ACC 214 – INTRODUCTION

TO THE AUDIT PROCESS

Presented by : Kudakwashe Ndlovu CA(z)

1
Module outline
⚫ INTRODUCTION
⚫ AUDITING ETHICS (CPC)
⚫ PERFORMING THE AUDIT
PROCESS
⚫ ( Planning, Execution ,Concluding and
reporting)
⚫ INTERNAL AUDIT
Presented by : Kudakwashe Ndlovu CA(z) 2
Admin issues
⚫COURSE ASSESSMENT
⚫Course work (Written) 30%
⚫Examination 70%
⚫Total 100%
At the end of the semester you are going to write a 3 hr
examination. Re call exam

Presented by : Kudakwashe Ndlovu CA(z) 3

Rules of the game (Cardinal)
1. Answer in point form (very important)
2. Skip a line after each and every point
3. Write legibly
4. Answer each question on a separate page
5. Use tabular format (wherever possible)

Presented by : Kudakwashe Ndlovu CA(z) 4

Disclaimer
Please note all names of persons, places and business entities
mentioned in these study slides are purely fictitious in nature and
any resemblance to real people (living or dead), places or
business entities are purely coincidental .

Presented by : Kudakwashe Ndlovu CA(z) 5

Introduction to Auditing
Overall Audit objective (ISA 200: 3)
⚫The objective of an audit is to give an
expression of an opinion on whether
the financial statements are prepared,
in all material respects, in accordance
with an applicable financial reporting
framework.

Presented by : Kudakwashe Ndlovu CA(z) 6

Introduction to Auditing
ISAs do not impose responsibilities on management or
those charged with governance and do not override laws
and regulations that govern their responsibilities.
However, an audit in accordance with ISAs is conducted
on the premise that management and, where appropriate,
those charged with governance have acknowledged certain
responsibilities that are fundamental to the conduct of the
audit.
The audit of the financial statements does not relieve
management or those charged with governance of their
responsibilities.
Presented by : Kudakwashe Ndlovu CA(z) 7
Basic Auditing premise
An audit in accordance with ISAs is conducted on the
premise that management and, where appropriate, those
charged with governance have acknowledged and
understand that they have responsibility:
(a) For the preparation of the financial statements in
accordance with the applicable financial reporting
framework
(b) For the design of internal control necessary to enable
the preparation of financial statements that are free from
material misstatement, whether due to fraud or error; and

Presented by : Kudakwashe Ndlovu CA(z) 8

Basic Auditing premise (cont’d)
(c) To provide the auditor with:
⚫(i) Access to all information of which management is aware that
is relevant to the preparation of the financial statements such as
records, documentation etc
⚫(ii) Additional information that the auditor may request from
management and for the purpose of the audit
⚫(iii) Unrestricted access to persons within the entity from whom
the auditor determines it necessary to obtain audit evidence

Presented by : Kudakwashe Ndlovu CA(z) 9

Basic Auditing premise
Because of the significance of the premise to the
conduct of an audit, the auditor is required to
obtain the agreement of management and,
where appropriate, those charged with
governance that they acknowledge and
understand that they have the responsibilities set
out in the basic premise as a precondition for
accepting the audit engagement. (ISA 200: A10)

Presented by : Kudakwashe Ndlovu CA(z) 10

Introduction to Auditing
An audit is not conducted on a 100% sample , as such
an auditor can only obtain reasonable assurance (not
absolute) about whether the financial statements as a
whole are free from material misstatement, whether due
to fraud or error.
An auditor cannot give an absolute assurance due to
inherent limitations of an audit as well as limitations of
internal controls.

Presented by : Kudakwashe Ndlovu CA(z) 11

Introduction to Auditing
Reasonable assurance is a high level of assurance. It is
obtained when the auditor has obtained sufficient
appropriate audit evidence to reduce audit risk to an
acceptably low level

Presented by : Kudakwashe Ndlovu CA(z) 12

Limitations of an Audit
⚫ An audit is performed on a sample basis (balance
between cost and benefit), the need for audit to be
conducted within a reasonable period of time within a
reasonable of time at at reasonable cost
⚫Audit evidence is persuasive rather than conclusive
⚫Nature of financial reporting
⚫Limitations of internal controls:
❖ management override of controls
❖collusion

Presented by : Kudakwashe Ndlovu CA(z) 13

Limitations of an Audit Qsn (ACC 214 June 2014 Exam
A junior member of the audit team of 21st Century registered
auditors was at the conclusion of the audit, requested to make
sure that the audit working papers were all properly filed and
finalised. What struck him was the volume of information in the
working papers. Having seen all the evidence together, he really
felt that the audit team was in a strong position to certify the
financial statements as correct, rather than just stating in the audit
report that, “in our opinion, the financial statements, present
fairly in all material respects….”

He asked you, his senior why, having all this work, the financial
statements had not been certified as correct.

Presented by : Kudakwashe Ndlovu CA(z) 14

Limitations of an Audit Qsn Cont’d
Required
Explain in detail to your junior, why the financial
statements cannot be certified. Include in your answer
an explanation of the limitations of the internal controls
and the limitations of an audit. (12
marks)

Presented by : Kudakwashe Ndlovu CA(z) 15

Key definitions
Audit risk
Audit risk – The risk that the auditor expresses an
inappropriate audit opinion when the financial
statements are materially misstated. Audit risk is a
function of the risks of material misstatement and
detection risk.

NB// Audit risk does not include the risk that the auditor
expresses an opinion that the financial statements are
materially misstated when they are not. This risk is
ordinarily insignificant.
Presented by : Kudakwashe Ndlovu CA(z) 16
Key definitions (Cont’d)
Risk of material misstatement (RMM):
Is the risk that the financial statements are
materially misstated prior to an audit being
performed on them. RMM consists of two
components which are ; Inherent risk and
Control risk

Presented by : Kudakwashe Ndlovu CA(z) 17

Key definitions (Cont’d)
Inherent risk
It the susceptibility of an assertion about a
class of transaction, account balance or
disclosure to a misstatement that could be
material either individually or when
aggregated with other misstatements

Presented by : Kudakwashe Ndlovu CA(z) 18

Key definitions (Cont’d)
Control risk
Is the risk that a misstatement could occur in the
financial statements, that could be material,
(either individually or when aggregated with
other misstatements), will not be prevented, or
detected or corrected on a timely basis by the
entity’s internal controls

Presented by : Kudakwashe Ndlovu CA(z) 19

Key definitions (Cont’d)
Detection risk
Is the risk that the procedures performed by
the auditor to reduce audit risk to an
acceptably low level will not detect a
misstatement that exist and that could be
material , either individually or when
aggregated with other misstatements

Presented by : Kudakwashe Ndlovu CA(z) 20

The Audit risk Model

RMM Risk of Material Misstatement

IR CR DR
Audit risk = Inherent * Control
Risk Risk
* Detection
Risk

Presented by : Kudakwashe Ndlovu CA(z) 21

Key definitions (Cont’d)
Professional skepticism
Is an attitude that includes a questioning
mind, being alert to conditions which may
indicate possible misstatements

Presented by : Kudakwashe Ndlovu CA(z) 22

Professional skepticism (Cont’d)
It includes being alert to:
⚫Audit evidence that contradicts each other
⚫Conditions that may indicate possible fraud
⚫Circumstances that suggest the need for audit
procedures in addition to those required by ISAs
⚫Information that brings into question the
reliability of documents and responses to
inquiries to be used as audit evidence

Presented by : Kudakwashe Ndlovu CA(z) 23

Questions ???

Presented by : Kudakwashe Ndlovu CA(z) 24

The CODE OF PROFESSIONAL CONDUCT

Presented by : Kudakwashe Ndlovu CA(z) 25

THE CODE OF PROFESSIONAL CONDUCT
A distinguishing mark of the accountancy and auditing
profession is its acceptance of the responsibility to act in
the public interest. Therefore, an auditor’s responsibility
is not exclusively to satisfy the needs of an individual
client. In acting in the public interest, the auditor has to
comply with the code of professional conduct (CPC)
Code.

Presented by : Kudakwashe Ndlovu CA(z) 26

FUNDAMENTAL PRINCIPLES
[Link]
[Link]
[Link] competence & due care
[Link]
[Link] behaviour
IESBA(e International Ethics Standards Board for
Accountants) , SAICA(South African Institute of
Chartered Accountants) CPC ( Codes of Professional
Conduct)
Presented by : Kudakwashe Ndlovu CA(z) 27
 FUNDAMENTAL PRINCIPLES (FPs) (Cont’d
Integrity – to be straight forward and honest in all
professional and business relationships

An auditor shall not knowingly be associated with

reports where the auditor believes:
• contains a materially false or misleading statement
•Omits or obscures information required to be
included where such omission or obscurity would
be misleading
Presented by : Kudakwashe Ndlovu CA(z) 28
FUNDAMENTAL PRINCIPLES (FPs) (Cont’d

Objectivity – not to allow bias, conflict of

interest or undue influence of others to
override professional or business
judgements

Presented by : Kudakwashe Ndlovu CA(z) 29

CODE OF PROFESSIONAL CONDUCT
Professional competence and due care – to
maintain professional knowledge and skill at the
level required to ensure that a client receives
competent professional services based on current
developments in practice, legislation and technical
and act diligently and in accordance with
applicable technical and professional standards

Presented by : Kudakwashe Ndlovu CA(z) 30

CODE OF PROFESSIONAL CONDUCT (Cont’d)

Confidentiality – to respect the confidentiality of

information acquired as a result of professional
and business relationships and therefore , not
disclose any such information to third parties
without proper and specific authority, unless there
is a legal or professional right or duty to disclose,
nor use the information for personal advantage

Presented by : Kudakwashe Ndlovu CA(z) 31

 CODE OF PROFESSIONAL CONDUCT (Cont’d)

The following are circumstances where an auditor

may be required to disclose confidential
information:

• disclosure is permitted by law and is authorised

by the client
• disclosure is required by law
•When there is a professional duty to disclose and
when it is not prohibited by law
Presented by : Kudakwashe Ndlovu CA(z) 32
 CODE OF PROFESSIONAL CONDUCT (Cont’d)
Professional behaviour – to comply with relevant
laws and regulations and avoid any action that
discredits the auditing profession

Auditors shall be honest and truthful in marketing

their work and not:
a)Make exaggerated claims for the services they are
able to offer
b)Make disparaging references or unsubstantiated
comparisons to the work of others
Presented by : Kudakwashe Ndlovu CA(z) 33
Threats to Compliance with FPs(fundamental
principles)
Self-interest threat - the threat that a financial or other
interest will inappropriately influence the auditor’s judgment
or behaviour;

Examples of circumstances that create self-interest threats

include:
• A member of the assurance team having a direct
financial interest in the client.
• A firm having undue dependence on total fees from a
client.
• A firm entering into a contingent fee arrangement
Presented by : Kudakwashe Ndlovu CA(z) 34
Threats to Compliance with FPs
Self-review threat - the threat that auditor will not
appropriately evaluate the results of a previous judgment
made or service performed by the auditor, or by another
individual within the audit firm, on which the auditor will
rely when forming a judgment as part of providing a
current service;

Eg A member of the assurance team being, or

having recently been, a director or officer of the
client.
Presented by : Kudakwashe Ndlovu CA(z) 35
Threats to Compliance with FPs
Advocacy threat - the threat that the auditor
will promote a client’s position to the point
that the auditor’s objectivity is compromised;

e.g. The firm promoting shares in an audit

client.

Presented by : Kudakwashe Ndlovu CA(z) 36

Threats to Compliance with FPs
Familiarity threat - the threat that due to a
long or close relationship with a client, an
auditor will be too sympathetic to their
interests or too accepting of their work;

E.g A member of the engagement team having a

close or immediate family member who is a director
or officer of the client.
Presented by : Kudakwashe Ndlovu CA(z) 37
Threats to Compliance with fundamental PPs
Intimidation threat - the threat that the
auditor will be deterred from acting
objectively because of actual or perceived
pressures, including attempts to exercise
undue influence over the auditor

E.g A firm being threatened with dismissal from a

client engagement.

