Topic 1
1. The Nature and Objective of an Audit
The primary objective of an external audit is to obtain reasonable assurance that financial
statements (AFS) are free from material misstatement. This enables the auditor to express an
opinion on whether the AFS fairly present the entity's financial position in accordance with a
specific reporting framework.
• Levels of Assurance: An audit provides a high, but not absolute, level of "reasonable
assurance," whereas an independent review provides "limited assurance". "Related
services," such as compilations or agreed-upon procedures, provide no assurance.
• Inherent Limitations: Audits cannot provide absolute assurance due to the nature of
financial reporting (which involves judgement), the nature of audit procedures (which
involve sampling), and time and cost constraints.
2. Statutory Requirements: Audit vs. Independent Review
Under the Companies Act and Regulations, entities must determine if their AFS require a
compulsory audit or an independent review.
Compulsory Audit Triggers:
• Public and State-Owned Companies: Always required to be audited.
• Fiduciary Capacity: Any company holding assets in a fiduciary capacity for people not
related to the company, exceeding R5 million at any time during the year.
• Public Interest (PI) Score:
o Any entity with a PI score of 350 or more.
o Any entity with a PI score between 100 and 349 if its AFS were internally
compiled.
• MOI Requirements: If the company’s Memorandum of Incorporation (MOI) specifically
requires an audit.
Independent Review and Exemptions:
• Entities with a PI score between 100 and 349 whose AFS are independently compiled
by an independent accounting professional require a review rather than an audit.
• Owner-Managed Businesses: Private companies where every shareholder is also a
director are generally exempt from both audit and review requirements, provided they do
not meet the other compulsory audit criteria (like the R5 million fiduciary asset
threshold or a high PI score).
3. Public Interest (PI) Score and Reporting Standards
The PI Score must be calculated at the end of every financial year. It is the sum of:
, • The number of points equal to the average number of employees.
• One point for every R1 million (or portion thereof) in turnover.
• One point for every R1 million (or portion thereof) in third-party liabilities.
• One point for every individual who has a beneficial interest (shareholders/members).
Financial Reporting Standards: Regulations specify which standards (e.g., IFRS or IFRS for
SMEs) must be used based on the company's category, PI score, and whether the statements
were compiled independently. Notably, SA GAAP is no longer a recognized standard.
4. Quality Management Standards (ISQM1 & ISA 220)
Quality management is essential to ensure firms comply with professional standards and legal
requirements.
• Firm Level (ISQM1): The audit firm is responsible for establishing and documenting a
system of quality management. The ultimate responsibility for this system rests with the
firm's CEO or managing board, not just individual partners.
• Engagement Level (ISA 220): The engagement partner is responsible for the overall
quality of each specific audit engagement. This includes proper direction, supervision,
and a thorough review of audit working papers before signing the audit report.
• Common Non-Compliance Issues:
o Failure to appoint an engagement quality reviewer for listed entity audits.
o Assigning staff based solely on availability rather than competence and
capability.
o Accepting new clients without first evaluating independence, ethical
requirements, or the integrity of the client's management.
o Failing to document quality management procedures within the audit working
papers.
5. Requirements for the Auditor
• Independent Accounting Professional: To be classified as such, an individual must be
a registered auditor, a member in good standing of an accredited professional body (like
SAICA), or a qualified CC accounting officer. They must have no personal financial
interest in the company and cannot have been involved in its day-to-day management
for the previous three years.
• Rotation: For listed companies, the lead engagement partner must rotate every five
years.
• Professional Oversight: The Independent Regulatory Board for Auditors (IRBA)
performs practice reviews to monitor compliance with standards. Registered auditors
must also perform mandatory Continued Professional Development (CPD).
1. The Nature and Objective of an Audit
The primary objective of an external audit is to obtain reasonable assurance that financial
statements (AFS) are free from material misstatement. This enables the auditor to express an
opinion on whether the AFS fairly present the entity's financial position in accordance with a
specific reporting framework.
• Levels of Assurance: An audit provides a high, but not absolute, level of "reasonable
assurance," whereas an independent review provides "limited assurance". "Related
services," such as compilations or agreed-upon procedures, provide no assurance.
• Inherent Limitations: Audits cannot provide absolute assurance due to the nature of
financial reporting (which involves judgement), the nature of audit procedures (which
involve sampling), and time and cost constraints.
2. Statutory Requirements: Audit vs. Independent Review
Under the Companies Act and Regulations, entities must determine if their AFS require a
compulsory audit or an independent review.
Compulsory Audit Triggers:
• Public and State-Owned Companies: Always required to be audited.
• Fiduciary Capacity: Any company holding assets in a fiduciary capacity for people not
related to the company, exceeding R5 million at any time during the year.
• Public Interest (PI) Score:
o Any entity with a PI score of 350 or more.
o Any entity with a PI score between 100 and 349 if its AFS were internally
compiled.
• MOI Requirements: If the company’s Memorandum of Incorporation (MOI) specifically
requires an audit.
Independent Review and Exemptions:
• Entities with a PI score between 100 and 349 whose AFS are independently compiled
by an independent accounting professional require a review rather than an audit.
• Owner-Managed Businesses: Private companies where every shareholder is also a
director are generally exempt from both audit and review requirements, provided they do
not meet the other compulsory audit criteria (like the R5 million fiduciary asset
threshold or a high PI score).
3. Public Interest (PI) Score and Reporting Standards
The PI Score must be calculated at the end of every financial year. It is the sum of:
, • The number of points equal to the average number of employees.
• One point for every R1 million (or portion thereof) in turnover.
• One point for every R1 million (or portion thereof) in third-party liabilities.
• One point for every individual who has a beneficial interest (shareholders/members).
Financial Reporting Standards: Regulations specify which standards (e.g., IFRS or IFRS for
SMEs) must be used based on the company's category, PI score, and whether the statements
were compiled independently. Notably, SA GAAP is no longer a recognized standard.
4. Quality Management Standards (ISQM1 & ISA 220)
Quality management is essential to ensure firms comply with professional standards and legal
requirements.
• Firm Level (ISQM1): The audit firm is responsible for establishing and documenting a
system of quality management. The ultimate responsibility for this system rests with the
firm's CEO or managing board, not just individual partners.
• Engagement Level (ISA 220): The engagement partner is responsible for the overall
quality of each specific audit engagement. This includes proper direction, supervision,
and a thorough review of audit working papers before signing the audit report.
• Common Non-Compliance Issues:
o Failure to appoint an engagement quality reviewer for listed entity audits.
o Assigning staff based solely on availability rather than competence and
capability.
o Accepting new clients without first evaluating independence, ethical
requirements, or the integrity of the client's management.
o Failing to document quality management procedures within the audit working
papers.
5. Requirements for the Auditor
• Independent Accounting Professional: To be classified as such, an individual must be
a registered auditor, a member in good standing of an accredited professional body (like
SAICA), or a qualified CC accounting officer. They must have no personal financial
interest in the company and cannot have been involved in its day-to-day management
for the previous three years.
• Rotation: For listed companies, the lead engagement partner must rotate every five
years.
• Professional Oversight: The Independent Regulatory Board for Auditors (IRBA)
performs practice reviews to monitor compliance with standards. Registered auditors
must also perform mandatory Continued Professional Development (CPD).
