms of the APA, and identify
the matters in the given scenario that relate to each of these requirements. Tabulate
your answer as indicated below (one of the requirements has been supplied as an
example):
Requirement in terms of the APA Situation in the given scenario

Must be committed by the The falsification was committed by the
management of the entity company’s financial director.
References:
 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005: Chapter I
(section 1) – Reportable Irregularity and section 45
 Jackson & Stent (2014:3/85−3/89)
Elements of a reportable irregularity
Requirements in terms of the APA Situation in the given scenario

Must be committed by the management The falsification was committed by the
of the entity company’s financial director.
Unlawful act or omission Falsifying the VAT returns implies that the
Value-Added Tax Act 89 of 1991 (VAT
Act) had been contravened.
Has caused or is likely to cause material The South African Revenue Service
financial loss to the entity or to any (SARS) will suffer a financial loss. SARS
partner, member, shareholder, creditor or is a “creditor”/stakeholder of the entity.
investor of the entity in respect of
his/her/its dealings with that entity
Is fraudulent or amounts to theft Contravening the VAT Act is a criminal
offence. Money is “stolen” from SARS.
Represents a material breach of any The director’s involvement in criminal
fiduciary duty owed by such person to the activities implies a material breach of his
entity or any partner, member, fiduciary duties.
shareholder, creditor or investor of the
entity under any law applying to the entity
or the conduct or management thereof
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Activity 6
Mr Heuer, an auditor registered with the IRBA, has discovered a reportable

irregularity in the conduct of the management of the affairs of the company during his
audit of Beta Ltd.
Required
Mention the procedures that Mr Heuer should follow, in terms of the APA, when he
discovers a reportable irregularity.
References:
IV (section 45)
 Jackson & Stent (2014:3/85−3/89)
Procedures
 Mr Heuer who is satisfied or has reason to believe that a reportable irregularity

has taken place or is taking place in respect of that entity must send, without
delay, a written report to the IRBA.
 The report must give particulars of the reportable irregularity and must include
such other information and particulars as Mr Heuer considers appropriate.
 Within three days of sending the report to the IRBA, Mr Heuer must notify the
members of the management board of the entity in writing that he has sent the
report to the IRBA and supply them with a copy of the report sent to the IRBA.
 As soon as possible, but within 30 days after the date on which the report was
sent to the IRBA
(a) Mr Heuer must take all reasonable measures to discuss the report with the
members of the management board of the entity
(b) afford members of the management board of the entity the opportunity to
make representations in respect of the report
(c) send another report to the IRBA, which must include
(i) a statement that the registered auditor is of the opinion that
 no reportable irregularity has taken place or is taking place; or

 the suspected reportable irregularity is no longer taking place and
that adequate steps have been taken for the prevention or
recovery of any loss as a result thereof; or
 the reportable irregularity is continuing
(ii) detailed particulars and information supporting the statement
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Activity 7
Required
Describe the basis of auditors' civil liability towards clients and third parties and the
elements of proof required under common law for negligence.
References:
IV (section 46)
 Jackson & Stent (2014:3/89–3/90)
In discussing the legal liability of auditors in respect of audit services it is usual to

distinguish between the following two main types of plaintiffs:
The client
An auditor’s liability to clients is based upon breach of contract or delict, that is the
client could sue the auditor for financial loss on the grounds that the auditor did not
meet the terms of the engagement (contract) or in delict on the grounds that the
auditor did not meet his or her “duty of care” (see Jackson & Stent 2014:3/89−3/90).
Third parties
As stated in Jackson & Stent (2014:3/90), an auditor’s liability to third parties

cannot be based upon breach of contract because there is normally no contract
between the auditor and the third party – in other words: the auditor “contracts” with
his client, not with the parties who may use the audited financial statements or
information. The third party, therefore, will have to bring a delictual action against the
auditor and prove the following:
 The auditor was negligent in expressing the opinion, or making his or her report or
statement.
 The third party relied upon the opinion, report or statement, and suffered loss as a
result of the reliance.
 The auditor knew or reasonably could have been expected to know (at the time
the negligence occurred) that the third party would rely on the opinion, report or
statement.
Activity 8
Required
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Summary
In this learning unit we focused on the theory contained in the various sections of the
APA and the sections were also applied to various practical scenarios.
Self-assessment
1. Describe the objects of the APA.

2. Explain the registration requirements of individuals as registered auditors.
3. Explain the registration requirements of firms as registered auditors.
4. Describe the situations which present grounds for the termination of
registration as an auditor.
5. Describe the requirements for renewal of registration and reregistration.
6. Explain the impermissible actions by persons who are not registered auditors
in terms of the APA.
7. Explain the permissible actions by persons who are not registered auditors in
terms of the APA.
8. Describe the auditor’s duties in conducting an audit.
9. Define a reportable irregularity.
10. Describe the procedures that an auditor must follow if he or she discovers a
reportable irregularity.
11. Explain the limitation of the auditor’s liability to the client and to third parties.
12 Explain the impact of reportable irregularities on the audit opinion.
13. Mention the consequences for the registered auditor for failing to report a
material irregularity.
1. References:

Chapter I (section 2)
2. References:

Chapter III, Part 2 (section 37)
 Jackson & Stent (2014:3/81–3/82)
3. References:

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4. References:

 Jackson & Stent (2014:3/81−3/82)
5. Reference: SAICA Student Handbook, Volume 2C, Auditing Profession Act of

2005: Chapter III, Part 2 (section 40)
6. References:

 Jackson & Stent (2014:3/83−3/84)
7. References:

 Jackson & Stent (2014:3/83−3/84)
8. References:

 Jackson & Stent (2014:3/84−3/85)
9. References:

Chapter I (section 1) – Reportable Irregularity
10. References:

Chapter IV (section 45:3)
 Jackson & Stent (2014:3/85−3/86)
11. Reference: SAICA Student Handbook, Volume 2C, Auditing Profession Act of
2005: Chapter IV (section 46)
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LEARNING UNIT 2.2: THE COMPANIES ACT 71 OF 2008

(THE AUDITOR)
Introduction
The Companies Act 71 of 2008 replaced the Companies Act 61 of 1972. The new
Companies Act was signed by the President on 8 April 2009 and gazetted in Gazette
no. 32121.
The Companies Act 71 of 2008 came into effect on 1 May 2011 and can be
downloaded from the following link:
https://www.saica.co.za/Portals/0/Technical/LegalAndGovernance/Act%2071%20200
8%20Companies%20Act.pdf
In this learning unit, the duties, rights and responsibilities of auditors and audit
committees are explained and applied in terms of the Companies Act 71 of 2008.
We will only be dealing with the sections of the Companies Act 71 of 2008 that relate
to auditors and the audit committee.
Study
 SAICA Student Handbook, Volume 2C, Companies Act 71 of 2008 Chapter 3:
Part C (section 90–93) – Enhanced Accountability and Transparency and Part D:
(section 94)
 Jackson & Stent (2014:3/51–3/54)

 Section 90 – Appointment of auditors
This section deals with when an auditor must be appointed, who may and who may
not be appointed as an auditor, the requirements of the audit committee regarding
the appointment of an auditor being independent of the company and the
reappointment of a retiring auditor.
 Section 91 – Resignation of auditors and vacancies
This section relates to the effective date of the resignation of an auditor and the
procedures to be followed when a vacancy arises.
 Section 92 – Rotation of auditors
This section covers the requirements relating to the rotation of auditors.
 Section 93 – Rights and restricted functions of auditors
This section deals with the rights of auditors and the services that auditors are not
permitted to perform.
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 Section 94 – Audit committees
This section covers the election of an audit committee, membership of an audit

committee, duties of an audit committee, requirements of an audit committee in
considering whether the registered auditor is independent of a company and the
appointment of an auditor by the audit committee.
Activity 9
Brian May and Co, a large international firm of registered auditors based in Cape
Town, are the auditors of Scooby Ltd. The partner of Brian May and Co responsible
for the audit have informed the directors of Scooby Ltd that the firm will be resigning
as its auditors effective from 1 March 20xx.
The directors of Scooby Ltd realise that there are certain requirements in terms of the
Companies Act that have to be fulfilled following the resignation of the current auditor
and the appointment of a new one.
Required
9.1 State the procedure to be followed by the board of directors of Scooby Ltd,
following the resignation by Brian May and Co as the registered auditors.
9.2 List the requirements of the audit committee regarding independence of the
new auditor to be appointed.
References:
 SAICA Student Handbook, Volume 2C, Companies Act 71 of 2008: section 90

and section 91.2(a), 3(a) & (b) and section 94.8
 Jackson & Stent (2014:3/51–3/54)
9.1 The following procedures should be followed when a vacancy arises:
 The board of directors must propose to the audit committee, within 15

business days, the name of at least one registered auditor to be
considered for appointment.
 The audit committee has five business days, after the proposal has been
delivered to it, to reject the proposed replacement auditor in writing, if they
so wish, otherwise the board of directors may make the appointment.
 Whatever the situation, a new auditor must be appointed within 40
business days of the vacancy arising.
9.2 The person appointed as auditor must be acceptable to the company’s audit
committee as being independent of the company. To this end the audit
committee must
 ascertain that the auditor does not receive any direct or indirect
remuneration except
 as auditor, or
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 for rendering other non-audit services which have been determined by

the audit committee
 consider whether the auditor’s independence may have been

prejudiced
 as a result of any previous appointment as auditor, or
 regarding the extent of any consultancy, advisory or other work
undertaken by the auditor for the company
 consider whether the auditor complies with the “Rules and Regulations” of
the IRBA, for example, the Code of Professional Conduct for Registered
Auditors, in relation to independence and conflict of interest
The audit committee must evaluate the independence of the auditor in the context of
the company itself, and within the group of companies if the company is a member of
a group.
Activity 10
Required
Summary
In this learning unit we focused on the theory contained in the sections dealing with
auditors in the Companies Act 71 of 2008. The sections were also applied to practical
scenarios.
Self-assessment
1. Describe the requirements an individual or firm must comply with in order to

be appointed as an auditor of a company.
2. Describe the requirements of the audit committee regarding independence of
the person or firm to be appointed as an auditor of a company.
3. Explain the situations in which a retiring auditor may not be re-appointed at
an annual general meeting without any resolution being passed.
4. Explain the procedures of the board of a company following a vacancy in the
office of auditor of a company.
5. Explain the rotation of auditors required in terms of the Companies Act 71 of
2008.
6. Explain the rights of auditors with regard to information and meetings.
7. Describe the actions that auditors can take if their rights are not enforced.
8. Explain the requirements for the election of an audit committee.
9. Describe the duties of an audit committee.
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1. References:
 SAICA Student Handbook, Volume 2C, Companies Act of 2008: section 90
 Jackson & Stent (2014:3/51–3/52)
2. References:
3. References:
 Jackson & Stent (2014:3/51–3/52)
4. References:
5. References:
6. References:
 Jackson & Stent (2014:3/52−3/53)
7. References:
 Jackson & Stent (2014:3/52−3/53)
8. References:
 Jackson & Stent (2014:3/53−3/54)
9. References:
 Jackson & Stent (2014:3/53–3/54)
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LEARNING UNIT 2.3: ETHICAL PRINCIPLES REGULATING

THE PROFESSION
Introduction
In this learning unit, the ethical principles regulating the auditing and accountancy
profession are explained and applied by reference to the International Federation of
Accountants (IFAC) Code of Ethics for Professional Accountants, the South African
Institute of Chartered Accountants (SAICA) Code of Professional Conduct for
Chartered Accountants and the Independent Regulatory Board for Auditors (IRBA)
Code of Professional Conduct for Registered Auditors. The acts or omissions which
may constitute improper conduct on the part of the registered auditor are described
with reference to the IRBA Rules regarding Improper Conduct.
The ethical principles governing the conduct of auditors belonging to the profession
are summarised in three principal sources, namely the SAICA Code of Professional
Conduct for Chartered Accountants, the IRBA Code of Professional Conduct for
Registered Auditors and the IRBA Rules regarding Improper Conduct, all of which
are contained in Volume 2B of the SAICA Student Handbook.
You will probably feel somewhat confused when we mention all the above Codes of
Conduct, because many of you may never have heard of them. Keep in mind that a
person who is registered with the SAICA is a “chartered accountant”, but unless he or
she is also registered with the IRBA, he or she is not a “registered auditor”. A person
registered with both the SAICA and the IRBA is therefore a “chartered accountant”
and a “registered auditor”.
The relevant documents can be downloaded from the following links:
 The SAICA Code of Professional Conduct for Chartered Accountants:

https://www.saica.co.za/Portals/0/Technical/Discipline/Code%20of%20
Professional%20Conduct.pdf
 The IRBA Code of Professional Conduct for Registered Auditors; and
 The IRBA Rules regarding Improper Conduct:
http://www.irba.co.za/index.php/legal-functions-49
Study the diagram below and read through the following paragraphs to familiarise
yourself with the different Codes of Conduct (the IFAC, the SAICA and the IRBA):
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Diagram 1: Illustration of the various bodies responsible for regulation of the ethics
of the profession
Profession
South Africa International
SAICA IRBA
IFAC
For all CA(SA)’s For Registered auditors only
SAICA Code of Professional Conduct IRBA

 IRBA Code of Professional conduct Parts
A and B(modified IFAC code of conduct for IFAC Code of Ethics for Professional
Adopted Parts A & B of the IRBA's Code jurisdiction in SA) Accountants
Adopted Part C of the IFAC code IRBA’s Rules regarding Improper conduct Parts A,B,C
Minor amendments
The SAICA Code of Professional Conduct for Chartered Accountants, as set

out in Volume 2B of the SAICA Student Handbook
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The IFAC Code of Ethics for Professional Accountants consists of three parts:
Part A – General Application of the Code

Part B – Professional Accountants in Public Practice
Part C – Professional Accountants in Business
The SAICA Code of Professional Conduct for Chartered Accountants (see SAICA
Student Handbook, Volume 2B), which was revised and became effective on 1
January 2014, conforms to the IFAC Code of Ethics for Professional Accountants
and is consistent in all material respects with the IFAC Code of Ethics for
Professional Accountants for Parts A, B and C, except for minor amendments to
accommodate terminology and jurisdictional requirements specific to South Africa.
The SAICA Code of Professional Conduct for Chartered Accountants and definitions
are also consistent in all material respects with the IRBA Code of Professional
Conduct for Registered Auditors for Part A and Part B.
The SAICA has replaced references to “professional accountants” in the IFAC

Code with a reference to “chartered accountants” as the SAICA regulates
individual chartered accountants in South Africa.
The IRBA Code of Professional Conduct for Registered Auditors, as set out in
Volume 2B of the SAICA Student Handbook
The IRBA Code of Professional Conduct for Registered Auditors is applicable to

members engaged in public practice as Registered Auditors (RAs).
The IRBA has adopted Parts A and B, and the related definitions contained in the
IFAC Code in their entirety, because these relate to professional services provided
by registered auditors. Part C of the IFAC Code has not been adopted, since it
provides for ethical conduct of Professional Accountants in businesses who are not
registered auditors. The IRBA has included a few requirements in the Code and
incorporated them into the relevant sections in Parts A and B. The IRBA has also
replaced references to “professional accountants” in the IFAC Code with a
reference to “registered auditors”, since the IRBA regulates individual registered
auditors and registered audit firms in South Africa.
The adoption of the IFAC Code of Ethics for Professional Accountants by both the
SAICA and the IRBA contributes to the worldwide convergence of ethical
standards. It is anticipated that this convergence will facilitate the implementation
of the Code by chartered accountants and registered auditors in South Africa.
The IRBA Rules regarding Improper Conduct as set out in Volume 2B of the
SAICA Student Handbook
The IRBA Rules regarding Improper Conduct provide the registered auditor with a list
of acts or omissions which could constitute improper conduct and which are
punishable in terms of the provisions of the Act and Disciplinary Rules.
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2.3.1 The SAICA Code of Professional Conduct for Chartered

Accountants
Parts A and B of the SAICA Code of Professional Conduct for Chartered Accountants
apply to chartered accountants in public practice and Parts A and C to chartered
accountants in business.
Note: In our discussion of Parts A and B of the SAICA Code of Professional

Conduct for Chartered Accountants and the IRBA Code of Professional Conduct
for registered auditors hereafter, our reference to an auditor or auditors implies a
person registered with both the SAICA and the IRBA. These auditors are therefore
chartered accountants and registered auditors.
2.3.1.1 Definitions and Part A (section 100–150): General application of

the Code
Study
 Jackson & Stent (2014:2/5–2/12)
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct:
Definitions and Part A (section 100−150)

 the meaning and definitions of words referred to in the SAICA Code of
Professional Conduct for Chartered Accountants
Activity 11
Required
Briefly define each of the following concepts:
 assurance client
 assurance engagement
 assurance team
 firm
 network firm
 independence
 financial statement audit client
Reference: SAICA Student Handbook, Volume 2B, SAICA Code of Professional
Conduct: Definitions
Definitions of concepts
See the references above in the prescribed textbook for the definition of each of
these concepts.
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Part A: General application of the Code
Part A establishes the fundamental principles of professional ethics for auditors

(chartered accountants and registered auditors) and provides a framework for
applying those principles.
Part A (section 100): Introduction and fundamental principles

 the profession's acceptance of its responsibility towards the public (section 100.1)
 the structure of the Code (section 100.2−4)
 the fundamental principles that the auditor must observe in order to achieve the
objectives of the profession (section 100.5) (Note: These are discussed in more
detail in section 110−150)
 the conceptual framework approach (section 100.6−11)
 the circumstances that can threaten the auditor’s compliance with the
fundamental principles (section 100.12)
 the safeguards the auditor is obliged to apply which will eliminate or reduce the
threat to an acceptable level (section 100.13−16)
 ethical conflict resolution that may be required to comply with the fundamental
principles (section 100.17−22)
* Safeguards are actions or other measures that may eliminate threats or reduce them to
an acceptable level (The SAICA Code of Professional Conduct: section 100.13). For
example, if you are an auditor and have shares in a public company, you will have to
sell the shares if you become the engagement partner on the audit.
Part A (section 110–150): Integrity, Objectivity, Professional competence and

due care, Confidentiality and Professional behaviour

 the principles relating to each of the fundamental principles (section 110–150)
Activity 12
As mentioned above, the SAICA Code of Professional Conduct for Chartered

Accountants has been subdivided into three parts.
Required
12.1 Describe each part of the Code.

