endunamoo bcta auditing - gimmenotes€¦ · preliminary engagement activities planning establish...

Endunamoo BCTA

Auditing Koena Gerald Moabelo CA (SA) | 24/03/2018

The Audit Process

Preliminary engagement activities

Planning

Establish overall audit strategy

Develop an audit plan

Obtain audit evidence (the auditor’s response to

assessed risk)

Perform tests of control

Perform substantive procedures

Evaluation, concluding and reporting

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Materiality

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Materiality

Learning objectives:

➢ Understand the concept of planning vs performance materiality

➢ Identify appropriate threshold to base planning materiality

➢ Be able to calculate planning materiality

➢ Criticise a planning materiality calculation

Planning - Planning Materiality

Materiality

Planning Materiality (ISA 320)

▪ Planning phase

▪ Affected by risk

Performance Materiality (ISA 320)

▪ Materiality for a specific class for transaction, account balance or disclosure

▪ Affects sample size

▪ Represents: Maximum potential error (Sample size) –”Catch all”-link with evaluation of identified errors.

▪ Less than overall materiality

▪ Used to scope in accounts

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Planning - Planning Materiality

Setting of materiality

Indicators:

▪ Quantitative

• Turnover ½ - 1%

• Gross profit 1 - 2%

• PBT 5 - 10%

• Total assets 1 - 2%

• Equity 2 - 5%.

• Qualitative:

• Regulation, Accounting Standard

• Control environment/ effectiveness of IC

• Integrity of management

• irregularities

Relationship between risk and materiality

▪ High audit risk → lower materiality and vice versa

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Planning - Planning Materiality

Exam Technique / Approach

1. Determine the relevant figures to use

CY TB/ CY Forecast / PY Audited results

2. Consider nature of an entity

Revenue, GP, Profit for the year, Total assets

3. % and calculations

4. Motivate your answer

5. Conclusion

Net loss is not considered an appropriate base

Relationship with audit risk

Performance materiality always lower than planning materiality

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Internal controls

Obtaining audit evidence

Learning objectives:➢ Understand the concept of internal controls and why we need to

assess the control environment

➢ Understand the cycles and be able to identify controls as well as control weaknesses within the cycles

➢ Understand IT control environment including difference between general and application controls

➢ Understand how application controls address certain assertions

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What is the relevance of controls to the audit?

➢ ISA 315 requires auditors to gain an understanding of the entity and its environment

➢ This includes gaining an understanding of the control environment

➢ Business processes and IT environment

Implications:➢ If controls are designed and implemented appropriately, we can place reliance on the

control environment

➢ This means we can incorporate tests of controls in our approach (combined approach)

➢ Weak control environment = No control reliance = Fully substantive audit approach

Definition: Internal control

Internal control is designed and implemented to addressidentified business risks that threaten the achievement of anyof the above objectives

• Definition ISA 315 par 4

• It is a process designed, implemented and maintained

• By those charged with governance, management and otherpersonnel

• To achieve an entity’s objectives with regards to:

➢ Reliability of financial reporting

➢ Effectiveness and efficiency of operations; and

➢ Compliance with applicable laws and regulations

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Why does it matter to the Auditor?

When the auditor obtains an understanding of internal control,he/she has to:

• evaluate the design of those controls. Does a control(individually or in combination with others) effectively prevent,detect and correct material misstatements?

• determine whether these controls have been implemented

(ISA315.13)

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Business Cycles

Business Cycles

Revenue & Receipts

Acquisitions & Payments

Inventory & Production

Payroll & Personnel

Finance & Investment

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IT Controls are categorized in the following categories:

➢ General controls

➢ Application controls

General controls

• Definition & components ISA 315.A104

• Controls which establish an overall framework of control forcomputer activities

• Address the risks at the overall financial statement level(Control risk) - ISA 315 para A63

• Controls which are in place before any processing oftransactions

• Refer to your text for categories of general controls (Page 8/7– 8/25, Auditing Notes)

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General controls

• Management support; IT governance policy

• Segregation of duties

• Server physically secure

• Computer terminals visible

• Managed by a database administrator – pre-authorisation; regularreviews

• ID logins

• Passwords regularly updated

• Control tested regularly – outsource?; SLA

• Segregation of duties

• Data recovery plan; Regular back ups

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Application controls

Control Objectives

Validity

Accuracy

Completeness

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Application controls

• Definition ISA315.A105

• Controls relevant to a specific task within an accountingbusiness cycle

• Address the risks of material misstatement level at theassertion level

• Include both manual and automated (computerised) controls

• If general controls are poor no reliance can be placed onapplication control

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Application controls

Control objective

Classes of transactions (IS)

Account balances (BS)

Validity Occurrence, Cut-offExistence,

Rights, Obligations

AccuracyAccuracy,

ClassificationValuation,Allocation

Completeness Completeness, Cut-offCompleteness,

Existence

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Application controls - Summary

Validity

• Access controls (passwords; usernames; access to specific functions; revoke access for terminated employees)

• Unique numbering of transactions

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Application controls

Accuracy

• Alpha numeric (Letters not accepted in number fields)

• Sign check (e.g., debits and credits)

• Drop down menus (to minimize finger errors)

• Echo check / Screen prompts (Are you sure? Prompts)

• Limit check / Reasonableness test

• Recons

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Application controlsCompleteness

• The system should not allow the transaction to be processed until allcompulsory information is captured

• An error message should be displayed on screen until all compulsoryinfo is completed

• All transaction should be sequentially numbered

• Email / text confirmation to customer before transaction is processed(validity as well)

• Reconciliation between transactions processed and money received

• Screen aid

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Application controls - Summary

Validity

• Access controls

• Unique numbering of transactions

Accuracy

• Edit checks

• Recons

Completeness

• Sequence numbering of transactions

• Compulsory fields

• Recons

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Internal control

Internal control activities:

• Authorisation

• Review

• Information processing

• Physical controls

• Segregation of duties

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Examination technique

• Identify weaknesses in the systems

o Internal controls performed incorrectly + internal controls omitted

o Describe from what you see as wrong and the right not there

• Identify weaknesses + risks

o Link the potential risks / consequences with weaknesses (a tablemight be appropriate)

o Risks = management and auditors are concerned with these becausethey have an impact on financial statements and/or client’s financial /reputational impact

• Identify weaknesses + risks + recommendations

o Link the recommendation with the potential risks / consequenceswith weaknesses (a table might be appropriate)

o Practical and cost effective recommendations

o Appropriate verb = should

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Examination technique

Evaluate the effectiveness of the internal controls

• Address both the negative and positive aspects

• Do not forget to conclude on the effectiveness

Identify the internal controls to be incorporated in the client’s system

• Identify the internal control objectives

• Understand the cycle you are looking at (study your textbook!!!)

Question 6 page 39 Health and Wellness (“H&W”), Audit Approach andKey controls

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The Audit Process

Preliminary engagement activities

Planning

Establish overall audit strategy

Develop an audit plan

Obtain audit evidence (the auditor’s response to

assessed risk)

Perform tests of control

Perform substantive procedures

Evaluation, concluding and reporting

The C

om

panie

s A

ct

(2008)

The A

uditin

g P

rofe

ssio

n

Act

(IRBA)

Kin

g I

VThe C

ode o

f Pro

fessio

nal

Conduct,

By-L

aw

sand r

ule

s

regard

ing im

pro

per

conduct

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Thank you

Presenter’s detailsKoena Gerald Moabelo

+2763 774 7577

BCTA2018 Administration

admin@endunamoo.co.za

+2711 056 6359

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