Presented by : Kudakwashe Ndlovu CA(z) 38

Safeguards to reduce threats
Safeguards are actions or other measures that may
eliminate threats or reduce them to an acceptable level
these include:

• Leadership that stresses the importance of compliance

with fundamental principles
•A disciplinary mechanism to promote compliance with
policies and procedures
•Using different partners & engagement teams with
separate reporting lines for the provision of non
assurance services to an assurance client
Presented by : Kudakwashe Ndlovu CA(z) 39
Safeguards to reduce threats (Cont’d)
•Educational, training and experience requirements for
entry into the profession.
• CPCs (Codes of Professional Conducts)
• Corporate governance legislation or regulations.
• Professional standards.
• Professional or regulatory monitoring and disciplinary
procedures.
• External review

Presented by : Kudakwashe Ndlovu CA(z) 40

Recruiting (Sec 150.10)
OF CODE OF ETHICS FOR PROFESSIONAL
ACCOUNTANTS

A registered auditor shall not, directly or indirectly, offer

employment to an employee of another registered auditor without
first informing the latter.

Presented by : Kudakwashe Ndlovu CA(z) 41

 Fees and Other Types of Remuneration (Sec 240)
⚫When entering into negotiations regarding professional services, a
registered auditor may quote whatever fee is deemed appropriate.
The fact that one registered auditor may quote a fee lower than
another is not in itself unethical.

⚫Nevertheless, there may be threats to compliance with the

fundamental principles arising from the level of fees quoted.

For example, a self-interest threat to professional competence and

due care is created if the fee quoted is so low that it may be difficult
to perform the engagement in accordance with applicable technical
and professional standards for that price.
Presented by : Kudakwashe Ndlovu CA(z) 42
 Fees and Other Types of Remuneration (Sec 240)
Contingent fees
⚫Contingent fees are widely used for certain types of non-assurance
engagements .They may, however, create threats to compliance
with the fundamental principles in certain circumstances. They may
create a self-interest threat to objectivity.

⚫Wef 1 March 2014. SAICA no longer allows any of its member to

charge contingent fees for tax return preparation.

Presented by : Kudakwashe Ndlovu CA(z) 43

 Marketing Professional Services (Sec 250)
⚫When a registered auditor solicits new work through advertising or other
forms of marketing, there may be a threat to compliance with the
fundamental principles.
⚫ For example, a self-interest threat to compliance with the principle of
professional behaviour is created if services, achievements, or products are
marketed in a way that is inconsistent with that principle,
A registered auditor shall not bring the profession into disrepute when
marketing professional services. The auditor shall be honest and
⚫truthful and shall not:
⚫(a) Make exaggerated claims for services offered, qualifications possessed,
or experience gained BELITTLING VALUE/IMPORTANCE OF
OTHERS; or
⚫(b) Make disparaging references or unsubstantiated comparisons to the
work of another. Presented by : Kudakwashe Ndlovu CA(z) 44
 Gifts and Hospitality (Sec 260)
⚫Gifts from clients pose a threat to compliance with Fundamental
principles.
⚫The existence and significance of any threat depends on the nature,
value, and intent of the offer.

Presented by : Kudakwashe Ndlovu CA(z) 45

 Custody of client assets (Sec 270)
⚫A registered auditor shall not assume custody of client monies or other assets
unless permitted to do so by law and, if so, in compliance with any additional
legal duties imposed on a registered auditor holding such assets.
⚫The holding of client assets creates a self interest threat.
⚫A registered auditor entrusted with money (or other assets) belonging to
others shall therefore:
(a) Keep such assets separately from personal or firm assets;
(b) Use such assets only for the purpose for which they are intended;
(c) At all times be ready to account for those assets and any income,
dividends, or gains generated, to any persons entitled to such accounting; and
(d) Comply with all relevant laws and regulations relevant to the holding of
and accounting for such assets.

Presented by : Kudakwashe Ndlovu CA(z) 46

 Custody of client assets (Sec 270)
A registered auditor is required to make appropriate inquiries about
the source of such assets and consider legal and regulatory
obligations. eg, if the registered auditor has reason to believe that
the assets were derived from illegal activities, such as money
laundering, a threat to compliance with the fundamental principles
would be created.

In such situations, the registered auditor shall not accept or hold

the client monies

Presented by : Kudakwashe Ndlovu CA(z) 47

 ACC 214 June 2014 Exam
⚫List and explain 5 fundamental principles as per the Code of
Professional Conduct (10 marks)

⚫List and explain 5 threats which the Auditors face in trying to

comply with the Fundamental principles of the code of
professional conduct, give an examples in your explanations (15
marks)

Presented by : Kudakwashe Ndlovu CA(z) 48

Questions ???

Presented by : Kudakwashe Ndlovu CA(z) 49

The audit process
1. Preliminary engagement activities

2. Planning
(Establish audit strategy & plan)

3. Obtain audit evidence

( SARs,TOCs,SPs)

4. Evaluate, conclude and report

Presented by : Kudakwashe Ndlovu CA(z) 50

 1. Preliminary engagement activities
Background
The first step in the audit process is to perform
preliminary engagement activities. During this step
the auditor assesses whether or not to act as an
auditor for a new client or to continue acting as an
auditor for an existing client. The auditor should take
into consideration the risks of legal liability or
reputational damage, whether a quality audit can
be conducted in terms of ISAs as well as
regulatory and ethical requirements.
Presented by : Kudakwashe Ndlovu CA(z) 51
 1. Preliminary engagement activities

1. Client investigation

2. Determination of skills, competence &

resources

3. Set engagement terms (engagement letter)

– ISA 210

Presented by : Kudakwashe Ndlovu CA(z) 52

a) Client investigation

Presented by : Kudakwashe Ndlovu CA(z) 53

Client investigation (cont’d)
- Independence of the auditor and threats to
auditor independence
- Ability and willingness of the client to pay
audit fees
- Integrity of management
- Results of communication with the previous
auditor
- Existence of a vacancy in the position of
auditor Presented by : Kudakwashe Ndlovu CA(z) 54
b) Determination of skills & resources

Presented by : Kudakwashe Ndlovu CA(z) 55

b)Determination of skills & resources
- Size of the audit team required
- Whether there is need for use of an
expert (the expert’s availability if
needed)
- Technology required
- Audit deadline (ability to meet it)
Presented by : Kudakwashe Ndlovu CA(z) 56
c) Agree engagement terms (ISA 210)

Presented by : Kudakwashe Ndlovu CA(z) 57

c) Agree engagement terms (ISA 210)
Agree engagement terms highlighting
management and auditor’s
responsibilities

Presented by : Kudakwashe Ndlovu CA(z) 58

Engagement letter
An engagement letter is a formal
document that defines the legal
relationship between the audit firm and
the client

Presented by : Kudakwashe Ndlovu CA(z) 59

 Engagement letter (Cont’d)
Contents of an engagement letter (ISA 210: 10; A23
Mandatory information
•The responsibilities of an auditor
•The responsibilities of management
•The objective and scope of the audit of the financial
statements
•Identification of the applicable financial reporting
framework .
• the fact that there is an unavoidable risk that some
misstatements may not be detected (due to audit
limitations)
Presented by : Kudakwashe Ndlovu CA(z) 60
 Contents of an Engagement letter (Cont’d
Additional information
Planning and audit execution arrangements
•An expectation that management will provide written
representations
•A request for management to acknowledge receipt of the
engagement letter and to agree to its terms
•Any restriction of the auditor’s liability when such
possibility exists
•The basis on which fees are computed and any billing
arrangements

Presented by : Kudakwashe Ndlovu CA(z) 61

Engagement letter (Cont’d
Audit of components
When the auditor of a parent entity is also the auditor of a
component, the factors that may influence the decision
whether to send a separate audit engagement letter to the
component include the following:

•Who appoints the component auditor;

• Whether a separate auditor’s report is to be issued on the
component;
• Legal requirements in relation to audit appointments;
• Degree of ownership by parent; and
• Degree of independence of the component management
from the parent entity.
Presented by : Kudakwashe Ndlovu CA(z) 62
Engagement letter (Cont’d)
Recurring audits (ISA 210 : 13, A28
The auditor may decide not to send a new audit engagement letter or other
written agreement each period. However, the following factors may make it
appropriate to revise the terms of the audit engagement or to remind the
entity of existing terms:
• Any indication that the entity misunderstands the objective and scope of
the audit.
• Any revised or special terms of the audit engagement.
• A recent change of senior management.
• A significant change in ownership.
• A significant change in nature or size of the entity’s business.
• A change in legal or regulatory requirements.
• A change in the financial reporting framework adopted in the preparation
of the financial statements.
• A change in other reporting requirements.
Presented by : Kudakwashe Ndlovu CA(z) 63
1. Preliminary engagement activities
Types of questions that may be asked
•List factors that Auditors need to consider before
accepting a new client
•List contents of an audit engagement letter

Presented by : Kudakwashe Ndlovu CA(z) 64

2. Planning (ISA 300, 315,320,330)

“Failing to plan, is planning to fail”

Presented by : Kudakwashe Ndlovu CA(z) 65
2. Planning (Cont’d)
After an engagement letter has been signed
and agreed, the auditor goes on to plan for
the audit.

Usually, the key engagement team

members are involved in planning , i.e the
engagement partner, manager and the
AIC.(ISA 300:5)

Presented by : Kudakwashe Ndlovu CA(z) 66

Audit strategy
The auditor shall establish an overall audit strategy that sets
the scope, timing and direction of the audit, and that guides
the development of the audit plan.

In establishing the overall audit strategy, the auditor shall:

(a) Identify the characteristics of the engagement (scope)
(b) Ascertain the reporting objectives of the engagement
(c) Consider the risk factors that are significant
(d) Consider results of preliminary engagement activities
(e) Ascertain the nature, timing and extent of resources

Presented by : Kudakwashe Ndlovu CA(z) 67

The Audit Plan
The auditor shall develop an audit plan
that shall include a description of:
The nature, timing and extent of:
•planned risk assessment
•planned further audit procedures at the
assertion level
•Other planned audit procedures

Presented by : Kudakwashe Ndlovu CA(z) 68

The Audit Plan Vs Audit Strategy

An Audit plan is a subset of an

Audit Strategy.

Presented by : Kudakwashe Ndlovu CA(z) 69

The planning process
1. Obtain an understanding of the
entity and its internal controls
(PARs, Discussions, System
documentation, (ISA 315)
2. Identify and Assess risk (@ OFSL
and at AL): overall financial
statement level & assertion level
3. Set materiality (ISA 320)
4. Develop Audit plan and Audit
Presented by : Kudakwashe Ndlovu CA(z) 70
Understanding the entity & its
environment
The Entity , its Environment and Internal Controls
The auditor shall obtain an understanding of the following:
(a) Relevant industry, regulatory, and other external factors
including the applicable financial reporting framework.
(b) The nature of the entity(operations, governance structures):
(c) The entity’s selection and application of accounting policies
(d) The entity’s objectives and strategies, and those related business
risks
(e) The measurement and review of the entity’s financial
performance.
(f) The entity’s internal controls (culture of the org)

Presented by : Kudakwashe Ndlovu CA(z) 71

Risk assessment

After obtaining knowledge, the auditor shall

identify and assess risk :

• At the overall financial statement level

•At assertion level

Presented by : Kudakwashe Ndlovu CA(z) 72

Risk at overall financial statement level
This is risk that relate pervasively to the
financial statements as a whole and potentially
affect many assertions.
E.g. A company is listed on the ZSE (RI)
There is a risk that the AFS may be materially
misstated due to the non compliance with the
stringent ZSE regulations. (RD)

Refer to Appendix 2 of ISA 315 risk indicators

Presented by : Kudakwashe Ndlovu CA(z) 73

Risk at assertion level
Risk at the assertion level
E.g. Sales are made to foreign customers in their
respective currencies
There is a risk that revenue might not be translated at
the correct exchange rate (accuracy).