12.2 List and briefly explain the five fundamental principles of professional conduct
which should be adhered to by auditors (chartered accountants and registered
auditors).
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References:
 Jackson & Stent (2014:2/6–2/10)
Part A (section 110–150)
12.1 Part A – General Applications of the Code (applies to CAs (SA) and (RAs).
Part B – Chartered Accountants in Public Practice (applies to CAs (SA) who
are registered as (RAs).
Part C – Chartered Accountants in Business (applies to CA)s (SA) who are
not registered as (RAs).
12.2 Integrity
Objectivity
Professional Competence and Due Care
Confidentiality
Professional Behaviour
Note: See Jackson & Stent (2014:2/6–2/10) for a brief explanation of each of the five
fundamental principles.
Activity 13
The SAICA Code of Professional Conduct for Chartered Accountants categorises

threats to compliance with the fundamental ethical principles into five categories.
Required
Identify and explain the meaning of each of the threats and give an example of how
each threat could arise.
References:
 Jackson & Stent (2014:2/10–2/11)
Part A (section 100.12)
Self-interest threat – the threat that a financial or other interest will inappropriately
influence the auditor’s judgement or behaviour.
This may occur as a result of the financial or other interests of an auditor or of an

immediate or close family member (e.g. when the auditor has shares in a company
that is about to become an audit client).
Self-review threats – the threat that an auditor will not appropriately evaluate the
results of a previous judgement made or service performed by the auditor, or by an
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individual in the auditor’s firm, on which the auditor will rely when forming a
judgement as part of providing a current service.
This may occur when previous work needs to be re-evaluated by the auditor
responsible for that work (e.g. if the auditor has written up the accounting records of
a client for which he or she has also been appointed to audit).
Advocacy threats – the threat that an auditor will promote a client’s position to the
point that the auditor’s objectivity is compromised.
This may occur when an auditor promotes a position or opinion to the point that his or
her subsequent objectivity may be compromised (e.g. an auditor values a client’s
shares and then leads the negotiations on the sale of the client’s company).
Familiarity threats – the threat that because of a long or close relationship with a
client, an auditor will be too sympathetic to their interest or too accepting of their work
(e.g. the auditor fails to report fraud at a client because the perpetrator is a close
friend).
Intimidation threats – the threat that an auditor will be deterred from acting
objectively because of actual or perceived pressures, including attempts to exercise
undue influence over the auditor.
This may occur when an auditor is deterred from acting objectively by actual or
perceived threats (e.g. a chartered accountant in business fails to report a fraud
committed by the section head because of fear of dismissal by the section head or
the financial director; or the financial manager of a client advises the audit partner
that unless audit fees are reduced by 50% he or she will lose the specific audit
client).
Activity 14
Big Deal, an auditing firm, uses university students dressed as clowns to hand out
brochures at traffic lights during peak hour traffic. The brochure states that Big Deal
is the best auditing firm in South Africa and that no work performed by any other
auditing firm can compare to the quality of Big Deal’s audits. The brochure also
states that the firm will substantially reduce the tax liability of the prospective clients.
The brochure also mentions the charge-out rates for the various staff members in the
firm.
Required
State the requirements with which all publicity, advertising and solicitation by an
auditor must conform and explain why Big Deal has not complied with these
requirements.
References:
Part A sec 150.2–5
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 Jackson & Stent (2014:2/8–2/9)
Requirements Non-compliance by Big Deal

 They may not make exaggerated  They state that they are the best
claims for the services they are able to auditing firm in South Africa.
offer, the qualifications they possess
or the experience they have gained
(section 150.2(a)).
 They may not make disparaging  They state that no work
references or unsubstantiated performed by any other auditing
comparisons with the work of others firm can compare to the quality
(section 150.2(b)). of the audits they perform.
 Advertising must be in good taste  It is not in good taste because
(Jackson & Stent (2014:2/9). clowns are handing out the
brochures.
 The medium used must be consistent  The brochure is being handed
with the dignity of the profession (sec out at traffic lights in peak hour
150.3). traffic.
 The medium used must conform to  They are being dishonest by
the accepted norms of legality, stating that they will reduce the
decency, honesty and truthfulness tax due to SARS.
(section 150.4).
 Reference may be made to the basis  The brochure contains details of
on which professional fees for the firm’s hourly charge rates.
services are calculated but hourly
rates should not be stated (section
150.5).
2.3.1.2 Part B (section 200–291): Chartered accountants in public practice
Study
 Jackson & Stent (2014:2/13–2/45)
Part B (section 200–291)
Part B of the SAICA Code of Professional Conduct illustrates how the conceptual
framework contained in Part A is to be applied by auditors in public practice.
Part B (section 200): Introduction
Study
 Jackson & Stent (2014:2/13–2/16)
Part B (section 200)

 the nature and significance of threats in the audit of public interest entities
 threats (and examples) of
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 self interest
 self-review
 advocacy
 familiarity
 intimidation
 safeguards created by the profession, legislation or regulation, and safeguards in
the work environment and examples of safeguards in the work environment that
can be implemented to overcome the threats
Activity 15
You are a trainee auditor at the firm Jordan and Redeye Inc. You are currently busy
with the audit of Fila 2014 Ltd, whose financial director happens to be your father.
One of your father’s main responsibilities is to approve the company financial
statements and he has asked you to reduce the extent of the audit work performed in
order to reduce the audit fees. You have also been entering into negotiations about
employment with the company because you plan to leave Jordan and Redeye Inc in
the next few months.
Required
State three threats to compliance with the fundamental ethical principles in terms of
the SAICA Code of Professional Conduct.
Conduct: Part B (section 200.3)
Threats
 A familiarity threat is created by your father, since he is the company’s financial

director.
 An intimidation threat is created by your father by asking you to reduce the extent
of the audit work in order to reduce the audit fee.
 A self-interest threat is created because you plan to enter into employment
negotiations with Fila 2014 Ltd.
Part B (section 210): Professional appointment
Study
 Jackson & Stent (2014: 2/17–2/18
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 Client acceptance – the responsibility, threats and safeguards that the auditor
should consider before accepting a new client
 Engagement acceptance – the responsibility, threats and safeguards that the
auditor should consider before accepting a specific client engagement
 Changes in professional appointment – the responsibility, threats and
safeguards that the auditor should consider when asked to replace another
auditor or when considering tendering for an engagement currently held by
another auditor
Activity 16
Required
What procedure should a proposed auditor follow before he or she accepts an
engagement to render professional services formerly rendered by another auditor?
References:

Part B (section 210.9–15)
The proposed auditor shall determine whether there are any reasons professional or
other, for not accepting the engagement, such as circumstances that threatens
compliance with the fundamental principles.
The auditor shall evaluate the significance of any threats. This may require direct
communication with the existing auditor.
In addition, the proposed auditor should implement the following safeguards:
 Discuss the client’s affairs fully and freely with the existing auditor. It will be
necessary for the proposed auditor to obtain the client’s permission in writing to
do so. If the client declines to give this permission, it would suggest that a
significant threat may have arisen which probably could not be addressed.
 Ask the existing auditor to provide known information on any facts or
circumstances of which, in the existing auditor’s opinion, the proposed auditor
should be aware of before accepting the engagement (e.g. poor relations
between the client and its professional advisors).
 Obtain necessary information from other sources.
 Where the proposed client refuses to give permission for the proposed auditor to
communicate with the existing auditor, or fails to do so, the proposed auditor shall
decline the appointment, unless there are exceptional circumstances of which the
proposed auditor has full knowledge, and he or she is satisfied, by some other
means, regarding all relevant facts.
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Part B (section 220): Conflicts of interest
Study
 Jackson & Stent (2014:2/19–2/20)

 the responsibility of the auditor when the interests of the firm may be in conflict
with the interests of a client
 the threats that could pose a conflict of interest
 the safeguards to be considered when a conflict of interest may exist
Part B (section 230): Second opinions
Study

 the responsibility of the auditor when he or she is asked to provide a second
opinion
 situations which may give rise to threats to compliance with the fundamental
principles
 the safeguards to be considered and steps that can be applied to eliminate or
reduce the threats to an acceptable level
Part B (section 240): Fees and other types of remuneration
Study
 Jackson & Stent (2014:2/21–2/22)
 the responsibility, threats and safeguards relating to normal fees, contingent fees
and referral fees/commissions
Activity 17
The auditor may quote whatever fee he or she deems appropriate when entering into
negotiations regarding the provision of professional services. Nevertheless, there
may be threats to compliance with the fundamental principles.
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Required
Describe the safeguards that may be applied by the auditor when entering into
negotiations for the provision of professional services in order to eliminate or reduce,
to an acceptable level, the threats of not complying with the fundamental principles.
References:
Part B (section 240.2)
 Jackson & Stent (2014:2/21–2/23)
Safeguards
 Make the client aware of the terms of the engagement.
 Provide the client with the basis on which fees are charged and which services
are covered by the quoted fee.
 Assign appropriate time and suitably qualified staff to the engagement.
Part B (section 250): Marketing professional services
Study

 the auditor’s responsibility when marketing professional services
 situations that may give rise to threats to compliance with the fundamental
principles
 the safeguards to be considered and applied to eliminate or reduce the threats to
an acceptable level
Part B (section 260): Gifts and hospitality
Study
 Jackson & Stent (2014:2/22–2/23)

 the auditor’s responsibility when receiving gifts from a client
 situations that may threaten the auditor’s fundamental principles
an acceptable level
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Activity 18
Required
State, in terms of the SAICA Code of Professional Conduct, whether each of the
following is true or false and briefly explain your answer:
18.1 Auditing firms should never accept gifts from their clients.
18.2 Auditors in public practice may call on prospective audit clients to offer their
services.
18.3 In their advertising campaigns auditing firms may
(a) include testimonials from their most prestigious clients
(b) indicate their links to prominent figures in the business world
18.4 Advertisements for professional services may
(a) state hourly charge-out rates (these are the rates that auditing firms
charge their clients on an hourly basis for work done)
(b) compare the firm’s charge-out rates with those of other firms
18.5 Fees should be charged in terms of what the "market can bear".
18.6 Commission paid to an auditor by a third party as a result of the auditor
referring a product to a client, should be disclosed to the client only if the
provider of the service agrees to it.
(Based on Gowar & Jackson 2010:49: Graded Questions on Auditing)
References:
Part B (section 240–260)
 Jackson & Stent (2014:2/21–2/23)
18.1 False: Small gifts that do not pose a threat (usually a familiarity threat) to
the auditor’s independence may be accepted; in fact it may be
discourteous to reject such a gift, although some auditing firms do
have a specific policy in place regarding this (section 260).
18.2 False: Auditors in public practice are NOT permitted to engage in cold
calling to offer professional services (section 250).
18.3 (a) False: This is not regarded as being in good taste (section 250).
(b) True: This is acceptable provided that excessive emphasis is not placed
on such persons.
18.4 (a) False: This would be inconsistent with the dignity of the profession
(section 250).
(b) False: This would be inconsistent with the dignity of the profession
(section 250).
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18.5 False: Fees should be a fair reflection of the value of the service rendered,
taking into account factors such as the time spent, skill and
knowledge required (section 240).
18.6 False: The commission may only be accepted if it was disclosed

beforehand and in writing to the client that the auditor will receive the
commission (section 240).
Part B (section 270): Custody of client assets
Study

 the auditor’s responsibility when taking custody of a client’s assets
 situations that may threaten the auditor’s fundamental principles
an acceptable level
Part B (section 280): Objectivity – all services
Study

 the requirement that auditors shall not compromise their professional judgement
because of bias, conflict of interest or the undue influence of others
 the requirement of independence in mind and appearance (see section 290 and
291 for specific guidance on the independence requirements)
an acceptable level
Part B (section 290): Independence – audit and review engagements and

(section 291): Independence – other assurance engagements
Study
 Jackson & Stent (2014:2/24–2/45)
Part B (section 290 and 291)
Bear in mind that section 290.4 of the SAICA Code of Professional Conduct states
that in the case of audit engagements, it is in the public interest that members of
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audit teams, firms and network firms shall be independent of audit clients.
As stated in section 290.6 of the SAICA Code of Professional Conduct, auditors

should be independent in mind and appearance when undertaking a reporting
assignment. In your study of the introduction of the SAICA Code of Professional
Conduct you were introduced to a number of concepts relating to independence.
Independence: Structure
The SAICA (IFAC) Code of Professional Conduct emphasises the importance of
independence, particularly in respect of the audit of public interest entities (section
290.4 of the SAICA Code of Professional Conduct).
It is very important to note the following sections for study purposes:

Independence – Audit and Review Engagements (section 290.1–500)
Independence – Other Assurance Engagements (section 291.1–157)
The conceptual approach applied to independence

The SAICA Code of Professional Conduct states in section 290.7 that the conceptual
framework approach shall be applied by auditors in public practice to
 identify threats to independence
 evaluate whether these threats are clearly insignificant
 apply appropriate safeguards to eliminate or reduce the threat to an acceptable
level, where they are not clearly insignificant
See Jackson & Stent (2014:2/24–2/45) for a discussion of situations that may provide
threats to an auditor’s independence. Note the type of threat, and the proposed
safeguard to eliminate or reduce the threat to an acceptable level.
Activity 19
Note: The information in this activity is the same information as in activity 15.
Here you should indicate how an auditor’s independence will be influenced in the
case of an audit engagement.
You are a trainee auditor at the firm Jordan and Redeye Inc. You are currently busy
with the audit of Fila 2014 Ltd, whose financial director happens to be your father.
One of your father’s main responsibilities is to approve the company financial
statements and he has asked you to reduce the extent of the audit work performed in
order to reduce the audit fees. You have also been entering into negotiations about
employment with the company because you plan to leave Jordan and Redeye Inc in
the next few months.
Required
Indicate three threats to your independence in terms of the SAICA Code of
Professional Conduct.
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Conduct: Part B (section 290)
Threats
 A familiarity threat is created, since your father is the company’s financial director
(section 290.130).
 An intimidation threat is created by your father asking you to reduce the extent of
the audit work in order to reduce the audit fee (section 290.132).
 A self-interest threat is created because of you have entered into employment
negotiations with Fila 2014 Ltd (section 290.138).
2.3.1.3 Part C (section 300–350): Chartered accountants in business
Study
 Jackson & Stent (2014:2/46–2/52)
 SAICA Student Handbook, Volume 2B Code, SAICA Code of Professional
Conduct: Part C (section 300–350)
This part of the Code illustrates how the conceptual framework contained in Part A is
to be applied by chartered accountants in business (SAICA Code of Professional
Conduct: section 300.1).
A chartered accountant in business may be a salaried employee, a partner, a

director, an owner manager, a volunteer or working for one or more employing
organisation (SAICA Code of Professional Conduct: section 300.3).
Part C (section 300): Chartered accountants in business
Study
 Jackson & Stent (2014:2/46–2/48)
Part C (section 300)

 compliance with the fundamental principles may be threatened by self-interest,
self-review, advocacy, familiarity and intimidation threats
 examples of circumstances which can threaten the chartered accountant’s
compliance with the fundamental principles
 the safeguards the chartered accountant is obliged to apply which will eliminate or
reduce the threat to an acceptable level
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Part C: (section 310–350)
Study
 Jackson & Stent (2014:2/48–2/52)
Part C (section 310–350)

 the responsibility of the chartered accountant
 situations that may give rise to threats to compliance with the fundamental
principles
an acceptable level
2.3.2 The IRBA Code of Professional Conduct for Registered

Auditors
As stated in the introduction of learning unit 2.3, the IRBA Code of Professional
Conduct for Registered Auditors and the SAICA Code of Professional Conduct for
Chartered Accountants (learning unit 2.3.1 above) are consistent in all material
respects regarding Parts A and B of the Codes, which apply to auditors in public
practice. However, the IRBA has not adopted Part C because it provides for ethical
conduct for chartered accountants in businesses who are not registered auditors.
Note the reason why two separate Codes of Professional Conduct exist for the
SAICA and the IRBA. As stated in Jackson & Stent (2014:2/3), the SAICA and the
IRBA are two separate professional bodies, which do not have identical membership,
and therefore must have their own Codes to which their members must adhere.
Also note that the IRBA Code of Professional Conduct for Registered Auditors has
replaced the reference to “chartered accountant” with “registered auditor” throughout.
2.3.3 The IRBA Rules regarding Improper Conduct

The IRBA Rules regarding Improper Conduct was already referred to in the
introduction of learning unit 2.3, as one of the pronouncements relating to ethics and
professional conduct in South Africa.
If a registered auditor commits an act or omission specified in the following

paragraphs of the IRBA Rules regarding Improper Conduct, he or she shall be guilty
of improper conduct.
Study
 SAICA Student Handbook, Volume 2B, IRBA Rules regarding Improper Conduct
Definitions and sec 2.1–2.17
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 definitions of words as used in the IRBA Rules regarding Improper Conduct
 the contraventions of the IRBA Rules regarding Improper Conduct and the
instances where the registered auditor would be guilty of improper conduct
To ensure that you understand how to answer an integrated question on the

regulation of the auditor you are required to complete the following activity:
Activity 20
The following conversation takes place between Mike Benji, a newly qualified
accountant (in charge of the audit), and Mrs King, the employee in charge of trade
and other receivables at the client, Jub Ltd. This is the first year that Mike Benji’s firm
has conducted the audit of Jub Ltd, a long standing company in the interior
decorating sector. Prior to this conversation Mike Benji had not met Mrs King.
Mike Benji: Howzit Mrs K, I'm Mike Benji from the auditors. You can call me Mike B.
Mrs King: Good morning Mr Benji. What can I do for you?

