AUD260S: Auditing II Study Guide (CPUT National Diploma in Accounting)

This study guide provides comprehensive, exam-focused notes for AUD260S: Auditing II within the Cape Peninsula University of Technology (CPUT) National Diploma in Accounting. It is designed as a practical, South African–context resource that aligns with topics commonly tested in second-year auditing modules at universities such as CPUT, UNISA (e.g. AUE2602, AUE3702), and Central University of Technology (e.g. AUD20AS). The emphasis is on understanding the audit process, internal controls, substantive procedures, audit evidence, and reporting, with many examples framed around South African legislation (Companies Act, 2008 and Auditing Profession Act, 2005) and International Standards on Auditing (ISA).

1. Foundations of Auditing II in the South African Context

1.1 Position of AUD260S within the CPUT National Diploma in Accounting

AUD260S: Auditing II at CPUT builds on the introductory principles covered in Auditing I (often coded AUD160S or similar). While first-year auditing modules focus on basic concepts such as the nature and objectives of an audit, ethics, and an overview of the audit process, Auditing II moves into:

The detailed phases of the audit cycle
Planning and risk assessment
Tests of controls and substantive procedures
Audit sampling
Audit evidence and documentation
Completion and reporting

In the National Diploma in Accounting structure at CPUT, AUD260S typically runs alongside modules such as FMA260S (Financial Management II) and FAC260S (Financial Accounting II). A solid grasp of intermediate accounting is essential, because most substantive procedures and audit assertions refer directly to figures and disclosures in the financial statements.

Other South African universities have similar second-level auditing modules with comparable outcomes:

UNISA: AUE2602 (Principles of Auditing), AUE3702 (Risk-based Auditing)
CUT (Central University of Technology): AUD20AS (Auditing II), AUD30AS (Auditing III)

Although course codes differ, the core content is driven by the ISA framework and South African legislation, so the concepts in this guide are broadly applicable.

1.2 Objectives and Purpose of an Audit (Revisited for Auditing II)

Auditing II expects you to move beyond definitions and discuss the implications and application of the audit objective.

Primary objective of an external audit:

To enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework (e.g. IFRS/IFRS for SMEs).

In South Africa, audits are regulated primarily by:

Companies Act 71 of 2008 – determines when an audit is required (e.g. certain public companies, state-owned entities, and companies exceeding public interest score thresholds).
Auditing Profession Act 26 of 2005 – establishes the Independent Regulatory Board for Auditors (IRBA) and regulates registered auditors.
International Standards on Auditing (ISA) – adapted and enforced by IRBA.

Secondary objectives (still important for exam questions):

Detecting material misstatements (due to error or fraud)
Providing credibility to financial statements
Enhancing stakeholder confidence (investors, banks, SARS, creditors)
Providing management letters with findings and recommendations on internal control weaknesses

Auditing II questions often test:

How the primary audit objective translates into audit procedures (planning, internal control testing, substantive procedures).
The relationship between audit risk, materiality, and the audit opinion.
How South African legal requirements shape the auditor’s work.

1.3 Key Auditing Concepts Refresher (Essential for Advanced Topics)

Before going deeper into Auditing II content, revise these core concepts. Exam questions often assume this knowledge and test your ability to apply it in a scenario-based context.

1.3.1 Audit Risk, Inherent Risk, Control Risk, Detection Risk

Audit Risk (AR): The risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated.

Mathematically (conceptual model):

AR = Inherent Risk (IR) × Control Risk (CR) × Detection Risk (DR)

Inherent Risk (IR): Susceptibility of an assertion to a misstatement, assuming there are no related internal controls.
– High in complex estimates (e.g. fair value) and industries with rapid technological change.
Control Risk (CR): Risk that a misstatement that could occur in an assertion will not be prevented, or detected and corrected, by the entity’s internal control.
– High where segregation of duties is weak or there is poor supervision.
Detection Risk (DR): Risk that audit procedures do not detect a misstatement that exists and that could be material.

For exams, always link AR to planning:

If IR and CR are assessed as high, the auditor must lower DR by performing more extensive or more effective substantive procedures.
If controls are strong and tested as effective, the auditor can rely more on controls and reduce the extent of substantive testing.

1.3.2 Materiality

Materiality is a central concept in Auditing II, used in planning, performing, and evaluating audit work.

Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.

