AUDT301: Auditing 301 Study Guide (UKZN / UNISA-Style Exam Notes)

This study guide provides comprehensive notes for AUDT301 / AUDT300W / AUE3701 auditing modules commonly taken in South African BCom Accounting degrees, with a particular focus on the University of KwaZulu-Natal (UKZN) context and alignment with UNISA AUE3701-style questioning. It is structured to help students prepare for mid-year tests, year-end exams and supplementary assessments by focusing on examinable principles, application techniques, and South African regulatory frameworks. Use this as a complement to prescribed texts (e.g. Graded Questions on Auditing) and past papers from UKZN, UNISA, CUT and other SA universities.

1. The Auditing Framework in South Africa (UKZN / UNISA-AUE3701 Alignment)

1.1 Purpose and Objectives of an Audit

The primary objective of an independent audit, as per ISA 200, is:

To enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.

For South African BCom students (including UKZN AUDT301 and UNISA AUE3701):

• The framework is usually IFRS or IFRS for SMEs, as required by the Companies Act 71 of 2008.
• The opinion provides reasonable assurance, not absolute assurance.
• The focus is on material misstatements due to:
  • Fraud (intentional)
  • Error (unintentional)

Exam tip (UKZN / UNISA-style MCQ or short question):

• If the question asks, “What is the purpose of an audit?”:
  • Do not say: “to detect fraud and error.”
  • Instead: “to express an opinion on whether the financial statements are fairly presented, in all material respects…”

1.2 Reasonable Assurance vs. Absolute Assurance

Reasonable assurance is:

• A high, but not absolute, level of assurance.
• Achieved by obtaining sufficient appropriate audit evidence.
• Limited by:
  • Use of sampling (not 100% testing).
  • Inherent limitations of accounting and control systems.
  • Use of professional judgment.
  • Time and cost constraints.

Absolute assurance is not attainable because:

• Many audit procedures are based on testing samples.
• There are limitations of internal control (e.g. management override).
• Evidence is often persuasive rather than conclusive.

Common exam question (AUE3701 / AUDT301 trend):

Explain why an auditor cannot provide absolute assurance.

Structure your answer around:

1. Inherent limitations of an audit (sampling, estimates, judgment).
2. Inherent limitations of internal controls (collusion, override).
3. Nature of evidence (primarily persuasive).

1.3 The South African Regulatory Environment

For all major South African universities (UKZN, UNISA, CUT, UJ, etc.), auditing modules emphasise:

• IRBA: Independent Regulatory Board for Auditors.
• Companies Act 71 of 2008.
• King IV Report on Corporate Governance for South Africa (2016).
• SAICA and IFAC codes on ethics and professional conduct.

Key elements:

1. IRBA

   • Registers auditors (Registered Auditors – RAs).
   • Issues South African Auditing Practice Statements (SAAPS).
   • Enforces the Code of Professional Conduct for Registered Auditors.

2. Companies Act 71 of 2008

   • Determines which companies must be audited vs independently reviewed (via Public Interest Score).
   • Sets requirements for:
     • Auditor appointment.
     • Rotation of audit partners.
     • Audit committees (public and large private companies).
   • Prohibits certain non-audit services by auditors to avoid conflicts.

3. King IV (2016)

   • Not law, but apply and explain governance principles.
   • Strong focus on:
     • Integrated reporting.
     • Combined assurance.
     • Role of audit committees.

Typical exam application question (UKZN):

Discuss the role of the audit committee under the Companies Act and King IV in promoting auditor independence.

Outline:

• Appointment and oversight of external auditors.
• Review of auditor independence and non-audit services.
• Review of financial statements and internal control environment.
• Combined assurance coordination.

1.4 Types of Assurance Engagements

ISA and SAAPS distinguish:

1. Reasonable assurance engagements

   • Example: Audit of annual financial statements.
   • Express positive assurance (“in our opinion, the financial statements present fairly…”).

2. Limited assurance engagements

   • Example: Review engagements (ISRE 2400) or limited scope engagements.
   • Express negative assurance (“nothing has come to our attention that causes us to believe…”).

3. Non-assurance engagements

   • Example: Compilation of financial statements (ISRS 4410).
   • No assurance is expressed; only a compilation report.

