Presented to LUPANE STATE UNIVERSITYAUDIT CLASS Bekithemba Ndebele

(ACCA*); BBA-Accounting

InPRACTICE

A process of gathering evidence that supports Management Assertions.

Carried out by Professional Accountants registered with a regulatory board.

To express an opinion whether the financial statements of an entity are fairly stated.

What is an Audit?

C - CompletenessE - Existence/OccurrenceA- AccuracyV - ValidityO - Rights and ObligationsP – Presentation and Disclosure

Management Assertions

An audit is a test of these assertions

Step 1

• Pre-engagement Activities

Step 2

• Planning and Risk Assessment

Step 3

• Testing Internal ControlsStep

4• Test of Detail

Step 5

• Concluding and Reporting

5 STEP Audit Process

Prof

essi

onal

Ske

ptic

ism

These are activities done before commencement of audit activities. Client evaluation process- usually done by Proposed Engagement

Partner A client acceptance or continuance template is completed; Issues affecting acceptance or continuance of audit clients include:

1. consideration of independence and ethics2. Firm’s capability to perform a qualitative engagement3. Client related issues including risks associated with auditing the client and

nature of business of the client. Drafting a TERMS OF REFERENCE LETTER-engagement letter

specifying the scope of the engagement and audit fees and any other important issued to be highlighted.

1. Pre-Engagement Activities

Accept or reject client Draft Engagement Letter, get it signed by both parties Send to client an Audit Planning Memorandum Send to client a Client Assistance Package

What is Done

Identifying Matters

Linking Matters to Account Balances or classes of

transactions

Identifying Inherent Risks

Identifying Significant

RisksDocument

Audit StrategyDocument

Audit Plan/Program

2. Planning and Risk Assessment

60% of the Auditor’s time

Have a thorough understanding of the client’s business and its environment.

You obtain this understanding from being a wide reader, research, past experience etc.

From your understanding of the entity and its environment, you can populate all the matters.

Examples of matters are:1. The entity uses cash2. The entity has one signatory to the bank account3. The accountant does receipting, banking and performs bank

reconciliations4. The Minister proclaimed the writing off of accounts receivable from

rates and service charges

How to Identify a matter

NB: Risk assessment is always led by a Partner!!!

Consider matters in the previous slide, what are the account balances associated to each?

Matter Account Balance1. The entity uses cash before it is banked 1. Cash and cash equivalents2. The entity has one signatory to the bank account

2. Overall financial statements

3. The accountant does receipting, banking and performs bank reconciliations

3. Cash and cash equivalents, Operating expenditure

4. The Minister proclaimed the writing off of accounts receivable from rates and service charges

4. Trade and Other receivables

How to Link Matters to Balances and Classes of Transactions

It is a RISK that assumes that there are no control. You are saying ‘What can possibly go wrong, assuming there were

no controls’? Consider what can go wrong arising from the matters you identified

How to IdentifyInherent Risks

NB: Auditors are worried about Audit Risk, not Business Risk. Audit risk is the Risk of Material Misstatement

A significant risk is a risk that requires a specific audit procedure, because It cannot be mitigated by ordinary audit procedures.

The audit procedure is usually a procedure that would not ORDINARILLY be performed An example would be circularisation of Creditors.

How to IdentifySignificant Risks

NB: Auditors are worried about Audit Risk, not Business Risk. Audit risk is the Risk of Material Misstatement

The Overall Audit Strategy looks at the TIMING AND EXTENT of Audit Procedures and setting planning and performance materiality.

TIMING OF AN AUDIT PROCEDURE refers to when a particular procedure is to be done. e.g. When are we doing the Interim audit?; when are doing the inventory count?

EXTENT OF AN AUDIT TEST refers to the size of the sample to test.

Formulating An Overall Audit Strategy

A detailed audit plan outlines our response to each risk identified.

A detailed Audit Plan is more of an audit program. An audit plan also includes staffing the assignment basing

on experience, personality, etc. It looks at each audit procedure on a step-by-step basis.

Formulating the Detailed Plan

Lets Map this Trial Balance

Client Bekithemba (Private) Limited

Year end 31 December 2012

Subject Materiality computation

Objective

Total RevenueUSD

Sales (Butchery) 1 525 024Sales (Farm) 1 062 838

2 587 862

Total revenues 2 587 862Benchmark (0.5%) 0.50%Planning materiality 12 939

Tolerable error (60%) 7 764

Audit Notes

Done By : BN Date: 15 Feb 2014Reviewed by : ST Date 15 Feb 2014

To determine planning materiality and tolerable error

A benchmark of 0.5% was used basing on prior year audit findigs which indicated a weak control environment over revenue and cash.

AA1

Setting Planning Materiality

Internal controls are used by the client to mitigate risks. Auditors take advantage of this and use internal controls

to determine the nature, timing and extent of substantive procedures and also to identify those controls that the auditor can rely on.

Where there is a weak control environment, the auditor will perform more work on substantive procedures either by:

Increasing sample size; or Performing more procedures on the same sample.