Practical aspects:

Planning Materiality: Set at the financial statement level (e.g. 5% of profit before tax or 1–2% of total revenue).
Performance Materiality: Lower than planning materiality; used to reduce the risk that the aggregate of uncorrected and undetected misstatements exceeds overall materiality.
Specific Materiality: For particular balances or disclosures (e.g. related party transactions, directors’ remuneration).

Auditing II exams may require you to:

Calculate a planning materiality figure and justify the benchmark.
Decide whether a misstatement is material individually, material in aggregate, or trivial.
Explain how materiality affects the nature, timing, and extent of audit procedures.

1.3.3 Assertions

Assertions are management’s implicit or explicit claims about the recognition, measurement, presentation, and disclosure of information in the financial statements. The ISA framework groups assertions into:

Classes of transactions/events: Occurrence, Completeness, Accuracy, Cut-off, Classification
Account balances: Existence, Rights and obligations, Completeness, Valuation and allocation
Presentation and disclosure: Occurrence and rights/obligations, Completeness, Classification and understandability, Accuracy and valuation

Auditing II questions usually require:

Linking audit procedures to the relevant assertions.
Identifying which assertions are most at risk for a particular balance (e.g. inventory – existence and valuation).

1.4 Ethical and Professional Requirements (IRBA and SAICA/SAIPA Context)

While Ethics is often emphasised in Auditing I, Auditing II assumes deeper application of ethical rules to practical scenarios.

Key professional codes:

IRBA Code of Professional Conduct – largely based on the IESBA Code.
SAICA and SAIPA codes – for chartered accountants and professional accountants (not all become registered auditors).

Core principles:

Integrity – honest and straightforward in all professional relationships.
Objectivity – no bias, conflict of interest, or undue influence.
Professional Competence and Due Care – maintain professional knowledge and perform duties diligently.
Confidentiality – respect information acquired as a result of professional relationships.
Professional Behaviour – comply with laws and avoid conduct that discredits the profession.

Common exam themes:

Independence threats in a South African context (familiarity, self-interest, self-review, advocacy, intimidation).
Ethical issues when auditing major clients such as a listed entity on the JSE or a large local municipality.
Appropriate safeguards: rotation of partners, additional reviews, limiting non-audit services, etc.

2. Audit Planning, Risk Assessment, and Documentation

2.1 The Audit Process Overview (Risk-Based Approach)

AUD260S uses a risk-based audit approach, consistent with ISA 315 and ISA 330. The process can be summarised as:

Client acceptance and continuance
Engagement terms and engagement letter
Overall planning and strategy
Risk assessment and understanding the entity
Designing and performing tests of controls and substantive procedures
Evaluating evidence, final analytical procedures, and forming an opinion
Issue the audit report and management letter

Exams frequently present a scenario of a Cape Town-based manufacturing company, retailer, or small NPO and require you to:

Identify the risks of material misstatement
Design audit procedures in response
Discuss planning and documentation requirements

2.2 Client Acceptance, Engagement Letters, and Preconditions

2.2.1 Client Acceptance and Continuance

Before accepting a new audit client or continuing an engagement, the auditor must comply with ISA 220 and ISA 300.

Key factors:

Integrity of client management – history of fraud, litigation, regulatory issues.
Competence and resources of the audit firm – experience with similar clients, staff availability.
Independence and ethical considerations – any relations or interests that threaten independence.
Predecessor auditor communication – required in many engagements to identify issues.

Typical exam question:
“List and explain the factors an auditor should consider before accepting the appointment as auditor of ABC (Pty) Ltd.”

A structured answer would cover: integrity, competence, independence, risk profile, legal requirements, and ability to obtain sufficient appropriate evidence.

2.2.2 Engagement Letter

Once the auditor decides to accept or continue a client, an engagement letter formalises the terms:

Objective and scope of the audit
Responsibilities of the auditor and management
Identification of the applicable financial reporting framework (e.g. IFRS for SMEs)
Form and content of reports to be issued
Reference to limitations of an audit and inherent risk

Exam tip: When describing an engagement letter for AUD260S, always mention both parties’ responsibilities:

Management: prepare financial statements, design and maintain internal control, provide access to information and staff.
Auditor: obtain reasonable assurance, conduct audit in accordance with ISA, maintain independence.