Presented by : Kudakwashe Ndlovu CA(z) 74

Assertions ISA 315 (A124)
These are representations by management
(explicit or otherwise) , embodied in the
financial statements

Presented by : Kudakwashe Ndlovu CA(z) 75

Assertions – Class of transactions
Occurrence: transactions and events that have been
recorded have occurred and pertain to the entity.
Completeness: all transactions and events that should
have been recorded have been recorded
Accuracy— all amount have been recorded
appropriately.
Cut – off —transactions and events have been recorded
in the correct accounting period.
Classification—transactions and events have been
recorded in the proper accounts.

Presented by : Kudakwashe Ndlovu CA(z) 76

Assertions – Account balances
Existence— A,L & E exist.
Rights and obligations —the entity holds or controls the
rights to assets & liabilities are truly obligations of the
entity.
Completeness: A,L & E that should have been recorded
have been recorded.
Valuation and allocation — A,L & E are included in the
financial statements at appropriate amounts and any
resulting valuation or allocation adjustments are
appropriately recorded.

Presented by : Kudakwashe Ndlovu CA(z) 77

Risk assessment
After we have identified risk, we then go on to assess the risk identified.
Risk is classified into high/low (significant/ normal).

Significant risk are those risks that require special audit attention. In
assessing significant risk the auditor should consider the following:
(a)Whether the risk is a risk of fraud;
(b) Whether the risk is related to recent significant economic, accounting or
other developments and, therefore, requires specific attention;
(c) The complexity of transactions;
(d) Whether the risk involves significant transactions with related parties;
(e) The degree of subjectivity in the measurement of financial information
related to the risk, especially those measurements involving a wide range of
measurement uncertainty; and
(f) Whether the risk involves significant transactions that are outside the normal
course of business for the entity, or that otherwise appear to be unusual.

Presented by : Kudakwashe Ndlovu CA(z) 78

Planning (Cont’d)
Planning is not a discrete phase of
an audit, it is a continual process

Presented by : Kudakwashe Ndlovu CA(z) 79

Materiality (ISA 320)
⚫ Misstatements, including omissions, are considered to
be material if they could reasonably be expected to
influence the economic decisions of users taken on the
basis of the financial statements

⚫ There is an inverse relationship between planning

materiality and inherent risk. i.e. the higher the
inherent risk the lower the materiality and vice versa.

Presented by : Kudakwashe Ndlovu CA(z) 80

Materiality (ISA 320)
⚫ Materiality is subjective, - 10 auditors would probably
come up with ten different decisions when setting a
materiality

⚫ Materiality is relative – what is ‘material’ will vary from

user and from audit client to audit client. What is regarded
as material for the financial statements of a medium
company , may be totally insignificant to an international
conglomerate.

Presented by : Kudakwashe Ndlovu CA(z) 81

Materiality (ISA 320)
⚫ Materiality is both quantitative and qualitative

⚫ An amount which is quantitatively material will be one

which exceeds the amount which the auditor determines as
material.

⚫ A matter which is qualitatively material will be one which

is regarded as material when judged a factor other than
amount. Eg important disclosure may be omitted from the
financial statements
Presented by : Kudakwashe Ndlovu CA(z) 82
Types of Materiality
Planning Materiality – set as planning

Performance materiality – to be used during execution

Final materiality – set at the end of the audit (at the

evaluation stage)

Presented by : Kudakwashe Ndlovu CA(z) 83

Responses to assessed risks (ISA 330)

Responses to assessed risks are made at

both overall and at assertion level

Presented by : Kudakwashe Ndlovu CA(z) 84

Overall Audit responses
•Emphasizing to the engagement team the need to maintain
professional skepticism.
• Assigning more experienced staff
• Providing more supervision.
• Incorporating additional elements of unpredictability in the
selection of further audit procedures to be performed.
• Make changes to the nature, timing or extent of audit procedures
•Conducting more audit procedures as of the period end rather than at
an interim date.
• Obtaining more extensive audit evidence from substantive
procedures.
• Increasing the number of locations to be included in the audit
scope (lower materiality)
Presented by : Kudakwashe Ndlovu CA(z) 85
Audit approach (Nature)
The auditor needs to decide on whether to go the
combined approach or the substantive approach.

The combined approach incorporates, TOCs and less

of substantive procedures

Presented by : Kudakwashe Ndlovu CA(z) 86

 The combined approach
The combined approach is affected by the following factors:

Necessity
Substantive procedures alone will not result in sufficient audit
evidence

Possibility`1`
• the necessary softwares are there
• the control environment is sound
•Electronic data is there

Desirability
The combined approach is very efficient (less time is consumed
Presented by : Kudakwashe Ndlovu CA(z) 87
Substantive tests – Factors to consider
It is ideal to perform substantive procedures when the
following factors are available:

Weak internal control environment

-Lack of internal controls
-Tests of controls indicate no/ little reliance on internal
controls
-Few transactions
-So requested by the client

Presented by : Kudakwashe Ndlovu CA(z) 88

Questions ???

Presented by : Kudakwashe Ndlovu CA(z) 89

Auditor’s responsibility iro Fraud (ISA 240)

Presented by : Kudakwashe Ndlovu CA(z) 90

Auditor’s responsibility iro Fraud (ISA 240)

The primary responsibility for the prevention and

detection of fraud rests with both those charged with
governance of the entity and management. It is important
that management, with the oversight of those charged
with governance, place a strong emphasis on fraud
prevention, which may reduce opportunities for fraud to
take place, and fraud deterrence, which could persuade
individuals not to commit fraud because of the likelihood
of detection and punishment.

Presented by : Kudakwashe Ndlovu CA(z) 91

Auditor’s responsibility iro Fraud (ISA 240)

Owing to the Inherent limitations of an audit, there

is an unavoidable risk that some material
misstatements may not be detected.

The risk of not detecting a material misstatement

relating to fraud is high due to the fact that fraud
may involve sophisticated and carefully organised
schemes, such as forgery and misrepresentations
being made to the auditor
Presented by : Kudakwashe Ndlovu CA(z) 92
Auditor’s responsibility iro Fraud (ISA 240)

Owing to the Inherent limitations of an audit, there

is an unavoidable risk that some material
misstatements may not be detected.

The risk of not detecting a material misstatement

relating to fraud is high due to the fact that fraud
may involve sophisticated and carefully organised
schemes, such as forgery and misrepresentations
being made to the auditor
Presented by : Kudakwashe Ndlovu CA(z) 93
Fraud detection
Fraud is more likely to be detected by tips than by any other
method as it involves well thought and designed schemes.

Presented by : Kudakwashe Ndlovu CA(z) 94

Fraud detection
According to the ACFE 2012 report , fraud was detected
through the following:

Tips 43.0%
Management review 14.6%
Internal Audit 14.4%
By Accident 7%
Account reconciliation 4.8%
Document examination 4.1%
External Audit 3.3%
Notified by police 3.0%
Surveillance/ Monitoring 1.9%
Confession 1.5%
IT controls 1.1%
Other 1.1%
Presented by : Kudakwashe Ndlovu CA(z) 95
How occupational Fraud is commited
⚫ Asset misappropriation schemes, in which an employee steals or
misuses the organization’s resources (e.g., theft of company cash,
false billing schemes or inflated expense reports)
⚫ Corruption schemes, in which an employee misuses his or her
influence in a business transaction in a way that violates his or her
duty to the employer in order to gain a direct or indirect benefit
(e.g., schemes involving bribery or conflicts of interest)
⚫ Financial statement fraud schemes, in which an employee
intentionally causes a misstatement or omission of material
information in the organization’s financial reports (e.g., recording
fictitious revenues, understating reported expenses or artificially
inflating reported assets)

Presented by : Kudakwashe Ndlovu CA(z) 96

The Fraud Triangle

Presented by : Kudakwashe Ndlovu CA(z) 97

Incentives/ Pressures – (Examples)

•Known or anticipated future employee layoffs

•Promotions, compensation or other rewards
inconsistent with expectations
•Social pressures

Presented by : Kudakwashe Ndlovu CA(z) 98

Opportunities (Examples)
• large amounts of cash on hand
•Inventory items that are small in size, of high
value or in high demand
•Inadequate segregation of duties
•Inadequate physical safeguards over cash.

Presented by : Kudakwashe Ndlovu CA(z) 99

Attitudes/ Rationalisations (Examples)

• “ I only borrowed the money”

• “ After all I am being underpaid here”

Presented by : Kudakwashe Ndlovu CA(z) 100

Incentives/Pressure: Fraudulent fin
reporting
High degree of competition or market saturation, accompanied by
declining margins.

• Significant declines in customer demand and increasing business failures

in either the industry or overall economy.

• Operating losses making the threat of bankruptcy, foreclosure, or hostile

takeover imminent.

• Recurring negative cash flows from operations or an inability to generate

cash flows from operations while reporting earnings and earnings growth.

• Rapid growth or unusual profitability especially compared to that of

other companies in the same industry.
Presented by : Kudakwashe Ndlovu CA(z) 101
Opportunities: Fraudulent fin reporting
• Significant related-party transactions not in the ordinary course
of business or with related entities

• Assets, liabilities, revenues, or expenses based on significant

estimates that involve subjective judgments or uncertainties that
are difficult to corroborate.

• Significant operations located or conducted across international

borders in jurisdictions where differing business environments
and cultures exist.

• Use of business intermediaries for which there appears to be no

clear business justification.
Presented by : Kudakwashe Ndlovu CA(z) 102
Audit documentation (ISA 230)
The auditor has to prepare audit documentation that is sufficient
to enable an experienced auditor, having no previous connection
with the audit, to understand:

•The nature, timing and extent of audit procedures performed to

comply with ISAs and applicable legal and regulatory
requirements
•The results of the audit procedures performed and the audit
evidence performed
•Significant matters arising during the audit, the conclusions
reached thereon and significant professional judgements made
in reaching those conclusions
Presented by : Kudakwashe Ndlovu CA(z) 103
Audit documentation (ISA 230)
In documenting the nature, timing and extent of
audit procedures performed the auditor shall
record:

•The identifying characteristics of the specific items

or matters tested
•Who performed the audit work and the date such
work was completed
•Who reviewed the audit work performed and the
date and extent of such review.
Presented by : Kudakwashe Ndlovu CA(z) 104
Uses of Audit documentation
Audit documentation serves a number of purposes:
• Assisting the engagement team to plan and perform the audit.
• Assisting members of the engagement team responsible for
supervision to direct and supervise the audit work, and to
discharge their review responsibilities
• Enabling the engagement team to be accountable for its work.
• Retaining a record of matters of continuing significance to
future audits.
• Enabling the conduct of quality control reviews and
inspections

Presented by : Kudakwashe Ndlovu CA(z) 105

ISA 260 – COMMUNICATING WITH TCWG
THOSE CHARGED
WITH GOVERNANCE
(e.g BOARD OF
DIRECTORS)

EXTERNAL AUDITORS

Presented by : Kudakwashe Ndlovu CA(z) 106

ISA 260 – COMMUNICATING WITH TCWG
This standard was revised on 1 January 2015
and its effective for audits of financial
statements for periods ending on or after 15
December 2016

It was revised as a result of changes to the

nature of the Auditor’s report (ISA 700,701,705
)

Presented by : Kudakwashe Ndlovu CA(z) 107

Those Charged with Governance (TCWG)
These are person(s) or organization(s) (e.g., a
corporate trustee) with responsibility for overseeing
the strategic direction of the entity and obligations
related to the accountability of the entity. This
includes overseeing the financial reporting process.

For some entities in some TCWG include

management personnel, for example, executive
members of a governance body.

Presented by : Kudakwashe Ndlovu CA(z) 108

Management
The person(s) with executive responsibility
for the conduct of the entity’s operations.

For some entities in some jurisdictions,

management includes some or all of those
charged with governance, for example,
executive members of a governance body.

Presented by : Kudakwashe Ndlovu CA(z) 109

Objectives
The objectives of the auditor are:
(a) To communicate clearly with TCWG, the
responsibilities of the auditor in relation to the financial
statement audit, and an overview of the planned scope and
timing of the audit;
(b) To obtain from TCWG, information relevant to the
audit;
(c) To provide TCWG with timely observations arising
from the audit that are significant and relevant to their
responsibility to oversee the financial reporting process;
(d) To promote effective two-way communication between
the auditor and TCWG.
Presented by : Kudakwashe Ndlovu CA(z) 110
What needs to be communicated?