Exam angle: Distinguish between an audit, a review, and a compilation by:

• Nature of work performed.
• Level of assurance.
• Type of conclusion or report.

1.5 Users of Financial Statements and Audit Reports

Typical users for a South African company include:

• Shareholders / investors – primary users.
• Banks / lenders – for credit decisions.
• SARS – for tax compliance.
• Suppliers and customers – for credit and continuity decisions.
• Employees and unions – for job security and wage negotiations.
• Regulators – e.g. JSE, CIPC.

Why an audit matters:

• Enhances credibility of financial statements.
• Reduces information asymmetry between management and users.
• Helps reduce the cost of capital.

In UKZN and UNISA exam questions, this may be tested as:

Explain why external financial statement audits add value to users.

Respond by linking credibility, assurance, and decision-making.

2. Professional Ethics and Auditor Independence (South African Context)

2.1 Fundamental Principles of Professional Ethics

South African auditing modules (UKZN AUDT301, UNISA AUE3701) rely on the IFAC Code of Ethics as adapted by IRBA. The five fundamental principles:

1. Integrity

   • Be straightforward and honest in all professional and business relationships.
   • No deliberate misleading or false statements.

2. Objectivity

   • Avoid bias, conflict of interest or undue influence.
   • No compromising professional judgment.

3. Professional Competence and Due Care

   • Maintain knowledge and skill at a level required.
   • Act diligently in accordance with applicable technical and professional standards.

4. Confidentiality

   • Respect confidentiality of information acquired.
   • Do not disclose client information without proper authority or legal/professional duty.

5. Professional Behaviour

   • Comply with relevant laws and regulations.
   • Avoid actions that discredit the profession.

Exam technique:

• When a scenario asks whether an auditor’s conduct is ethical, reference these principles explicitly and apply each relevant principle to the facts.

2.2 Threats to Independence and Objectivity

The code identifies five main threats:

1. Self-interest threat

   • Example: Auditor holds shares in the client.
   • Example: Large outstanding fees from the client; fear of losing the client.

2. Self-review threat

   • Example: Auditor previously prepared the financial statements now being audited.
   • Example: Providing valuation services and then auditing that valuation.

3. Advocacy threat

   • Example: Auditor promotes client’s shares or securities.
   • Example: Representing client in a legal dispute.

4. Familiarity threat

   • Example: Long association with client management.
   • Example: Close family member of the engagement partner is a director of the client.

5. Intimidation threat

   • Example: Client threatens to dismiss auditor.
   • Example: Aggressive client management pressures the auditor to reduce work.

Each threat must be identified, evaluated, and addressed with appropriate safeguards, or the engagement must be declined/terminated.

2.3 Safeguards to Reduce Threats

Safeguards can be:

• Created by the profession, legislation or regulation:

  • IRBA inspections.
  • Professional education and CPD.
  • Corporate governance requirements (e.g. audit committees).

• Implemented in the work environment:

  • Rotation of engagement partners.
  • Independent review of significant judgments.
  • Removal of individuals causing threats.
  • Policies on gifts, hospitality, and fees.

Example (typical UKZN question):

You are the engagement partner of Zulu Ltd. You own 1% of its ordinary shares. Discuss the ethical issues and safeguards.

Analysis:

• Threat: Self-interest (financial interest).
• Principle: Objectivity and independence.
• Safeguard: Dispose of shares; remove partner from engagement; or decline/withdraw.

2.4 Independence in Fact and Appearance

Independence has two dimensions:

1. Independence of mind (in fact)

   • Ability to express an opinion without being affected by influences that compromise judgment.

2. Independence in appearance

   • Avoid facts and circumstances that may cause reasonable third parties to doubt independence.

Both are vital in South Africa due to high-profile corporate failures (e.g. Steinhoff, which often features indirectly in case study style questions).

Common short question:

Distinguish between independence of mind and independence in appearance, and explain why both are important.

2.5 Confidentiality and its Exceptions

Auditors must not disclose client information without proper authority, except when:

• Disclosure is permitted by client consent.
• Disclosure is required by law (e.g. money laundering reports under FIC Act).
• Disclosure is required by professional duty to protect the public interest.

Practical examples:

• Reporting of reportable irregularities to IRBA under the Auditing Profession Act.
• Responding to a court order or subpoena.