2.3 Understanding the Entity and Its Environment

ISA 315 requires the auditor to obtain an understanding of:

The entity and its environment
The entity’s internal control
The applicable financial reporting framework
Industry, regulatory, and other external factors

2.3.1 Sources of Understanding

Common methods:

Inquiries of management and staff
Analytical procedures (e.g. ratio analysis, trend analysis)
Observation and inspection:
– Site visits to factories or warehouses in Cape Town, Bellville, or Gugulethu
– Inspection of organisational charts, policy manuals, minutes of meetings

For example, when auditing a CPUT campus bookstore subsidiary or a local FMCG retailer, understanding the business includes:

Product lines and margins
Sales cycles and discounts
Supplier terms and inventory management practices

2.3.2 Analytical Procedures in Planning

Analytical procedures at the planning stage (ISA 520) aim to identify areas of potential risk.

Examples:

Gross profit margins decreasing from 35% to 28% in one year.
Trade receivable days increasing from 30 to 60 days.
Inventory turnover dropping significantly.

Each unusual fluctuation suggests possible misstatements (e.g. inventory overstatement, revenue recognition issues, allowance for doubtful debts understatement).

Exams often require:

Calculation of simple ratios.
Interpretation of trends and identification of risk areas.
Recommendations for further audit procedures.

2.4 Risk Assessment and Responses

2.4.1 Risks of Material Misstatement (RMM)

RMM can arise at:

Financial statement level (e.g. poor control environment, going concern issues).
Assertion level for classes of transactions, balances, and disclosures.

Risk factors:

Business risks (e.g. high competition, new IT systems, economic downturn).
Fraud risks (ISA 240) – particularly in revenue recognition and management override of controls.

Example: A small, family-owned company in Cape Town where the managing director overrides credit limits and authorises all significant transactions could indicate high control risk and a risk of fraudulent financial reporting.

2.4.2 Significant Risks and Fraud Risks

Some risks are designated as significant – often involving:

Complex transactions
Significant judgment or estimation uncertainty
Related party transactions
Revenue recognition in high-pressure environments

Auditor’s response:

Perform more extensive substantive procedures.
Consider specialist involvement (e.g. property valuations).
Incorporate unpredictability in tests (e.g. unannounced inventory counts).

Exams may ask you to:

Distinguish between inherent risk and significant risk.
Describe specific audit responses to identified risks.

2.5 Audit Strategy, Audit Plan, and Documentation

2.5.1 Overall Audit Strategy and Audit Plan

The overall audit strategy sets the scope, timing, and direction of the audit. It addresses:

Characteristics of the engagement (group structure, reporting deadlines).
Reporting objectives (e.g. listed vs non-listed clients).
Factors that affect audit direction (e.g. reliance on internal auditors, use of service organisations).

The detailed audit plan translates this into specific procedures, including:

Nature, timing, and extent of tests of controls.
Nature, timing, and extent of substantive procedures.
Assignment of work to team members.

In AUD260S exam questions, you may be asked to:

Outline the contents of an audit plan for a specific cycle (e.g. revenue and receivables).
Distinguish between an overall strategy and a detailed plan.

2.5.2 Documentation

ISA 230 requires the auditor to prepare audit documentation (working papers) providing:

Evidence of compliance with ISA.
Support for the audit opinion.

Documentation must be:

Sufficient and appropriate to enable an experienced auditor to understand the work performed, results, and conclusions.
Complete and timely – prepared on or before the date of the audit report, with retention periods in line with regulations (in South Africa, IRBA requires working papers to be retained normally for at least 5 years).

Common working paper types:

Permanent file – information of continuing relevance (e.g. incorporation documents, organisational charts, long-term contracts).
Current file – current-year audit programmes, trial balance, adjusting entries, lead schedules, and evidence.

Exam answers should reference:

Indexing and cross-referencing of working papers.
Use of tick marks and legends.
Review notes and sign-offs by audit seniors and managers.

3. Internal Control, Tests of Controls, and Audit Sampling

3.1 Internal Control: Concepts and Components

ISA 315 and COSO identify five components of internal control that are often tested in AUD260S:

Control Environment
Entity’s Risk Assessment Process
Information System and Communication
Control Activities
Monitoring of Controls

3.1.1 Control Environment

The control environment sets the tone at the top:

Integrity and ethical values
Commitment to competence
Participation of those charged with governance (e.g. board, audit committee)
Management’s philosophy and operating style
Organisational structure and assignment of authority
Human resource policies and practices

In South African companies subject to King IV governance principles, aspects like independent non-executive directors, audit committees, and internal audit functions are critical parts of the control environment.