• The auditor’s responsibilities in relation to

the Financial Statement Audit

• Planned scope and timing of the audit

• Significant findings from the audit

• Confirmation of Auditor Independence

Presented by : Kudakwashe Ndlovu CA(z) 111

HOW to Communicate?

The communication shall be in writing for

significant findings as well as
independence confirmation. Oral
communication is not adequate.

The form and content is agreed in the

Audit Engagement Letter (ISA 210:10)

Presented by : Kudakwashe Ndlovu CA(z) 112

OBTAIN AUDIT EVIDENCE (ISA 500)
Audit evidence is : Information used by
the auditor in arriving at the conclusion
on which the auditor’s opinion is based.
Audit evidence must be sufficient and
appropriate

Presented by : Kudakwashe Ndlovu CA(z) 113

OBTAIN AUDIT EVIDENCE (ISA 500)
Appropriateness is the measure of
quality (relevance & reliability).

Sufficiency is the measure of quantity.

(Quantity is affected by the auditor’s
assessment of risk)

Presented by : Kudakwashe Ndlovu CA(z) 114

 OBTAIN AUDIT EVIDENCE (ISA 500)

Audit evidence is obtained through the

following:

[Link] procedures
- Substantive analytical procedures
- Test of detail
2. Test of controls
Presented by : Kudakwashe Ndlovu CA(z) 115
Reliability of Audit Evidence
The reliability of audit evidence is increased when it is
obtained from independent sources outside the entity.
• The reliability of audit evidence that is generated
internally is increased when the related controls,
including those over its preparation and maintenance,
imposed by the entity are effective.
• Audit evidence obtained directly by the auditor (for
example, observation of the application of a control) is
more reliable than audit evidence obtained indirectly or
by inference (for example, inquiry about the application
of a control).
Presented by : Kudakwashe Ndlovu CA(z) 116
Reliability of Audit Evidence
• Audit evidence in documentary form, whether paper,
electronic, or other medium, is more reliable than
evidence obtained orally (for example, a
contemporaneously written record of a meeting is more
reliable than a subsequent oral representation of the
matters discussed).
• Audit evidence provided by original documents is
more reliable than audit evidence provided by
photocopies or facsimiles, or documents that have been
filmed, digitized or otherwise transformed into electronic
Presented by : Kudakwashe Ndlovu CA(z) 117
Analytical procedures (ISA 520)

Analytical procedures are evaluations of financial

information through analysis of plausible relationships
among both financial and non-financial data. Analytical
procedures also encompass such investigation as is
necessary of identified fluctuations or relationships that
are inconsistent with other relevant information or that
differ from expected values by a significant amount.

Presented by : Kudakwashe Ndlovu CA(z) 118

Analytical procedures (ISA 520)
When designing and performing substantive
analytical procedures, there is need to consider:

•Suitability
•Reliability of data
•Develop an expectation
•Determine the acceptable difference from the
expected amount

Presented by : Kudakwashe Ndlovu CA(z) 119

Analytical procedures (ISA 520)
Analytical procedure examples:

• Compare month on month payroll costs in relation to

changes in the number of employees. Obtain and
corroborate explanations for variations.

•Compare current year sales revenue with prior year

sales revenue. Obtain and corroborate explanations for
the difference

Presented by : Kudakwashe Ndlovu CA(z) 120

Substantive procedures
Substantive procedure: An audit procedure designed to
detect material misstatements at the assertion level.
Substantive procedures comprise:

(a) Test of detail (of classes of transactions, account

balances, and disclosures); and
(b) Substantive analytical procedures.

Presented by : Kudakwashe Ndlovu CA(z) 121

Substantive procedures – Test of detail
When designing audit procedures use the
following verbs:
Inspect
Observe
Inquire
External Confirmation
Recalculate
Reperform
Analytical procedures
(ISA 500 par A14 to A25)
etc
NB//: NOT CHECK
Presented by : Kudakwashe Ndlovu CA(z) 122
Substantive procedures – Test of detail
When designing audit procedures try to address the
How, Why and What

Example of a badly worded procedure:

Check minutes to see if transactions were approved by
management.

Example of a good worded procedure:

Inspect(1) minutes of directors’ meetings(2) to confirm(3) that the
purchase of motor vehicles was authorised.
(1) verb (HOW)
(2) source (WHAT)
(3) reason with regard to the assertion (WHY)
Presented by : Kudakwashe Ndlovu CA(z) 123
Test of controls

A test of control is an audit procedure

designed to evaluate the operating
effectiveness of controls in preventing,
or detecting and correcting, material
misstatements at the assertion level.

Presented by : Kudakwashe Ndlovu CA(z) 124

Standard documentation
Minutes (board of directors, shareholders, management
•Management representation letter
•Bank confirmation
•Attorneys confirmation letters
•Insurance contracts
•Previous year working papers
•Communication with previous auditors
•Reports of internal auditors
•Tax returns
•Budgets
•Management accounts
•Confirmation from third parties
Presented by : Kudakwashe Ndlovu CA(z) 125
Audit approach
Evaluate the effectiveness of the internal
controls. This is done by performing tests of
controls that test the effective functioning of the
internal controls.

The result of the test of controls will determine

the nature, scope and timing of substantive
procedures

Presented by : Kudakwashe Ndlovu CA(z) 126

Direction of testing
Understatement test – start from the source
documents to the accounting records

Overstatement test – start from the

accounting records to source documents

Presented by : Kudakwashe Ndlovu CA(z) 127

Audit objectives (Income audit)
Assertion Audit objective
Completeness Test whether all income due to the entity in respect of
goods or services rendered is completely accounted for
and nothing has been omitted
Accuracy Test whether Income is accounted for at the correct
amounts
Occurrence Test whether all recorded income is valid (or has
actually occurred)
Cut - off Test whether all income transactions are accounted for
in the correct accounting period
Presentation & Test whether all Income is properly disclosed in terms
disclosure of IFRS

Presented by : Kudakwashe Ndlovu CA(z) 128

 Test of controls
How should a test of control be performed

A test of control should address the following:

How : This is the verb that describes the action to the performed.

What : Here you should make reference to the source document (e.g. The
reconciliation on which the signature is made) and/or the action
(control) being performed (e.g. the password being entered by the
employee to gain access to the system).

Why : This describes the reason for performing a test of control. What are
the internal control objectives?

Presented by : Kudakwashe Ndlovu CA(z) 129

Test of controls
Example 1:
− Inspect the clock card summary reconciliation for
the manager’s signature as evidence of approval.
Inspect = HOW = verb = ISA 500 par A14
Clock card summary reconciliation = WHAT =
Source document
For the manager’s signature as evidence of approval
= WHY =reason authorisation

Presented by : Kudakwashe Ndlovu CA(z) 130

 Test of controls
Example 2:
Inquire from management whether all employees should log
into the system with a valid user identification number and
password, to ensure that only authorised employees have
access to the system.

Inquire = HOW = verb

All employees log into system with valid ID and password =
WHAT = action
Ensure only authorised employees have access = WHY =
reason = authorisation
Presented by : Kudakwashe Ndlovu CA(z) 131
 Using the work of Internal Auditors (ISA 610
The external auditor has sole responsibility for the audit
opinion expressed, and that responsibility is not reduced
by the external auditor’s use of the work of the internal
audit function on the engagement. Although the function
may perform audit procedures similar to those performed
by the external auditor, neither the internal audit function
nor the internal auditors are independent of the entity as
is required of the external auditor in an audit of financial
statements in accordance with ISA 200.6

Presented by : Kudakwashe Ndlovu CA(z) 132

 Using the work of Internal Auditors (ISA 610
The objectives of the external auditor, where the entity has an
internal audit function and the external auditor expects to use the
work of the function to modify the nature or timing, or reduce
the extent, of audit procedures to be performed directly by the
external auditor are:
(a) To determine whether the work of the internal audit function
can be used, and if so, in which areas and to what extent;

and having made that determination:

(b) If using the work of the internal audit function, to determine
whether that work is adequate for purposes of the audit.

Presented by : Kudakwashe Ndlovu CA(z) 133

 Factors to consider (ISA 610
•Whether the internal audit function is free of any conflicting
responsibilities, for example, having managerial or operational
duties

•Whether those charged with governance oversee employment

decisions related to the internal audit function, for example,
determining the appropriate remuneration policy.

Whether there are any constraints or restrictions placed on the

internal audit function by management or those charged with
governance, for example, in communicating the internal audit
function’s findings to the external auditor.
Presented by : Kudakwashe Ndlovu CA(z) 134
 Factors to consider (ISA 610
•Whether the internal auditors are members of relevant
professional bodies and their memberships obligate their
compliance with relevant professional standards relating to
objectivity, or whether their internal policies achieve the
same objectives.

•Whether the internal audit function is adequately and

appropriately resourced relative to the size of the entity and
the nature of its operations.

Presented by : Kudakwashe Ndlovu CA(z) 135

 Factors to consider (ISA 610
• Whether activities of the internal audit function are properly
planned, supervised, reviewed or documented

•Whether, and to what extent management acts on the

recommendations of the internal audit function and how such
action is evidenced

Presented by : Kudakwashe Ndlovu CA(z) 136

 Using the work of Internal Auditors (ISA 610
The external auditor shall not use the work of the internal
audit function if the external auditor determines that:
(a) The function’s organizational status and relevant policies
and procedures do not adequately support the objectivity of
internal auditors;
(b) The function lacks sufficient competence; or
(c) The function does not apply a systematic and disciplined
approach, including quality control.

Presented by : Kudakwashe Ndlovu CA(z) 137

Using the work of an expert (ISA 620)

Presented by : Kudakwashe Ndlovu CA(z) 138

 Using the work of an expert (ISA 620
Auditor’s expert – An individual or organization possessing
expertise in a field other than accounting or auditing, whose
work in that field is used by the auditor to assist the auditor
in obtaining sufficient appropriate audit evidence. An
auditor’s expert may be either an auditor’s internal expert
(who is a partner or staff, including temporary staff, of the
auditor’s firm or a network firm), or an auditor’s external
expert.

Presented by : Kudakwashe Ndlovu CA(z) 139

 Using the work of an expert (ISA 620
Management’s – An individual or organization possessing
expertise in a field other than accounting or auditing, whose
work in that field is used by the entity to assist the entity in
preparing financial statements

Presented by : Kudakwashe Ndlovu CA(z) 140

 Using the work of an expert (ISA 620
We can use the work of experts to do the following:

•The valuation of complex financial instruments, land and buildings,

plant and machinery, jewellery, works of art, intangible assets, assets
acquired and liabilities assumed in business combinations and assets
that may have been impaired.
• The actuarial calculation of liabilities associated with insurance
contracts or employee benefit plans.
• The estimation of oil and gas reserves.
• The valuation of environmental liabilities, and site clean-up costs.
• The interpretation of contracts, laws and regulations.
• The analysis of complex or unusual tax compliance issues.

Presented by : Kudakwashe Ndlovu CA(z) 141

Agreement Btn the Auditor and the Expert
The Auditor shall agree in writing on the following matters
with the expert. (ISA 620:11)

•The Nature, scope and objectives of the expert’s work

•The roles and responsibilities of both the auditor and the expert
•The nature, timing and extent of communication between the
auditor and the expert
•The need for the auditor’s expert to observe confidentiality
requirements

Presented by : Kudakwashe Ndlovu CA(z) 142

 Assessing competence and objectivity of the expert
• Personal experience with previous work of that expert.
• Discussions with that expert.
• Discussions with other auditors or others who are familiar
with that expert’s work.
• Knowledge of that expert’s qualifications, membership of a
professional body or industry association, license to practice,
or other forms of external recognition.
• Published papers or books written by that expert.
• The auditor’s firm’s quality control policies and procedures

Presented by : Kudakwashe Ndlovu CA(z) 143

 Evaluating the work of an expert
Procedures to evaluate the adequacy of the auditor’s expert’s
work for the auditor’s purposes may include:
• Inquiries of the auditor’s expert.
• Reviewing the auditor’s expert’s working papers and reports.
• Corroborative procedures, such as:
-Observing the auditor’s expert’s work;
-Examining published data, such as statistical reports
from reputable, authoritative sources;
-Confirming relevant matters with third parties;
-Performing detailed analytical procedures; and
-Reperforming calculations.