Mike Benji: I need to do some audit tests on your trade receivable files. I
understand from my senior trainee that you have three files of invoices.
Mrs King: Yes I do, but as I told your trainee, there is a fourth file in which we
keep queries pertaining to trade receivables.
Mike Benji: He didn't tell me that, but then I do have to watch him as he is very
unreliable and quite honestly, incompetent.
Mrs King: I can't give you the queries file as Mr Kimble, the financial director, has
given strict instructions that nobody other than himself may take control
of the file. This includes the auditors.
Mike Benji: OK. That’s fine. I won't worry about auditing it then. What about the
other files?
Mrs King: I can let you have Files 1 and 2 now, but File 3 is with the chief
accountant, Mr Calder. Shall I introduce you to him?
Mike Benji: Not necessary, he's my uncle. I'll get the file from him.
Mrs King: I also have an analysis book that I use for my own purposes to assist in
evaluating long outstanding debts. The previous auditors used it. Would
you like to use it?
Mike Benji: No, I'm not interested in the other auditors − they couldn't even retain
this audit − why should I do what they did?
Mrs King: As you wish.
Mike Benji: By the way, I want all the invoices for one of your debtors, Design
Fabrics Ltd. I was auditing there last week and they are heading for
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financial trouble. You had better get them to pay quickly before they are
declared insolvent.
Mrs King: Thank you. We didn't know that.
Mike Benji: Why not? If you are in charge of trade receivables you should know
these things. In this audit I will really be concentrating on trade
receivables because I’m not going to do any work at all on inventory. I'll
see you later.
Required
Discuss fully Mike Benji’s understanding of professional conduct and audit
procedures as reflected in the above conversation. In your answer refer to the APA,
the SAICA Code of Professional Conduct for Chartered Accountants, the Companies
Act 71 of 2008 and the IRBA Rules regarding Improper Conduct.
(Based on Gowar and Jackson 2010:55: Graded Questions on Auditing)
References:
 SAICA Student Handbook, Volume 2C, Auditing Profession Act of 2005: section
44
section 120,140, 150, 290
 SAICA Student Handbook, Volume 2B, IRBA Rules Regarding Improper Conduct:
Rule 2.7, 2.6, 2.17
 SAICA Student Handbook, Volume 2C, Companies Act of 2008: Chapter 3:
Enhanced Accountability and transparency – Part C (section 93)
20.1 Mike Benji's attitude (SAICA Code of Professional Conduct: (section 150) −
Professional Behaviour
An auditor should conduct himself or herself with courtesy and consideration

towards all with whom he or she comes into contact. His or her conduct should
be consistent with the good reputation of the profession and should not
discredit the profession.
Mike Benji was arrogant and discourteous, towards Mrs King:
20.1.1 Howzit Mrs K (he had not met her before).

20.1.2 You can call me Mike B!
20.1.3 He rudely turned down her offer of the analysis book.
20.1.4 He was critical of her ability to do her job (you should know these
things).
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20.2 Criticism of his senior trainee
Mike Benji should never criticise his staff in front of the client, because it is
unprofessional to do so. He should discuss the matter privately with his
trainee. In essence Mike Benji has a "responsibility to his colleague" and
should act in a manner that promotes co-operation and good relations with his
team. To describe a senior trainee as very unreliable and incompetent is
completely unacceptable (SAICA Code of Professional Conduct: section 150).
20.3 Scope restriction acceptance
20.3.1 An auditor should "...remain free from any influence... which could
impair his professional judgement or independence." Mike Benji has
contravened this requirement by allowing people to influence his
choice of records to be audited. Mike Benji has failed to recognise or
respond to a threat to his objectivity (SAICA Code of Professional
Conduct: section 120).
20.3.2 In terms of Section 44 of the Auditing Profession Act 26 of 2005, the
audit should be conducted free of restriction and the auditor should
have access to all information he or she deems necessary. A
competent auditor would consider the queries file to be "necessary
evidence".
20.3.3 Mike Benji has failed to recognise or respond to threats to his
objectivity (independence) and has compromised the fundamental
principle of professional competence (SAICA Code of Professional
Conduct: section 130).
20.3.4 In terms of section 93 of the Companies Act 71 of 2008 the auditor is
given right of access to all information he or she requires.
20.4 Independence
20.4.1 In terms of section 290 of the SAICA Code of Professional Conduct

(Independence) a close family member or personal relationship can
result in a significant self-interest, familiarity or intimidation threat to
the auditor. Although the relationship is one between an auditor and
his uncle (and thus not a close or immediate relationship as defined),
the threat could easily exist in view of the fact that
 the uncle is involved in the financial aspects of the business

 Mike Benji is in charge of the audit and is therefore directly
involved in all aspects of it
20.4.2 Whilst this is essentially the firm’s problem, Mike Benji is

compromised and should have brought this to the attention of his
engagement partner (SAICA Code of Professional Conduct: section
290.8 and section 290.10).
20.5 Criticism of previous auditor
20.5.1 An auditor should not irresponsibly criticise a fellow auditor (Jackson

& Stent (2014:2/10).
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20.5.2 Mike Benji's statement "They couldn't even retain the audit..." is an
uninformed, irresponsible criticism of their ability.
20.5.3 Mike Benji has failed to comply with the fundamental principles of
professional behaviour and integrity.
20.6 Confidentiality
20.6.1 In terms of section 140 of the SAICA Code of Professional Conduct,

an auditor must respect the confidentiality of information acquired by
him or her in the course of his or her work. The information
concerning Design Fabrics should not have been disclosed. Hence
Mike Benji has failed to comply with the fundamental principle of
confidentiality.
20.7 No work on inventory
Mike Benji has transgressed on three counts here:
20.7.1 The APA (section 44) requires the auditor to satisfy himself or herself
about the existence of all assets and liabilities − this requirement will
not be met if no work is done on inventory.
20.7.2 In addition, Mike Benji should not be informing the client of what his
audit plan is – this client now knows that they could manipulate the
financial statements if they wish to, without fear of discovery by the
auditors.
There is no suggestion that the company wishes to manipulate the
financial statements, but Mike Benji’s disclosure is technically
unsound (and unwise).
20.7.3 The extensive audit of trade receivables cannot be a substitute for an
audit of inventory – again Mike Benji has compromised the
fundamental principle of professional competence (SAICA Code of
Professional Conduct: section 130).
20.8 The IRBA Rules regarding Improper Conduct − overall
20.8.1 Rule 2.7 states that an auditor will be guilty of improper conduct if he
or she fails to perform his or her duties with due care and skill.
or she contravenes the Code.
or she conducts himself or herself in a manner which is discreditable
on the part of an auditor or which brings the profession into disrepute.
Mr Benji has clearly transgressed these rules.
Activity 21
Required
Answer the questions in section 2.3, if provided, of Tutorial Letter 102 and compare
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Summary
In the preceding learning units we focused on professional conduct as contained in
the SAICA Code of Professional Conduct for Chartered Accountants (Parts A, B and
C), and the IRBA Rules regarding Improper Conduct. The sections contained in the
above were also applied to practical scenarios.
Self-assessment
1. Explain the definitions referred to in the SAICA Code of Professional Conduct.

2. Describe the five fundamental principles contained in Part A that must be
observed to achieve the objectives of the profession.
3. Explain the two categories of safeguards that can be implemented.
4. Explain the main categories of threats and explain each threat.
5. With reference to section 210–290 of the SAICA Code of Professional Conduct,
explain the responsibility of the chartered accountant/auditor, the threats and
the safeguards to be considered for each of the sections contained in Part B
and illustrate their application in practical situations.
6. With reference to section 300–350 of the SAICA Code of Professional Conduct,
explain the responsibility of the chartered accountant/auditor, the threats and
the safeguards to be considered for each of the sections contained in Part C
and illustrate their application in practical situations.
7. Explain what constitutes improper conduct and illustrate its application in
practical situations.
1. Reference: SAICA Student Handbook, Volume 2B, SAICA Code of Professional
Conduct: Definitions
2. References:
Part A (section 110–150)
 Jackson & Stent (2014:2/6–2/12)
3. References:
Part A (section 100.13–16)
4. References:
Part A (section 100.12)
 Jackson & Stent (2014:2/10–2/11)
5. References:
Part A (sec 210–290)
 Jackson & Stent (2014:2/14–2/45)
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6. References:
 SAICA Student Handbook, Volume 2B, SAICA Code of Professional Conduct
of SAICA: Part A (section 300–350)
 Jackson & Stent (2014:2/46–2/52)
7. References:
 SAICA Student Handbook, Volume 2B, IRBA Code of Professional Conduct:
Definition of Improper Conduct
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LEARNING UNIT 2.4: QUALITY CONTROL OF AUDIT WORK

Introduction
Auditing firms are required to implement policies and procedures to monitor the firm’s
practices and ensure that the International Standards of Auditing (ISAs) are being
followed.
The International Standards on Quality Control (ISQC 1) requires the auditing firm to
establish policies and procedures designed to provide it with reasonable assurance
that the firm and its personnel comply with the relevant ethical requirements
(Integrity, Objectivity, Professional Competence and Due Care, Confidentiality and
Professional Behaviour). ISA 220 deals with the specific responsibilities of the
engagement partner’s regarding quality control procedures for an audit of financial
statements (see ISA 200: par A17).
In other words, ISQC 1 establishes an auditing firm’s responsibility for its system of
quality control while ISA 220 provides guidance on the engagement team’s
responsibilities regarding quality control for audit engagements.
In this learning unit you will be introduced to the quality control standards of auditing
firms and for audit engagements.
ISAs are available for download from the following link:

http://www.irba.co.za/index.php/auditing-standards-functions-55/252-international-
clarity-pronouncements-adopted-and-i/831-2014-auditing-standards
2.4.1 Auditing firms’ system of quality control

The requirement of quality control applies to all firms in respect of audits and reviews
of financial statements (ISQC 1: par 4). The auditing firm shall comply with each
requirement of ISQC 1, unless, in the circumstances of the auditing firm, the
requirement is not relevant to the services provided in respect of audits and reviews
of financial statements (ISQC 1: par 14).
Study
 SAICA Student Handbook, Volume 2A, ISQC 1: Quality control for firms that
perform audits and reviews of financial statements, and other assurance and
related service engagements (par 1–18, 20, 26, 29, 32 and 48 & A1–A3).

 the auditing firm’s objective in establishing and maintaining a system of quality
control
 the meaning of the definitions
 the elements of a system of quality control (you should be able to briefly describe
each element)
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Activity 22
Every audit firm performing audits has to have a system of quality control.
Required
22.1 Describe the objective of establishing a system of quality control for an
auditing firm.
22.2 List the six elements of a quality control system and explain each element.
Reference: SAICA Student Handbook, Volume 2A, ISQC 1: par 11 (a) and (b), 18,
20, 26, 29, 32 and 48
22.1 See ISQC1: par 11 (a) and (b) for the objective of establishing a system of
quality control for an audit firm.
22.2
Element of quality control Explanation

Leadership responsibilities for quality in the firm See ISQC 1 par 18
Relevant ethical requirements (including Independence) See ISQC 1 par 20
Acceptance and continuance of client relationships and See ISQC 1 par 26
specific requirements
Human resources See ISQC 1 par 29
Engagement performance See ISQC 1 par 32
Monitoring See ISQC 1 par 48
2.4.2 Quality control for an audit of financial statements

The engagement partner is responsible for the overall quality on each audit
engagement to which that partner is assigned (see ISA 220: par 8).
Study
 SAICA Student Handbook, Volume 2A, International Standards on Auditing (ISA)
220: Quality control for an audit of financial statements (par 1−11 and A1–A7)

 the objective of the auditor in implementing quality control procedures at the
engagement level
 the meaning of the definitions (you would have already studied many of these in
ISQC 1 referred to in learning unit 2.4)
 the leadership responsibilities for quality on audits
 the ethical requirements that the engagement partner shall comply with
throughout the audit engagement (these have also been dealt with in learning unit
1.1)
 the requirements of the engagement partner relating to independence
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Activity 23
Required
Summary
In this learning unit we focused on quality control of audit work which includes the
firms system of quality control and quality control for an audit of financial statements.
Self-assessment
1. Explain the objective of the firm in establishing and maintaining a system of

quality control.
2. Explain the meaning of the definitions in ISQC 1 and ISA 220.
3. List and describe the six elements of a system of quality control.
4. Explain the objective of the auditor and the responsibility of the engagement
partner in implementing quality control procedures at the engagement level.
5. List the ethical requirements that the engagement partner has to comply with
throughout the audit engagement.
6. Describe the requirements of the engagement partner relating to independence.
1. Reference: SAICA Student Handbook, Volume 2A, ISQC1: par 11 (a) and (b)
2. Reference: SAICA Student Handbook, Volume 2A, ISQC1: (Definitions) and ISA
220
3. Reference: SAICA Student Handbook, Volume 2A, ISQC 1: par 18, 20, 26, 29,
32 and 48
4. Reference: SAICA Student Handbook, Volume 2A, ISA 220: par 6, 8, 9, 11, 12,
14–16, 18, 19, 22–24
5. Reference: SAICA Student Handbook, Volume 2A, ISA 220: par 9 and A4
6. Reference: SAICA Student Handbook, Volume 2A, ISA 220: par 11
Conclusion
In this topic, Regulation of the Auditor, we explained and applied knowledge of the
regulatory process in the profession and the role of the registered auditor in the
statutory audit.
We dealt with the Auditing Profession Act 26 of 2005 (APA), the SAICA Code of
Professional Conduct for Chartered Accountants, the IRBA Code of Professional
Conduct for Registered Auditors, the Companies Act 71 of 2008, the IRBA Rules
regarding Improper Conduct and the quality control of audit work.
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In topic 3 we will be dealing with the general principles of assurance engagements,

internal control, audit evidence, risk assessment and audit procedures, materiality,
audit risk, audit documentation and assurance reports.
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TOPIC 3: GENERAL PRINCIPLES OF

ASSURANCE ENGAGEMENTS
Topic overview
The aim of this topic is to explain and apply the general principles of assurance
engagements in terms of the International Standards on Auditing (ISAs), to the
statutory or voluntary audit of a company or other business entity.

3.1 ASSURANCE ENGAGEMENTS 119
3.2 INTERNAL CONTROL 122
3.2.1 An overview of internal control 122
3.2.2 Understanding internal control 123
3.3 AUDIT EVIDENCE 134
3.3.1 The nature of audit evidence 134
3.3.2 Sufficient appropriate audit evidence 134
3.3.3 Assertions in financial statements 137
3.4 RISK ASSESSMENT AND AUDIT PROCEDURES 144
3.4.1 Types of audit procedures for obtaining audit evidence 144
3.4.2 Identifying and assessing the risks of material 144
misstatement
3.4.3 Tests of controls and substantive procedures 147
3.5 MATERIALITY 155
3.5.1 The concept of materiality 155
3.5.2 Materiality in planning and performing an audit 156
3.6 AUDIT RISK 160
3.6.1 The concept audit risk and its components 160
3.6.2 The interaction between the components of audit risk 162
3.7 AUDIT DOCUMENTATION 166
3.8 ASSURANCE REPORTS 168
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Learning outcomes

3.1 Assurance engagements  Explain the auditing principles 1
relating to assurance engagements.
3.2 Internal control  Explain and apply the auditing 2

principles relating to internal control.
3.3 Audit evidence  Explain and apply the auditing 2

principles relating to audit evidence.
3.4 Risk assessment and  Explain and apply the auditing 2

audit procedures principles relating to risk assessment
and audit procedures.
3.5 Materiality  Explain and apply the auditing 2

principles relating to materiality.
3.6 Audit risk  Explain and apply the auditing 2

principles relating to audit risk.
3.7 Audit documentation  Explain and apply the auditing 2

principles relating to audit
documentation.
3.8 Assurance reports  Explain the auditing principles 1

relating to assurance reports.
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LEARNING UNIT 3.1: ASSURANCE ENGAGEMENTS
Introduction
Certain sections of the International Framework for Assurance Engagements

(Framework) and ISA 200 were dealt with in the preceding topics of the study guide.
In this learning unit we will cover the sections on assurance engagements not
previously dealt with in the study guide.
As stated in the International Framework for Assurance Engagements (par 01), the
purpose of the Framework is to define and describe the elements and objectives of
an assurance engagement performed by practitioners. ISA 200 further deals with the
independent auditor’s overall objectives and requirements when conducting an audit
of financial statements in accordance with the ISAs.
Study
200 – Overall objectives of the independent auditor and the conduct of an audit in
accordance with International Standards on Auditing: par 15 and16,18–24 and
A18–A27 and A53–A76
 SAICA Student Handbook, Volume 2A, International Framework for Assurance
Engagements: par 1–4
The International Standards on Auditing (ISAs) and the International Framework for
Assurance Engagements can be downloaded from the following link:
http://www.irba.co.za/index.php/auditing-standards-functions-55/252-
international-clarity-pronouncements-adopted-and-i/831-2014-auditing-
standards

 the purpose of the Framework and an overview of the Framework (Framework:
par 1–4)
 the requirement of professional scepticism to be observed by the auditor (ISA
200: par 15 and A18–A22)
 the requirement of professional judgement to be observed by the auditor (ISA
200: par 16 and A23–A27)
 the conduct of the audit in accordance with ISAs (ISA 200: par 18–24 and A53–
A76)
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Activity 1
Professional judgment means that the auditor applies relevant knowledge and
experience in making informed decisions during the planning and conduct of an audit
of financial statements.
Required
Mention the situations during an audit of financial statements where the auditor is
required in particular to exercise professional judgment in his or her decisions.
Reference: SAICA Student Handbook, Volume 2A (ISA 200: par A23)
See the above reference in the prescribed textbook regarding situations in which
professional judgment is essential for the proper conduct of an audit.
Activity 2
Required
Summary
In this learning unit we dealt with the auditing principles relating to assurance
engagements.
Self-assessment
1. Explain the purpose of the Framework.

2. Describe the overview of the Framework.
3. Explain what is meant by professional scepticism.
4. Explain what is meant by professional judgment.
5. Explain when professional judgment is required by the auditor during the
planning and performance of the audit.
6. Explain the nature of the ISAs.
7. Describe the considerations specific to audits in the public sector.
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8. Explain the contents of the ISAs.