Exam application: Discuss weaknesses in a scenario (e.g. MD dominates board, no segregation of duties, informal procedures) and the likely effect on the audit.

3.1.2 Control Activities

Control activities are specific policies and procedures to ensure that management directives are carried out. Common types:

Authorisation controls – approvals for transactions.
Performance reviews – budget vs actual comparisons.
Information processing controls – application and general IT controls.
Physical controls – safeguarding of assets.
Segregation of duties – separation of responsibilities (custody, recording, authorisation).

Example in a CPUT campus canteen scenario:

Cashiers receive cash; supervisor reconciles daily cash to system reports; accountant records entries in the general ledger. Lack of segregation (e.g. cashiers also doing reconciliations) increases risk of misappropriation.

3.2 Evaluating Internal Control: Walkthroughs and Flowcharts

3.2.1 Methods of Understanding Internal Control

AUD260S expects familiarity with:

Narrative descriptions – written descriptions of the system.
Flowcharts – diagrams showing processes and controls.
Internal control questionnaires (ICQs) – standard questions with Yes/No answers.
Walkthrough tests – tracing a few transactions from initiation to recording.

When auditing the purchases and payables cycle of a Cape Town manufacturing company:

A walkthrough involves tracing a purchase order, goods received note (GRN), supplier’s invoice, and payment through the system, confirming the operation of each control (e.g. three-way match of PO–GRN–Invoice).

3.2.2 Assessing Design and Implementation

Two key steps:

Assess design – Is the control capable of preventing or detecting a misstatement?
Assess implementation – Has the control been put into operation?

Example: A company has a policy requiring credit approvals by a credit manager before sales to new customers (good design). But if, in practice, the sales manager bypasses the credit manager and sets high limits, the control is poorly implemented.

Exam responses should systematically:

Identify controls.
Comment on their adequacy of design.
Assess implementation often based on walkthrough results.

3.3 Tests of Controls and Reliance on Internal Controls

3.3.1 Deciding Whether to Test Controls

Auditors may choose to test controls when:

Controls are relevant to the audit and, if effective, can reduce substantive testing.
The auditor’s risk assessment includes an expectation that controls are operating effectively.
The audit approach is combined (relying on both controls and substantive procedures).

In small entities with weak controls, the auditor often adopts a substantive approach, focusing primarily on substantive procedures rather than tests of controls.

3.3.2 Types of Tests of Controls

Common techniques:

Inspection – of documents for evidence of authorisation, signatures.
Observation – watching the performance of control procedures.
Inquiry – of personnel involved in the control.
Re-performance – the auditor independently re-performs the control.

Example: For a payroll system at a medium-sized firm in Bellville:

Re-perform the calculation of a sample of employee net pays.
Inspect evidence that HR authorisation exists for new employees and changes in salary.
Observe the process of distributing payslips.

3.4 Audit Sampling: Statistical and Non-Statistical Approaches

Audit sampling is a major Auditing II topic, especially in modules like UNISA AUE2602 and CPUT AUD260S.

3.4.1 Definition and Purpose

ISA 530 defines audit sampling as:

The application of audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection, in order to provide the auditor with a basis on which to draw conclusions about the entire population.

Purpose:

Make efficient use of resources.
Obtain sufficient appropriate evidence.
Manage detection risk.

3.4.2 Statistical vs Non-Statistical Sampling

Statistical sampling:

Uses random selection and probability theory to evaluate results.
Allows quantification of sampling risk.
Examples: Random sampling, systematic sampling, monetary unit sampling.

Non-statistical sampling (judgemental sampling):

Auditor uses judgement to select items.
Does not involve statistical evaluation of results.
Examples: Haphazard sampling, block sampling.

Exams may ask you to:

Compare statistical and non-statistical sampling.
Discuss advantages and disadvantages of each.
Apply sampling concepts to a scenario (e.g. selecting debtors for confirmation).

3.4.3 Sampling Risk and Non-Sampling Risk

Sampling risk: Risk that the auditor’s conclusion based on the sample differs from the conclusion that would have been reached if the entire population had been tested.
– Risk of incorrect acceptance (more serious) or incorrect rejection.
Non-sampling risk: Risk of inappropriate audit conclusions due to factors other than sampling (e.g. inappropriate audit procedures, misinterpretation of results, errors in data entry).