Presented by : Kudakwashe Ndlovu CA(z) 144

Related party transactions (ISA 550)
Documents that may provide information about related
parties include:
• Third-party confirmations
• Entity income tax returns.
• Information supplied to regulatory authorities.
• Shareholder registers to identify principal shareholders.
• Statements of conflicts of interest
• Records of investments and those of its pension plans.
• Contracts and agreements with key management
• Significant contracts and agreements not in the entity’s
ordinary course of business.

Presented by : Kudakwashe Ndlovu CA(z) 145

Subsequent events (ISA 560)
The objectives of the auditor under ISA 560 are:
(a) To obtain sufficient appropriate audit evidence about
whether subsequent events are appropriately reflected
in those financial statements in accordance with the
applicable financial reporting framework; and
(b) To respond appropriately to facts that become known
to the auditor after the date of the auditor’s report, that,
had they been known to the auditor at that date, may
have caused the auditor to amend the auditor’s report.

Presented by : Kudakwashe Ndlovu CA(z) 146

Subsequent events (ISA 560)
Enquiry about subsequent events:
•Whether new commitments, borrowings or guarantees have
been entered into.
• Whether sales or acquisitions of assets have occurred or are
planned.
• Whether there have been increases in capital or issuance of
debt instruments, such as the issue of new shares or
debentures, or an agreement to merge or liquidate has been
made or is planned.
• Whether any assets have been appropriated by government
or destroyed, for example, by fire or flood.
Read minutes
Presented by : Kudakwashe Ndlovu CA(z) 147
Going concern (ISA 570) - Revised
Effective for audits of Financial Statements for periods
ending on or after 15 December 2016

Presented by : Kudakwashe Ndlovu CA(z) 148

Going concern (ISA 570) - Revised
Financial statements are prepared on an assumption that the
entity is a going concern and will continue to operate in the
foreseeable future, unless management either intends to
liquidate the entity or to cease operations, or has no realistic
alternative but to do so.

IAS 1 (para 25-26) requires mgt to make an assessment of an

entity’s ability to continue as a going concern. Mgt’s
assessment of the entity’s ability to continue as a going
concern involves making a judgment, at a particular point in
time, about inherently uncertain future outcomes of events or
conditions.
Presented by : Kudakwashe Ndlovu CA(z) 149
Going concern (ISA 570) – Auditor’s responsibility
The auditor’s responsibilities are to obtain sufficient
appropriate audit evidence regarding, and conclude on,
the appropriateness of management’s use of the going
concern basis of accounting in the preparation of the
financial statements, and to conclude, based on the audit
evidence obtained, whether a material uncertainty exists
about the entity’s ability to continue as a going concern.

Presented by : Kudakwashe Ndlovu CA(z) 150

Effect on opinion
Use of going concern basis of accounting is
inappropriate

If the financial statements have been prepared using the

going concern basis of accounting but, in the auditor’s
judgment, management’s use of the going concern basis
of accounting in the preparation of the financial
statements is inappropriate, the auditor shall express an
adverse opinion.

Presented by : Kudakwashe Ndlovu CA(z) 151

Effect on opinion
Use of going concern basis is appropriate but a
material uncertainty exists

If adequate disclosure about the material uncertainty is

made in the financial statements, the auditor shall
express an unmodified opinion and the auditor’s report
shall include a separate section under the heading
“Material Uncertainty Related to Going Concern”

Presented by : Kudakwashe Ndlovu CA(z) 152

 Material Uncertainty Related to Going Concern
paragraph

(a)Draws attention to the note in the financial statements

that discloses the matters

(b) State that these events or conditions indicate that a

material uncertainty exists that may cast significant
doubt on the entity’s ability to continue as a going
concern and that the auditor’s opinion is not modified in
respect of the matter.

Presented by : Kudakwashe Ndlovu CA(z) 153

 Use of going concern basis is appropriate but a
material uncertainty exists
If adequate disclosure about the material uncertainty is not
made in the financial statements, the auditor shall
(a)Express a qualified opinion or adverse opinion, as
appropriate, in accordance with ISA 705

(b) In the Basis for Qualified/(Adverse) Opinion section of

the auditor’s report, state that a material uncertainty exists
that may cast significant doubt on the entity’s ability to
continue as a going concern and that the financial
statements do not adequately disclose this matter.

Presented by : Kudakwashe Ndlovu CA(z) 154

Going concern (ISA 570) - Revised
Going concern indicators (Financial):

• Net liability or net current liability position.

• Fixed-term borrowings approaching maturity without realistic
prospects of renewal ; or excessive reliance on short-term
borrowings to finance long-term assets.
• Indications of withdrawal of support by creditors.
•Negative operating cash flows
• Adverse key financial ratios.
• Substantial operating losses or significant deterioration in the
value of assets used to generate cash flows.
• Arrears or discontinuance of dividends.
• Inability to pay creditors on due dates.
Presented by : Kudakwashe Ndlovu CA(z) 155
Going concern (ISA 570)
Going concern indicators (Operating):

•Management intentions to liquidate the entity or to cease

operations.
• Loss of key management without replacement.
• Loss of a major market, key customer(s), franchise,
license, or principal supplier(s).
• Labour difficulties.
• Shortages of important supplies.
• Emergence of a highly successful competitor.

Presented by : Kudakwashe Ndlovu CA(z) 156

Going concern indicators (Other):
• Non-compliance with capital or other statutory or
regulatory requirements e. g RBZ minimum capital
requirements for financial institutions in Zimbabwe

• Pending legal or regulatory proceedings against the entity

that may, if successful, result in claims that the entity is
unlikely to be able to satisfy.

• Changes in law or regulation or government policy

expected to adversely affect the entity.

• Uninsured or underinsured catastrophes when they occur.

Presented by : Kudakwashe Ndlovu CA(z) 157
Going concern indicators (Other):
• Non-compliance with capital or other statutory or
regulatory requirements e. g RBZ minimum capital
requirements for financial institutions in Zimbabwe

• Pending legal or regulatory proceedings against the entity

that may, if successful, result in claims that the entity is
unlikely to be able to satisfy.

• Changes in law or regulation or government policy

expected to adversely affect the entity.

• Uninsured or underinsured catastrophes when they occur.

Presented by : Kudakwashe Ndlovu CA(z) 158
Audit procedures to audit going concern
• Analyzing and discussing cash flow, profit and other relevant
forecasts with management.

• Analyzing and discussing the entity’s latest available interim

financial statements.

• Reading the terms of debentures and loan agreements and

determining whether any have been breached.

• Reading minutes of the meetings of shareholders, those

charged with governance and relevant committees for reference
to financing difficulties.

Presented by : Kudakwashe Ndlovu CA(z) 159

Audit procedures to audit going concern
• Inquiring of the entity’s legal counsel regarding the existence
of litigation and claims and the reasonableness of management’s
assessments of their outcome and the estimate of their financial
implications.

• Confirming the existence, legality and enforceability of

arrangements to provide or maintain financial support with
related and third parties and assessing the financial ability of
such parties to provide additional funds

• Evaluating the entity’s plans to deal with unfilled customer

orders.

Presented by : Kudakwashe Ndlovu CA(z) 160

Audit procedures to audit going concern
• Performing audit procedures regarding subsequent events to
identify those that either mitigate or otherwise affect the
entity’s ability to continue as a going concern.

• Confirming the existence, terms and adequacy of borrowing

facilities.

• Obtaining and reviewing reports of regulatory actions.

• Determining the adequacy of support for any planned disposals
of assets.

Presented by : Kudakwashe Ndlovu CA(z) 161

Audit procedures to audit going concern
A comparison of:

•The prospective financial information for recent prior periods

with historical results;

•The prospective financial information for the current period with

results achieved to date.

Presented by : Kudakwashe Ndlovu CA(z) 162

FORMING AN OPINION AND REPORTING ON
FINANCIAL STATEMENTS (ISA 700)

The standard was revised and the revised standard is effective for
audits of financial statements for periods ending on or after 15
December 2016

Presented by : Kudakwashe Ndlovu CA(z) 163

Forming an opinion and reporting on financial
statements (ISA 700)

The standard was revised and the revised standard is effective for
audits of financial statements for periods ending on or after 15
December 2016

Presented by : Kudakwashe Ndlovu CA(z) 164

 Forming an opinion and reporting on financial
statements (ISA 700)

The objectives of the auditor are:

(a)To form an opinion on the financial statements
based on an evaluation of the conclusions drawn
from the audit evidence obtained; a

(b) To express clearly that opinion through a

written report.

Presented by : Kudakwashe Ndlovu CA(z) 165

Forming an opinion and reporting on financial
statements (ISA 700)
The auditor shall evaluate whether the financial statements
are prepared, in all material respects, in accordance with the
requirements of the applicable financial reporting framework.

This evaluation shall include consideration of the qualitative

aspects of the entity’s accounting practices, including
indicators of possible bias in management’s judgments.

Presented by : Kudakwashe Ndlovu CA(z) 166

 General evaluations made by the auditor
Confirm whether
(a)The financial statements adequately disclose the
significant accounting policies selected and applied;

(b)The accounting policies selected and applied are

consistent with the applicable financial reporting
framework and are appropriate;

(c)The accounting estimates made by management are

reasonable

Presented by : Kudakwashe Ndlovu CA(z) 167

 General evaluations made by the auditor
Confirm whether
(d) The information presented in the FSs is relevant,
reliable, comparable, and understandable;

(e) The FSs provide adequate disclosures to enable the

intended users to understand the effect of material
transactions and events on the information conveyed in the
FSs;

(f) The terminology used in the FSs, including the title of

each FS, is appropriate.
Presented by : Kudakwashe Ndlovu CA(z) 168
 Forming an opinion
The auditor shall express an unmodified opinion when
the auditor concludes that the FSs are prepared, in all
material respects, in accordance with the applicable
financial reporting framework.

The auditor must modify the opinion when he/she:

(a) concludes that, the FSs as a whole are not free from
material misstatement;

(b) is unable to obtain sufficient appropriate audit

evidence to conclude that the FSs as a whole are free from
material misstatement,
Presented by : Kudakwashe Ndlovu CA(z) 169
 Auditor’s report

The Auditor’s report shall be in writing (ISA 700:20)

Presented by : Kudakwashe Ndlovu CA(z) 170

The Auditor’s report
Title :The auditor’s report should have a title that clearly indicates that it is the
report of an independent auditor.

Addressee :The auditor’s report shall be addressed as required by the

circumstances of the engagement.

Auditor’s opinion
The opinion section of the auditor should:
(a) Identify the entity whose financial statements have been audited;
(b) State that the financial statements have been audited;
(c) Identify the title of each statement that comprises the financial statements;
(d) Refer to the summary of significant accounting policies and other
explanatory information; and
(e) Specify the date or period covered by each financial statement comprising
the financial statements.
Presented by : Kudakwashe Ndlovu CA(z) 171
The Auditor’s report
• Basis for opinion
a) States that the audit was conducted in accordance with ISAs

(b) Refers to the section of the auditor’s report that describes the auditor’s
responsibilities under the ISAs;

(c) Includes a statement that the auditor is independent of the entity in

accordance with the relevant ethical requirements relating to the audit, and has
fulfilled the auditor’s other ethical responsibilities in accordance with these
requirements. The statement shall identify the jurisdiction of origin of the
relevant ethical requirements or refer to the International Ethics Standards
Board for Accountants’ Code of Ethics for Professional Accountants (IESBA
Code);
(d) States whether the auditor believes that the audit evidence the auditor has
obtained is sufficient and appropriate to provide a basis for the auditor’s
opinion.
Presented by : Kudakwashe Ndlovu CA(z) 172
The Auditor’s report
Going concern
•Where applicable, the auditor shall report in accordance with ISA 570

Key audit matters (KAMs)

•For audits of complete sets of general purpose financial statements of listed
entities, the auditor shall communicate key audit matters in the auditor’s report
in accordance with ISA 701 or;

•When the auditor is otherwise required by law or regulation or decides to

communicate key audit matters in the auditor’s report, the auditor shall do so
in accordance with ISA 701.