In exam problems, always:

• Identify if there is a legal obligation to report.
• Distinguish from mere gossip or curiosity (which would breach confidentiality).

2.6 Fees, Gifts and Hospitality

Ethical aspects frequently examined in AUE3701 and UKZN AUDT301 scenario questions:

1. Contingent fees

   • Generally prohibited for audit engagements.
   • Creates a self-interest threat.

2. Overdue fees

   • Large unpaid fees may be similar to a loan from auditor to client.
   • Threat: Self-interest.
   • Safeguard: Require partial payment before issuing the report; consider resignation.

3. Gifts and hospitality

   • Small, insignificant gifts (e.g. low-value year-end diary) may be acceptable if seen as clearly insignificant.
   • Valuable gifts or lavish hospitality create self-interest or familiarity threats.

Exam-style analysis structure:

1. Identify threat (e.g. self-interest).
2. Identify violated principle (e.g. objectivity).
3. Suggest safeguards or state that engagement must be discontinued.

3. Audit Risk, Materiality and Planning (UKZN AUDT301 Core)

3.1 Components of Audit Risk

Audit risk is the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated.

Standard model (ISA 200):

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

• Inherent Risk (IR):

  • Susceptibility of an assertion to misstatement, assuming no related controls.
  • Examples:
    • Complex financial instruments.
    • High-volume cash transactions.
    • New accounting standards.

• Control Risk (CR):

  • Risk that a misstatement will not be prevented or detected and corrected by the entity’s internal controls.

• Detection Risk (DR):

  • Risk that audit procedures will not detect existing misstatements.

Inverse relationship between DR and (IR × CR):

• If IR and CR are high, DR must be low (more extensive procedures).
• If IR and CR are low, DR can be higher (less testing needed).

Typical exam application (numeric & descriptive):

A scenario may describe a high-risk client (e.g. fast-growing construction company with weak internal controls and many related-party transactions). You must:

• Identify factors increasing IR and CR.
• Conclude that acceptable DR must be low.
• Propose more substantive procedures, increased sample sizes, more experienced staff, etc.

3.2 Understanding the Entity and Its Environment

ISA 315 requires auditors to obtain an understanding of:

• Industry, regulatory, and other external factors.
• Nature of the entity and its operations.
• Objectives, strategies and related business risks.
• Measurement and review of performance.
• Internal control, including IT environment.

Methods:

• Enquiries of management and staff.
• Analytical procedures (ratio analysis, trend analysis).
• Observation and inspection (factory tours, documentation review).

Example (South African retail company):

• External factors: Economic conditions, inflation, load shedding.
• Business risks: Stock theft, obsolete inventory, online competition.
• Impact: High inherent risk in inventory valuation and revenue recognition.

In exams, these aspects often appear in:

• “Risk of material misstatement” questions.
• Planning memo requirements (UKZN AUDT301 mid-year test style).

3.3 Materiality: Concept and Types

Materiality is:

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

Types:

1. Overall materiality (financial statement as a whole).
2. Performance materiality (amounts set to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole).
3. Specific materiality (for particular classes of transactions, account balances or disclosures).

Quantitative bases commonly used in SA practice:

• 5–10% of profit before tax (if profits stable).
• 1–2% of revenue.
• 1–2% of total assets or equity.

Example:

• Profit before tax: R5 000 000.
• Overall materiality (5% of PBT): R250 000.
• Performance materiality (e.g. 70% of overall): R175 000.

In exam calculations:

1. Show the base selected and explain why.
2. Show the percentage chosen and justify (e.g. consistent with past audits).
3. Calculate overall and performance materiality.

3.4 Planning the Audit (Planning Memorandum)

Audit planning is crucial and frequently examined in UKZN AUDT301 and UNISA AUE3701:

Objectives:

• Ensure appropriate attention to important areas.
• Identify potential problems.
• Ensure work is completed efficiently.

Key planning documents:

• Overall audit strategy.
• Detailed audit plan.
• Planning memorandum that may include:
  • Background information.
  • Understanding of entity and environment.
  • Risk assessment (IR, CR).
  • Materiality calculations.
  • Timing and staffing.