Reducing risks:

Proper planning and sample design.
Adequate training of staff.
Supervision and review.
Use of computer-assisted audit techniques (CAATs).

3.5 Sampling in Tests of Controls vs Substantive Testing

3.5.1 Sampling for Tests of Controls

Objective: To evaluate operating effectiveness of controls.

Key parameters:

Tolerable deviation rate – maximum rate of deviations the auditor is willing to accept without changing the planned reliance on controls.
Expected deviation rate – estimate based on past experience or pilot tests.

If the actual deviation rate in the sample exceeds the tolerable rate, the auditor must:

Conclude that controls are not effective.
Increase substantive procedures.

3.5.2 Sampling for Substantive Tests of Details

Objective: To test for misstatements in monetary amounts (e.g. balances of trade receivables, inventory).

Key parameters:

Tolerable misstatement – maximum monetary misstatement that can exist without causing the financial statements to be materially misstated.
Expected misstatement – anticipated level based on prior years or risk assessment.

Sample items may be selected using:

Monetary Unit Sampling (MUS) – probability proportional to size.
Random or systematic selection – ensure all items have an equal opportunity of selection.

Exam example: You are given a trade receivables population of R1 200 000, tolerable misstatement of R60 000, expected misstatement of R24 000, and required to discuss sample size considerations and selection methods.

4. Substantive Procedures by Cycle and Audit Evidence

4.1 Audit Evidence: Sufficiency, Appropriateness, and Reliability

ISA 500 defines audit evidence as information used by the auditor in arriving at conclusions on which the audit opinion is based.

Sufficiency – quantity of evidence needed.
Appropriateness – measure of quality (relevance and reliability).

General reliability principles (often tested in multiple-choice and written questions):

Evidence from independent external sources is more reliable than evidence generated internally.
Evidence obtained directly by the auditor (e.g. observation, recalculation) is more reliable than that obtained indirectly.
Original documents are more reliable than photocopies or scans.
Effectiveness of internal control affects the reliability of internally generated evidence.

4.2 Revenue and Receivables Cycle

The revenue and receivables cycle is a common focus in AUD260S exam questions. It involves:

Sales orders
Credit approvals
Despatch of goods (delivery notes)
Invoicing
Cash receipts and adjustments
Recording in debtors’ ledger and general ledger

4.2.1 Key Assertions for Revenue

For sales transactions (income statement):

Occurrence – recorded sales occurred and relate to real transactions.
Completeness – all sales that occurred are recorded.
Accuracy – amounts and other data are recorded correctly.
Cut-off – sales are recorded in the correct period.
Classification – sales are recorded in proper accounts.

4.2.2 Substantive Procedures – Revenue

Typical procedures:

Analytical procedures:
- Compare current year sales with prior year and budget.
- Calculate gross profit percentage, sales by month, or by product line.
- Investigate significant fluctuations.
Tests of details – occurrence and accuracy:
- Select a sample of recorded sales invoices and vouch to:
  – Customer orders
  – Delivery notes
  – Price lists and authorised discounts
- Ensure invoices are properly authorised and cross-footed.
Cut-off testing:
- Near year-end (e.g. 31 December), examine pre- and post-year-end goods despatch notes, invoices, and returns.
- Ensure that sales are recorded in the correct accounting period.
Completeness:
- Select a sample of dispatch notes or shipping documents around year-end and trace to sales invoices and the sales journal.
- Investigate gaps in invoice or delivery note sequence.

Exam scenario: A retail company in Cape Town offers large December discounts and free delivery; you may be asked to identify risks (e.g. premature revenue recognition, fictitious sales) and design substantive procedures to address them.

4.2.3 Substantive Procedures – Trade Receivables

Assertions for receivables balances:

Existence – debtors actually exist.
Rights and obligations – debts are owed to the client, not factored or pledged.
Completeness – all customer balances are included.
Valuation – receivables are stated at recoverable amount, including appropriate allowances.