Presented by : Kudakwashe Ndlovu CA(z) 173

The Auditor’s report
•Responsibilities of Management for the Financial Statements
(To prepare financials and to design internal controls and to assess the
entity’s ability to continue as a going concern)

•Auditor’s responsibilities for the Audit of the Financial Statements (36-44)

Obtain reasonable assurance about whether the financials as a whole are free
from material misstatements and to issue the auditor’s report which includes
an opinion
• Name of the Engagement Partner
for listed companies, unless in rare circumstances where such disclosure
could lead to a significant personal security threat

Presented by : Kudakwashe Ndlovu CA(z) 174

The Auditor’s report
•Signature of the Auditor’s

•Date of the Auditor’s report

•Auditor’s address
The report shall name the location in the jurisdiction where the auditor
practices

Presented by : Kudakwashe Ndlovu CA(z) 175

Example – Revised Audit report

Presented by : Kudakwashe Ndlovu CA(z) 176

Communicating Key Audit Matters in the Auditor’s
Report (ISA 701)
A new standard- it deals with the auditor’s responsibility to
communicate key audit matters (KAMs) in the auditor’s
report. It is intended to address both the auditor’s judgment
as to what to communicate in the auditor’s report and the
form and content of such communication

The purpose of communicating KAMs is to enhance the

communicative value of the auditor’s report by providing
greater transparency about the audit that was performed.

Communicating KAMs provides additional information to

intended users of the financial statements to assist them in
understanding those matters that, in the auditor’s professional
judgment, were of most significance in the audit of the financial
statements of the current period.

Presented by : Kudakwashe Ndlovu CA(z) 177

Communicating Key Audit Matters in the Auditor’s
Report (ISA 701)
Communicating KAMs may also assist intended users in
understanding the entity and areas of significant
management judgment in the audited financial statements

The communication of KAMs in the auditor’s report may also

provide intended users a basis to further engage with
management and those charged with governance about
certain matters relating to the entity, the audited financial
statements, or the audit that was performed.

Presented by : Kudakwashe Ndlovu CA(z) 178

Communicating Key Audit Matters in the Auditor’s
Report (ISA 701)
Communicating key audit matters in the auditor’s report is in the context of
the auditor having formed an opinion on the financial statements as a
whole. Communicating key audit matters in the auditor’s report is not:

•A substitute for disclosures in the financial statements that the applicable

financial reporting framework requires management to make, or that are
otherwise necessary to achieve fair presentation;

•A substitute for the auditor expressing a modified opinion when

required by the circumstances of a specific audit engagement in
accordance with ISA 705

•A substitute for reporting in accordance with ISA 570 (Revised) when a

material uncertainty exists relating to events or conditions that may cast
significant doubt on an entity’s ability to continue as a going concern; or

•A separate opinion on individual matters. (Ref: Para. A5–A8)

Presented by : Kudakwashe Ndlovu CA(z) 179
Communicating Key Audit Matters in the Auditor’s
Report (ISA 701)

⚫This ISA applies to audits of complete sets of general purpose

financial statements of listed entities and circumstances when the
auditor otherwise decides to communicate key audit matters in the
auditor’s report.

⚫This ISA also applies when the auditor is required by law or

regulation to communicate key audit matters in the auditor’s report.
However, ISA 705 (Revised) prohibits the auditor from
communicating key audit matters when the auditor disclaims an
opinion on the financial statements, unless such reporting is
required by law or regulation.

Presented by : Kudakwashe Ndlovu CA(z) 180

Effective date

ISA 701 is effective for audit of financial statements

for periods ending on or after 15 December 2015

Presented by : Kudakwashe Ndlovu CA(z) 181

KAMs Defined
Key audit matters —Those matters that, in the
auditor’s professional judgment, were of most
significance in the audit of the financial statements of
the current period.

KAMs are selected from matters communicated with

those charged with governance.

Presented by : Kudakwashe Ndlovu CA(z) 182

Determining KAMs
The auditor shall determine, from the matters communicated with those
charged with governance, those matters that required significant auditor
attention in performing the audit. In making this determination, the
auditor shall take into account the following: (Ref: Para. A9–A18)

• Areas of higher assessed risk of material misstatement, or significant

risks identified in accordance with ISA 315 (Revised). (Ref: Para.
A19–A22)

•Significant auditor judgments relating to areas in the financial statements

that involved significant management judgment, including accounting
estimates that have been identified as having high estimation uncertainty.

•The effect on the audit of significant events or transactions that occurred

during the period.

Presented by : Kudakwashe Ndlovu CA(z) 183

Modifications to the audit opinion (ISA 705
This ISA establishes three types of modified opinions,
namely, a qualified opinion, an adverse opinion, and a
disclaimer of opinion. The decision regarding which type of
modified opinion is appropriate depends upon:
(a) The nature of the matter giving rise to the modification,
that is, whether the financial statements are materially
misstated or, in the case of an inability to obtain sufficient
appropriate audit evidence, may be materially misstated; and
(b) The auditor’s judgment about the pervasiveness of the
effects or possible effects of the matter on the financial
statements.

Presented by : Kudakwashe Ndlovu CA(z) 184

Modifications to the audit opinion (ISA 705
The objective of the auditor is to express clearly an
appropriately modified opinion on the financial
statements that is necessary when:
(a) The auditor concludes, based on the audit evidence
obtained, that the financial statements as a whole are not
free from material misstatement; or
(b) The auditor is unable to obtain sufficient appropriate
audit evidence to conclude that the financial statements as
a whole are free from material misstatement.

Presented by : Kudakwashe Ndlovu CA(z) 185

Modifications to the audit opinion (ISA 705
Pervasive – Pervasive effects on the financial
statements are those that, in the auditor’s judgment:
(i) Are not confined to specific elements, accounts or
items of the financial statements
(ii) If so confined, represent or could represent a
substantial proportion of the financial statements.
(iii) In relation to disclosures, are fundamental to
users’ understanding of the financial statements.

Presented by : Kudakwashe Ndlovu CA(z) 186

Modifications to the audit opinion (ISA 705
Qualified Opinion
The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit
evidence, concludes that misstatements, individually or in
the aggregate, are material, but not pervasive, to the
financial statements; or
(b) The auditor is unable to obtain sufficient appropriate
audit evidence on which to base the opinion, but the auditor
concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be
material but not pervasive.

Presented by : Kudakwashe Ndlovu CA(z) 187

Modifications to the audit opinion (ISA 705
Adverse Opinion
The auditor shall express an adverse opinion
when the auditor, having obtained sufficient
appropriate audit evidence, concludes that
misstatements, individually or in the
aggregate, are both material and pervasive to
the financial statements.

Presented by : Kudakwashe Ndlovu CA(z) 188

Modifications to the audit opinion (ISA 705
Disclaimer of Opinion
- The auditor shall disclaim an opinion when he is unable to obtain
sufficient appropriate audit evidence on which to base the opinion
and concludes that the possible effects on the financial statements
of undetected misstatements, if any, could be both material and
pervasive.
- The auditor shall disclaim an opinion when, in extremely rare
circumstances involving multiple uncertainties he concludes that,
notwithstanding having obtained sufficient appropriate audit
evidence regarding each of the individual uncertainties, it is not
possible to form an opinion on the financial statements due to the
potential interaction of the uncertainties and their possible
cumulative effect on the financial statements.
Presented by : Kudakwashe Ndlovu CA(z) 189
Modifications to the audit opinion (ISA 705
Basis for Modification Paragraph
When the auditor modifies the opinion on the financial
statements, the auditor shall, in addition to the specific
elements required by ISA 700, include a paragraph in the
auditor’s report that provides a description of the matter
giving rise to the modification. The auditor shall place this
paragraph immediately before the opinion paragraph in the
auditor’s report and use the heading “Basis for Qualified
Opinion,” “Basis for Adverse Opinion,” or “Basis for
Disclaimer of Opinion,” as appropriate.

Presented by : Kudakwashe Ndlovu CA(z) 190

Modifications to the audit opinion (ISA 705
Opinion Paragraph
When the auditor modifies the audit opinion, the
auditor shall use the heading “Qualified
Opinion,” “Adverse Opinion,” or “Disclaimer of
Opinion,” as appropriate, for the opinion
paragraph.

Presented by : Kudakwashe Ndlovu CA(z) 191

Modifications to the audit opinion (ISA 705
When the auditor expresses a qualified opinion due to a
material misstatement in the financial statements, the auditor
shall state in the opinion paragraph that, in the auditor’s
opinion, except for the effects of the matter(s) described in
the Basis for Qualified Opinion paragraph The financial
statements presents..........

When the modification arises from an inability to obtain

sufficient appropriate audit evidence, the auditor shall use
the corresponding phrase “except for the possible effects of
the matter(s) ...” for the modified opinion.
.
Presented by : Kudakwashe Ndlovu CA(z) 192
Modifications to the audit opinion (ISA 705
When the auditor expresses an adverse opinion, the
auditor shall state in the opinion paragraph that, in the
auditor’s opinion, “because of the significance of the
matter(s) described in the Basis for Adverse Opinion
paragraph the financial statements do not present
fairly (or give a true and fair view) in accordance
with the applicable financial reporting framework when
reporting in accordance with a fair presentation
framework

Presented by : Kudakwashe Ndlovu CA(z) 193

Modifications to the audit opinion (ISA 705)
When the auditor disclaims an opinion due to an
inability to obtain sufficient appropriate audit
evidence, the auditor shall state in the opinion
paragraph that:
(a) Because of the significance of the matter(s)
described in the Basis for Disclaimer of Opinion
paragraph, the auditor has not been able to obtain
sufficient appropriate audit evidence to provide a
basis for an audit opinion; and, accordingly,
(b) The auditor does not express an opinion on the
financial statements.
Presented by : Kudakwashe Ndlovu CA(z) 194
Modifications to the audit opinion (ISA 705)
Description of Auditor’s Responsibility When the
Auditor Expresses a Qualified or Adverse Opinion
When the auditor expresses a qualified or adverse
opinion, the auditor shall amend the description of the
auditor’s responsibility to state that the auditor believes
that the audit evidence the auditor has obtained is
sufficient and appropriate to provide a basis for the
auditor’s modified audit opinion.

Presented by : Kudakwashe Ndlovu CA(z) 195

Modifications to the audit opinion (ISA 705)
Description of Auditor’s Responsibility When the Auditor Disclaims an
Opinion
When the auditor disclaims an opinion due to an inability to obtain
sufficient appropriate audit evidence, the auditor shall amend the
introductory paragraph of the auditor’s report to state that the auditor
was engaged to audit the financial statements. The auditor shall also
amend the description of the auditor’s responsibility and the description
of the scope of the audit to state only the following: “Our responsibility
is to express an opinion on the financial statements based on
conducting the audit in accordance with International Standards on
Auditing. Because of the matter(s) described in the Basis for
Disclaimer of Opinion paragraph, however, we were not able to obtain
sufficient appropriate audit evidence to provide a basis for an audit
opinion.”
Presented by : Kudakwashe Ndlovu CA(z) 196
Modifications to the audit opinion (ISA 705)
Auditor’s Judgment about the Pervasiveness of the
Effects or Possible Effects on the Financial
Statements

Nature of Matter Giving Material but Not Material and Pervasive

Rise to the Modification Pervasive

Financial statements are Qualified opinion Adverse opinion

materially misstated

Inability to obtain Qualified opinion Disclaimer of opinion

sufficient appropriate
audit evidence

Presented by : Kudakwashe Ndlovu CA(z) 197

Emphasis of matter and other matter paragraph (ISA 706
This standard also changed with the change in the audit report.

The amended standard is effective for audits of financial

statements for periods ending on or after December 15, 2016

Presented by : Kudakwashe Ndlovu CA(z) 198

Emphasis of matter and other matter paragraph (ISA 706
Emphasis of Matter paragraph – A paragraph included in the
auditor’s report that refers to a matter appropriately
presented or disclosed in the financial statements that, in the
auditor’s judgment, is of such importance that it is
fundamental to users’ understanding of the financial statements.

