Pre-engagement activities

Audit process

the steps the external auditor follows from commencement to completion of the audit engagement

Preliminary engagement activities-

activities performed BEFORE the audit commences

Engagement letter-

agreement with management on how audit will be conducted

Audit planning

Preparing for the audit once auditor decides to proceed with the audit

Audit strategy

scope , timing and direction of the Audit plan

Audit plan-

executes the audit plan to determine nature , timing and extent of audit process

Audit approach

how the auditor responds to identified risks of material misstatement

Audit Principles

Audit process -> Preliminary engagement -> Engagement letter -> Audit planning activities -> Audit plan -> Audit approach -> Audit strategy

Overview of the Audit Process 1. PRE ENGAGEMENT

-Client investigation ( new and existing )

-Determine skills and competence requirements

-Determine engagement terms

Overview of the Audit Process 2. PLANNING

-Obtain an updated knowledge of the business

-Consider audit risk

-Obtain an understanding of the accounting and internal control systems

-Determine materiality

-Formulate an audit strategy and audit plan

-Coordination and control

-Consider other matters that may affect the audit procedures

Overview of the Audit Process 3. OBTAINING EVIDENCE

-Test of Controls ( TOC ) ( combined approach )

-Evaluate results of ToC and adapt planned substantive procedures ( SP )

-Substantive procedures

-Evaluate results of SP and perform further SP

Overview of the Audit Process 4. EVALUATION, CONCLUSION, REPORTING

-General review of financial information and evaluate audit evidence

-Conclusion and formulation of audit opinion

-Reporting

Preliminary engagement activities

1. Investigate client

2. Auditor's Requirements for skills and ability

3. Terms of the engagement and the engagement letter ( ISA 210 )

Planning (ISA 300)

-Knowledge & understanding of the business ( ISA 315 )

-Understanding of the accounting & internal control system

-Risk evaluation: Inherent risk ( IR ) . ( ISA 330 ), Control risk ( CR ), Auditor's reaction on risk assessment ( ISA 330 )

-Planning materiality ( ISA 320 )

-Formulate: Audit strategy ( Scope , timing , direction → Big picture ), Audit approach ( Substantive OR Combined Approach ), Audit plan ( List of audit procedures )

Gathering audit evidence Audit approach ( Combination depends on audit approach )

-Test of Control ( TOC ) : Audit procedures designed to test the operating effectiveness of controls in the control environment and business cycles

-Substantive Procedures ( SP ) : Audit procedures designed to verify directly the amount or disclosure in the financial statements is free from material misstatement .

Evaluate , conclude and report

-Evaluate audit differences & Overall review

-conclusion

-audit report, report to management

THE AUDIT PROCESS AND THE ISA's Preliminary engagement activities

-Terms of the audit engagement ( ISA 210 )

-Quality control of the audit of F / S ( ISA 220 & ISQM 1 )

THE AUDIT PROCESS AND THE ISA's Planning ( ISA 300 )

-Knowledge of the business ( ISA 315 )

-Risk assessment ( ISA 315 )

-Materiality ( ISA 320 )

-Formulate audit approach

THE AUDIT PROCESS AND THE ISA's Gathering of audit evidence

-Auditor's response to risks ( ISA 330 )

-Audit evidence ( ISA 500 ) ( Control tests and / or substantive tests )

-Audit Sampling ( ISA 530 )

THE AUDIT PROCESS AND THE ISA's Evaluation and reporting

Evaluation and reporting ( ISA 450 )

Preliminary engagement activities: Why evaluate acceptability ?

limit auditor's risk protect professional appearance

Preliminary engagement activities: Risk relating to unacceptable clients

-legal liability

-damage to firm's name & reputation

-fees not paid

Preliminary engagement activities Ethical considerations

-Code of professional conduct : professional & statutory bodies ( SAICA , IFAC , IRBA )

-ISA's

Preliminary engagement activities steps

STEP 1: Client investigation

STEP 2 : Knowledge and competence assessment of auditor: Compliance with standards, procedures to gather preliminary engagement information

STEP 3: Terms of engagement and engagement letter

Preliminary engagement activities - STEP 1 : Client investigation: Ethical considerations

-Independence, any threats

-Conflict of interest

-Information from previous auditors ( COPC ) or third parties

Preliminary engagement activities - STEP 1 : Client investigation: Business considerations

-Prohibitions on performing the audit ( preconditions not met or scope limitations )

-Association with the industry

-Association with the owners and management : oreputation , attitude & indicators oreason for change / previous auditor

-Nature of client - auditor relationship ( consider relationship with previous auditor )

-Significant risks of material misstatement

-Sound business decision : Potensial users, Stability, Audit fee

-Compliance applicable financial reporting requirements

Preliminary engagement activities - STEP2 : Knowledge and competence assessment

-Identify the audit team ; Ensure that sufficient , appropriate staff members are available

-Evaluate necessary expertise to perform the audit : Client industry, Services needed

-Resources other than staff : Industry specialists, Hardware , software, Audit deadline

Are there any statutory reasons why the auditor should not accept the engagement ?

-Eligibility to conduct audits in terms of APA and Companies Act

-Compliance with Companies Act requirements regarding outgoing auditor and appointment of new auditor

Preliminary engagement activities - Compliance with standards

-ISQC 1 and ISA 220 - Quality control for firms that perform audits and reviews of financial statements etc , require that the firm :

-Consider the integrity of the client's principal owners , key management and those charged with governance of the entity . For example : Reputation of these individuals , Attitude of these individuals , etc.

-Determine whether the firm is competent to perform the engagement . For example : Knowledge of the industry, Technical competence , Audit deadlines in reach , etc.

-Comply with ethical requirements . For example: Possible conflict of interest , Threats to independence , etc.

Preliminary engagement activities - Procedures to gather preliminary engagement information

-Current client - rely on knowledge of the client's business .

-Prospective client - process begins at first meeting .

-Procedures that can be performed to get information : Procedures to be carried out :

Conversations with People

Inspection of Paper

Visits to the entity's Premises

Performance of analytical Procedures

Decision to be made

Whether to accept the audit or not

Preliminary engagement activities - STEP 3 : Terms of engagement and engagement letter ( ISA 210 )

-Determine & confirm in writing: Acceptance, Purpose & extent, Responsibilities, Reports

-Contractual relationship

-File copy

ENGAGEMENT LETTER

Engagement letter on Letterhead

Dear ..

Introduction ...

We accept the engagement of .....

Required information

Additional information

Engagement

Closure

ENGAGEMENT LETTER Issue for all audit or related services

-Letterhead & introduction paragraph

-Addressed to ...

-Confirm acceptance of engagement

ENGAGEMENT LETTER Required information

1. Purpose of audit : opinion

2. Management responsibility ; fin statements & IC Auditors responsibility i.r.o RI

3. Scope of audit :

-Complied to audit standards & statutory requirements

-Definition of audit & conducting audit procedures

-Only provide reasonable assurance

-Appropriate framework : IFRS & Co act: management

-Form of the report or result of audit Inherent limitations of audit and internal control

-Confirmation of auditor's independence

-Auditor's expectations wrt written confirmation or oral representation

-Material weaknesses in controls will be brought under management's attention Involvement of other parties / specialists

-Other services which will be provided

-Designated auditor if applicable

-Arrangements w.r.t planning and execution of audit

-Deadlines

-Basis of calculation of the audit fee .

4. Additional information

-Report to management

-Representations by management

- Documents issued with fin statements

-Fees: Invoice arrangements

5. Engagement applicable in future until steps taken

6. Closure

-Dated and signed

-Request return