Key procedures:

Debtors’ confirmations (existence and rights):
- Positive confirmations: Customers are asked to reply whether they agree or disagree with the stated balance.
- Negative confirmations: Customers respond only if they disagree.
- Follow up non-responses by alternative procedures (e.g. examining subsequent receipts, sales orders, and delivery notes).
Subsequent receipts testing (valuation):
- Examine cash receipts after year-end and match to year-end balances.
- Long-outstanding balances may require an allowance for doubtful debts.
Review of age analysis:
- Identify old and disputed debts.
- Evaluate adequacy of allowance for doubtful debts (e.g. 3% of current, 20% of 60–90 days, 50–100% of >90 days, depending on entity policy and experience).
Rights and obligations:
- Inspect any agreements for factoring or pledging trade receivables as security (common for SMEs with bank overdrafts in South Africa).
- Confirm disclosure of such arrangements.

4.3 Purchases and Payables Cycle

The purchases and payables cycle involves:

Purchase requisition
Purchase order
Goods received note (GRN)
Supplier’s invoice
Payment
Recording in payables ledger and general ledger

4.3.1 Key Assertions – Trade Payables

For trade payables balances:

Completeness – all liabilities are recorded.
Existence – recorded payables are real obligations.
Valuation – amounts are stated correctly.
Rights and obligations – obligations of the entity, not related parties or other entities.
Cut-off – purchases and payables recorded in correct period.

4.3.2 Substantive Procedures – Payables

Search for unrecorded liabilities (completeness):
- Review post year-end payments and match back to suppliers’ invoices prior to year-end.
- Examine unmatched GRNs, unpaid invoices, and suppliers’ statements.
- Compare suppliers’ statements with creditor ledger balances and investigate differences.
Existence and valuation:
- Vouch a sample of recorded payables from the ledger to supporting invoices and GRNs.
- Recalculate arithmetic accuracy of suppliers’ invoices.
Cut-off:
- Inspect GRNs and supplier invoices around year-end to ensure purchases and payables are recorded in the proper period.
- For inventory purchased FOB shipping point, consider ownership at year-end.

Exam context: Many South African SMEs rely on a few large suppliers. Exam questions may mention long outstanding reconciliations or goods received but not invoiced, leading to increased risk of unrecorded liabilities.

4.4 Inventory and Cost of Sales

Inventory is often a significant balance, especially in manufacturing and retail entities common in CPUT case studies.

4.4.1 Assertions and Risks

For inventory balances:

Existence – items physically exist in warehouse.
Rights and obligations – inventory belongs to the entity (consignment risks).
Completeness – all inventory is recorded.
Valuation and allocation – lower of cost and net realisable value (NRV).

Common risks:

Obsolete or slow-moving inventory not written down.
Cut-off errors around year-end deliveries.
Inclusion of consignment stock incorrectly.
Errors in standard costing or overhead allocation.

4.4.2 Attendance at Inventory Counts

ISA 501 requires the auditor to attend the physical inventory count, except in rare circumstances.

Objectives:

Observe management’s counting procedures.
Inspect inventory for existence and condition.
Perform test counts and reconcile to inventory records.

Exam elements:

Pre-count planning: obtain copy of stocktaking instructions; assess adequacy.
During the count:
– Perform sample test counts from floor to sheet and sheet to floor.
– Ensure that stock movements are properly controlled (e.g. recording of in/out).
After the count:
– Trace test count sheets to final inventory listing.
– Investigate any discrepancies.

4.4.3 Valuation Procedures

Obtain inventory listing with unit cost and NRV.
Test cost:
– For purchased goods: inspect purchase invoices.
– For manufactured goods: verify bill of materials, labour and overhead allocation.
Test NRV:
– Compare selling prices after year-end to carrying value.
– Review sales returns, damaged stock, and slow-moving items.
Consider obsolescence:
– Identify items with low turnover or no movement for an extended period.
– Inquire about management’s plans for such items (discounts, scrapping).

4.5 Non-Current Assets and Depreciation

Auditing property, plant and equipment (PPE) also features frequently in AUD260S.

4.5.1 Assertions

For PPE:

Existence – assets exist at the location shown.
Rights and obligations – owned by the entity or recognised appropriately under leases.
Completeness – all additions and disposals are recorded.
Valuation – cost or revalued amount less accumulated depreciation and impairment.
Presentation – correct classification and disclosure (e.g. IFRS, IFRS for SMEs).