9. Describe the considerations to be taken into account in audits of smaller
entities.
10. Describe the purpose of objectives in the ISAs.
11. Mention the auditor’s responsibility regarding compliance with the requirements
of the ISAs.
12. Mention the auditor’s action if an objective in a relevant ISA is not achieved.
1. Reference: SAICA Student Handbook, Volume 2B (Framework: par 1–3)
2. Reference: SAICA Student Handbook, Volume 2B (Framework: par 4)
3. Reference: SAICA Student Handbook, Volume 2B (ISA 200: par 13(l))
4. Reference: SAICA Student Handbook, Volume 2B (ISA 200: par 13(k))
5. Reference: SAICA Student Handbook, Volume 2B (ISA 200: par 16 and
A23–A27)
6. Reference: SAICA Student Handbook, Volume 2B (ISA 200: par A53–A56)
7. Reference: SAICA Student Handbook, Volume 2B (ISA 200: par A57)
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LEARNING UNIT 3.2: INTERNAL CONTROL
Introduction
As stated in Jackson & Stent (2014:5/3), all of us experience internal controls around
us in our everyday lives, often without even realising it. Refer to the prescribed
textbook for some examples. These controls are in place to address and limit
potential risks.
In this learning unit we will deal with the importance of the components of internal
control, the limitations of internal control and internal controls in smaller entities, as
well as the external auditor’s interest in internal controls.
3.2.1 An overview of internal control
Internal control is the process designed, implemented and maintained by those

charged with governance, management and other personnel to provide reasonable
assurance about the achievement of the entity’s objectives regarding the reliability of
financial reporting, the effectiveness and efficiency of operations, and compliance
with applicable laws and regulations (see ISA 315: par 4(c)).
Internal controls and controls relating to the cycles (e.g. the revenue and receipts
cycle) from a governance perspective will be dealt with in the AUE 2602 module. In
this module we will be dealing with internal control from the perspective of the
external auditor to identify and assess the risk of material misstatement.
Study
 Jackson & Stent (2014:5/3–5/5)
315 – Identifying and assessing the risks of material misstatement: par 4(c) and
A51

 the definition of internal control
 the fact that internal control is designed and effected by those charged with
governance (e.g. an entity’s board of directors or audit committee), management
and other personnel to provide reasonable assurance on the achievement of an
entity’s objectives with regard to
 the reliability of financial reporting
 the effectiveness and efficiency of operations
 compliance with applicable laws and regulations
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3.2.2 Understanding internal control
When conducting an audit, the auditor should obtain an understanding of internal

controls relevant to the audit. In order to do so, the auditor should evaluate the
design of the controls and determine whether they have actually been implemented
(see ISA 315: par 12 and 13). If a client has an effective (good) accounting and
internal control system, the financial information produced by the system will also be
adequate (good).This means that the financial information will be valid, accurate,
complete and timeously produced (see Jackson & Stent:2014:5/10).
Note: In this section of the study guide you must study the internal control of a
business in the context of the auditor’s understanding of the entity and its
environment, including the entity’s internal control as part of his or her risk
assessment procedures. The auditors’ risk assessment procedures will be dealt with
in learning unit 3.4.
In this learning unit you will encounter the components of internal control, the
limitations of internal controls, the accounting system and the tasks and
responsibilities relating to the internal control of an entity.
3.2.2.1 Internal control components
Study
 Jackson & Stent (2014:5/5–5/19 and 7/1 –7/19)
315 – Identifying and assessing the risks of material misstatement: par 12–24 and
A49-A50, A58-A117 and Appendix 1
Internal control consists of five components, as illustrated in diagram 1 below:
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Diagram 1: Five components of internal control (based on ISA 315: par 14–24)
Internal control
The
information
The entity’s system
The control risk Control Monitoring
environment including the activities of controls
assessment related
process business
processes
Activity 3
Required
List and define the five components of internal control.
Reference: SAICA Student Handbook, Volume 2A, International Standards on
Auditing (ISA) 315 – Identifying and assessing the risks of material
misstatement: par 12–24 and A49, A50, A58
Definition of the five components of internal control:
Component of internal control Definition of the component

Control environment The control environment includes the governance
and management functions and the attitudes,
awareness and actions of those charged with
governance and management concerning the
entity’s internal controls. The control environment
sets the tone of the organisation, influencing the
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control consciousness of its people (ISA 315: par

A76).
The entity’s risk assessment The entity’s risk assessment process forms the
process basis for how management determines the risks
to be managed. (ISA 315: par A87).
The entity’s information system The information system relevant to financial
and related business processes reporting objectives, which includes the
accounting system, consists of procedures and
records designed and established to
i) initiate, record, process and report entity
transactions and to maintain
accountability for the related assets,
liabilities and equity
ii) resolve incorrect processing of
transactions
iii) process and account for system overrides
or bypass of controls
iv) transfer information from the transaction
processing system to the general ledger
v) capture information relevant to financial
reporting
vi) ensure information required to be
disclosed by the applicable financial
reporting framework is accumulated,
recorded, processed, summarised and
appropriately reported in the financial
statements (ISA 315: par A89)
Control activities Control activities are the policies and procedures
that help to ensure that management directives
are carried out. Examples include: authorisation,
performance reviews, information processing,
physical controls and segregation of duties (ISA
315: par A96).
Monitoring of controls Monitoring of controls is a process to assess the
effectiveness of internal control performance over
time. It involves assessing the effectiveness of
controls on a timely basis and taking necessary
remedial action (ISA 315: par A106).

The control environment
 the concept “control environment" as an essential element in the implementation
of an internal control system
 the elements of the control environment (ISA 315: Appendix 1: par 2)
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The entity’s risk assessment process

 the extent of risk assessment as an essential element in the implementation of
an internal control system
 the circumstances to which the management of an entity should pay close
attention when assessing risk (ISA 315: Appendix 1: par 4)
The information system including the related business processes

 the extent of the information system, including the related business processes,
relevant to financial reporting as an essential element in the implementation of an
internal control system
 the matters that should be covered by an information system (ISA 315:
Appendix: par 6)
The control activities

 the extent of control activities as an essential element in the implementation of
an internal control system
 the policies and procedures that may be categorised as control activities (ISA
315: Appendix 1: par 9)
Monitoring of controls
 the extent of monitoring as an essential element in the implementation of an
internal control system
 the procedures that may be classified as monitoring. (ISA 315: Appendix 1: par
11−13)
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Diagram 2: Schematic representation of the five components of internal control in

relation to the objectives of internal control
Control
environment
Monitoring The entity's
of controls risk
Objectives of internal control: assessment
process
Reliabilty of financial reporting
Effectiveness and efficiency of operations
Compliance with laws and regulations
The
information Control
system activities
This diagram illustrates that internal control is designed, implemented and

maintained to address identified business risks that threaten the achievement of any
of the entity’s objectives concerning internal control (see ISA 315: par A51).
3.2.2.2 Limitations of internal controls
Irrespective of how well the internal controls are designed and applied by the
employees and management, they can only provide an entity with reasonable
assurance about achieving the entity’s financial reporting objectives (see ISA 315:
par A53).
Study
315 − Identifying and assessing the risks of material misstatement: par A53−A55
 Jackson & Stent (2014:5/4−5/5)

 the inherent limitations that may be present in any internal control system
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3.2.2.3 The accounting system
Study

 the explanation of an accounting system
Activity 4
You are busy with the audit of Elm Ltd and have made the following observation:
A creditor’s clerk, who has no formal training and who was previously employed as a
sales representative, does not sign off the creditor’s reconciliation before submitting it
for review to the financial manager. Payment is then authorised by the financial
manager prior to it being reviewed by him. The organisation has no formal
procedures in place for the creditor’s function.
As a trainee auditor, you know that management is responsible for running all
aspects of the business, and to this end, they must put in place policies and
procedures to achieve the orderly and efficient operation of the business. It thus
follows that if the client has an effective accounting system and internal controls then
the information produced by the system will be valid, accurate, complete and
timeously produced.
Required
4.1 Define an internal control system.
4.2 In terms of ISA 315, describe the characteristics of a good control
environment.
4.3 Mention four control weaknesses in the above scenario and for each
weakness indicate what control could be put in place to overcome the
weakness.
4.4 Mention the elements that may have an impact on the effectiveness of an
internal control system (limitation of internal controls).
4.5 Explain what is meant by an accounting system.
4.1 Reference: SAICA Student Handbook, Volume 2A (ISA 315: par 4(c))
4.2 Reference: SAICA Student Handbook, Volume 2A (ISA 315: Appendix 1:
par 2)
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4.3 Reference: SAICA Student Handbook, Volume 2A (ISA 315: par 12 and 20
and Appendix 1: par 2 and 9)
4.4 Reference: Jackson & Stent (2014:5/12−5/17)
4.5 References:
 SAICA Student Handbook, Volume 2A (ISA 315: par A53−A55)
 Jackson & Stent (2014:5/4−5/5)
4.1 Definition of an internal control system

Internal control is the process designed and affected by those charged with
governance and management (and other personnel) to provide reasonable
assurance about the achievement of the entity’s objectives with regard to the
reliability of financial reporting, effectiveness and efficiency of operations, and
compliance with applicable laws and regulations. If follows that internal control
is designed and implemented to address identified business risks that threaten
the achievement of any of these objectives.
4.2 Effective control environment

 Communication and enforcement of integrity and ethical values
Integrity and ethical behaviour are the products of the entity’s ethical and
behavioural standards and the way in which they are communicated, and
enforced in practice.
 Commitment to competence
Competence is the knowledge and skills necessary to accomplish tasks that
define the individual’s job.
 Participation by those charged with governance

The importance of the responsibilities of those charged with governance (e.g.
audit committee/board of directors) is recognised in the codes of practice and
other laws and regulations.
 Management’s philosophy and operating style

Management’s philosophy and operating style will be affected, firstly, by the
formal structure of the organisation and the way in which authority is
exercised; and, secondly, by the characteristics or behavioural aspects and
operating styles of the board and management, and their attitude towards
responsible risk assessment and internal control.
 Organisational structure
The establishment of a relevant organisational structure involves considering
the key areas of authority and responsibility and appropriate lines of reporting.
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 Assignment of authority and responsibility

Assignment of authority deals with the manner in which the board and
management assign responsibility to company employees for all entity
activities. For authority to be assigned effectively, all employees need to
understand how their work is interrelated to that of others in achieving the
company’s objectives.
 Human resource policies and practices

Human resource policies and practices should demonstrate important
matters in relation to the control consciousness of an entity.
4.3 Weaknesses in internal control

 Weakness: The creditor’s clerk has no formal training and was previously
employed as a sales representative.
 Control: Management must ensure that the staff member is adequately
trained for the position and should only employ people who have the
necessary experience (control environment).
 Weakness: There is no proof on the creditor’s reconciliation that it has
been performed and completed correctly.
 Control: The creditor’s clerk needs to be made aware of the interrelation
between his or her work and that of others, and should realise how
important it is to reconcile properly before handing over to the financial
manager for payment (control activity).
 Weakness: The financial manager authorises payment without first
inspecting that the creditor’s reconciliation has been completed properly
and signed off by the creditor’s clerk.
 Control: Management must have a proper organisational structure in place
to ensure that a proper review is always done (control activity).
 Weakness: There are no formal procedures in place for the creditor’s
function.
 Control: There should be standard policies and procedures in place to
ensure that the creditor’s clerk and the financial manager are aware of the
control consciousness of the entity (control environment).
4.4 Elements impacting the effectiveness of internal control (inherent

limitations of internal controls)
 Management’s usual requirement is that the cost of internal control should
not exceed the expected benefits to be derived.
 Most internal controls tend to be directed at routine transactions instead of
non-routine transactions.
 There is a potential for human error due to carelessness, distraction,
judgment errors and the misunderstanding of instructions.
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 There is a possibility of circumventing internal controls through collusion of

a member of management, or an employee, with parties outside or inside
the company.
 There is a possibility that a person responsible for exercising an internal
control could abuse that responsibility.
 There is a possibility that procedures may become inadequate because of
changes in conditions and compliance with procedures.
3.2.2.4 Internal control in smaller entities
Study
 SAICA Student Handbook, Volume 2B (ISA 315: par A56−A57, A84−A86, A88,
A93, A95 and A108)

 the reasons why internal control in smaller entities differs to internal control in
large companies
3.2.2.5 The external auditor’s interest in internal control
An auditor requires a thorough understanding of a client’s internal control system

before an effective audit can be conducted (see Jackson & Stent 2014: 5/19–5/20).
Study
Jackson & Stent (2014:5/19-5/20)

The external auditor’s interests in the internal control of an entity are the following:
 evaluating the components of the entity’s internal controls
 the entity’s risk assessment
 the entity’s monitoring activities
Activity 5
Required
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Summary
In this learning unit we explained the auditing principles relating to internal control
and applied the knowledge gained to practical scenarios.
Self-assessment
1. Define the concept “internal control”.

2. Explain the purpose of internal control.
3. List and describe the five components of internal control.
4. Explain the elements of the control environment.
5. Explain the circumstances that management must consider when assessing
risk.
6. Describe the matters that should be covered by an information system.
7. Discuss the policies and procedures that may be categorised as control
activities.
8. Describe the procedures that may be classified as monitoring.
9. Explain the inherent limitations of internal control.
10. Define the concept “accounting system”.
11. Explain internal control in smaller entities.
12. Explain the external auditor’s interest in the internal control of an entity.
1. Reference: SAICA Student Handbook, Volume 2B (ISA 315: par 4(c))
4. References:
 SAICA Student Handbook, Volume 2B (ISA 315: par A76−A77)
 Jackson & Stent (2014:5/7−5/8)
5. References:
 SAICA Student Handbook, Volume 2B (ISA 315: par 15−17 and A87−A88)
 Jackson & Stent (2014:5/8−5/10)
6. References:
 Jackson & Stent (2014:5/10-5/12)
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7. References:
 SAICA Student Handbook, Volume 2B (ISA 315: par 20−21 and A96-A105)
 Jackson & Stent (2014:5/12−5/17)
8. References:
 Jackson & Stent (2014:5/17−/18)
9. References:
 Jackson & Stent (2014:5/4−5/5)
10. Reference: Jackson & Stent (2014:5/12) (section 4.4)
11. Reference: Jackson & Stent (2014:5/18−5/19)
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LEARNING UNIT 3.3: AUDIT EVIDENCE
Introduction
The auditor must design and perform audit procedures in such a way that he or she
will be able to obtain sufficient appropriate audit evidence to draw reasonable
conclusions on which to base his or her auditor’s opinion (see ISA 500: par 4). As
stated in the International Framework for Assurance Engagements, the auditor
should, with an attitude of professional scepticism, obtain sufficient appropriate audit
evidence (see Framework: par 50).
In this learning unit, the auditing principles relating to audit evidence are explained
and applied as required by International Standards on Auditing.
3.3.1 The nature of audit evidence
Study
500 – Audit evidence: par 1−5 and A7−A13

 the objective of the auditor in obtaining audit evidence
 the definition of "audit evidence"
 the explanation of accounting records
 the sources of audit evidence
 the audit procedures for obtaining audit evidence (these will be covered in greater
detail in learning unit 3.4)
3.3.2 Sufficient appropriate audit evidence
Study
 Jackson & Stent (2014:5/20–5/22)
500 – Audit evidence: par 5(b) and (e), 6−11 and A1−A6 and A26−A33
 SAICA Student Handbook, Volume 2A, International Framework for Assurance
Engagements: par 50-66, 76, and 81
200 – Overall objectives of the independent auditor: par 17 and A 28−A31
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 The sufficiency of audit evidence is the criterion that determines the quantity of
audit evidence gathered (see ISA 500: par A4). The appropriateness of audit
evidence is the criterion for measuring the quality of audit evidence and its
relevance to a particular assertion (see ISA 500: par A5).
 The factors that influence the auditor's judgment about what constitutes sufficient
appropriate audit evidence are important.
Diagram 3: Illustration of sufficient appropriate evidence
Audit evidence
Appropriate
Sufficient evidence
evidence
Relates to the
Relates to the
quantity of audit
quality of audit
evidence gathered
evidence gathered
Reliability Relevance
There is a Relevance to the
hierarchy of assertion being
reliability for audit audited
evidence
Activity 6
An auditor performs audit procedures during an audit to obtain audit evidence

regarding the assertions in the financial statements of an entity to be able to express
assurance in an auditor’s report.
Required
In terms of International Standards on Auditing (ISAs), do the following:
6.1 Mention the audit procedures that can be performed to obtain audit evidence.
6.2 Define audit evidence.
6.3 Mention the requirements that evidence must meet to be acceptable as audit
evidence.
For the answers to questions 6.1 and 6.2 in this activity, refer to the prescribed
textbook.
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6.1 Reference: SAICA Student Handbook Volume 2A (ISA 500: par A10(a) and (b))
6.2 Reference: SAICA Student Handbook Volume 2A (ISA 500: par 5(c))
6.3 Reference: SAICA Student Handbook Volume 2A (ISA 500: par A4−A5 and
A27−A31)
The evidence must be sufficient and appropriate (ISA 500: par 6).
Sufficient: The sufficiency of audit evidence relates to the quantity of audit evidence
gathered. However, the sufficiency and appropriateness of audit evidence are
interrelated. The quantity of audit evidence needed is affected by the auditor’s
assessment of the risks of misstatement as well as the quality of such evidence.
Obtaining more audit evidence may not compensate for its poor quality (ISA 500: par
A4).
Appropriate: Appropriateness of audit evidence is the measure of its relevance and

its reliability in providing support for the conclusions on which the auditor’s opinion is
based (ISA 500: par A5).
The relevance of audit evidence deals with the logical connection with or bearing
upon the purpose of the audit procedure and where appropriate, the assertion under
consideration (see ISA 500: par A27−A30).
The reliability of audit evidence is influenced by its source and nature, and the
circumstances under which it was obtained, including the controls over its
preparation and maintenance where relevant. Some evidence is more reliable than
other evidence, for example, evidence generated internally by the undertaking,
obtained from independent sources outside the entity (third parties) or obtained
directly by the auditor, has different degrees of reliability (see ISA 500: par A31).
Activity 7
Required
For each of the following unrelated instances regarding appropriate audit evidence,
identify the most reliable audit evidence and substantiate your answer:
7.1. Confirmation of accounts receivable balances
(a) The auditor sends debtor statements to debtors for confirmation and the
debtors then return the statements directly to the auditor.
(b) The auditor follows through sales invoices, credit notes and bank deposit slips
to the debtor statements and reviews the calculations.
7.2. Confirmation of depreciation
(a) The auditor performs a recalculation of the depreciation written off on non-
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current assets and agrees the amount to the depreciation figure in the statement of
comprehensive income (income statement).
(b) The auditor agrees a computer generated printout of the calculation of

depreciation on non-current assets to the depreciation figure in the statement of
comprehensive income (income statement).
References:
 SAICA Student Handbook, Volume 2A (ISA 500: par 31)
7.1 Option (a) will provide the most reliable evidence.

Audit evidence from external sources, say confirmation received from a third
party, is more reliable than that generated internally.
7.2 Option (a) will provide the most reliable evidence.