Content of a typical planning memo (exam format):

1. Client background
   • Industry, size, ownership, governance.
2. Engagement information
   • Reporting deadlines, applicable financial reporting framework.
3. Risk assessment
   • High-risk areas, including fraud risks.
4. Materiality
   • Base, percentage, calculation, and justification.
5. Audit approach
   • Balance between tests of controls and substantive procedures.
6. Resources and timing
   • Budget hours, staff mix, use of IT specialists.

3.5 Analytical Procedures

Analytical procedures involve:

Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data.

Types:

1. Risk assessment (planning stage):

   • Identify unusual trends or relationships.
   • Example: Sales growing 25% while receivables grow 80%.

2. Substantive procedures:

   • Use ratios or trend analysis as evidence for account balances.
   • Example: Gross profit margin analysis to test completeness of revenue.

3. Overall review (final stage):

   • Assess whether the financial statements are consistent with auditor’s knowledge.

Common ratios used in exam questions:

• Gross profit % = Gross profit / Revenue.
• Current ratio = Current assets / Current liabilities.
• Inventory days = (Inventory / Cost of sales) × 365.
• Receivables days = (Trade receivables / Credit sales) × 365.

Exam-style requirement:

• Compute ratios for two years.
• Identify unusual movements.
• Explain what they may indicate and additional procedures required.

3.6 Documentation and Audit Working Papers

ISA 230 requires auditors to prepare documentation that:

• Provides a sufficient and appropriate record of the basis for the auditor’s report.
• Evidence that the audit was planned and performed in accordance with ISAs.

Working papers include:

• Planning documents.
• Understanding of internal control.
• Audit programmes.
• Evidence of tests performed (sampling lists, confirmations, calculations).
• Significant matters discussed with management and those charged with governance.

Key documentation features:

• Should be complete and detailed enough for an experienced auditor, with no prior connection to the audit, to understand:
  • Nature, timing and extent of procedures.
  • Results and conclusions.
• Must be assembled on a timely basis after completion of the audit.
• Retention typically for at least five years (per IRBA and firm policy).

In exam questions, documentation is often tested in:

• “Explain the importance of audit documentation” (8–10 marks).
• “List the information that should be recorded in a working paper” (5–6 marks).

4. Internal Control, Tests of Controls and Substantive Procedures

4.1 Components of Internal Control (COSO Framework)

Auditing syllabi across South African universities, including UKZN AUDT301 and UNISA AUE3701, adopt the COSO internal control framework:

1. Control Environment

   • Tone at the top.
   • Integrity and ethical values.
   • Assignment of authority and responsibility.

2. Entity’s Risk Assessment Process

   • Identification and analysis of relevant risks.
   • Basis for determining how risks should be managed.

3. Information and Communication

   • Systems that support identification, capture and exchange of information.

4. Control Activities

   • Policies and procedures that help ensure management directives are carried out.
   • Examples: authorisation, segregation of duties, physical controls, reconciliations.

5. Monitoring of Controls

   • Ongoing and separate evaluations of the internal control system.

Exam scenarios usually present a cycle (e.g. revenue, purchases, payroll) and ask you to:

• Identify control objectives.
• Evaluate strengths and weaknesses.
• Recommend improvements.
• Design tests of controls.

4.2 Segregation of Duties

Segregation (separation) of duties is a core principle of effective control:

• Authorisation (approving transactions).
• Recording (accounting and record keeping).
• Custody (physical possession of assets).

No single person should have responsibility for two or more of these for any major transaction or asset.

Examples:

• Revenue cycle:

  • Sales orders approved by credit department (authorisation).
  • Invoices prepared by invoicing clerk (recording).
  • Cash collected and banked by cashier (custody).

• Cash disbursements:

  • Purchase ordering (authorisation).
  • Recording in purchase ledger (recording).
  • Signing cheques (custody/authorisation but with dual signatures).

Exam questions may show a small company where one person does everything and you must explain the risk (e.g. misappropriation) and propose compensating controls (e.g. owner review of bank reconciliations).

4.3 Revenue Cycle: Controls and Substantive Procedures

Revenue recognition is always examinable and high-risk.

Key assertions:

• Existence / occurrence (recorded sales actually occurred).
• Completeness (all sales that occurred are recorded).
• Accuracy (amounts correctly recorded).
• Cut-off (sales recorded in the correct period).
• Classification and presentation.

