INTRODUCTION TO THE

AUDIT PROCESS
 Audit definitions
• Textbooks
• SAICA HANDBOOK – Volume 2A (N/A at 2nd level):
o Glossary of terms
o Definitions
E.G:
• Applicable financial reporting framework
• Audit evidence
• Audit risk
• Detection risk
• Misstatement
• Risk of material misstatement (including Inherent &
Control risk)
 Shareholders

Auditors

Company

Board of Directors
A model of an INDEPENDENT audit
 Objective of the audit
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.
Objective of the audit
Audit of Financial Statements

Role of ISAs
Role of Assertions
Role of professional skepticism
Role of professional judgement
Assertions (ISA 315R, A190)
CLASSES OF TRANSACTIONS AND ACCOUNT BALANCES AND RELATED
RELATED DISCLOSURES DISCLOSURES

• Existence
• Occurrence
• Completeness
• Completeness
• Accuracy, Valuation and
• Accuracy
allocation
• Cut-off
• Rights and obligations
• Classification
• Classification
• Presentation
• Presentation
Assertions (ISA 315R, A190)
Example:
The line item below appears in the statement of financial position of Tradition Ltd:
Accounts receivable R2 782 924
What are the directors actually saying (asserting) about accounts receivable? In terms of assertions, they are
representing that at period end:
• The debtors included in the balance existed at year end, that no fictitious debtor have been included(existence).
• Tradition Ltd controls the rights to amounts owed by debtors(right)
• All the debtors have been included in the amount of R2 782 924, and all related disclosures have been
included(completeness)
• The amount of R2 782 924 is appropriate and represents the amount that can be reasonable be expected to be
collected from debtors after making suitable allowance for debtors who will not pay(accuracy, valuation and
allocation).
• Accounts receivable have been recorded in the proper accounts (classification)
• Accounts receivable have been appropriately aggregated and clearly described, and related disclosures are
relevant and understandable(presentation)
 PROFESSIONAL SCEPTICISM
• Requires team members to be alert to conditions which may indicate possible
misstatement due to fraud or error. (ISA200)

• It requires audit evidence to be critically assessed not simply taken at face value

• The auditor should remain unconvinced until suitable evidence is provided to

support the fact

• Members of the team should be alert to:

‐ audit evidence that contradicts other evidence
‐ information that brings into question the reliability of documents or responses
‐ conditions that may indicate fraud
 PROFESSIONAL JUDGEMENT
Audits give rise to uncertainties – there is no one size fits all approach.
Professional judgement is the application of training, knowledge and
experience in making informed decisions about the appropriate courses of
action in the specific circumstances.
ISA 200: the auditor is required to exercise professional judgement in planning and
performing an audit of financial statements. Examples:

• Evaluating integrity of client management

• Deciding on materiality levels
• Identifying and assessing risk
• Evaluating whether sufficient appropriate audit evidence has been obtained
• Drawing conclusions and deciding on the appropriate audit opinion
 Simple manufacturing process

Assets
(Finance Employees
and
(Payroll)
investment)

Production
Suppliers
(Production
(Purchases and Customers
and inventory) (Revenue
payables) Raw Finished and
materials goods receivables)
 Simple manufacturing process

DR PPE DR Expense
CR Bank CR Bank

DR Finished
DR Raw Goods
Material CR Raw DR
CR Payable Materials Receivable
Raw Finished
goods CR Sale
materials
Recording of transactions
 The directors make certain statements to the
shareholders and other users of the financial
statements about the figures included in the
Assertions financial statements.

CUT-OFF

ACCURACY
COMPLETENESS

OCCURRENCE

PRESENTATION
 The directors make certain statements to the
shareholders and other users of the financial
statements about the figures included in the
Assertions financial statements.

Only revenue that has been

earned in the current year has
been included in the financial
statements for this year.

The revenue
recorded in the
financial statements All the revenue that The revenue
is accurate and should have been recorded in the
recorded in recorded, has been financial
accordance with IFRS recorded. statements is
15. supported by valid
invoices and
delivery notes

The revenue is presented and

disclosed in accordance with IFRS
15.
THE AUDIT PROCESS
Pre-engagement

2 Planning

3 Performance of the audit

4 Completion of the audit

 1. Pre- 3. Responding to
engagement 2. Planning assessed risk (audit 4. Completion
activities procedures)
Test of Control (TOC)
Formulate an audit plan + ➢ Evaluation of audit
audit strategy) differences
and/or
1. Obtain knowledge of the Substantive procedures (SP)
Ethics
entity & environment ALWAYS some SP ➢ Subsequent events
Competence 2. Obtain an understanding
Client of the accounting system ➢ Going concern
integrity and internal control
3. Assess audit risk Analytical (AP)
➢ Reporting
• Vacancy? 4. Planning materiality
• Business Test of Detail (TOD)
decision?

Terms of
engagement Audit evidence Management
ISA210 ISA 500 + 230 representation
Assess risk (by performing letter ISA580
Quality risk assessment procedures) Sampling
management and plan HOW to respond… ISA 530
ISA220 revised AFS
and ISQM 1&2 Toolbox (assertions)
O I CRRAI

Consideration of laws & regulations – ISA 250

18
 THE AUDIT PROCESS
Stages of the audit process:
Stage
1. Pre-engagement activities
2. Planning
2.1. Understanding the entity and its environment
2.2. Risk assessment
2.3. Developing an overall audit strategy
2.4. Developing an audit plan
2.5. Setting materiality
2.6. Co-ordination and control
3. Responding to assessed risk
4. Evaluating, concluding and reporting