Audit evidence obtained directly by the auditor is more reliable than that
obtained from the entity.
3.3.3 Assertions in financial statements
The assertions made by management about the financial statements were dealt with
in learning unit 1.5, but will now be covered in greater detail to confirm the link
between the assertions and sufficient appropriate evidence (see Jackson & Stent
2014:5/23).
Assertions used by the auditor to consider the different types of potential

misstatements that may occur are grouped into three categories (see ISA 315:
A124).
Study
 Jackson & Stent (2014:5/23−5/55)
 SAICA Student Handbook Volume 2A, International Standards on Auditing (ISA)
315 – Identifying and assessing the risks of material misstatement par
A123−A124

 the meaning of "assertions" in financial statements
 the three categories into which assertions in the financial statements can be
divided and the implication of each category
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As per ISA 200: par 13(f) the term "financial statements" ordinarily refers to a
complete set of financial statements as determined by the requirements of the
applicable financial reporting framework. A complete set of financial statements
consists of the statement of financial position, the statement of comprehensive
income, the statement of changes in equity, the statement of cash flows and the
related notes to the financial statements.
In representing the financial statements, management implicitly or explicitly make

assertions about the elements of the financial statements and related disclosures
(see ISA 315: par A124).
Example of company financial statements

In your accounting studies you will be dealing with the preparation of company
financial statements, if you have not already done so. To relate your auditing studies
to your accounting studies, consider as an example the financial statements of a
company, trading as an ordinary commercial enterprise.
The following is an example of an extract from the financial statements of a company

trading as an ordinary commercial enterprise (see International Financial Reporting
Standards (IFRS) in IAS 1 IG – Guidance on Implementing IAS 1 Presentation of
Financial Statements):
Statement of Financial Position as at 31 December 20xx
20xx 20xx
R R
'000 '000
ASSETS
Non-current assets 2 850 2 550
Property, plant and equipment 2 600 2 150

Investments 240 385
Other intangible assets 10 15
Current assets 3 635 3 358
Inventories 1 625 1 583

Trade receivables 1 826 1 662
Cash and cash equivalents 184 113
Total assets 6 485 5 908
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EQUITY AND LIABILITIES
Equity 4 441 4 056
Share capital 10 7
Retained earnings 4 431 4 049
Non-current liabilities 790 355
Long-term borrowings 790 355
Current liabilities 1 254 1 497
Trade and other payables 1 120 976
Current tax payable 134 521
Total equity and liabilities 6 485 5 908
Statement of comprehensive income for the year ended 20xx
20xx 20xx
R R
'000 '000
Revenue 21 450 19 720

Cost of sales 16 088 15 776
Gross profit 5 362 3 944
Other income 34 45
Operating expenses
(4 895) (2 498)
Profit before tax 501 1 491
Income tax expense (134) (521)
Profit for the year 367 970
By implication or explicitly, management make assertions about the recognition,

measurement, presentation and disclosure of the various elements in the financial
statements (see ISA 315: par A123). Management are implying, for example, that all
the assets, liabilities and equity at the period-end did actually exist have been
completely recorded, at the correct value, and that rights and obligations thereto
exist.
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Assertions about classes of transactions and events are applicable to all

transactions and events affecting both the statement of financial position and
statement of comprehensive income during the period under review. Assertions
about account balances at the period end are applicable to the balances as stated
in the statement of financial position. The assertions about presentation and
disclosure apply to both the statement of comprehensive income and the statement
of financial position.
In Jackson & Stent (2014:5/24), the following summary of the assertions indicate the
categories to which the assertions apply:
Diagram 4: Summary of management’s assertions (Jackson & Stent 2014:5/24)
ASSERTION CLASSES OF ACCOUNT PRESENTATION

TRANSACTIONS AND BALANCES AND DISCLOSURE
EVENTS
Occurrence
Completeness
Accuracy
Cut off
Classification
(and understandability)
Existence
Rights and obligations
Valuation and allocation
Activity 8
Required
8.1 Describe the assertions made by management in the following statement of
financial position balance at the period-end:
R R
'000 '000
Loans from related companies 790 355
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8.2 Describe the assertions made by management in the following statement of

financial position and statement of comprehensive income transactions which
took place during the year:
8.2.1 the purchase of new machinery for an amount of R1 200 000
8.2.2 purchases of trading goods (inventory) − invoice 1817 to the value of
R80 520
References:
 SAICA Student Handbook Volume 2A (ISA 315: par A124)
 Jackson & Stent (2014:5/23−5/25)
8.1 Loans from related companies (non-current liability)

Note: This relates to the account balance at period-end.
 The loans exist at year-end (existence).
 The loans are the obligations of the entity at year-end (obligations).
 All loans, that should have been recorded, have been recorded
(completeness).
 The loans are included at appropriate amounts and any resulting valuation or
allocation adjustments are appropriately recorded (valuation and
allocation).
 The loans are properly presented and disclosed at year-end.
8.2 Purchases
8.2.1 Purchase of new machinery

Note: This relates to the acquisition of the machinery, which is a transaction.
 The purchase of machinery actually occurred and pertains to the entity
(occurrence).
 All purchases of machinery were recorded (completeness).
 The purchase of machinery was appropriately recorded (accuracy).
 The purchases of machinery were recorded in the correct accounting
period (cut-off).
 All purchases of machinery were recorded in the proper accounts
(classification).
 The acquisition of machinery was properly presented and disclosed at
year-end.
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8.2.2 Purchase of trading goods (inventory)

Note: This relates to the acquisition of inventory, which is a transaction.
 The purchase of inventory actually occurred and pertains to the entity
(occurrence).
 All purchases of inventory were recorded (completeness).
 The purchase transaction of the inventory was appropriately recorded
(accuracy).
 The purchase transaction of the inventory was recorded in the correct
accounting period (cut-off).
 The purchase transaction of the inventory was recorded in the proper
accounts (classification).
Because the individual transaction will not be disclosed in the financial

statements, the assertions about presentation and disclosure do not apply.
Note: When we ask a question about management assertions on either classes of

transactions and events or account balances we expect you to give all the relevant
assertions and to only mention that the assertions relating to presentation and
disclosure will apply. If we expect you to give all the assertions relating to
presentation and disclosure we will clearly indicate this in the question.
Activity 9
Required
Summary
In this learning unit we explained the auditing principles relating to audit evidence
and assertions and applied the acquired knowledge to practical scenarios.
Self-assessment
1. Define the term "audit evidence".

2. Explain accounting records.
3. Explain the sources of audit evidence.
4. Describe the audit procedures for obtaining audit evidence.
5. Determine and describe the sufficiency and appropriateness of audit evidence.
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6. Explain the factors that influence the auditor’s judgement about what constitutes
sufficient appropriate audit evidence.
7. Explain the concept “assertions” in financial statements.
8. Explain the assertions made by management for each of the account balances
in the statement of financial position and the transactions recorded in the
statement of financial position and statement of comprehensive income. Include
the presentation and disclosure assertions in your response.
2. Reference: SAICA Student Handbook, Volume 2B (ISA 500: par 5(a))
3. Reference: SAICA Student Handbook, Volume 2B (ISA 500: par A7−A9)
5. References:
 SAICA Student Handbook, Volume 2B (ISA 500: A26−A33)
 Jackson & Stent (2014:5/20−5/22)
7. References:
 SAICA Student Handbook, Volume 2B (ISA 315: par 4(a) and A123−A124)
 Jackson & Stent (2014:5/23−5/24)
8. References:
 Jackson & Stent (2014:5/23−5/24)
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LEARNING UNIT 3.4: RISK ASSESSMENT AND AUDIT

PROCEDURES
Introduction
As explained in ISA 500: par A10 and A11, audit evidence is obtained by performing
risk assessment procedures and further audit procedures, which comprise tests
of control and substantive procedures. The audit procedures conducted by the
auditors include inspection, observation, external confirmation, recalculation, re-
performance, analytical procedures and inquiry.
In this learning unit, the auditing principles relating to risk assessment procedures
and further audit procedures (tests of controls and substantive procedures) are
explained and applied as required by the International Standards on Auditing (ISAs).
3.4.1 Types of audit procedures for obtaining audit evidence
Study
 Jackson & Stent (2014:5/2−5-5/27)
500 – Audit evidence: par A10−A25

The procedures inspection, observation, external confirmation, recalculation, re-
performance, analytical procedures and inquiry to be used when performing risk
assessment procedures, carrying out tests of controls or carrying out substantive
procedures (see ISA 500: par A11).
3.4.2 Identifying and assessing the risks of material

misstatement
A misstatement is defined in ISA 200: par 13(i). It is a difference between the

amount, classification, presentation, or disclosure of a reported financial statement
item and the amount, classification, presentation, or disclosure required for the item
to be in accordance with the applicable financial reporting framework.
The auditor’s objective is to identify and assess the risks of material misstatement at
the financial statement and assertion levels by understanding the entity and its
environment, including its internal control, thereby providing a basis for designing
and implementing responses to the assessed risks of material misstatement (see ISA
315: par 3).
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Internal control was dealt with in learning unit 3.2. We will now continue with a
discussion of the auditor’s risk assessment procedures and related activities.
3.4.2.1 The auditor’s risk assessment procedures and related activities
Study
 Jackson & Stent (2014:7/8−7/10)
315 – Identifying and assessing the risks of material misstatement: par 3−10 and
A1−A23

 the auditor’s objective in identifying and assessing the risks of material
misstatement
 the definitions of business risk, risk assessment procedures and significant risks
 risk assessment procedures to be carried out by the auditor to provide a basis for
the identification and assessment of risks of material misstatement at the
financial statement and assertion level
3.4.2.2 The required understanding of the entity and its environment
Study
 Jackson & Stent (2014:7/11−7/14)
315 – Identifying and assessing the risks of material misstatement: par 11 and
A24−A47
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Diagram 4: A schematic overview of the auditor’s risk assessments procedures and

related activities (based on Jackson & Stent 20140:7/115−7/148)
Auditor performs risk assessment procedures which include:
Inquiries
Analytical procedures
Observation and inspection
Other procedures (including information obtained
in prior periods)
Discussion among engagement team
to obtain an understanding of the entity and
its environment
Industry, Internal control
Objectives, Financial (refer to
regulatory & Nature of the Accounting
strategies & performance learning unit
other external entity policies
business risks 3.2.2.1)
factors

 The auditor's understanding of the industry, regulatory and other external factors,
the nature of the entity, the accounting policies, the objectives, strategies and
related business risks, and the financial performance measures (see learning unit
3.2 for the auditor's understanding of the entity’s internal control).
3.4.2.3 Identifying and assessing the risks of material misstatement at

financial statement level and at assertion level
Study
200 – Overall objectives of the independent auditor: par 17 and A34–A36 – Risk
of material misstatement
A118−A147
 Jackson & Stent (2014:6/16–17 and 7/20−7/21)
 the factors the auditor should take into account when assessing the risks of
material misstatement at the financial statement level and at the assertion level
 the process the auditor should follow when identifying and assessing the risks of
material misstatement
 risks that require special audit consideration (significant risks)
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 instances in which it is unsuitable to perform only substantive procedures in

relation to the risk (substantive procedures are dealt with in learning unit 3.4.3)
 revision of risk assessment as the audit progresses
 the documentation requirements (audit documentation is dealt with in greater
detail in learning unit 3.7)
Diagram 5: Identifying and assessing the risks of material misstatement (see ISA
315: par 25 and 26)
Identifying and assessing the risks

of material misstatement
At the financial statement level At the assertion level
Relate risks to
Identify risks
Assess the risks what may go
during process of
that relate to the wrong at the
obtaining an
financial assertion level, Consider the
understanding of
statements as a taking into likelihood of
the entity and its
whole and may account the misstatement
environment and
affect many controls that (ISA 315:
internal controls
assertions need to be tested par 26 (d)
(ISA 315:
(ISA 315: par 26 (ISA 315:
par 26 (a) and
(b) par 26 (c) and
A127−A128)
A128−A131)
3.4.3 Tests of controls and substantive procedures
It is the responsibility of the auditor to design and implement responses to the risks of
material misstatement identified and assessed by the auditor in accordance with ISA
330.
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Study
 Jackson & Stent (2014:5/25-5/28)
330 – The auditor’s response to assessed risks: par 4
Diagram 6: The nature of further audit procedures (see ISA 330: par 4)
Main classes of further
audit procedures
Substantive procedures
Tests of controls
Audit procedure designed
Testing an internal control
to detect material
measure throughout the
misstatement at the
period of reliance
assertion level
Tests designed to evaluate the Tests of detail of
operating effectiveness of
controls in preventing, or  classes of transactions
Analytical procedures
detecting and correcting  account balances
material misstatements at the
assertion level  disclosures
3.4.3.1 Tests of controls
Study
 Jackson & Stent (2014:5/27−5/28)
330 – The auditor’s response to assessed risks: par 4(b), 8, 9 and A20−A25
The auditor shall design and perform tests of controls to be carried out to obtain
sufficient appropriate audit evidence as to the operating effectiveness of relevant
controls if
 the auditor’s assessment of risks of material misstatement at the assertion level
includes an expectation that the controls are operating effectively or substantive
procedures alone cannot provide sufficient audit evidence at the assertion level
(see ISA 330: par 8)
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 the definition of tests of controls
 factors that the auditor should consider in designing and performing tests of
controls
3.4.3.2 Substantive procedures
Study
330 – The auditor’s response to assessed risks: par 4(a),18,19 and A42−A51
Substantive procedures are audit procedures designed to detect material

misstatements at the assertion level (see ISA 330: par 4(a)).The auditor shall design
and perform substantive procedures for each material class of transactions,
account balance and disclosure (see ISA 330: par 18).

 the definition of substantive procedures
 the factors to be considered by the auditor when designing and performing
substantive procedures carried out in order to obtain audit evidence
 the factors to be considered when the auditor considers whether external
confirmations are to be performed
Activity 10
The audit procedures used to gather audit evidence are the following:
 inspection
 observation
 external confirmation
 recalculation
 re-performance
 analytical procedures
 inquiry
Required
Explain each of the audit procedures and give one example of each. For each
example given, also state whether the procedure is a risk assessment procedure, a
test of controls or a substantive procedure.
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Reference: Jackson & Stent (2010:5/25−5/28)
Note: The examples of audit procedure given cannot be categorised simply as a risk
assessment procedure, test of control or substantive procedure. The procedure will
be categorised in terms of what the auditor is trying to achieve (see Jackson & Stent
2010:5/25−5/28).
 Inspection
Inspection involves examining records, documents (physical files or electronic
storage media), or tangible assets.
Example: inspecting a lease agreement to determine whether it has been signed
by an authorised signatory (test of control and/or substantive procedure).
 Observation
Observation entails looking at a process or procedure being performed by the
client's staff.
Example: attending the annual inventory count to observe the performance of the
counters (test of control and/or substantive procedure).
 Inquiry
Inquiry involves seeking information from knowledgeable persons inside or outside
the entity. Inquiries may range from formal written inquiries addressed to third
parties to informal oral inquiries addressed to persons inside the entity.
Example: inquiring from the warehouse controller about to the methods of
identifying obsolete or damaged inventory (test of control).
 Recalculation
Recalculation entails checking the arithmetic accuracy of source documents and
accounting records.
Example: recalculating depreciation on plant and equipment (substantive
procedure).
 Analytical procedures
Analytical procedures relate to the analysis of significant ratios and trends and the
resulting investigation of fluctuations and relationships that are inconsistent with
other relevant information or deviate from predicted amounts.
Example: ratio analysis is conducted on the turnover and compared to prior years
(risk assessment procedure and/or substantive procedure).
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 Re-performance
Re-performance entails the auditor repeating, either wholly or in part, the same
procedures performed by the client.
Example: re-performing the bank reconciliation at the financial year-end
(substantive procedure).
 External confirmation
External confirmation involves obtaining a direct written response from a third
party to a request/query from the auditor to that third party.
Example: confirming an accounts receivable balance (debtor’s balance) directly
with a debtor (substantive procedure).
Activity 11
Pro-Paint (Ltd) is a paint manufacturer and retailer. The following audit procedures
were carried out by the auditor during the audit:
 She asked the credit manager for details of the procedures followed for granting
credit and the authorisation of sales.
 She performed analytical review procedures of sales per month and obtained
explanations for extraordinary fluctuations.
 She inspected duplicate sales invoices for the authorising signature of the sales
manager.
 She observed procedures followed regarding gate control at the inventory store.
 She re-performed the leave pay accrual at year-end.
 She performed a debtor’s circularisation at year-end on selected large debtors,
requiring the debtors to confirm the balance at year-end.
Required
Indicate for each of the audit procedures whether the procedure is a tests of controls
or a substantive procedure.
Reference: Jackson & Stent (2014:5/27−5/28)
Note: The procedure will be categorised in terms of what the auditor is trying to
achieve (Jackson & Stent: 2014:5/27−5/28).
 Ask (inquire) the credit manager for details of procedures followed for the granting
of credit and the authorisation of sales − test of control.
 Perform analytical review procedures of sales per month and obtain explanations
for extraordinary fluctuations − substantive procedure.
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 Inspect duplicate sales invoices for the authorising signature of the sales
manager − test of control.
 Observe procedures followed regarding gate control at the inventory store − test
of control.
 Re-perform the leave pay accrual at year-end − substantive procedure.
 Perform a debtor’s circularisation at year-end on selected large debtors, requiring
the debtors to confirm the balance at year-end − substantive procedure.
Activity 12
Required
Summary
In this learning unit we explained the audit procedures performed by auditors to carry
out risk assessment procedures. We also dealt with further audit procedures (tests of
control and substantive procedures).
Self-assessment
1. List and describe the audit procedures used by the auditor when carrying out
risk assessment, tests of control and substantive tests.
2. Explain the auditor’s objective in identifying and assessing the risks of material
misstatement.
3. Define the concept “business risk”.
4. Define the concept “significant risk”.
5. Explain the risk assessment procedures the auditor can perform.
6. Describe the factors the auditor should take into account when obtaining
information about the entity and its environment.
7. Describe the factors that the auditor should take into account when assessing
the risk of material misstatement at the financial statement level and at the
assertion level.
8. Describe the process that the auditor should follow when identifying and
assessing the risk of material misstatement at the financial statement level and
at the assertion level.
9. Explain the risks that require special audit consideration.
10. Describe when it is not suitable to perform only substantive procedures in
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relation to risk and revision of risk assessment as the audit progresses.