Typical controls in a well-controlled environment:

1. Pre-numbered sales orders and invoices.
2. Credit approval before dispatch.
3. Matching of:
   • Sales order.
   • Delivery note.
   • Invoice.
4. Independent review of prices and discounts (authorisation).
5. Monthly statements sent to customers and follow-up of discrepancies.
6. Segregation of duties between:
   • Capturing sales orders.
   • Dispatching goods.
   • Recording sales.
   • Receiving cash.

Tests of controls (exam examples):

• Inspect a sample of sales orders for evidence of credit approval.
• Observe and re-perform the matching of delivery notes to invoices.
• Inspect evidence of review/approval of prices and discounts.
• Review reconciliations between sub-ledger and general ledger.

Substantive procedures for revenue:

• Detailed vouching: From sales journal to source documents (delivery notes, customer orders) to verify occurrence.
• Detailed tracing: From delivery notes to sales journal to test completeness.
• Analytical procedures:
  • Compare monthly sales and gross margin ratios to prior years and budgets.
• Confirmations:
  • Debtors circularisation; follow up exceptions.
• Cut-off testing:
  • Inspect sales transactions before and after year-end to ensure proper period.

In UKZN-style written questions, you may be asked to:

Design substantive procedures to test the occurrence and completeness of revenue for King Traders (Pty) Ltd for the year ended 31 December 20X5.

Structure by assertion, then list procedures clearly.

4.4 Purchases and Payables Cycle

Assertions and risks:

• Completeness (all liabilities recorded).
• Existence (recorded liabilities are valid).
• Accuracy and valuation.

Controls:

1. Pre-numbered purchase orders.
2. Approval of suppliers and new vendors.
3. Three-way match:
   • Purchase order.
   • Goods received note (GRN).
   • Supplier invoice.
4. Segregation between ordering, receiving, and recording.
5. Monthly supplier statement reconciliations.

Tests of controls:

• Inspect sample of purchase orders for management approval.
• Match supplier invoices to GRN and PO.
• Review reconciliations of supplier statements.

Substantive procedures:

• Search for unrecorded liabilities:
  • Examine post year-end payments.
  • Review unmatched GRNs.
• Supplier statement reconciliations and confirmations.
• Analytical procedures (payables days vs. prior year).

4.5 Inventory: Controls, Counts and Substantive Testing

Inventory is often a high-risk area tested in AUE3701 and AUDT301:

Key assertions:

• Existence.
• Completeness.
• Valuation and allocation.
• Rights and obligations.

Controls:

• Segregation of duties (ordering, receiving, storing, recording).
• Perpetual inventory records.
• Regular stock counts and reconciliations.
• Physical safeguards (fencing, locks, CCTV).
• Standard costing systems and variance analysis.

Auditor’s attendance at stock count:

• Evaluate management’s instructions.
• Observe count procedures.
• Perform test counts.
• Identify obsolete, slow-moving or damaged inventory.

Substantive procedures:

1. Existence:

   • Attend stock counts and perform test counts.
   • After year-end, trace count sheets to final inventory records.

2. Completeness:

   • Trace from warehouse floor to count sheets and then to records.

3. Valuation:

   • Test pricing: verify cost to invoices.
   • Assess net realisable value: compare selling prices post year-end, review sales forecasts.
   • Evaluate provisions for slow-moving inventory.

4. Cut-off:

   • Review GRNs and dispatch notes around year-end.
   • Ensure inventory and purchases/sales are recorded in correct period.

Typical exam tasks:

• Prepare audit procedures for a given client’s inventory.
• Identify weaknesses in stock count procedures and suggest improvements.

4.6 Cash and Bank

Cash is inherently high-risk due to its liquid nature.

Controls:

• Segregation between receipt, banking, and recording.
• Daily banking of cash receipts.
• Pre-numbered receipts and deposit slips.
• Independent preparation and review of bank reconciliations.
• Cash-on-hand surprise counts.

Substantive procedures:

1. Bank confirmations from all banks (existence, rights and obligations).
2. Bank reconciliations:
   • Match bank balance per confirmation to reconciliation and general ledger.
   • Test outstanding cheques and deposits in transit with subsequent bank statements.
3. Cash count:
   • Count petty cash and till floats at year-end.
4. Analytical procedures:
   • Compare cash balances and bank overdrafts with prior year and budget.

