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Auditing
JOIN KHALID AZIZ
COACHING
CLASSES
ACCA F8 & P7
PIPFA FINAL
AUDITING.
0322-3385752
JOIN KHALID AZIZ
ICMAP STAGE 1, 2 & 3 COACHING
CLASSES.
FUNDAMENTALS OF FA &
ECONOMICS.
COST ACCOUNTING
FA & APPRAISAL
0322-3385752
JOIN KHALID AZIZ
B.COM COACHING CLASSES.
ACCOUNTING, ADVANCED
ACCOUNTING, STATISTICS,
ECONOMICS & INCOME TAX
LAW.
0322-3385752
Topics for discussion today
Preliminary engagement activities
Planning process
◦ Overview
◦ Risk and materiality
◦ Audit strategy & audit plan
Going concern & factual insolvency
Subsequent Events
Fraud, AP Act (if time available)
Reporting (if time available)
SAICA HANDBOOK:
◦ ISA 240: The Auditor’s responsibilities relating to fraud in an audit of
financial statements.
◦ ISA 315: Identifying and assessing the risks of material misstatement
through understanding the entity and its environment.
◦ ISA 320: Materiality in planning and performing an audit.
◦ ISA 330: The Auditor’s responses to assessed risks.
◦ ISA 450: Evaluation of misstatements identified during the audit
◦ ISA 510: Initial audit engagements – opening balances.
◦ ISA 520: Analytical Procedures.
Risk-based auditing
Documentation required
◦ Discussions between audit team
◦ Key elements of understanding
◦ Identified risks
FS level
Assertion level
Responsibility of auditor
◦ To obtain reasonable assurance that AFS are free of
material misstatement – through error or fraud
Audit report
◦ Auditor’s opinion on whether or not the AFS are materially
misstated
Considerations
◦ Amount of misstatement
Quantitative
◦ Nature of misstatement
Qualitative
◦ 2 Levels at which materiality is considered
Overall level
Individual level
Evaluation of misstatements
◦ Selected audit procedures are carried out – on
samples of the population e.g. debtors, sales,
creditors
◦ Errors in samples
◦ Draw audit conclusions about the populations
Cash is King
Auditor’s responsibility
◦ Risk of expression of unqualified opinion where
has been inappropriately applied
◦ Need to gather sufficient, appropriate evidence to
support adoption (by management) of the going
concern assumption
Nature of testing
◦ Substantive evaluation of directors’ assessment of going
concern
◦ Procedures
Analytical procedures
Confirmation of evidence provided
Enquiry of personnel
Extent of testing
◦ Determined by “certainty” of company to
continue as a going concern
Advanced Auditing
March/April 2009 Advanced Auditing 72
S45 – Reportable Irregularities
The individual registered accountant
◦ Is satisfied or has reason to believe that
◦ A reportable irregularity has / is taking place MUST
◦ Without delay
◦ Send a written report to the IRBA, with particulars
◦ MUST notify management within 3 days, and
provide management with a copy of the report
◦ Within 30 days of sending report to IRBA
◦ Discuss report with management » representations
Advanced Auditing
March/April 2009 Advanced Auditing 73
S45 – Reportable Irregularities
Send another report to the IRBA
◦ No reportable irregularity has / is taking place OR
◦ Suspected RI is no longer taking place, and that steps
have been taken to recover losses OR
◦ RI is continuing
Where RI is continuing
◦ Notify appropriate regulator ASAP
Details of irregularity
In writing
Copy of report
◦ Regulator may carry out investigations as needed
Advanced Auditing
March/April 2009 Advanced Auditing 74
Fraud – Introduction
Primary responsibility for prevention and detection of
fraud (and error) rests with management and those
charged with governance
Good control environment
Risk assessment procedures
Implementation, operation, and monitoring of IC system
Auditor’s responsibility
Consider fraud when assessing risk of material misstatement
Respond to assessed, identified, or suspected risk
Able to express audit opinion at acceptable level of audit risk
Advanced Auditing
March/April 2009 Advanced Auditing 75
Terminology
Error
◦ Unintentional act which leads to misstatement of
AFS
Fraud
◦ Intentional act, in order to obtain unfair illegal
advantage
◦ Fraud may be committed by
Management
Those charged with governance
Employees
3rd parties
Advanced Auditing
March/April 2009 Advanced Auditing 76
Terminology
Fraud risk factors
◦ Indicate an incentive or pressure to commit fraud,
or provide an opportunity to commit fraud
Management fraud
◦ Committed by member of management or person
charged with management
◦ S45 implications
Employee fraud
◦ Committed by employee
◦ NO S45 implications
Advanced Auditing
March/April 2009 Advanced Auditing 77
Terminology
2 Main categories of fraud
◦ Fraudulent financial reporting
Intentional misstatements, including omissions – deceive
users
Perpetrated by management
Includes
Falsification of accounting records
Management override
◦ Misappropriation of assets
Embezzlement
Theft of physical assets, intellectual property
Company pays for goods and services not received
Advanced Auditing
March/April 2009 Advanced Auditing 78
Auditor’s Responsibilities
Requirements in terms of ISA 240
◦ Attitude of professional scepticism
Even where management has previously acted with
integrity
◦ Discussion amongst audit team
Client’s susceptibility to material misstatement due to
fraud and error
◦ Obtain information identify risk of material
misstatement due to fraud and error
NB: consider whether any of the information obtained
indicates whether any of the FRAUD RISK FACTORS are
present
Advanced Auditing
March/April 2009 Advanced Auditing 79
Auditor’s responsibilities
Requirements in terms of ISA 240
◦ Assess the risk of material misstatement due to
fraud and error
At FS level
At assertion level
◦ Determine audit response to address the risk
At FS level
At assertion level
Advanced Auditing
March/April 2009 Advanced Auditing 80
Auditor’s response to risk due to
fraud
At FS level
◦ Assignment and supervision of staff
◦ Consider accounting polices adopted by management
◦ Element of unpredictability in nature, timing and extent
of audit procedures
At assertion level
◦ Impacts on nature, timing and extent of audit
procedures
◦ Considerations
Attempts to conceal fraud
Relevance and reliability of evidence collected
Advanced Auditing
March/April 2009 Advanced Auditing 81
Auditor’s response to risk due to
fraud
Management override
◦ Auditor must design and perform procedures to
respond to the risk of management override
Advanced Auditing
March/April 2009 Advanced Auditing 82
Auditor’s response to risk due to
fraud
Management representations
◦ To include
Management is responsible for IC systems – prevent and
detect fraud
Management has disclosed results of its assessment of risk
of material misstatement due to fraud
Management has disclosed all frauds involving management
and employees
Management has disclosed any allegations of fraud
◦ Should only ever be corroborating evidence
Advanced Auditing
March/April 2009 Advanced Auditing 83
Fraud Risk Factors
Stage of audit
◦ At the planning stage
Gaining understanding of entity and its environment
Gather information to identify the risk of material
misstatement due to fraud
Assessing the risk of material misstatement due to
fraud
◦ Does the information gathered indicate the
presence of the risk factors
Advanced Auditing
March/April 2009 Advanced Auditing 84
Fraud Risk Factors
Consideration of
◦ Incentives / pressures
On management to report fraudulently
On management and employees to misappropriate assets
◦ Opportunities
For management to report fraudulently
For management and employees to misappropriate assets
◦ Attitudes / rationalisations
Do attitudes of management and employees indicate
Fraudulent reporting
Misappropriation of assets
Advanced Auditing
March/April 2009 Advanced Auditing 85
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