2. What is an audit really?
• Definition
– Express opinion whether AFS prepared, within
materiality, in accordance with identified financial
reporting framework
• Considerations
– Sufficient, appropriate evidence
– Enhances credibility, but not absolute assurance
– Does not guarantee future viability
• Auditing & society
– May be required by statute, external requirements or
voluntarily
– We sell peace of mind
3. The Nexia audit approach
• Planning & risk assessment
– Briefing/Pre-planning meeting
– Obtain/update & record understanding of client’s business
– Document & evaluate internal control
– Engagement team discussion
– Identify & assess risks
– Set materiality
– Design audit strategy & tailor programmes
• Review & approve risk assessment & audit strategy
• Fieldwork
• Completion procedures
• Conclude & report/express opinion
4. The Audit Process
Client Pre-planning: Understanding of Client’s Business
Acceptance / Review of files Document & Evaluate Internal Control
Continuance & Meetings Preliminary Analytical Review
Internal Audit
Prior Years' Experience
Engagement Team Discussion
Audit Strategy
Tailor Audit
Link Programmes
Identify and Assess Risks
Control Evaluation
Audit Set Materiality
Work
Conclude on
Matters for Partner
Attention
5. Briefing / pre-planning meeting
• Partner to brief team prior to planning
• Prepare
– Review permanent & prior yr file, prior yr
management letters, AFS, etc
– Identify points forward
• Focus of meeting
– Latest developments
– Likely risk areas
– Potential going concern problems
– Input from partner
• Minutes / notes of meeting
• Incorporate in planning
6. Obtain/update & record
understanding of client business
• Often have unrecorded knowledge
– Must record to comply with the ISAs
• Aim
– To obtain/update understanding of client’s
business & record relevant details to design
audit approach
• Record in relevant parts of the file
7. Document & evaluate internal control
• Reasons
– Gain understanding of business
– Assists in drafting substantive tests
– Assessment of control risk
• ISAs require understanding of internal control
relevant to audit
– Control environment
– Entity’s risk assessment procedures
– Information system re financial reporting
– Control activities
– Monitoring of controls
8. Document & evaluate internal control
• Information relevant to the audit
– Use professional judgment
– Usually relate to objective of preparing financial
statements
– May be relevant if apply to non-financial data
– Partner / manager to provide guidance
– File in current file
9. Document & evaluate internal control
• Depth of understanding
– Use professional judgment
– Evaluate design & implementation relevant to
audit, and to extent not done yet for
• Significant risks
• Risks for which substantive procedures alone not
adequate
– Inquiry alone not sufficient – confirm by
• Observation
• Inspection of document & reports
• Walk-through tests
– Must include risks arising from IT
10. Engagement team discussion
• ISA 315 requires discussion of susceptibility of
AFS to material misstatements due to fraud or
error
• Objective is to
• Understand above for areas assigned to team members
– How results of their areas impact on others
• May be further discussions
– Objective is to communicate & share information
11. Identify & Assess Risks
• Direct impact on extent & nature of procedures
• Based on understanding – not educated guess
• Assess at
– Overall FS level
– Assertion level for balances, classes of transactions &
disclosures
• Revision of risk assessment – continuous
• Response to risk in order to reduce audit risk
– At overall FS and individual assertion level
12. Set materiality
• Information is material if its omission or
misstatement influences users
• Generally procedures focus on high-risk
areas
• But MUST consider materiality
• Perform substantive procedures for material
transactions, balances & disclosures
irrespective of risk
13. Design audit strategy
• Consider risk, materiality, understanding
(incl. internal control)
• Do not blindly follow prior year
• Address risks by section, by assertion
• Assertions for
– Classes of transactions
– Account balances
– Presentation & disclosure
14. Directional Testing
• Hinges on double entry bookkeeping
• Test debit entries for overstatement
• Test credit entries for understatement
• Usual misstatement assumed
– Improper expenditure
– Unrecorded income
• Direction of test depends on risk of item
15. Impact of directional testing
• Most obvious in
– Purchases ² Payments ² Accounts payable
– Revenue ² Receipts ² Accounts Receivable
– Payroll ² Payments ² Accounts Payable
• Does not apply to
– Inventory
– Bank
– Provisions
16. Tailor programmes
• Tailor templates / existing programmes
for
– Risks identified
– Industry of client
– Client’s accounting system
– Significant accounting work performed
by Nexia
17. Conduct the fieldwork
• Proper brief
– Prior year file without brief NOT good enough
• Read planning, ensure client & risks
understood
• Understand audit approach
• For individual sections
– Study TB, draw up leads & then follow
programme
• Do not blindly follow prior year file
• Follow tailored programmes
18. Audit evidence
• ISAs require sufficient, appropriate
evidence on which to base opinion
• What is audit evidence?