Common exam questions:

• Draft an audit programme for cash and bank.
• Identify misstatements from a flawed bank reconciliation.

5. Audit Evidence, Sampling and Audit Reports (Exam-Focused)

5.1 Sufficient Appropriate Audit Evidence

Audit evidence must be:

• Sufficient: enough in quantity to support conclusions.
• Appropriate: relevant and reliable (quality).

Reliability hierarchy (from most to least reliable):

1. Evidence obtained directly by the auditor (observation, inspection).
2. External evidence obtained from independent sources (bank confirmations).
3. Internal evidence under strong internal controls.
4. Evidence from client enquiries and representations (least reliable).

Types of procedures:

• Inspection (physical and documents).
• Observation.
• External confirmation.
• Recalculation.
• Reperformance.
• Analytical procedures.
• Enquiry.

In exam questions, for each account/assertion, you must select appropriate procedures that provide reliable evidence.

5.2 Audit Sampling

Audit sampling is:

The application of audit procedures to less than 100% of items within a population, so that all sampling units have a chance of selection, to provide a basis for concluding about the population.

Two types:

1. Statistical sampling

   • Uses probability theory.
   • Example: random selection, use of sampling tables.

2. Non-statistical (judgmental) sampling

   • Based on auditor judgment.
   • Example: haphazard sampling, block sampling.

Steps in sampling (important for exams):

1. Define the objective (e.g. test existence of trade receivables).
2. Define the population and sampling unit.
3. Determine sample size (considering materiality, expected error, risk).
4. Select the sample items.
5. Perform procedures.
6. Evaluate misstatements:
   • Project misstatements to population.
   • Consider whether the misstatements indicate a problem with population.
   • Conclude if balance/assertion is fairly stated.

Sampling versus non-sampling risk:

• Sampling risk: risk that sample is not representative.
• Non-sampling risk: risk of inappropriate procedures or misinterpretation.

Exam-style short questions:

• Distinguish between statistical and non-statistical sampling.
• Explain sampling risk and non-sampling risk (4–6 marks).

5.3 Tests of Controls vs Substantive Procedures

Tests of controls:

• Evaluate operating effectiveness of controls in preventing, detecting, and correcting material misstatements.
• Examples:
  • Inspect bank reconciliation prepared and reviewed monthly.
  • Observe inventory count procedures.

Substantive procedures:

• Detect material misstatements at assertion level.
• Include tests of details and substantive analytical procedures.

When to rely on tests of controls:

• If controls are well designed and have been effective historically.
• If reliance reduces overall testing effort.

When to focus on substantive procedures:

• When controls are weak or non-existent.
• For certain assertions like existence of cash where substantive procedures are inevitable.

Exam questions often require you to:

• Explain when an auditor should rely on internal controls.
• Distinguish between tests of controls and substantive procedures.
• Provide examples of each for a particular cycle.

5.4 Management Representations (ISA 580)

Written representations:

• Letters from management confirming responsibilities and specific assertions (e.g. completeness of liabilities).
• Required for:
  • Acknowledgment of management responsibility for preparation of financial statements.
  • Completeness of information provided.

Limitations:

• They are weak evidence on their own.
• Cannot replace other audit evidence.

Exam angle:

• Explain purpose and limitations of management representation letters.
• Identify when a lack of representation might lead to qualification or disclaimer.

5.5 Subsequent Events (ISA 560)

Subsequent events are events occurring between:

1. The period-end date, and
2. The date of the auditor’s report,
   and facts discovered after the auditor’s report.

Types:

1. Adjusting events:

   • Provide evidence of conditions existing at year-end.
   • Financial statements should be adjusted.
   • Example: Bankruptcy of a debtor shortly after year-end due to financial difficulties existing at year-end.

2. Non-adjusting events:

   • Indicate conditions that arose after year-end.
   • May require disclosure.
   • Example: Major fire after year-end, large acquisition.

Procedures:

• Review minutes of board meetings.
• Enquire of management.
• Review subsequent management accounts.
• Obtain lawyer’s letters.

Exam questions:

• Identify events as adjusting or non-adjusting.
• Describe auditor’s responsibilities for subsequent events before and after the audit report date.