The auditor will test the design effectiveness of controls through performing a test of controls to determine of controls are designed effectively; if yes

The auditor will then test the operating effectiveness of controls to determine if they were applied properly throughout the period under review.

3. Testing Internal Controls

4. Audit Procedures

Audit Risk =

Inherent Risk X

Control Risk X

Detection Risk

The auditor needs to obtain SUFFICIENT APPROPRIATE audit evidence.

To express an opinion…

SufficientQuantitative

AppropriateQualitative+ = Opinion

The Audit Opinion Depends on the Sufficiency and Appropriateness of the Evidence Obtained

It is the risk that the auditor will not detect a material misstatement in the audit of financial statements whether due to fraud or error.

It emanates from the following: The Auditor will apply an inappropriate audit procedure Omission of critical audit procedures The Auditor will apply an appropriate audit procedure on a

wrong population The auditor will select a sample that is not representative of

the population The auditor applying an appropriate audit procedure at the

wrong timing

Detection Risk

Auditors apply the following Audit Procedures depending on the audit plan.

Enquiry

Confirmations

Analytical Procedures

Observation

Recalculation

Re-performance

NB: You cannot have sufficient poor quality audit evidence

?

Remember… Application of an inappropriate audit procedure; or Applying an appropriate audit procedure at the wrong time; Applying an appropriate audit procedure on the wrong

sample

Will make the auditor fail to detect material misstatements due to error or fraud.

How to Apply Audit Procedures

Direction of testing is very important…it is influenced by the primary risk.

Depending on whether it’s a Balance Sheet Item or a Statement of Profit or Loss and Other Comprehensive Income item.

Direction of testingTesting

Nature of Balance

Primary risk Primary Assertion

Debit Balances Overstatement Existence/Occurrence

Credit Balances Understatement Completeness

Financial Statement Item

Primary Risk Primary Assertion

Direction of Testing

Revenue Understatement Completeness Source Document to Accounting System

Cost of Sales/ Expenditure

Overstatement Occurrence Accounting System to Source Document

Non-current Assets

Overstatement Existence Accounting System to Source Document

Current Assets Overstatement Existence Accounting System to Source Document

Non-current Liabilities

Understatement Completeness Source Document to Accounting System

Current Liabilities

Understatement Completeness Source Document to Accounting System

Direction of Testing

NB: Where a Significant risk is identified, then procedures will be tailored to reduce it to an acceptably low level.

1. Nature of Balance Credit2. Primary risk Understatement3. Primary Assertion Completeness4. Direction of testing Source document to

accounting record

How to Audit Revenue

Test sequence of all invoices

1. Nature of Balance Debit2. Primary risk Overstatement3. Primary Assertion Occurrence4. Direction of testing Accounting records to source

document

How to Audit Expenses

Trace amounts to supporting documentation

1. Nature of Balance Debit2. Primary risk Overstatement3. Primary Assertion Existence4. Direction of testing Accounting records to source

document

How to Audit Non-current Assets

Physically Verify Assets in Asset Register

1. Nature of Balance Debit2. Primary risk Overstatement3. Primary Assertion Existence4. Direction of testing Accounting records to source

document

How to Audit Inventory

Perform a Stock Count

1. Nature of Balance Debit2. Primary risk Overstatement3. Primary Assertion Existence4. Direction of testing Accounting records to source

document

How to Audit Trade and Other Receivables

Circularize Debtors’ Confirmations

1. Nature of Balance Debit2. Primary risk Overstatement3. Primary Assertion Existence4. Direction of testing Accounting records to source

document

How to Audit Cash and Cash Equivalents

Circularize Bank Confirmations

Perform Cash Count

1. Nature of Balance Credit2. Primary risk Understatement3. Primary Assertion Completeness4. Direction of testing Source document to

accounting record

How to Audit Non-current Liabilities

Review contracts

1. Nature of Balance Credit2. Primary risk Understatement3. Primary Assertion Completeness4. Direction of testing Source document to

accounting record

How to Audit Current Liabilities

Agree to supplier statements

1. Nature of Balance Debit/ Credit2. Primary risk Overstatement and

Understatement3. Primary Assertion Validity and Completeness4. Direction of testing Accounting records to source

document

How to Audit Payroll

Check for ghost employeesPerform a depth test

CONCLUDING AND

REPORTING

Concluding activities include: A review of the Going Concern of the client A review of Subsequent Events Determining whether all identified risks were mitigated Preparing Audit Opinion

Concluding Activities

An audit is done for the sole purpose of expressing an opinion, however, we also provided a Management Letter (Report to Management).

An Audit will normally have two deliverables:1. Auditor’s opinion on the Audited Financial Statements2. Management Letter (Report to Management)

Reporting

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

OpinionIn our opinion, the financial statements present fairly, in all material respects, the financial position of Bekithemba (Private) Limited as at 31 December 2013 and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards.

Other MatterWe would like to draw the attention of the shareholders to the fact that Bekithemba (Private) Limited uses a fixed exchange rate to translate foreign currency transactions into the functional currency. This has resulted in a large foreign currency exchange gain.

Auditor’s Opinion