• Sufficient vs. Appropriate
• Obtained for each assertion
• Must be adequately documented
– Procedures performed
– Extent & nature of tests
– Items selected for testing
– Results
19. Procedures for obtaining audit evidence
• Includes
– Risk assessment procedures
– Tests of controls
– Substantive procedures
• Risk assessment procedures include
evaluation of internal control
– Regardless of planned approach
– All 5 elements of internal control
– Inquiry alone not sufficient
– Document intended reliance
20. Tests of control
• Required where
– Risk assessment includes expectation of
operating effectiveness of controls
– Substantive procedures alone not adequate
– Efficiency is overriding consideration
• Objective: determine if internal control
– Suitably designed
– Operated effectively throughout period
• Usually precede substantive tests
21. Tests of control
• Conducted through
– Reperformance
– Inspection
– Observation
– Enquiry
• Value of no significance
• Every failure important
• Record results and confirmed reliance on
controls
22. Substantive tests
• Includes
– Analytical review (AR) & detailed substantive tests
• Responsive to risk assessment & controls
• Required for material balances, classes of
transactions & disclosures
– Regardless of risk assessment
– May be AR
• Always consider AR first – detailed tests when
– No AR, reliance on others; or
– Significant risk & no controls reliance
23. Substantive tests
• Remember directional testing
• Do per assertion, as risks may be different
• Practical considerations
– Substantive approach common in practice
– BUT consider effectiveness of not relying on
controls
– May be cases where have to rely on controls
24. Fieldwork - Obtaining evidence
Significant risk/ NO
YES substantive procedures
inadequate?
Evaluate if not
Controls in YES done yet.
place?
Rely?
Material
NO NO YES Balance, Class of
Transactions or
Detailed Disclosure?
Test controls
substantive testing
YES NO
Do some No further
Substantive Testing testing
25. Completion / Conclude
• Completion covered in subsequent
course
• Partner expresses opinion on FS
– Based on results of audit evidence
• You must conclude on individual
sections
– Based on results of tests performed
26. Documentation
• Types of documentation
– Permanent & Current
• Documentation & referencing
– Record tests, procedures & conclusions
– Serves as evidence to support opinion
– Basis on which your performance measured
– Various types of documentation
• Attributes of quality documentation
27. Documentation…
• Preparation of documentation
– Evidence logical thought, communicate ideas &
resolve issues completely
– Ask: What is purpose of this WP?
– ISA 230 requirements must be adhered to
• Headings
• Dated
• Identity of compiler & reviewer
• Purpose & applicable info
• Cross referencing
• Conclusions
• Specific weaknesses
28. Documentation…
• Computer generated documentation
– Same standards as manual documentation
– Additional standards for identification & filing, backups
• Minimising documentation
– Always be aware of ways to do this
• Use of prior year documents
– Do not accept without questioning
– Ask senior before changing
• Technical accuracy & completeness
– Perform a self-review where possible
• Confidentiality of documentation
• Review of documentation
29. Referencing
• Refers to numbering of documentation
– Unique number
– .1 used if it is a continuation
• Missing page easily determinable
• Reference in red ink
• Cross referencing
– Relating 2 or more w/papers
– Must be between specific amounts / procedures
• Separate ref. no. for each w/paper
• Leads referenced as x.20 – e.g. Bank & Cash = 32.20
• Roman numerals & alphabet letters unacceptable
30. Audit Trail
• Objective
– AFS agree to books
• TB is summary of books
– Must be agreed to AFS
– Only via lead schedules
– If not on lead, reference to sub lead
32. Referencing System
Explained on
From TB R100 000 supporting
documentation
To A.F.S.