11. Define tests of controls.
12. Describe the factors that the auditor should take into account in designing and
performing tests of controls.
13. Define substantive procedures.
14. Describe the factors the auditor should consider when designing and
performing substantive procedures carried out in order to obtain audit
evidence.
15. Describe the factors to be considered when the auditor considers whether or
not external confirmations should be performed.
16. Apply your knowledge of tests of control and substantive procedures to
practical scenarios.
1. References:
 Jackson & Stent (2014: 5/25−5/27)
2. Reference: SAICA Student Handbook, Volume 2B (ISA 315: par 3)
3. Reference: SAICA Student Handbook, Volume 2B (ISA 315: par 4(b))
4. Reference: SAICA Student Handbook, Volume 2B ISA 315: par 4(e)
5. References:
 Jackson & Stent (2014:7/8−7/10)
6. References:
7. References:
 Jackson & Stent (2014:6/16-6/17)
9. References:
 Jackson & Stent (2014:7/20-7/21)
A140−A142)
12. References:
 Jackson & Stent (2014:5/27−5/28)
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14. References:
 SAICA Student Handbook, Volume 2B (ISA 330: par 18 and A42−A47)
A48−A51)
16. References:
 SAICA Student Handbook, Volume 2B (ISA 330: par 8−9 and A20−A25 and
ISA330 par 18–19 and A42–A51)
 Jackson & Stent (2014:5/27−5/28)
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LEARNING UNIT 3.5: MATERIALITY
Introduction
Materiality is a fundamental concept in auditing (see Jackson & Stent 2014:7/21). It

means that misstatements, including omissions, are considered to be material if they,
individually or in aggregate, could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial statements (see ISA 320: par
2).
In this learning unit, the auditing principles relating to materiality are explained and
applied as required by International Standards on Auditing (ISAs).
3.5.1 The concept of materiality
Study
320 – Materiality in planning and performing an audit: par 1−3 and 8
 SAICA Student Handbook Volume 2A, International Framework for Assurance
Engagements: par 67
 the relevance of materiality

 the explanation of materiality
 the auditor’s objective in applying the concept of materiality
There are several definitions of materiality in the prescribed study material. However,
the main elements that should be included in the definitions remain the same.
These are the following:

 an omission or misstatement
 the auditor’s perception of the influence of such omission or misstatement on the
economic decisions of users/shareholders
 based on the information in the financial statements
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3.5.2 Materiality in planning and performing an audit
3.5.2.1 Consideration of materiality by the auditor
Study
 Jackson & Stent (2014:7/21−7/22)
320 – Materiality in planning and performing an audit: par 5 and A1
Engagements: par 67

The concept of materiality is applied by the auditor in the following:
 planning the audit
 performing the audit
 evaluating the effect of identified misstatements on the audit and of uncorrected
misstatements on the financial statements
 forming and expressing an opinion in the auditor’s report
3.5.2.2 The nature of materiality
Study
 Jackson & Stent (2014:7/22–7/24)
320 – Materiality in planning and performing an audit: par 4
Note the following in the above study resources above:

 Materiality is subjective.
 Materiality is relative, not absolute.
 Materiality is both quantitative and qualitative.
3.5.2.3 Determining materiality and performance materiality when planning

the audit
Study
 Jackson & Stent (2014:7/24–7/27)
320 – Materiality in planning and performing an audit: par 6, 9−11 and A1 and
A12
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 The auditor first determines materiality for the financial statements as a whole
(this is determined when establishing the overall audit strategy).
 In specific circumstances the auditor may determine materiality levels for
particular classes of transactions, account balances or disclosure: This is
determined for particular classes of transactions, account balances or disclosures
for which misstatements of lesser amounts than for the financial statements as a
whole could be expected to influence the economic decisions of users. Hence the
auditor may or may not deem it necessary to determine separate materiality levels
to be applied.
 The auditor shall determine performance materiality, which is used for purposes
of assessing risks of material misstatement and determining the nature, timing
and extent of further audit procedures. Performance materiality is set by the
auditor at lower than materiality for the financial statements as a whole in order to
reduce to an appropriate low level the probability that the aggregate of undetected
and uncorrected misstatements exceeds materiality for the financial statements
as a whole (see ISA 320: par A12).
Activity 13
Required
Give reasons why it is important that the auditor shall determine materiality when
planning an audit.
References:
 SAICA Handbook, (ISA 320: par A1)
 Jackson & Stent (2014:7/2–7/27)
The auditor shall determine materiality to obtain reasonable assurance about

whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, thereby enabling him or her to express an opinion on
whether the financial statements are prepared in all material respects, in accordance
with an applicable financial reporting framework; and to report on the financial
statements, and communicate as required by the ISAs, in accordance with the
auditor’s findings.
Materiality and audit risk are considered throughout the audit, in particular, when
 identifying and assessing the risks of material misstatement
 determining the nature, timing and extent of further audit procedures
 evaluating the effect of uncorrected misstatements, if any, on the financial
statements and in forming an opinion in the auditor’s report
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3.5.2.4 Reasons why performance materiality differs from the auditor's

assessment of materiality for the financial statements as a whole
Study
 Jackson & Stent (2014:7/22–7/24)
320 – Materiality in planning and performing an audit: par A12
Activity 14
Required
Summary
Information is material if its omission or misstatement could influence the economic

decisions of users taken on the basis of the financial statements.
Self-assessment
1. Describe the concept "materiality".

2. Explain why it is important for the auditor to consider materiality.
3. Explain when the auditor should consider materiality.
4. Explain the nature of materiality.
5. Describe the materiality considerations during the audit planning process.
6. Describe materiality for the financial statements as a whole.
7. Describe materiality for classes of transactions, account balances or
disclosures.
8. Describe performance materiality.
9. Explain why performance materiality may differ from materiality for the financial
statements as a whole.
2. Reference: SAICA Student Handbook, Volume 2B (ISA 320: par 8 and A1)
4. References:
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 SAICA Student Handbook, Volume 2B (ISA 320: par 4)

 Jackson & Stent (2014:7/22−7/24)
5. References:
 SAICA Student Handbook, Volume 2B (ISA 320: par 6, 10 and 11)
 Jackson & Stent (2014:7/24−7/27)
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LEARNING UNIT 3.6: AUDIT RISK
Introduction
One of the most important concepts in auditing is audit risk. This is the risk that the
auditor may express an inappropriate audit opinion when the financial statements
have been materially misstated (see ISA 200: par 13(c)) – in other words the risk that
the auditor will give an unmodified opinion when in fact a modified opinion should
have been given. Because the auditor only gives reasonable assurance in the
auditor’s report, there is always a risk that a material misstatement could be present
in the financial statements (see ISA 200: par 5). Therefore, the auditor must plan and
perform the audit in such a way that audit risk is kept to an acceptably low level.
3.6.1 The concept audit risk and its components
3.6.1.1 Audit risk
Study
Engagements (par 71-75) (Assurance engagement risk)
200 – Overall objectives of the independent auditor: par 13(c) and (n) and
A32−A33, A37−A44 (Definition of audit risk and components)
 Jackson & Stent (2014:7/4–7/7)

 the definition of assurance engagement risk
 the definition of audit risk
 the existence of inherent and control risk prior to the audit
 the fact that audit risk is a function of the risks of material misstatement (inherent
risk and control risk) and detection risk
 the definition of inherent, control and detection risk
Inherent risk
Inherent risk, as a component of the risk of material misstatement, is defined in ISA
200: par 13(n).
ISA 200: A38 and Jackson & Stent 2014:7/5 cite a few examples of inherent risks.
The following are additional examples of inherent risks that the auditor may
encounter:
 Management may have a motive to misstate the financial statements in order to
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achieve budget targets or inflate profit or to influence the share price on the stock
exchange.
 Valuation of intangible assets can be subject to significant estimation uncertainty.
Control risk
Control risk is a function of the efficiency of the client's system of internal controls
(see ISA 200: A39). If the system of internal controls is functioning poorly, there is a
major risk of the occurrence of fraud and error, which could cause the financial
statements to be materially misstated (the system of internal controls is discussed in
learning unit 3.2.).
Examples of control risks are provided in the study reference to the prescribed book
and in ISA 200: A39 and include the following:
 the potential for management to override controls
 inadequate segregation of duties
 mistakes or errors made by personnel
 carelessness in performing duties
 the fact that internal control procedures may become inadequate because of
changes in conditions
Detection risk
Detection risk is the risk that the procedures performed by the auditor will not detect
a material misstatement that exists in the financial statements (see ISA 200:13(c)).
Detection risk is determined by the effectiveness of the audit procedures and how
well the auditor applies them.
Examples of detection risks are mentioned in the study reference to the prescribed
book, and the following are additional examples that the auditor may encounter:
 The audit team experiences time pressure or tight audit deadlines.
 The audit team member lacks competence and application.
 There is no consultation with senior staff when selecting and applying an audit
procedure and interpreting the results of the test.
Activity 15
Required
Describe assurance engagement risk and audit risk. Also explain the difference
between the two types of risk.
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References:
 SAICA Student Handbook, Volume 2A (Framework: par 71–72)

 SAICA Student Handbook, Volume 2A (ISA 200: par 13(c))
Assurance engagement risk is the risk that the auditor expresses an inappropriate
conclusion when the subject matter information is materially misstated.
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when
the financial statements are materially misstated. Audit risk is a function of the risks
of material misstatement and detection risk.
Assurance engagement risk is thus a general definition and is applicable to all

assurance engagements, whereas audit risk is applicable to an audit of financial
statements and is the risk that an unmodified opinion will be expressed when in fact a
modified opinion is required.
3.6.1.2 Consideration of audit risk throughout the audit
Study
320 – Materiality in planning and performing an audit: par A1
Materiality (referred to in learning unit 3.5) and audit risk are considered throughout
the audit, and in particular when
 identifying and assessing the risks of material misstatement
 determining the nature, timing and extent of further audit procedures
 evaluating the effect of uncorrected misstatements on the financial statements
and in forming the opinion in the auditor’s report
3.6.2 The interaction between the components of audit risk
Study
 Jackson & Stent (2014:7/6−7/7)
200 – Overall objectives of the independent auditor: par A37−A42
A118−A143
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As stated previously, the components of audit risk are the risk of material
misstatement (inherent risk + control risk) and detection risk (based on Jackson &
Stent 2014:7/6).
It is clear from the definitions of the components of audit risk that inherent and control
risks are independent of the audit, whereas detection risk is directly related to the
efficiency of the auditor's procedures.
The interaction between the components of audit risk can be expressed

mathematically as follows:
The audit risk model
As mentioned previously audit risk is a function of the risks of material

misstatement (RMM) and detection risk (DR).
Audit risk = RMM x DR

(RMM = IR x CR)
As stated in ISA 200: A42, there is an inverse relationship between detection risk and
the combined level of inherent and control risk. When inherent and control risk are
high, for example, the acceptable level of detection risk must be low in order to
reduce the audit risk to an acceptably low level (additional audit procedures must be
conducted).
However, if the inherent and control risks are low, the auditor could accept a higher
detection risk and still reduce the audit risk to an acceptably low level. Because the
client's internal controls, accounting and internal control systems are so efficient that
they should prevent/identify and timeously correct any material errors/omissions, the
auditor can accept a higher detection risk.
Activity 16
For a given level of audit risk, the acceptable level of detection risk bears an inverse
relationship to the assessed risks of material misstatement at the assertion level.
In this instance, the auditor believes there is a low risk of material misstatement at
the assertion level.
Required
Explain what detection risk the auditor may accept on the basis of the low estimate of
the risk of material misstatement.
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Reference: SAICA Handbook, (ISA 200: par A42)
The auditor has assessed the risk of material misstatement as being low and would
therefore be able to accept a higher detection risk. The audit procedures would be
less persuasive.
Activity 17
An auditor has assessed the risk of material misstatement as being high. Refer to the
table below:
Amount Inherent risk Control risk

(R)
Trade receivables 613 214 High High
Required
Explain the influence of the high assessment of the risk of material misstatement for
trade receivables on detection risk.
Trade receivables
The result of the high assessment of the risk of material misstatement (inherent risk x
control risk) is that the auditor is compelled to accept a lower level of detection risk. In
order to achieve this, the auditor would have to increase the extent of his or her audit
procedures.
Activity 18
Required
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Summary
In this learning unit you have learned what audit risk entails, the different components
of audit risk and the interaction between the components of audit risk.
Self-assessment
1. Define assurance engagement risk.

2. Define audit risk.
3. Describe the components of audit risk.
4. Give examples of inherent, control and detection risks.
5. Explain why audit risk is considered throughout the audit.
6. Explain how the components of audit risk interact.
7. Explain how an acceptable level of audit risk is determined.
8. Explain the relationship between the risk of material misstatement and detection
risk.
1. Reference: SAICA Student Handbook, Volume 2B (Framework: par 71-72)
3. References:
 SAICA Student Handbook, Volume 2B (Framework: par 74, ISA 200: par 13(n)
and A32−A33 and A37−A44
 Jackson & Stent (2014:7/5−7/6)
4. Reference: SAICA Student Handbook, Volume 2B (ISA 200: par A38, A39 and
A42−A44)
6. References:
 SAICA Student Handbook, Volume 2B (ISA 200 par 42)
 Jackson & Stent (2014:7/6-7/7)
7. References:
 SAICA Student Handbook, Volume 2B (ISA 200: par A42)
 Jackson & Stent (2014:7/6−7/7)
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LEARNING UNIT 3.7: AUDIT DOCUMENTATION
Introduction
Audit documentation provides evidence of the auditor’s basis for a conclusion about
the achievement of the auditor’s overall objectives and evidence that the audit was
planned and performed in accordance with ISAs and applicable legal and regulatory
requirements(see ISA 230: par 5).
In this learning unit you will learn what the purpose and requirements of proper
documentation of audit work entails in terms of the ISAs.
Study
 Jackson & Stent (2014:17/13−17/15)
230 – Audit documentation: par 1−16 and A1−A24
As stated in ISA 230: par 5, the objective of the auditor is to prepare documentation
that provides a sufficient and appropriate record of the basis for the auditor’s report
and evidence that the audit was planned and performed in accordance with ISAs and
applicable legal and regulatory requirements.
The purpose of documenting audit work

 the auditor’s objective in preparing audit documentation
 the meaning of audit documentation, an audit file and an experienced auditor
 the additional purposes of audit documentation
 the significant matters in the audit that should be documented
 the form, content and extent of audit documentation
 the matters arising from the date of the auditors’ report
 the assembly of the final audit file
In practice the form and content of audit documentation may differ considerably,
since such papers are drawn up in accordance with the auditor's professional
judgment. The form, content and extent of audit documentation however, should
comply with the requirements as stated in ISA 230: par 8–11.
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Activity 19
Required
Summary
Documentation for audit work includes all the working papers drawn up in relation to
the conduct of the audit. These working papers should be sufficiently complete and
detailed to provide an overall picture of the audit, which will ultimately enable the
auditor to express an audit opinion in the auditor's report.
Self-assessment
1. Explain the purpose of audit documentation.

2. Explain the auditor’s objective in preparing audit documentation.
3. Explain the additional purposes of audit documentation.
4. Describe the requirements for audit documentation.
5. Describe the form, content and extent of audit documentation.
6. Explain the requirements relating to the documentation of matters arising after
the date of the auditor’s report.
7. Explain the requirements relating to the assembly of the final audit file.
1. References:
 SAICA Student Handbook, Volume 2B (ISA 230: par 2)
 Jackson & Stent 2014:17/13−17/14
5. Reference: SAICA Student Handbook, Volume 2B (ISA 230: par 8−11 and
A2−A11)
7. Reference: SAICA Student Handbook, Volume 2B (ISA 230: par 14−16 and
A21−A24)
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LEARNING UNIT 3.8: ASSURANCE REPORTS
Introduction
At the conclusion of the audit, the auditor provides a written report stating the
conclusion of the assurance obtained on the relevant audit (see Framework: par 83-
84).
Study
Note the following in the study sources above:

 the types of reports to be issued in
 an assertion-based engagement (see learning unit 1.2)
 a reasonable assurance engagement
 a limited assurance engagement (see learning unit 1.2)
 the conditions that result in the auditor not being able to express an unmodified
opinion
Activity 20
Required
Summary
The auditor’s report should include management’s responsibility for the financial
statements, the auditor’s responsibility and the auditor’s opinion. The auditor’s report
will be dealt with in greater detail in topic 4.
Self-assessment
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1. Explain the wording of the conclusion in the assurance report for the different
types of engagements.
2. Explain the situations that may prevent the auditor from issuing an unmodified
auditor’s report.
Conclusion
In this topic, General Principles of Assurance Engagements, we explained and

applied the auditing principles of assurance engagements, internal control, audit
evidence, risk assessment and audit procedures, materiality, audit risk, audit
documentation and assurance reports.
In topic 4, the audit process and the various stages of the audit process will be
explained and applied.
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TOPIC 4: THE AUDIT PROCESSTOPIC 4

Topic overview
The aim of this topic is to explain and apply the different stages of the audit
process to the statutory audit of an ordinary company trading in goods and
services.

4.1 STAGES OF THE AUDIT PROCESS 173
4.2 THE PRELIMINARY ENGAGEMENT STAGE 175
4.2.1 Preconditions for an audit 175
4.2.2 Prospective clients/continuance with an existing client 175
4.2.3 Compliance with standards 176
4.2.4 Procedures to gather preliminary engagements 176
information on the client’s business
4.2.5 Establishing an understanding of the terms of the 177
engagement
4.3 THE PLANNING STAGE 179
4.3.1 Identifying and assessing the risks of material 179
misstatement
4.3.2 The objective of audit planning 179
4.3.3 The overall audit strategy, the audit plan and audit 180
documentation
4.4 PUTTING THE AUDIT STRATEGY AND PLAN INTO 184
ACTION
4.4.1 The auditor’s response to risks at the financial 184
statement level and at the assertion level
4.5 THE EVALUATING, CONCLUDING AND 189
REPORTING STAGE
4.5.1 Evaluation of audit findings 189
4.5.2 Drawing conclusions on the audit results 190
4.5.3 Auditor’s opinion 190
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Learning outcomes

4.1 Stages of the audit • Explain the different stages
process of the audit process. 1
4.2 The preliminary • Explain the preliminary

engagement stage engagement stage of the
1
audit process.
4.3 The planning stage • Explain the planning stage

of the audit process. 1
4.4 Putting the audit • Explain putting the audit
strategy and plan into strategy and plan into
action 1
action in the audit process.
4.5 The evaluating, concluding • Explain the evaluating,

and reporting stage concluding and reporting stage 1
of the audit process.
This topic refers to the following information in the prescribed textbooks:

 Jackson & Stent (2014:6/6−6/23)
 References to the International Framework for Assurance Engagements
 References to the ISAs
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LEARNING UNIT 4.1: STAGES OF THE AUDIT PROCESS
Introduction
In this learning unit, the different stages of the audit process are explained according
to the statutory audit of an ordinary company trading in goods and services.
In ISA 200: par 5 you learnt that as the basis for the auditor’s opinion, ISAs require the
auditor to obtain reasonable assurance on whether the financial statements as a
whole are free from material misstatement whether due to fraud or error.
In order to obtain reasonable assurance, the ISAs, taken together, provide the
standards for the auditor’s work in fulfilling the overall objectives of the audit (see ISA
200:par A53). According to Jackson & Stent (2014:6/6), the ISAs are directly
applicable to each of the stages of the audit process.
Diagram 1: Stages of the audit process
Preliminary stage
Planning stage
Responding to assessed risk

stage
Concluding stage
Study
 Jackson & Stent (2014:6/6–6/8)

 the four stages of the audit process
 how the ISAs relate to the different stages of the audit process
ISA 200:par 21 also states that to achieve the overall objectives of the auditor, the
auditor shall use the objectives stated in relevant ISAs in planning and performing the
audit, having regard to the inter-relationship among the ISAs.
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Activity 1
Required
Summary
In this learning unit we explained the various stages of the audit process.
Self-assessment
1. Describe the four stages of the audit process.