4.5.2 Substantive Procedures – PPE

Additions:
- Inspect purchase agreements, invoices, and payment evidence.
- Ensure assets are capitalised, not expensed.
- Consider whether capitalisation criteria under IFRS are met.
Disposals:
- Inspect sales agreements or scrapping approvals.
- Recalculate profit or loss on disposal.
- Ensure fully depreciated assets no longer in use are identified.
Existence and condition:
- Conduct physical inspection of significant assets (e.g. machinery, vehicles).
- Verify asset tags and serial numbers.
Depreciation:
- Review depreciation policy and rates (e.g. straight-line over 5 years for motor vehicles).
- Recalculate depreciation for a sample of assets.
- Ensure consistent application of method and rate.
Revaluations and impairment:
- If property is revalued, review valuation reports by independent valuers.
- Consider indicators of impairment (e.g. losses, idle assets) and evaluate management’s impairment tests.

5. Completion, Reporting, and Exam Technique for AUD260S

5.1 Completion Stage Procedures

Near the end of the audit, the focus shifts from obtaining evidence to evaluating evidence and forming an opinion.

Key completion procedures:

Subsequent events review (ISA 560)
Going concern assessment (ISA 570)
Final analytical procedures (ISA 520)
Review of misstatements and overall presentation
Obtaining written representations (ISA 580)
Review of working papers and quality control

5.1.1 Subsequent Events

Two types of subsequent events:

Adjusting events: Provide evidence of conditions that existed at the reporting date (e.g. settlement of a court case that was ongoing at year-end). Financial statements often require adjustment.
Non-adjusting events: Indicative of conditions arising after the reporting date (e.g. major fire in January destroying warehouse). Require disclosure if material.

Completion procedures:

Review post year-end minutes of board and shareholder meetings.
Inquire of management and legal advisors.
Inspect subsequent management accounts.
Consider whether events cast doubt on going concern.

5.1.2 Going Concern

The auditor must assess whether:

Management’s use of the going concern basis of accounting is appropriate.
A material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern.

Indicators:

Net current liability position.
Inability to pay creditors on due dates.
Loss of major customers or suppliers.
Legal or regulatory challenges (e.g. licence withdrawal).

Audit procedures:

Analyse cash flow forecasts and budgets.
Consider financing arrangements (e.g. bank overdrafts, loan agreements).
Review correspondence with banks and suppliers.
Obtain written representations from management regarding plans.

Possible outcomes:

If going concern assumption is appropriate but a material uncertainty exists:
– Adequate disclosure: include an “Material Uncertainty Related to Going Concern” section in the report.
– Inadequate disclosure: qualified or adverse opinion.

5.2 Evaluation of Misstatements and Overall Opinion

Throughout the audit, misstatements are accumulated, unless clearly trivial.

Steps:

Quantify misstatements (both factual and projected).
Consider qualitative factors – nature of misstatement, impact on compliance with covenants, possible fraud.
Compare aggregate misstatements with planning and performance materiality.
Request management to correct material misstatements.

If management refuses to correct:

Consider the effect on the audit opinion.
Evaluate whether the misstatements, individually or in aggregate, are material but not pervasive (qualified opinion) or material and pervasive (adverse opinion).

5.3 Types of Audit Opinions (ISA 700–705)

Understanding audit opinions is crucial for AUD260S exams, especially in longer question scenarios.

5.3.1 Unmodified (Unqualified) Opinion

Issued when:

Financial statements are prepared, in all material respects, in accordance with the applicable framework.
No material misstatements identified or any misstatements are immaterial.

Structure of a basic South African audit report (for a company applying IFRS for SMEs):

Opinion
Basis for Opinion
Key Audit Matters (for listed or certain public interest entities)
Responsibilities of Directors
Auditor’s Responsibilities
Report on Other Legal and Regulatory Requirements (if applicable)

5.3.2 Modified Opinions (ISA 705)

Three types:

Qualified Opinion
Adverse Opinion
Disclaimer of Opinion

Two dimensions:

Nature of matter:
– Material misstatement
– Inability to obtain sufficient appropriate evidence (limitation of scope)
Pervasiveness of the effect:
– Not pervasive → qualified
– Pervasive → adverse (for misstatement) or disclaimer (for scope limitation)

Qualified opinion – “except for”

Example: Inventory of R2 000 000 could not be observed due to a fire after year-end; auditor unable to obtain sufficient appropriate evidence about this balance. If inventory is material but not pervasive, a qualified opinion due to scope limitation is appropriate.