5.6 Going Concern (ISA 570)

Management is responsible for assessing whether the entity is a going concern.

Auditor’s responsibilities:

1. Evaluate the adequacy and appropriateness of management’s assessment.
2. Consider events or conditions that may cast significant doubt on going concern:
   • Negative operating cash flows.
   • Loan defaults.
   • Loss of major customers.
   • Legal cases.

Possible outcomes:

• No material uncertainty: standard unmodified opinion.
• Material uncertainty adequately disclosed:
  • Unmodified opinion, with separate “Material Uncertainty Related to Going Concern” section.
• Inadequate disclosure:
  • Qualified or adverse opinion.
• Management unwilling to make or extend assessment, or severe uncertainty:
  • Possibly disclaimer of opinion.

Exam scenario (UKZN / UNISA typical):

• Describe indicators of going concern problems for Siyabonga Ltd and outline auditor’s response including impact on audit report.

5.7 Types of Audit Opinions and Reports (ISA 700–705)

Standard report (unmodified opinion) structure:

1. Opinion.
2. Basis for opinion.
3. Key audit matters (for listed / some public entities).
4. Responsibilities of management.
5. Auditor’s responsibilities.
6. Other reporting responsibilities (if any).

Modified opinions (ISA 705):

1. Qualified opinion:

   • Material but not pervasive misstatement, or
   • Inability to obtain sufficient appropriate evidence (limitation of scope), material but not pervasive.
   • Wording: “except for the effects of…”

2. Adverse opinion:

   • Misstatements are both material and pervasive.
   • Financial statements do not present fairly.

3. Disclaimer of opinion:

   • Inability to obtain evidence is both material and pervasive; or
   • Auditor lacks independence.
   • Wording: “We do not express an opinion…”

Material vs pervasive (for exam purposes):

• Material: affects decisions of users but confined to certain elements.
• Pervasive: not confined to specific elements; or represents substantial proportion of financial statements; or fundamental to users’ understanding.

Emphasis of Matter (EoM) and Other Matter paragraphs (ISA 706):

• EoM: draws attention to a matter already appropriately presented or disclosed, fundamental to users’ understanding (e.g. significant uncertainty).
• Does not modify the opinion.
• Other Matter: refers to matters not presented or disclosed in financial statements but relevant to users’ understanding of the audit, auditor’s responsibilities or report.

Exam tasks:

• Given a scenario, state:
  • Type of opinion.
  • Basis for modification.
  • Example wording.
• Differentiate between:
  • Qualified vs adverse vs disclaimer.
  • Emphasis of Matter vs modified opinion.

5.8 Typical Exam-Style Integrated Scenario (UKZN / UNISA AUE3701)

In many South African auditing exams, you get a long-form integrated question requiring:

• Identification and evaluation of risks of material misstatement.
• Suggestions of controls and audit procedures.
• Consideration of ethics and independence.
• Identification of going concern and subsequent events.
• Determination of appropriate audit opinion.

To approach such questions strategically:

1. Read the required first:

   • Is the examiner asking for “risks”, “procedures”, “report impact”, or “ethics”?

2. Scan the scenario for:

   • High-risk accounts (inventory, revenue, estimates).
   • Weaknesses in internal controls.
   • Ethical threats (loans, gifts, employment relationships).
   • Events or conditions affecting going concern.

3. Structure answers clearly:

   • Use headings per assertion or risk.
   • Link risk → impact → response (procedures and possible report modification).

4. Apply South African context:

   • Refer to Companies Act, King IV, IRBA Code of Professional Conduct where relevant.
   • Incorporate local realities (e.g. load shedding effects on going concern, exchange rate volatility).

5. Time management:

   • Allocate time according to marks (1 mark ≈ 1.5 minutes).
   • Don’t write “everything you know”; answer exactly what is asked.

This AUDT301: Auditing 301 Study Guide aligns with the style and syllabus emphasis of UKZN BCom Accounting and UNISA AUE3701 modules, focusing on core examinable areas: auditing framework, ethics and independence, risk and planning, internal controls and substantive procedures, and audit evidence and reporting. For best results, combine these notes with tutorial letters, UKZN lecture slides, and past papers from UKZN, UNISA, CUT and other South African institutions, consistently practising scenario-based application and proper exam technique.