2. Explain how the ISAs relate to the different stages of the audit process.
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LEARNING UNIT 4.2: THE PRELIMINARY ENGAGEMENT

STAGE
Introduction
In this learning unit, the preliminary engagement stage of the audit process is
explained.
We will deal with a number of key factors that are relevant during the preliminary
engagement stage, but the detailed information, as contained in the ISAs regarding
the preliminary engagement stage, will be dealt with in your further auditing studies.
Diagram 2 depicts the preliminary engagement activities. As stated in Jackson &

Stent (2014:6/6), the stages of the audit are not “stand-alone units” and the activities
in each stage do not always fit neatly into the order presented.
Diagram 2: The activities involved in the preliminary engagement stage
Assess firm’s
Prospective clients/
competence and Consider ethical Formulate terms
continuance with an
availability of requirements of engagement
existing client
resources
4.2.1 Preconditions for an audit
Study
4.2.2 Prospective clients/continuance with an existing client
You have learnt in learning unit 1.2 that the “responsible party” is part of the three-
party relationship as an element of an assurance engagement. In the context of an
assurance engagement, the prospective or existing client is the responsible party
(International Framework for Assurance Engagements:par 28).
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Study
 Jackson & Stent (2014:6/9–6/10)
Engagements (Framework: par 22-25)

 the considerations relevant to the auditor’s decision on whether or not to accept an
audit engagement
 the reasons why an auditor may not wish to accept an engagement
 the preliminary engagement activities for the continuance with an existing client
 the standards (ISAs) the auditor should comply with regarding integrity,
competence and ethical requirements (see learning unit 2.4 to revise the quality
control of audit work)
4.2.3 Compliance with standards
Study
4.2.4 Procedures to gather preliminary engagements information

on the client’s business
Study
 Jackson & Stent (2014:6/10–6/11)
Note: In the study resource above that before the auditor accepts the audit
engagement, he or she should acquire preliminary engagement information on the
client’s business which can then be extended once the engagement has been
accepted.
Also note the following in the study resource above:

 the procedures the auditor can perform to gather preliminary engagement
information
It is vital for the auditor to gain an adequate knowledge of the client’s business by
performing the preliminary engagement activities because this will assist the auditor
to identify and evaluate events or circumstances that may adversely affect his or her
ability to plan and perform the audit engagement (see ISA 300:par A5).
Activity 2
Required
Draw up a list of sources and outline the procedures the auditor could follow to
acquire preliminary information on the client’s business.
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The sources and procedures the auditor could use to obtain preliminary information
on the business are the following:
 The previous auditor: communication with the previous auditor (in compliance
with the Code of Professional Conduct)
 Those charged with governance: inter alia, discussion with the client’s
directors, senior financial personnel, audit committee
 External sources: inquiries from the firm’s bankers, legal counsel and so on
(permission would have to be sought)
 External information: background searches of relevant databases (e.g. the
internet)
 Internal documentation: review of any documentation, either public or made
available by the prospective client (e.g. group or management reports)
 The auditor’s firm: regarding independence, inquiry and analysis of the status of
the firm and its employees in relation to the potential client
 The financial press: searches in financial magazines for relevant information
4.2.5 Establishing an understanding of the terms of the

engagement
When an auditor accepts an audit engagement from a client, a contractual

relationship arises between the auditor and the client. As stated in ISA 210:par A22,
it is in the interests of both the entity and the auditor that the auditor sends an audit
engagement letter prior to commencing the audit to help avoid any
misunderstandings in the audit.
Study
 Jackson & Stent (2014:6/11–6/13).
 SAICA Student Handbook in Volume 2A, International Standards on Auditing (ISA)
210: Agreeing the Terms of Audit Engagements (par 3 and 10)

 the objective of agreeing on the terms of the engagement
 what to include in the audit engagement letter
 the fact that the audit engagement letter should be a written document that
 includes at least the elements indicated in ISA 210:par 10
The in-depth information regarding “Agreeing the Terms of Audit Engagements” will
be dealt with in your further auditing studies.
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Activity 3
Required
Summary
In this learning unit we explained the auditing principles relating to the preliminary
engagement stage.
Self-assessment
1. Explain the considerations that apply to the auditor’s decision whether or

not to accept an engagement to carry out audit work.
2. List the factors the auditor should consider when acquiring preliminary
information on the business.
3. Describe the various sources and procedures the auditor could use to
acquire preliminary engagement information on the client’s business.
4. Describe the purpose of audit engagement letters and the elements to be
included in the audit engagement letter.
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LEARNING UNIT 4.3: THE PLANNING STAGE
Introduction
Planning an audit involves establishing the overall audit strategy for the engagement
and developing an audit plan (ISA 300:par 2). The objective of audit planning by the
auditor is to ensure that the audit will be performed in an effective manner (see ISA
300:par 4).
The auditor establishes an overall audit strategy that sets the scope, timing and
direction of the audit and guides the development of the audit plan (see ISA 300:par
7).
This learning unit explains the planning stage of the audit process.
4.3.1 Identifying and assessing the risks of material

misstatement
Once an auditor has issued an audit engagement letter to a client, a contractual
relationship exists between the auditor and the client. The auditor can then start to
gain an understanding of the entity and its environment, including the entity’s internal
control.
See learning unit 3.4 in which identifying and assessing the risks of material
misstatement was dealt with.
In recurring audit engagements, the auditor would have to update and re-evaluate
previously collected information. Significant changes that may have occurred since
the last audit would have to be investigated and the information updated (see ISA
210:par A28).
4.3.2 The objective of audit planning
Study

• the auditor’s objective in planning an audit
• the importance for an auditor of planning an audit adequately
Activity 4
Required
Name the ways in which adequate planning benefits the audit of financial statements.
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 Reference: Jackson & Stent (2014:6/13)
 It helps to ensure that the appropriate attention is focused on the important
areas of the audit (e.g significant risks are identified and addressed).
 It helps to ensure that potential problems are identified and resolved timeously.
 It helps the auditor to properly organise and manage the audit engagement so that
it is performed effectively and efficiently.
 It assists in the selection of engagement team members with appropriate levels of
capabilities and competence to respond to anticipated risks, and the proper
assignment of work to them.
 It facilitates the direction and supervision of engagement team members and
review of their work.
 It helps with the coordination of work done by other auditors and experts.
Planning is not a discrete phase of an audit, but rather a continual and iterative
process that often begins shortly after the completion of the previous audit and
continues until the completion of the current audit engagement (ISA 300:par A2). It
may also be necessary to modify the planned audit work as a result of changes in
circumstances or unforeseen problems that may have arisen after the completion of
the initial planning work (see ISA 300:par A13).
4.3.3 The overall audit strategy, the audit plan and audit
documentation
Study
 Jackson & Stent (2014:6/13–6/15)
Diagram 3: Planning activities
OVERALL AUDIT STRATEGY
• Sets the scope, timing and direction of the audit that guides the
development of the audit plan (ISA 300:par 7)
Audit PLAN includes:
• the nature, timing and extent of planned risk assessment procedures

sufficient to assess the risks of material misstatement
• the nature, timing and extent of planned further audit procedures at the
assertion level for each material class of transactions, account balance
and disclosure
• other planned audit procedures that are required to be carried out to
comply with the ISAs (ISA 300: par 9)
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4.3.3.1 The overall audit strategy
 The auditor must establish an overall audit strategy that sets the scope, timing
and direction of the audit that guides the development of the audit plan (ISA
300:par 7).
 When establishing the overall audit strategy, the auditor should do the following
in terms of ISA 300:par 8:
 Identify the characteristics of the engagement that define its scope (e.g.
whether the company is listed or whether industry-specific regulations govern
the audit).
 Ascertain the reporting objectives of the engagement to determine the timing
of the audit (e.g. reporting deadlines) and the nature of the communication
required.
 Consider the factors that are significant in directing the engagement team’s
efforts (e.g. materiality levels and risk factors).
 Consider the results of the preliminary engagement activities which may affect
the audit plan.
 Ascertain the nature, timing and extent of resources necessary to perform the
engagement (e.g. the use of experts, the number of staff, the level of staff
experience, and the procedures to be performed at an interim stage, meetings
and quality reviews).
 Scope refers to the range of activities to be performed by the auditor.
4.3.3.2 The audit plan
In the study reference to the prescribed book, it is stated that the audit plan is more
detailed than the audit strategy (also see ISA 300:par A12). Many of the factors
which will influence the audit strategy will also influence the audit plan (see ISA
300:par A10).
In terms of ISA 300:par 9, the audit plan shall include the following:
 the nature, timing and extent of planned risk assessment procedures

sufficient to assess the risks of material misstatement
 the nature, timing and extent of planned further audit procedures at the
assertion level for each material class of transactions, account balance and
disclosure
 other planned audit procedures that are required to be conducted in order to
comply with the ISAs
4.3.3.3 Audit documentation
In terms of ISA 300:par 12, the auditor should include the following in the audit
documentation:
 the overall audit strategy

 the audit plan
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 any significant changes made during the audit engagement to the overall audit
strategy or the audit plan, and the reasons for such changes
4.3.3.4 Changes to the overall audit strategy and audit plan
As a result of unexpected events, changes in conditions, or the audit evidence

obtained from the results of audit procedures, the auditor may need to modify the
overall audit strategy and audit plan and thereby the resulting planned nature, timing
and extent of further audit procedures, based on the revised consideration of
assessed risks (see ISA 300:par 10 and A13).
Activity 5
Required
Summary
In this learning unit we explained the auditing principles relating to planning.
The auditor’s objective in planning is to plan the audit to ensure that it will be
performed effectively.
Self-assessment
1. Describe the auditor’s objective in planning the audit.

2. Explain the importance of adequate audit planning for the auditor.
3. Describe the steps of the audit planning stage.
4. Describe the matters the auditor should consider when formulating the overall audit
strategy.
5. Explain the elements that should be included in the audit plan.
6. Explain what should be included in audit documentation relating to audit planning.
7. Explain why changes may have to be made to the overall audit strategy and audit
plan.
Feedback on self-assessment:
1. References:

 SAICA Student Handbook Volume 2A (ISA 300:par 2)
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2. References:

 SAICA Student Handbook Volume 2A (ISA 300:par A2)
3. References:
 Jackson & Stent (2014:6/9–6/12)

4. References:

5. References:

6. References:

7. References:

 SAICA Student Handbook Volume 2A (ISA 300:par 10 and A13)
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LEARNING UNIT 4.4: PUTTING THE AUDIT STRATEGY AND

PLAN INTO ACTION
Introduction
As stated in ISA 200:par 11, in conducting an audit of financial statements, the overall
objectives of the auditor are the following:
 to obtain reasonable assurance about whether the financial statements as a

whole are free from material misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether the financial statements are
prepared, in all material respects, in accordance with an applicable financial
reporting framework
 to report on the financial statements and communicate as required by the ISAs, in
accordance with the auditor’s findings
See learning unit 1.5 for a detailed discussion of the above.
We have already discussed the auditor’s objectives in auditing the financial

statements and have also dealt with the nature of the assurance provided by an audit
of financial statements to the users of the financial statements (see learning unit 1.2).
You also learnt about the importance of obtaining sufficient appropriate audit
evidence to form a basis for the audit opinion (see learning unit 3.3). If you are still
unsure about any of the important concepts, revise the relevant learning units.
In this learning unit, the stage of putting the audit strategy and audit plan into action
of the audit process is explained.
4.4.1 The auditor’s response to risks at the financial statement

level and at the assertion level
You learnt in learning unit 3.4 (sec 3.4.2) that in terms of ISA 315, the auditor
should assess the risks of material misstatement at the financial statement
level and at the assertion level. In learning unit 3.4 (sec 3.4.3), you learnt that
the auditor responds to the assessed risks of material misstatement by
conducting further audit procedures (test of controls and substantive
procedures).
Refer to the learning units above to refresh your memory.
In this learning unit you will learn more about the auditor’s overall responses to
address the assessed risk of material misstatements at the financial statement
level and to design and perform further audit procedures (test of controls and
substantive procedures) whose nature, timing and extent are based on and are
responsive to the assessed risk of material misstatement at the assertion level
(see ISA 330: par 5 and 6).
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Diagram 4: Auditor’s response to assessed risks

Auditor’s response to assessed risks

Overall responses Response to assessed risks

• Auditor to design and implement • Auditor to design and perform further

overall responses to address the audit procedures (test of controls and
assessed risks of material substantive procedures) whose nature,
misstatement at the financial timing and extent are based on the

statement level assessed risks of material misstatement

at the assertion level for each class of
transaction, account balance or
disclosure

General actions include the following: Audit procedures

• assign more experienced staff with • The auditor must respond to the risks by

special skills ensuring that the nature, timing and

• assign experts extent of tests of control and

• emphasise to the audit team the substantive tests are correct to reduce
importance of professional audit risk to an acceptable low level
scepticism
• incorporate elements of
unpredictability
• make general changes to the nature,
timing and extent of audit

Test of control Substantive
procedures
procedures

4.4.1.1 Overall response at financial statement level
The auditor must design and implement overall responses to address the assessed
risks of material misstatement at the financial statement level (ISA 330:par 5).
Study
330: The Auditor’s Responses to Assessed Risks (par 5 and A1–A3)
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 auditor’s overall response to address the assessed risks of material
misstatement at the financial statement level
4.4.1.2 Audit procedures to respond to the assessed risks of material

misstatement at the assertion level
Study
 Jackson & Stent (2014:6/20–6/21)
330: The Auditor’s Responses to Assessed Risks (par 6–7 and A4–A19)

the nature, timing and extent of audit procedures to respond to the assessed risks
of material misstatement at the assertion level
4.4.1.3 Audit procedures carried out to satisfy the requirements of the ISAs
The auditor obtains audit evidence by carrying out a number of audit procedures.
Study
In learning unit 3.4 you were introduced to the types of audit procedures that can be
performed. To ensure that you have mastered the required information, complete
the following activity:
Activity 6
Required
Identify the type of procedures (substantive procedures) that the auditor carries out to
obtain audit evidence in each of the following instances:
6.1 The auditor sends out debtors’ letters of confirmation to confirm outstanding
balances.
6.2 The auditor calculates the tax payable by the enterprise and compares this with
the figure calculated by the client.
6.3 The auditor calculates the monthly gross profit percentage of the enterprise and
makes inquiries about any deviations.
6.4 The auditor attends the annual stocktake to take note of stock-taking procedures.
6.5 The auditor checks a calculation of a rebate on an invoice received from a
creditor.
6.6 The auditor asks the financial manager of an enterprise whether there were any
strikes during the year.
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6.1 External confirmation (sends out debtors’ letters of confirmation)

6.2 Re-performance (calculation of tax payable)
6.3 Analytical procedures (calculation of the monthly gross profit percentage)
6.4 Observation (attending the annual stocktake)
6.5 Recalculation (calculation of the rebate on the invoice)
6.6 Inquiries (inquiring about any strikes during the year)
Activity 7
Required
Summary
In this learning unit we explained the auditing principles relating to implementing the
overall audit strategy and audit plan.
The next learning unit deals with the final stage of the audit process.
Self-assessment
1. Describe the auditor’s overall response to assessed risks of material

misstatement at the financial statement level.
2. Describe the auditor’s procedures to respond to assessed risks of material
misstatement at the assertion level.
3. Explain the factors that determine the nature, timing and extent of audit
procedures to respond to the assessed risks of material misstatement at the
assertion level.
4. Explain the various audit procedures used to gather audit evidence and apply
them to practical scenarios.
1. References:
 SAICA Student Handbook in Volume 2A, International Standards on Auditing

(ISA) 330: The Auditor’s Responses to Assessed Risks (par 5 and A1–A3)
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2. References:
 SAICA Student Handbook in Volume 2A, International Standards on Auditing

(ISA) 330: The Auditor’s Responses to Assessed Risks (par 6–7 and A4–A19)
 Jackson & Stent (2014:6/20–6/21)

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LEARNING UNIT 4.5: THE EVALUATING, CONCLUDING AND

REPORTING STAGE
Introduction
In this stage of the audit process, the achievement of the auditor’s overall objectives in
conducting an audit of financial statements is evaluated (see learning unit 1.5:sec
1.5.1.3 and ISA 200:par 11). These objectives are as follows:
 to obtain reasonable assurance about whether the financial statements as a whole

are free from material misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether the financial statements are
prepared, in all material respects, in accordance with an applicable financial
reporting framework
 to report on the financial statements and communicate as required by the ISAs, in
accordance with the auditor’s findings
Based on ISA 700:par 11, the auditor should form an opinion on the financial
statements based on an evaluation of the conclusions drawn from the audit evidence
obtained (see also Jackson & Stent 2014:6/21).
This learning unit deals with the evaluating, concluding and reporting stage of the
audit process.
4.5.1 Evaluation of audit findings
Study
 Jackson & Stent (2014:6/21–6/23)
Note: The auditor has to evaluate and conclude whether or not

 sufficient appropriate audit evidence has been obtained
 uncorrected misstatements are material, individually or in aggregate
 the financial position, financial performance and cash flows are fairly presented in
all material respects in accordance with the applicable financial reporting
standards
 all material events occurring after the financial year-end and the date of the audit
report, have been identified and appropriately dealt with
Make sure that you understand what is meant by a misstatement in the financial
statements (see ISA 200:par 13(i)). An example of an uncorrected misstatement
would be the disclosure of trade and other payables in the financial statements as
R950 680, whereas the auditor corroborated the value of trade and other payables as
R1 065 890 by means of the substantive procedures he or she carried out. Therefore,
the misstatement is R1 065 890 – R950 680 = R115 210.
The actual evaluation of audit findings and conclusions drawn by the auditor will be
dealt with in your further auditing studies.
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4.5.2 Drawing conclusions on the audit results
For the purposes of this module it is sufficient for you to know the following: The
auditor must form an audit opinion about whether the financial statements are
prepared, in all material respects, in accordance with the applicable financial reporting
framework (see ISA 700:par 10).
In order to form that opinion, the auditor must conclude whether or not he or she has
obtained reasonable assurance that the financial statements as a whole are free from
material misstatement, whether due to fraud or error (see ISA 700:par 11).
The actual evaluation of audit findings and conclusions drawn by the auditor will be
dealt with in your further auditing studies.
4.5.3 Auditor’s opinion
For the purposes of this module, it is sufficient for you to know what an unmodified
audit opinion means and be aware of the elements that should be contained in the
auditor’s report (the structure of the audit report).
An unmodified opinion will be expressed when the auditor concludes that the
financial statements are prepared in all material respects, in accordance with
the applicable financial reporting framework (see ISA 700:par 16).
4.5.3.1 The auditor’s report
Study
 Jackson & Stent (2014:18/2–18/5)
700 (Revised): Forming an Opinion and Reporting on Financial Statements (par
20–49)
 SAICA Student Handbook in Volume 2B, South African Auditing Practice
Statement 3 (SAAPS 3) (Revised): Illustrative Independent Auditor’s Reports: Part
A, section 1 (Unmodified Independent Auditor’s Report)
 the elements that form the structure of the auditor’s report and what should be
included in each of the elements
 the example of an unmodified auditor’s report (including the introduction,
management’s responsibility for the financial statements, the auditor’s
responsibility and the auditor’s opinion)
You will not be expected to write an unmodified auditor’s report, but you must be able
to explain all the elements of an unmodified auditor’s report.
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4.5.3.2 Dating of the auditor’s report
Study
700: Forming an Opinion and Reporting on Financial Statements (par 41)
Note: In the study resource above that the auditor’s report should be dated no earlier
than the date on which the auditor has obtained sufficient appropriate audit evidence
on which to base his or her opinion.
Also note that, before an auditor can sign the auditor’s report, all the statements
comprising the financial statements, including the relevant notes, must have been
prepared, and those with the recognised authority must have accepted responsibility
for the financial statements.
Activity 8
Required
Summary
In this learning unit we explained the evaluating, concluding and reporting stage of
the audit process.
Self-assessment
1. Explain what is expected of the auditor in evaluating the audit evidence

obtained.
2. Define the term “misstatements”.
3. Describe and explain the basic elements that form part of the auditor’s unmodified
report.
4. Describe the dating of the auditor’s report.
3. References:
 Jackson & Stent (2014:18/2–18/5)