Other Matter paragraph – A paragraph included in the auditor’s

report that refers to a matter other than those presented or
disclosed in the financial statements that, in the auditor’s
judgment, is relevant to users’ understanding of the audit, the
auditor’s responsibilities or the auditor’s report.

Presented by : Kudakwashe Ndlovu CA(z) 199

Emphasis of matter and other matter paragraph (ISA 706

An Emphasis of Matter paragraph shall be included

provided that:

(a) The auditor would not be required to modify the

opinion in accordance with ISA 705 as a result of the
matter
(b) When ISA 701 applies, the matter has not been
determined to be a key audit matter to be communicated
in the auditor’s report.

Presented by : Kudakwashe Ndlovu CA(z) 200

Emphasis of matter and other matter paragraph (ISA 706
When the auditor includes an Emphasis of Matter
paragraph in the auditor’s report, the auditor shall:
(a) Include it immediately after the Opinion paragraph
in the auditor’s report;
(b) Use the heading “Emphasis of Matter,” or other
appropriate heading;
(c) Include in the paragraph a clear reference to the
matter being emphasized and to where relevant
disclosures that fully describe the matter can be found in
the financial statements; and
(d) Indicate that the auditor’s opinion is not modified in
respect of the matter
Presented by :emphasized.
Kudakwashe Ndlovu CA(z) 201
Emphasis of matter and other matter paragraph (ISA 706
Examples of circumstances where the auditor may consider it
necessary to include an Emphasis of Matter paragraph are:
• An uncertainty relating to the future outcome of exceptional
litigation or regulatory action.
• Early application (where permitted) of a new accounting
standard (for example, a new International Financial
Reporting Standard) that has a pervasive effect on the
financial statements in advance of its effective date.
• A major catastrophe that has had, or continues to have, a
significant effect on the entity’s financial position.

Presented by : Kudakwashe Ndlovu CA(z) 202

Emphasis of matter and other matter paragraph (ISA 706
A widespread use of Emphasis of Matter paragraphs
diminishes the effectiveness of the auditor’s
communication of such matters. Additionally, to include
more information in an Emphasis of Matter paragraph
than is presented or disclosed in the financial statements
may imply that the matter has not been appropriately
presented or disclosed; accordingly, the Emphasis of
Matter paragraph should be limited to matters presented
or disclosed in the financial statements.

Presented by : Kudakwashe Ndlovu CA(z) 203

INTERNAL AUDITING

Presented by : Kudakwashe Ndlovu CA(z) 204

INTERNAL AUDITING
IIA defines Internal Auditing as:

“an independent, objective assurance and consulting activity

designed to add value and improve an organization's
operations. It helps an organization accomplish its objectives
by bringing a systematic, disciplined approach to evaluate
and improve the effectiveness of risk management, control,
and governance processes” .

Presented by : Kudakwashe Ndlovu CA(z) 205

INTERNAL AUDITING STANDARDS
Internal Auditing is governed by the IIA and International
Body which has its own standards which are called the
INTERNATIONAL STANDARDS FOR THE
PROFESSIONAL PRACTICE OF INTERNAL
AUDITING

Presented by : Kudakwashe Ndlovu CA(z) 206

INTERNAL AUDITING STANDARDS
1000 Series : Attributes standards

1000 – Purpose, Authority, and Responsibility

The purpose, authority, and responsibility of the internal
audit activity must be formally defined in an internal audit
charter (IAC). The CAE(Chief Audit Executive) must
periodically review the internal audit charter and present it to
senior management and the board for approval.

Presented by : Kudakwashe Ndlovu CA(z) 207

INTERNAL AUDIT CHARTER DEFINED
The IAC is a formal document that defines the internal
audit activity's purpose, authority, and responsibility.

The IAC(internal audit charter) establishes the internal

audit activity's position within the organization,
including the nature of the CAE’s functional reporting
relationship with the board; authorizes access to records,
personnel, and physical properties relevant to the
performance of engagements; and defines the scope of
internal audit activities.

Presented by : Kudakwashe Ndlovu CA(z) 208

INTERNAL AUDIT CHARTER (Cont’d)
The final approval of the internal audit charter resides
with the board. It is usually delegated to the Audit
Committee

1000.A1 – The nature of assurance services provided to the

organization must be defined in the IAC. If assurances are to
be provided to parties outside the organization, the nature of
these assurances must also be defined in the IAC.

1000.C1 – The nature of consulting services must be defined

in the IAC.

Presented by : Kudakwashe Ndlovu CA(z) 209

INTERNAL AUDITING STANDARDS
1010 – Recognition of the Definition of Internal Auditing,
the Code of Ethics, and the Standards in the Internal
Audit Charter

•The mandatory nature of the Definition of Internal Auditing,

the Code of Ethics, and the Standards must be recognized in
the IAC.

•The CAE should discuss the Definition of Internal Auditing,

the Code of Ethics, and the Standards with senior
management and the board.

Presented by : Kudakwashe Ndlovu CA(z) 210

INTERNAL AUDITING STANDARDS
1100 – Independence and Objectivity
The internal audit activity must be independent, and internal
auditors must be objective in performing their work.

Presented by : Kudakwashe Ndlovu CA(z) 211

INDEPENDENCE
Independence is the freedom from conditions that threaten
the ability of the internal audit activity to carry out internal
audit responsibilities in an unbiased manner. To achieve the
degree of independence necessary to effectively carry out the
responsibilities of the internal audit activity, the CAE has
direct and unrestricted access to senior management and the
board. This can be achieved through a dual-reporting
relationship.

Threats to independence must be managed at the individual

auditor, engagement, functional, and organizational levels.

Presented by : Kudakwashe Ndlovu CA(z) 212

OBJECTIVITY
Objectivity is an unbiased mental attitude that allows internal
auditors to perform engagements in such a manner that they
believe in their work product and that no quality
compromises are made.

Objectivity requires that internal auditors do not subordinate

their judgment on audit matters to others. Threats to
objectivity must be managed at the individual auditor,
engagement, functional, and organizational levels.

Presented by : Kudakwashe Ndlovu CA(z) 213

INTERNAL AUDITING STANDARDS
1110 – Organizational Independence
•The CAE must report to a level within the organization
that allows the internal audit activity to fulfill its
responsibilities.

•The CAE must confirm to the board, at least annually,

the organizational independence of the internal audit
activity.

Presented by : Kudakwashe Ndlovu CA(z) 214

INTERNAL AUDITING STANDARDS
Organizational independence is effectively achieved
when the CAE reports functionally to the board. Eg:
•Approving the IAC;
•Approving the RBIAP;
•Approving the internal audit budget and resource plan;
•Receiving communications from the CAE on the internal audit activity’s
performance relative to its plan and other matters;
•Approving decisions regarding the appointment and removal of the
CAE;
•Approving the remuneration of the CAE;
•Making appropriate inquiries of management and the CAE to determine
whether there are inappropriate scope or resource limitations.
1110.A1 – The internal audit activity must be free from interference in
determining the scope of internal auditing, performing work, and
communicating results.
Presented by : Kudakwashe Ndlovu CA(z) 215
INTERNAL AUDITING STANDARDS
1110.A1 – The internal audit activity must be free
from interference in determining the scope of
internal auditing, performing work, and
communicating results.

Presented by : Kudakwashe Ndlovu CA(z) 216

INTERNAL AUDITING STANDARDS
1111 – Direct Interaction with the Board

The CAE must communicate and interact directly with

the board.

1120 – Individual Objectivity

Internal auditors must have an impartial, unbiased
attitude and avoid any conflict of interest

Presented by : Kudakwashe Ndlovu CA(z) 217

CONFLICT OF INTEREST DEFINED
Conflict of interest is a situation in which an internal
auditor, who is in a position of trust, has a competing
professional or personal interest. Such competing
interests can make it difficult to fulfill his or her duties
impartially. A conflict of interest exists even if no
unethical or improper act results. A conflict of interest
can create an appearance of impropriety that can
undermine confidence in the internal auditor, the internal
audit activity, and the profession. A conflict of interest
could impair an individual's ability to perform his or her
duties and responsibilities objectively.
Presented by : Kudakwashe Ndlovu CA(z) 218
INTERNAL AUDITING STANDARDS
1130 – Impairment to Independence or Objectivity

•If independence or objectivity is impaired in fact or

appearance, the details of the impairment must be
disclosed to appropriate parties.

•The nature of the disclosure will depend upon the

impairment.

Presented by : Kudakwashe Ndlovu CA(z) 219

IMPAIRMENT TO OBJECTIVITY
Impairment to organizational independence and
individual objectivity include (inter alia)
•personal conflict of interest
• scope limitations
• restrictions on access to records, personnel, and
properties
• resource limitations, such as funding.

Presented by : Kudakwashe Ndlovu CA(z) 220

INTERNAL AUDITING STANDARDS
1130.A1 – Internal auditors must refrain from assessing
specific operations for which they were previously
responsible.

1130.A2 – Assurance engagements for functions over

which the CAE has responsibility must be overseen by a
party outside the internal audit activity.

1130.C1 – Internal auditors may provide consulting

services relating to operations for which they had
previous responsibilities.
Presented by : Kudakwashe Ndlovu CA(z) 221
INTERNAL AUDITING STANDARDS
1200 – Proficiency and Due Professional Care
Engagements must be performed with proficiency and
due professional care.

1210 – Proficiency
Internal auditors must possess the knowledge, skills, and
other competencies needed to perform their individual
responsibilities. The internal audit activity collectively
must possess or obtain the knowledge, skills, and other
competencies needed to perform its responsibilities.

Presented by : Kudakwashe Ndlovu CA(z) 222

INTERNAL AUDITING STANDARDS
1220 – Due Professional Care
Internal auditors must apply the care and skill expected
of a reasonably prudent and competent internal auditor.
Due professional care does not imply infallibility. (i.e
doesn’t mean they don’t make mistakes)

1230 – Continuing Professional Development (cpd)

Internal auditors must enhance their knowledge, skills,
and other competencies through continuing professional
development.

Presented by : Kudakwashe Ndlovu CA(z) 223

INTERNAL AUDITING STANDARDS
1300 – Quality Assurance and Improvement Program

The CAE must develop and maintain a quality assurance

and improvement program that covers all aspects of the
internal audit activity.

1310 – Requirements of the Quality Assurance and

Improvement Program

The quality assurance and improvement program must

include both internal and external assessments.
Presented by : Kudakwashe Ndlovu CA(z) 224
INTERNAL AUDITING STANDARDS
1311 – Internal Assessments
Internal assessments must include:
•Ongoing monitoring of the performance of the internal
audit activity;

•Periodic self-assessments or assessments by other

persons within the organization with sufficient
knowledge of internal audit practices.

Presented by : Kudakwashe Ndlovu CA(z) 225

INTERNAL AUDITING STANDARDS
1312 - External Assessments

External assessments must be conducted at least once

every five years by a qualified, independent assessor or
assessment team from outside the organization.

The CAE must discuss with the board:

•The form and frequency of external assessment
•The qualifications and independence of the external
assessor or assessment team, including any potential
conflict of interest.
Presented by : Kudakwashe Ndlovu CA(z) 226
INTERNAL AUDITING STANDARDS
External assessments can be in the form of a full external
assessment, or a self-assessment with independent
external validation.

Presented by : Kudakwashe Ndlovu CA(z) 227

INTERNAL AUDITING STANDARDS
1320 – Reporting on the Quality Assurance and
Improvement Program
The CAE must communicate the results of the quality
assurance and improvement program to senior
management and the board.

1321 – Use of “Conforms with the ISPPIA”

The CAE may state that the internal audit activity
conforms with the International Standards for the
Professional Practice of Internal Auditing only if the
results of the quality assurance and improvement
program support this statement.
Presented by : Kudakwashe Ndlovu CA(z) 228
INTERNAL AUDITING STANDARDS
2000 Series : Performance Standards

2000 – Managing the Internal Audit Activity

The CAE must effectively manage the internal audit
activity to ensure it adds value to the organization.

