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9 LEARNING UNIT 9

9 ASSURANCE BY THE EXTERNAL AUDITOR

IN THIS LEARNING UNIT WE ARE GOING TO


•• explain the objective of an audit
•• identify the level of assurance provided by external auditors
•• identify organisations subject to an financial statement audit

9.1 INTRODUCTION
In the previous learning unit we looked at the auditing profession and noticed that
it is highly regulated through legislation, standards and codes. Although external
auditors perform many different functions in practice (non-assurance engage-
ments), for the purposes of this module the main function of the external auditor
registered with the IRBA is to perform the external audit of financial statements
(assurance engagements). So, what do auditors really do when they audit finan-
cial statements? All of the auditor’s work is summarised in an audit report that
accompanies the annual financial statements. The end product of the auditor’s
work is reflected in the audit report.

9.2 THE EXTERNAL AUDITOR

INTERNET ACTIVITY 9.1

We all have bought something from Shoprite, so let’s go to their annual financial
statements. Google “annual financial statements Shoprite” and then select and
open an example of their latest annual financial statements. Scroll through the
document (heavy stuff) but I want you to read the page titled “Independent Auditor’s
Report to the Shareholders of Shoprite Holdings Limited”. Note that the report sets
out the director’s responsibilities, the auditor’s responsibilities and the audit opinion.

As stated in Jackson & Stent (2016:1/2) registered external auditors are auditors
who express an independent opinion on whether the annual financial statements
of a company fairly present the financial position and results of the company’s
operations. The external auditor is not an employee of the company. The external
auditor enhances the degree of confidence which users of the financial statements
will have in the information in those financial statements. Registered auditors offer
their services to the public. They are described as being “in public practice” and
must be registered with the Independent Regulatory Board for Auditors.

9.3 LEVELS OF ASSURANCE


In terms of the International Framework for Assurance Engagements, an assur-
ance engagement is one in which the professional accountant (registered audi-
tor) “expresses a conclusion designed to enhance the degree of confidence of

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LEARNING UNIT 9:  Assurance by the external auditor

the intended users, other than the responsible party, about the outcome of the
evaluation or measurement of a subject matter against the criteria”.

The work performed by the auditor can be divided into levels of assurance.

STUDY

Jackson & Stent (2016:1/8-9) – Levels of assurance

DIAGRAM 9: LEVELS OF ASSURANCE

Absolute assurance eg. Certifying


“100%”

t
es
gh
hi Reasonable assurance eg. Standard
audit “Fairly present”
Levels of Assurance
Limited assurance eg. Reviews
“Nothing came to our attention”
low
es
t

Non-assurance eg. Taxation and


advisory services

ACTIVITY 9.1

Refer to the Shoprite annual financial statements. Identify the level of assurance
provided by their auditors.

ACTIVITY 9.2

You are required to:


(1) describe what the level of assurance in an audit of financial statements entails
(2) explain the meaning of reasonable assurance in an auditing context

SUGGESTED SOLUTION 9.2

Reference: Jackson & Stent (2016:1/5–1/9)

(1) In an audit as a reasonable assurance engagement, a registered auditor gath-


ers 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 Standards (or other suitable
reporting framework) appropriately in presenting fairly the financial position,
financial performance and cash flow information and accompanying notes
of the company for the financial year.

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TOPIC 3:  THE EXTERNAL AUDITOR

(2) The auditor does not certify or confirm the absolute correctness of financial
information, but rather, expresses an opinion on its fair presentation. The audit
is designed to provide reasonable assurance that the financial statements,
taken as a whole, are free of material misstatement, not that they are one
hundred per cent correct. The International Standards of Auditing, defines
reasonable assurance as a “high but not absolute” level of assurance.

9.4 BUSINESSES SUBJECT TO AN AUDIT


Determining which businesses are subject to an audit depends on the extent to
which the annual financial statements will affect or influence the general public.
Therefore, all public companies and state-owned companies will automatically be
subject to an audit. What about the private companies and close corporations?
The audit of financial statements is legislated to protect the general public. For
example, it will be senseless for a very small company (low turnover), with one
shareholder and three employees to be subjected to an audit. In this case, an
independent review will be adequate.

STUDY

•• Jackson & Stent (2016:1/13–14) – The public interest and public interest scores
•• Jackson & Stent (2016:1/14) – Chart summary

ACTIVITY 9.3

A private company or close corporation with a public interest (PI) score of 350
points and above is subject to an audit in terms of the Companies Act.

List the four elements that make up the public interest score calculation.

SUGGESTED SOLUTION 9.3

1. The average number of employees per year equals the same number of points.

2.
3.
4.

9.5 THE FINANCIAL STATEMENT AUDIT ENGAGEMENT


Close corporations and private companies with a public score of 350 points and
more are subject to a financial statement audit. All public and state-owned compa-
nies, regardless of their public interest score, are subject to a financial statement
audit. Private companies with a public score between 100 to 349, who compile
their own annual financial statements, are also subject to an audit. As mentioned

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LEARNING UNIT 9:  Assurance by the external auditor

earlier in this learning unit, the level of assurance provided by a financial state-
ment engagement is one of “reasonable assurance”.

ACTIVITY 9.4

Describe the overall objectives of the auditor in a financial statement audit.

SUGGESTED SOLUTION 9.4

Reference: Jackson & Stent (2016:1/7)

The overall objectives of the external auditor are to:


•• obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, 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
•• report on the financial statements and communicate as required by the
International Standards on Auditing (ISA), in accordance with the auditor’s
findings (SAICA, Handbook: Volume 2)

9.6 SUMMARY AND SELF-ASSESSMENT


In this learning unit we discussed the role of the external auditor.

Refer to your notes you made in your workbook after completing the following
activities.

Activity 9.1 Internet Activity 9.1


Activity 9.2
Activity 9.3

After having worked through the learning unit and the study references are you
able to:
•• explain the objective of an audit?
•• identify the level of assurance provided by external auditors?
•• identify organisations subject to a financial statement audit?
In the next learning unit we will discuss the professional conduct requirements
for external auditors.

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