Adverse opinion

Used when misstatements are both material and pervasive.
Example: Management refuses to consolidate a significant subsidiary as required by IFRS, leading to major distortions in financial statements.

Disclaimer of opinion

Used when there is a material and pervasive limitation of scope, and the auditor is unable to obtain evidence to form an opinion.
Example: Records destroyed and no alternative procedures possible.

5.3.3 Emphasis of Matter and Other Matter Paragraphs (ISA 706)

Emphasis of Matter (EoM): Draws users’ attention to a matter already properly presented or disclosed in the financial statements that is of such importance that it is fundamental to users’ understanding.
– Example: Significant uncertainty relating to a court case disclosed in the notes.
Other Matter (OM): Refers to matters not presented or disclosed in the financial statements but relevant to users’ understanding of the audit, auditor’s responsibilities, or report.
– Example: Component auditor involvement in a group audit context.

EoM and OM do not modify the audit opinion unless accompanied by a qualified/adverse/disclaimer.

5.4 Practical Exam Technique for AUD260S (CPUT Focus)

Exams for AUD260S: Auditing II at CPUT typically include:

Scenario-based written questions (20–40 marks)
Short questions testing definitions or conceptual understanding
Occasionally multiple-choice or objective-type questions

5.4.1 Structuring Long-Form Answers

For a 20-mark question on a revenue cycle scenario:

Identify the requirements precisely. For example:
- “Identify and explain FIVE internal control weaknesses…”
- “Recommend appropriate audit procedures…”
Use headings/subheadings in your answer (where allowed):
- Internal control weaknesses
- Recommended controls
- Substantive procedures
Link each point clearly to:
- The scenario.
- The relevant audit assertion or risk.
Apply, do not just define. Avoid generic answers not tailored to the case.

Illustration of a well-structured point (worth 2–3 marks):

Weakness: Cash receipts from customers are collected and banked by the same clerk who also records them in the debtors’ ledger.
Risk: Lack of segregation of duties increases the risk of misappropriation of cash and concealment of theft by manipulating ledger entries.
Recommendation: Separate responsibilities so that cash receipts and banking are performed by one person, and updating the debtors’ ledger and reconciling to bank statements is performed by another.

5.4.2 Time Management

Assuming a 3-hour AUD260S exam worth 100 marks:

Allocate approximately 1.8 minutes per mark (180 minutes ÷ 100).
For a 20-mark question, aim for about 36 minutes including planning and review.

Tactics:

Quickly outline key points before writing full sentences.
Start with the highest mark questions you feel confident on.
Avoid spending too long on a single part; return later if time permits.

5.4.3 Using Keywords and Phrases for Maximum Marks

Markers at CPUT, UNISA (AUE2602), and CUT (AUD20AS) often look for specific terminology:

“Sufficient appropriate audit evidence”
“Risk of material misstatement”
“Tests of controls vs substantive procedures”
“Inherent risk, control risk, detection risk”
“Material and pervasive”
“Qualified opinion due to limitation of scope/material misstatement”

Ensure that your answers include these keywords where relevant, but do not simply list them—integrate them within applied explanations.

5.5 Integrating Knowledge Across Modules (CPUT and Other SA Universities)

Finally, Auditing II is not studied in isolation. It interlinks with:

Financial Accounting II (FAC260S) – understanding IFRS/IFRS for SMEs is crucial when evaluating misstatements and disclosures.
Taxation modules – awareness of SARS requirements, VAT, and income tax exposures.
Management Accounting and Finance – relevant for going concern assessments and performance reviews.
Related modules at other universities such as UNISA AUE2602, AUE3702, and CUT AUD20AS, where similar risk-based and ISA-driven content is examined.

For students searching for “AUD260S CPUT exam notes”, “AUE2602 UNISA study guide”, or “AUD20AS CUT auditing study notes”, the core structure is the same:

Understand the audit risk model and materiality.
Plan and document the audit properly.
Evaluate internal control, decide when to rely on it, and design tests of controls.
Perform substantive procedures by cycle and gather sufficient appropriate evidence.
Complete the audit, evaluate misstatements, and form the correct opinion.

Building a strong conceptual base, practising scenario-based questions, and learning to think like an auditor will enable success not only in AUD260S at CPUT but also in later modules and professional exams (IRBA’s ITC and APC, SAIPA’s PCE, etc.).