or
Next / Lead schedule
33. Standard audit symbols
• Indication of procedures applied very NB
– Tick mark/symbol explains work done
– Usually at bottom of w/paper
• Must be clearly distinguishable
– ‘ ^ ‘ & ‘c/c ‘ standard for ‘casts’ & ‘cross cast’
• ‘Traced to supporting documentation’ not
sufficient
– Specify WHICH supporting documentation
34. Dealing with errors
• Tests of control
– Consider cause & document conclusions
– Amendments to substantive tests depend on
reasons for departure
• Poorly trained “temp” vs. incompetent work
throughout
• Consider extending tests
• No amendments if corrected long before y/e
35. Dealing with errors
• Tests of control
– Can be isolated due to a
• Person, season, type of transaction
– If isolated
• Rely on control but test deviations substantively
– Summary
• Report to management
• Design substantive tests
• Combination of both
36. Dealing with errors
• Substantive tests
– If no errors, no evaluation process needed
– Errors: misstatements of amounts /disclosures
• Mistakes in gathering or processing data
• Incorrect accounting estimates
• Mistakes in application of accounting principles
• Classification/manner of presentation & disclosure
– Irregularities: intentional misstatements
• Include fraudulent reporting and theft
• Must be brought to attention of partner
– Errors categorised as
• Known errors, errors in estimates, projected errors
37. When misstatement detected
• Investigate what caused the misstatement
– May have common feature
– May be intentional - existence of fraud
• Error from isolated event not necessarily
representative
– Have to perform additional procedures to
confirm
• If isolated & all affected items tested and
corrected, known and projected errors are
eliminated
38. When misstatement detected
• Discuss with management because
– Mistake may be ours
– Client's knowledge may help
– May take immediate preventative action
– Financial loss may result if not rectified
– Practical difficulties later
– Client should investigate full effect of error
• May extend tests / alternative procedures
• Consider reasons & effects on other areas
• Assess whether intentional or unintentional
39. When misstatement detected
• Document in file
• Extrapolate remaining errors
• Encourage client to:
– Adjust for at least all known errors & estimates
– Consider adjusting for projected errors
• Types of errors
– Known errors can be specifically identified
– Projected errors result from audit sampling
applications
• Less than 100% of items tested
• Summarise uncorrected errors > materiality
40. Monetary errors
• Project error results of sample to population
– Does not indicate precise amount of error
• The ratio method
– Projected error = value of error * value of
representative pop/ value of items tested
• The difference method
– Projected error = error found/no. of items in
sample * number of items in population
41. Assessing results of sample
• Total projected error > materiality
– Insuff. evidence to conclude that account correct
• Total error < materiality
– Decide if acceptable low risk that true monetary
value exceeds materiality
• Use professional judgment & experience
• Action depends largely on reason for error
• Client might decide to adjust regardless
– Deduct adjustments from projected error
42. Summary of process
• Determine materiality at planning
• Record errors > materiality / recordable error
on O/U
• Discuss errors with client
43. Irregularities
• If conclude that error may be intentional
– Speak to senior first!!!
– Refer matter to appropriate level of management
– Consider implications for any other areas of audit
– Advise client if legal advice is necessary
– Consider communication with audit committee /
Board
– Compliance with S20 (5) of PAAA / APA
45. Core Audit Courses
• 4 core training modules
• Will attend each course as you progress
• Combination of theory / lectures & case
studies / group discussions
• Extensive use of videos and role plays for
soft skills training
• Presentation and writing skills covered
• Network opportunity
• Assessments of your performance
46. On-the-job coaching
• Significant part of training you will receive
– Eventually you will provide it
• Theoretical training limited – must learn
while doing
– Benefit from experience of your superiors
• Not everyone equally good at it
– Your responsibility to ensure you get it
– Be proactive
48. Close
• Implement lessons – make time for “soft”
issues
• Manage your time
• ASK ASK ASK
• Attitude
• Use Assessments for personal growth-
CHANGE if you have to
• Use opportunity to learn about business
• Focus on the big picture
• Questions?
49. DO OR DO NOT
THERE IS NO TRY
Yoda, from “The Empire Strikes Back”
Editor's Notes
End the session off with The character Yoda, in the movie The Empire Strikes Back, said: “ Do or do not. There is no try.”