Presented by : Kudakwashe Ndlovu CA(z) 229

INTERNAL AUDITING STANDARDS
The internal audit activity is effectively managed when:
•The results of the internal audit activity’s work achieve
the purpose and responsibility included in the internal
audit charter

•The internal audit activity conforms with the Definition

of Internal Auditing and the Standards;

•The individuals who are part of the internal audit activity

demonstrate conformance with the Code of Ethics and
the Standards.
Presented by : Kudakwashe Ndlovu CA(z) 230
INTERNAL AUDITING STANDARDS
2010 – Planning
The CAE must establish a risk-based plan to determine
the priorities of the internal audit activity, consistent
with the organization’s goals.

Presented by : Kudakwashe Ndlovu CA(z) 231

INTERNAL AUDIT PLAN
The CAE is responsible for developing a risk-based
plan. The CAE takes into account the organization’s risk
management framework, including using risk appetite
levels set by management for the different activities or
parts of the organization. If a framework does not exist,
the CAE uses his/her own judgment of risks after
consideration of input from senior management and the
board. The CAE must review and adjust the plan, as
necessary, in response to changes in the organization’s
business, risks, operations, programs, systems, and
controls.
Presented by : Kudakwashe Ndlovu CA(z) 232
INTERNAL AUDIT PLAN
2020 – Communication and Approval
The CAE must communicate the internal audit activity’s
plans and resource requirements, including significant
interim changes, to senior management and the board for
review and approval.

The CAE must also communicate the impact of resource

limitations.

Presented by : Kudakwashe Ndlovu CA(z) 233

INTERNAL AUDIT PLAN
2020 – Communication and Approval
The CAE must communicate the internal audit activity’s
plans and resource requirements, including significant
interim changes, to senior management and the board for
review and approval.

The CAE must also communicate the impact of resource

limitations.

Presented by : Kudakwashe Ndlovu CA(z) 234

INTERNAL AUDITING STANDARDS
2030 – Resource Management
The CAE must ensure that internal audit resources are
appropriate, sufficient, and effectively deployed to
achieve the approved plan.

2040 – Policies and Procedures

The CAE must establish policies and procedures to guide
the internal audit activity.

Presented by : Kudakwashe Ndlovu CA(z) 235

INTERNAL AUDITING STANDARDS
2050 – Coordination
The CAE should share information and coordinate
activities with other internal and external providers of
assurance and consulting services to ensure proper
coverage and minimize duplication of efforts.

2060 – Reporting to Senior Management/ Board

The CAE must report periodically to senior
management/board on the internal audit activity’s
purpose, authority, responsibility, and performance
relative to its plan.
Presented by : Kudakwashe Ndlovu CA(z) 236
INTERNAL AUDITING STANDARDS
2070 – External Service Provider and Organizational
Responsibility for Internal Auditing

When an external service provider serves as the internal

audit activity, the provider must make the organization
aware that the organization has the responsibility for
maintaining an effective internal audit activity.

Presented by : Kudakwashe Ndlovu CA(z) 237

INTERNAL AUDITING STANDARDS
2100 – Nature of Work
The internal audit activity must evaluate and contribute
to the improvement of governance, risk management,
and control processes using a systematic and disciplined
approach.

Presented by : Kudakwashe Ndlovu CA(z) 238

INTERNAL AUDITING STANDARDS
2110 – Governance
The internal audit activity must assess and make
appropriate recommendations for improving the
governance process in its accomplishment of the
following objectives:
•Promoting appropriate ethics and values within the organization;
•Ensuring effective organizational performance management and
accountability;
•Communicating risk and control information to appropriate areas of
the organization;
•Coordinating the activities of and communicating information among
the board, external and internal auditors, and management.

Presented by : Kudakwashe Ndlovu CA(z) 239

INTERNAL AUDITING STANDARDS
2120 – Risk Management
The internal audit activity must evaluate the
effectiveness and contribute to the improvement of risk
management processes.

2130 – Control
The internal audit activity must assist the organization in
maintaining effective controls by evaluating their
effectiveness and efficiency and by promoting
continuous improvement.

Presented by : Kudakwashe Ndlovu CA(z) 240

INTERNAL AUDITING STANDARDS
2200 – Engagement Planning
Internal auditors must develop and document a plan for
each engagement, including the engagement’s
objectives, scope, timing, and resource allocations

2210 – Engagement Objectives

Objectives must be established for each engagement.

2220 – Engagement Scope

The established scope must be sufficient to achieve the
objectives of the engagement.

Presented by : Kudakwashe Ndlovu CA(z) 241

INTERNAL AUDITING STANDARDS
2230 – Engagement Resource Allocation
Internal auditors must determine appropriate and
sufficient resources to achieve engagement objectives
based on an evaluation of the nature and complexity of
each engagement, time constraints, and available
resources.

2240 – Engagement Work Program

Internal auditors must develop and document work
programs that achieve the engagement objectives.

Presented by : Kudakwashe Ndlovu CA(z) 242

INTERNAL AUDITING STANDARDS
2300 – Performing the Engagement
Internal auditors must identify, analyze, evaluate, and
document sufficient information to achieve the
engagement’s objectives.

2310 – Identifying Information

Internal auditors must identify sufficient, reliable,
relevant, and useful information to achieve the
engagement’s objectives.

Presented by : Kudakwashe Ndlovu CA(z) 243

INTERNAL AUDITING STANDARDS
2320 – Analysis and Evaluation
Internal auditors must base conclusions and engagement
results on appropriate analyses and evaluations

2330 – Documenting Information

Internal auditors must document relevant information to
support the conclusions and engagement results.

Presented by : Kudakwashe Ndlovu CA(z) 244

INTERNAL AUDITING STANDARDS
2330.A1 – The CAE must control access to engagement
records.
The CAE must obtain the approval of senior
management and/or legal counsel prior to releasing such
records to external parties, as appropriate.

2330.A2 – The CAE must develop retention

requirements for engagement records, regardless of the
medium in which each record is stored. These retention
requirements must be consistent with the organization’s
guidelines and any pertinent regulatory or other
requirements. Presented by : Kudakwashe Ndlovu CA(z) 245
INTERNAL AUDITING STANDARDS
2340 – Engagement Supervision
Engagements must be properly supervised to ensure
objectives are achieved, quality is assured, and staff is
developed.
The extent of supervision required will depend on the
proficiency and experience of internal auditors and the
complexity of the engagement. The CAE has overall
responsibility for supervising the engagement, whether
performed by or for the internal audit activity, but may
delegate. Appropriate evidence of supervision must be
documented and retained.
Presented by : Kudakwashe Ndlovu CA(z) 246
INTERNAL AUDITING STANDARDS
2400 – Communicating Results
Internal auditors must communicate the results of
engagements

2410 – Criteria for Communicating

Communications must include the engagement’s
objectives and scope as well as applicable conclusions,
recommendations, and action plans.

2420 – Quality of Communications

Communications must be accurate, objective, clear,
concise, constructive, complete, and timely.
Presented by : Kudakwashe Ndlovu CA(z) 247
INTERNAL AUDITING STANDARDS
2421 – Errors and Omissions
If a final communication contains a significant error or
omission, the CAE must communicate corrected
information to all parties who received the original
communication.

2500 – Monitoring Progress

The CAE must establish and maintain a system to
monitor the disposition of results communicated to
management.

Presented by : Kudakwashe Ndlovu CA(z) 248

INTERNAL AUDITING STANDARDS
2500 – Monitoring Progress
The CAE must establish and maintain a system to monitor
the disposition of results communicated to management.

2500.A1 – The CAE must establish a follow-up process to

monitor and ensure that management actions have been
effectively implemented or that senior management has
accepted the risk of not taking action.

2500.C1 – The internal audit activity must monitor the

disposition of results of consulting engagements to the extent
agreed upon with the client.
Presented by : Kudakwashe Ndlovu CA(z) 249
INTERNAL AUDITING STANDARDS
2600 – Communicating the Acceptance of Risks
When the CAE concludes that management has accepted
a level of risk that may be unacceptable to the
organization, the CAE must discuss the matter with
senior management. If the CAE determines that the
matter has not been resolved, the CAE must
communicate the matter to the board.

Presented by : Kudakwashe Ndlovu CA(z) 250

 THE STRUCTURE OF THE
ACCOUNTANCY PROFESSION
⚫ Public Accountants and Auditors Board (PAAB) heads the
profession
⚫ There is also the Zimbabwe Accounting Practices Board
(ZAPB) which sets accounting standards. A technical
committee of PAAB

Presented by : Kudakwashe Ndlovu CA(z) 251

 ZAPB
⚫ The Zimbabwe Accounting Practices Board was established
in the 1970s as a means for interested bodies to participate
in the setting of accounting standards by the Institute of
registered auditors. It received statutory recognition in 1993
when amendments to the Companies Act made it a
requirement for the Minister of Justice Legal and
Parliamentary Affairs to have regard to the international
accounting standards adopted by the Board when making
regulations about the content of company accounts.
⚫ Reference: Sections 142(2) and 360(2) of the Companies Act
(Cap: 24:03)

Presented by : Kudakwashe Ndlovu CA(z) 252

 ZAPB
⚫ Membership of the Board currently includes all member
bodies of the PAAB plus the Zimbabwe Stock Exchange,
the Chamber of Mines, the Zimbabwe National Chamber of
Commerce, the Confederation of Zimbabwe Industries and
other interested bodies. The Board may alter its membership
as it thinks best and has recently, for example, invited the
Institute of Directors to join.

Presented by : Kudakwashe Ndlovu CA(z) 253

 THE STRUCTURE OF THE
ACCOUNTANCY PROFESSION
⚫ The Zimbabwe Public Accountants and Auditors Board is a
statutory body which was established in 1996 under the
Public Accounts and Auditors Act (Cap: 27:12).

Presented by : Kudakwashe Ndlovu CA(z) 254

 THE PAAB
In Zimbabwe, the PAAB is made up of representatives from five professional
accountancy bodies –
⚫ The Institute of registered auditors of Zimbabwe, established under the
registered auditors Act (Cap: 27:02) in 1918
⚫ The Institute of Chartered Secretaries and Administrators of Zimbabwe
established under the Chartered Secretaries (Private) Act (Cap: 27:03)
⚫ Zimbabwe Institute of Certified Public Accountants of Zimbabwe (CPA)
⚫ The Zimbabwe branch of Chartered Institute of Management Accountants
(CIMA) incorporated by Royal Charter in the UK
⚫ The Zimbabwe branch of Association of Chartered Certified Accountants
(ACCA) incorporated by Royal Charter in the UK

Presented by : Kudakwashe Ndlovu CA(z) 255

 THE PAAB
⚫ The Board’s primary function is to register qualified accountants
and auditors and to provide assurance to the public and
employers regarding the quality of accountancy services.
⚫ Members of the profession are registered as either Registered
Public Accountants or as Registered Public Auditors. Neither
category may practice (provide services directly to the public)
without a Practising Certificate issued by the Board.

Presented by : Kudakwashe Ndlovu CA(z) 256

 THE PAAB
⚫ In addition to the five professional bodies that are constituent
members of the PAAB,
⚫ there accountancy bodies also exist for non-professional
accountants. The best known are the:
- Zimbabwe Association of Accounting Technicians and
- The Institute of Administration and Commerce and various
associations of book-keepers.

Presented by : Kudakwashe Ndlovu CA(z) 257

 THE PAAB
⚫ Because the PAAB only registers members of constituent bodies,
members of foreign professional bodies must join a local
professional body (and constituent member of the Board) before
they can register as public accountants or auditors.
⚫ It is an offence under the PAAB Act for an unregistered person to
hold himself out to be a public auditor or public accountant and
an offence under the Companies Act and the Acts establishing
many public bodies tocarry out an audit without being registered
with the Board as a Registered Public Auditor.
⚫ Note however that while the Act defines auditing it does not
define accounting. A foreign accountant may therefore work or
provide accounting services in Zimbabwe without registering.

Presented by : Kudakwashe Ndlovu CA(z) 258