 SAICA Student Handbook Volume 2A, International Standards on Auditing
(ISA) 700: Forming an Opinion and Reporting on Financial Statements (par 20–
42)
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 SAICA Student Handbook Volume 2B, South African Auditing Practice

Statement 3 (SAAPS 3): Illustrative Independent Auditor’s Reports: Part A,
section 1 (Unmodified Independent Auditor’s Report)
4. Reference: SAICA Student Handbook Volume 2A, International Standards on

Auditing (ISA) 700: Forming an Opinion and Reporting on Financial Statements
(par 41)
Conclusion
In this topic, “The Audit Process”, you learnt the different stages of the audit
process in the statutory audit of an ordinary company trading in goods and services.
You also learnt about the commencement of the audit, planning the audit, putting the
audit strategy and plan into action in relation to audit evidence and evaluating,
concluding and reporting on the audit. In your third-year studies, you will be dealing
with all the stages of the audit process in greater detail.
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TOPIC 5: ENGAGEMENTS TO REVIEW

HISTORICAL FINANCIAL STATEMENTSPIC 4
Topic overview
The aim of this topic is to explain and apply the general principles of review
engagements in accordance with the International Standards on Review
Engagement (ISRE) 2400.

5.1 The auditing principles with regard to review 195
engagements
5.1.1 Ethical requirements, professional scepticism and 197
engagement level quality control
5.2 Preliminary engagement activities 199
5.2.1 Agreeing terms of the engagement 199
5.3 Performing the engagement 201
5.3.1 Determining materiality 201
5.3.2 Obtain an understanding of the entity 201
5.3.3 Designing and performing procedures 201
5.3.4 Subsequent events 203
5.3.5 Written representation 203
5.3.6 Evaluating evidence obtained from the procedures 203
performed
5.4 Conclusion and reporting 205
5.4.1 Forming and expressing a practitioner’s conclusion on 205
the financial statements
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Learning outcomes
In this topic we focus on the following

Learning unit Level
learning outcomes:
5.1 The auditing  Describe and apply the ethical
principles with principles regulating the auditing and
regard to accountancy profession by referring to
review the IFAC Code of Ethics for
engagements Professional Accountants, the SAICA
Chartered Accountants, the IRBA Code
of Professional Conduct for Registered
2
Auditors and the IRBA Rules regarding
Improper Conduct.
 Describe and apply the auditing firm’s

responsibilities for its system of quality
control and quality control for audits and
review of financial statements.
5.2 Preliminary  The preliminary engagement

engagement activities of the review engagement
activities are explained and applied according
to auditing theory.
 The terms of engagement of the 2
review engagement is explained
according to auditing theory.
5.3 Performing the  The principles of performing of the

engagement review engagement are explained and
2
applied according to auditing theory.
5.4 Evaluating,  The evaluating, concluding and reporting

concluding and stage of the review engagement is
reporting explained according to auditing theory 2
and applied.
This topic refers to the following information in the prescribed textbooks:
 Jackson & Stent (2014:19/2–19/16)

 References to the International Standard on Review Engagements (ISRE) 2400
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LEARNING UNIT 5.1: THE AUDITING PRINCIPLES WITH

REGARD TO REVIEW ENGAGEMENTS
Introduction
As stated in Jackson & Stent (2014:19/2) the Companies Act of 2008 resulted in a
marked increase in the number of review engagements performed by auditors. A
review of financial statements is a limited assurance engagement, where the
practitioner expresses a conclusion in a negative form. You learned in learning unit
1.2 that there are two types of assurance engagements: a reasonable assurance
engagement and a limited assurance engagement. Differences between the two
engagement types were explained in that learning unit. It is worthwhile to revise the
principles learned in that learning unit before commencing your studies of this learning
unit.
In this learning unit you will learn about the objectives of the review engagement,
client continuance and acceptance for an independent review engagement, ethical
requirements of a practitioner and quality control of the independent review of
Study
 Jackson & Stent (2014:19/2–19/3)
 SAICA Student Handbook, Volume 2A: International Standards on Review
Engagements (ISRE 2400 par 14)
 companies which qualify for an independent review in terms of the Companies

Act requirements
 description of a review engagement
 practitioner’s objectives in conducting a review of financial statements
Activity 1
Thabo’s Kota (Pty) Ltd calculated its public interest score for the current
financial year to be 200 points.
Required
Discuss which assurance engagement will be applicable to Thabo’s Kota
(Pty) Ltd in the current financial year.
As Thabo’s Kota (Pty) Ltd public interest score is between 100 and 349, the company
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will first have to decide on whether its annual financial statements will be internally or
externally complied. If compiled internally the company’s financial statements will
have to be audited and if complied externally the financial statements can be
independently reviewed.
The review engagement process has been outlined below.
Diagram 1: Stages of the review process
Professional Skepticism
 Preliminary engagement
Client
activities
acceptance  Terms of engagement
 Determine materiality
 Obtain understanding of entity
 Designing and performing procedures

o inquiries of management
o analytical procedures
Quality Control
Perform the
Ethical principles
engagement  Procedures to address specific
circumstances:

o related parties
o fraud considerations
o going concern

 Reconciling the financial statement to
underlying accounting records
 Subsequent events
 Evaluating whether sufficient
appropriate evidence has been
obtained
Concluding
and reporting  Form a conclusion and report
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5.1.1 Ethical requirements, professional skepticism and

engagement level quality control
The diagram above illustrates that the practitioner should always and throughout the
review engagement comply with the relevant ethical principles; plan and perform the
engagement with professional skepticism and implement policies and procedures to
ensure the review engagement is in accordance with the firm’s quality control
procedures.
Jackson & Stent (2014:19/5) states that the practitioner must be independent in mind
and appearance. Likewise, the other fundamental principles of ethical/professional
behaviour cannot be compromised because the engagement is a review and not an
audit. These fundamental principles were covered in detail in learning unit 2.3.
ISA 200 par 13(l) refers to professional skepticism as an attitude that includes a
questioning mind, being alert to conditions which may indicate possible misstatement
due to error and fraud and a critical assessment of audit evidence. It is important that
a practitioner displays this quality throughout the review engagement.
The engagement partner is responsible for the implementation of the firm’s quality
control procedures at the engagement level.
Study

Engagements (ISRE 2400 par 21–25)
 fundamental ethical principles that an practitioner is required to observe

 examples of circumstances that a practitioner should be alert to when exercising
his or her professional skepticism
 the engagement partner’s responsibility with regards to review engagement
quality control.
Activity 2
 Answer the questions, if provided, in section 5.1 of Tutorial Letter 102 and compare your
answers with the solutions in section 5.1 of Tutorial Letter 103.

Summary
In this learning unit we focused on objectives of the review engagement, client
continuance and acceptance for an independent review engagement, ethical
requirements of a practitioner and quality control of the independent review of
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Self-assessment
study material, you should determine if you are able to answer the following
questions:
1. Define a limited assurance engagement.

2. Explain which companies qualify for an independent review in terms of
Companies Act requirements.
3. Define the objective of an independent review engagement.
4. Explain what is meant by professional skepticism.
5. Provide examples of circumstances that a practitioner should be alert to when
exercising his or her professional skepticism.
6. Explain the engagement partner’s responsibility with regard to review
engagement quality control.
2. Reference: Jackson & Stent (2014: 19/2)
3. References:

4. Reference: SAICA Student Handbook, Volume 2A: Overall objectives of an

Standards of Auditing (ISA 200 par 13(l))
6. References:

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LEARNING UNIT 5.2: PRELIMINARY ENGAGEMENT

ACTIVITIES
Assurance engagements may only be accepted when the engagement exhibits
certain characteristics that are conducive to achieving the practitioner’s objectives
specified for the engagement (ISRE 2400 par A35).
In the study resource below you will learn that before the practitioner accepts the
assurance engagement (audit or review), he or she should acquire preliminary
engagement information on the client’s business which can be extended once the
engagement has been accepted.
Study

 factors affecting the acceptance or continuance of a client relationship for review

engagements
 pre-conditions for accepting a review engagement
5.2.1 Agreeing terms of the engagement
When a practitioner accepts a review engagement from a client, a contractual

relationship arises between the practitioner and the client. It is in the interests of both
management and those charged with governance as well as the practitioner, that the
practitioner sends an engagement letter prior to performing the review engagement,
to help avoid misunderstandings with respect to the engagement (ISRE 2400 par
A52). Much of what is covered in the pre-conditions for accepting a review
engagement will be recorded in an engagement letter (Jackson & Stent: 2014:19/6).
Study

 items included in the review engagement letter
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Activity 3
 Answer the questions, if provided, in section 5.2 of Tutorial Letter 102 and
Summary
In this learning unit we focused on preliminary engagement information on the
client’s business which the practitioner is required to acquire before accepting or
continuing with the independent review engagement. You also learned of items that
are included in the engagement letter.
Self-assessment
1. List the factors that affect the acceptance or continuance of client relationships
for review engagements.
2. Describe the pre-conditions for accepting a review engagement.
3. List the items to be included in the review engagement letter.
1. Reference:

 References:

 References:

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LEARNING UNIT 5.3: PERFORMING THE ENGAGEMENT
5.3.1 Determining materiality
The concept of materiality for an audit engagement were discussed in learning unit
3.5. These concepts are similar to those of a review engagement. For a review
engagement, the practitioner is required to identify areas in the financial statements
where material misstatements are likely to arise and to provide limited assurance on
whether the financial statements are free from material misstatements (Jackson &
Stent: 2014:19/7).
Study
 Jackson & Stent (2014:19/7–19/8)

 concepts of materiality in a review engagement
5.3.2 Obtain an understanding of the entity
It’s important for the practitioner to obtain an understanding of the entity and its
applicable financial reporting framework as this enables the practitioner to identify
areas where material misstatements are likely to occur. This enables the practitioner
to design procedures to address these areas.
Study
 Jackson & Stent (2014:19/8–19/9)

 benefits of obtaining an understanding of the entity in a review engagement

 matters that forms part of the practitioner’s understanding of the entity
5.3.3 Designing and performing procedures
As stated in Jackson & Stent (2014:19/9-19/10) the practitioner performs mainly

inquiries and analytical procedures in order to obtain sufficient appropriate
evidence as the basis for a conclusion on the financial statements. The practitioner
shall perform additional procedures to address circumstances/matters he or she
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becomes aware of that cause him or her to believe that the financial statements may
be materially misstated.
Study
 Jackson & Stent (2014:19/9–19/11)

Engagements (ISRE 2400 par 47–49, 57)
 procedures performed by the practitioner to obtain sufficient appropriate

evidence
 matters included in the practitioner’s inquiries of management
 analytical procedures performed by the practitioner
 Procedures to address specific circumstances
In addition to the procedures performed above by the practitioner to obtain sufficient

appropriate evidence, ISRE 2400 lists three specific matters that a practitioner must
conduct procedures on. These are:
 related parties
 fraud and non-compliance with laws and regulation
 going concern
Study

 procedures to be performed by the practitioner in addressing the three specific

matters raised in ISRE 2400
 Reconciling the financial statements to the underlying accounting

records
The practitioner shall obtain evidence that the financial statements agree with or
reconcile to the entity’s underlying accounting records (ledgers, summary records or
schedules such as the trial balance).
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Before expressing a conclusion the practitioner shall perform the following

procedures:
5.3.4 Subsequent events
 Request management to make the necessary adjustments or disclosure in the

financial statements as a result of events occurring between the date of the
financial statements and the date of the practitioner reports.
 Take appropriate actions to seek to prevent reliance on the practitioner's report
should the financial statements be subsequently issued without the necessary
amendments.
5.3.5 Written representation
 Request management to provide a written representation that management has

fulfilled its responsibilities described in the agreed terms of engagement (ISRE
2400 par 61).
5.3.6 Evaluating evidence obtained from the procedures

performed
 Evaluate whether sufficient appropriate evidence has been obtained from the
procedures performed. If not, the practitioner shall perform additional procedures
necessary in the circumstances to be able to form a conclusion on the financial
statements (ISRE 2400 par 66).
Study

Activity 4
Summary
In this learning unit we focused on the principles of performing a review
engagement.
Self-assessment
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1. Describe the concept of “materiality” in a review engagement and how it should

be applied in a review engagement.
2. Explain the benefits of obtaining an understanding of the entity in a review
engagement.
3. List the matters that will form part of the practitioner’s understanding of the
entity.
4. Describe the procedures performed in order to obtain sufficient appropriate
evidence.
5. Describe the matters included in the practitioner’s inquiries of management to
obtain sufficient appropriate evidence.
6. Describe the analytical procedures that practitioner will perform in order to
obtain sufficient appropriate evidence.
7. List the practitioner’s considerations and procedures performed in addressing
the specific matters raised in ISRE 2400: related parties, non-compliance with
laws and regulations and going concern.
3. References:
 Jackson & Stent (2014:19/8–19/9)

4. References: Jackson & Stent (2014:19/9)

5. References:

6. References: Jackson & Stent (2014:19/9–19/10)

7. References:
 Jackson & Stent (2014:19/10–19/11)

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LEARNING UNIT 5.4: CONCLUSION AND REPORTING

The practitioner’s objectives in a review of financial statements under this ISRE are to
(see ISRE 2400 par 14):
(a) obtain limited assurance, primarily by performing inquiry and analytical procedures,
about whether the financial statements as a whole are free from material
misstatement, hereby enabling the practitioner to express a conclusion on whether
anything has come to the practitioner’s attention that causes the practitioner to
believe the financial statements are not prepared, in all material respects, in
accordance with an applicable financial reporting framework; and
(b) report on the financial statements as a whole and communicate, as required by this
ISRE
In the previous learning units we learnt of the practitioner’s considerations in

determining materiality. We also learnt of the different procedures the practitioner will
perform in order to adhere to ISRE2400's requirements before expressing his or her
conclusion. This learning unit deals with concluding and reporting of a review
engagement.
5.4.1 Forming and expressing a practitioner’s conclusion on the

financial statements
Study
 Jackson & Stent (2014:19/12–19/16)
 factors to be considered by the practitioner in forming a conclusion on the

financial statements
 types of conclusions a practitioner can express for an unmodified or modified
conclusions
 items included in the practitioner’s report
Activity 5
Summary
In this learning unit we focused on the principles of evaluating, concluding and
reporting of a review engagement.
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Self-assessment
1. Describe the factors to be considered by the practitioner in forming a conclusion

on the financial statements.
2. Describe the types of conclusion a practitioner can express for a unmodified or
modified conclusion.
3. List the items to be included in the practitioner’s report.
3. References: Jackson & Stent (2014:19/13–19/14)
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Bibliography
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MO001/4/2017

Auditing Theory and Practice

© 2016 University of South Africa

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Announcement 2: Message:

Announcement 3: Message:

Announcement 4: Message:

Announcement 5: Message:

Announcement 6: Message:

2. Purpose of this module

3. Link to other modules

internal controls in the accounting cycles from the auditor’s perspective,

4. Framework of the module

5.1 The study package

 the prescribed book(s)

A variety of learning activities and self-evaluation questions are included in each

Advise Give advice; express an opinion as an expert.

Compare Examine in order to observe resemblances, relationships and

Define State precisely the meaning/scope/total character of; make

Motivate Cite facts/reasons in support of a viewpoint or argument.

6.2 Mastering the study material

 Creating your personal list of key ideas and terms

 a brief definition or explanation of the meaning

You can expect us to do the following:

 We will provide you with up-to-date and relevant learning material.

TOPIC 1: INTRODUCTION TO AUDITING

This topic is divided into the following learning units:

Learning unit Title Page

1.1 THE AUDITOR 43

Learning unit In this topic we focus on the Level

1.1 The auditor  Describe the various roles of 1

1.2 Assurance and non-  Describe assurance and other 1

1.3 Auditing postulates  Explain and discuss the 1

1.4 The accounting  Describe the accounting 1

1.5 The financial statement  Explain the financial statement 1

LEARNING UNIT 1.1: THE AUDITOR

The organisers require an independent verification by a reputable profession which

1.1.1 The definition, types and characteristics of auditors

1.1.1.1 What is an auditor?

Note the following in the study resources above:

1.1.1.2 Types, characteristics and classification of auditors

Note the following in the study resource above:

Table 1: Differences between internal and external auditors

Internal auditors External auditors

 Report to management (including  Report to the shareholders.

1.1.1.3 Independence and fundamental ethical principles

Independence is the characteristic that is common to all the assurance

Note the following in the study resources above:

Professional competence and due care

Note: Objectivity is the fifth fundamental ethical principle. However, it is not

1.1.2 The need for auditors

You may ask: “Why do entities require an audit?”

Why is there a need for auditors?

Note the following in the study resources above:

 Confidence in financial information

1. Describe what an auditor does.

LEARNING UNIT 1.2: ASSURANCE AND NON-

An auditing pronouncement is an official or authoritative statement, for example the

Diagram 1: Types of assurance and non-assurance engagements (based on

1.2.1 Assurance engagements

1.2.1.1 Definition of an assurance engagement and the scope of the

Note the following in the study resources above: