ODT 300: Auditing Exam Notes (University of Pretoria – BCom Taxation)

ODT 300 is a core third‑year auditing module in the University of Pretoria’s BCom Taxation degree. It builds on introductory and intermediate auditing to prepare students for professional practice and further studies with SAICA, SAIPA and other professional bodies. These exam notes focus on the concepts, processes and techniques that appear most frequently in ODT 300 tests, semester tests and final exams, with an emphasis on the needs of BCom Taxation students who must integrate auditing with taxation and financial accounting.

The material is aligned with mainstream South African university auditing curricula, and uses terminology and approaches consistent with UNISA’s AUI2601/AUI3702 and CUT’s AUD300 modules, but tailored specifically for UP’s ODT 300 context. Concepts are explained with exam‑style examples and practical applications to help you handle written questions, scenario analyses and multiple‑choice questions.

1. Auditing Fundamentals in the South African Context

1.1 Nature and Purpose of an Audit

An audit of financial statements is an independent examination of the financial statements of an entity, performed with the objective of expressing an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework (e.g. IFRS or IFRS for SMEs).

Key elements:

• Independence: The auditor must be independent in mind and in appearance.
• Objective: Provide reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error.
• Users: Existing and potential shareholders, SARS, banks, creditors, regulators, and management (for governance purposes).

In ODT 300, exam questions often require you to distinguish between:

• Auditing vs Accounting vs Taxation:
  • Accounting: Recording, classifying and summarising transactions.
  • Taxation: Calculating and reporting tax obligations according to tax legislation.
  • Auditing: Independently evaluating the financial information prepared by accountants and tax practitioners.

For BCom Taxation students, the critical link is that auditors evaluate the tax balances and disclosures in the financial statements (e.g. current tax, deferred tax, contingent tax liabilities), but do not normally prepare the tax returns themselves.

1.2 Types of Assurance Engagements

ODT 300 follows the International Framework for Assurance Engagements used in South Africa. Learn to categorise different engagements and identify common exam triggers.

1. Reasonable vs Limited Assurance

• Reasonable assurance:

  • High, but not absolute, level of assurance.
  • Results in a positive form of expression: “In our opinion, the financial statements present fairly, in all material respects…”
  • Example: Statutory audit of a public company.

• Limited assurance:

  • Moderate level of assurance.
  • Negative form of expression: “Nothing has come to our attention that causes us to believe that…”
  • Example: Review engagement on financial statements of a small private company.

2. Audit vs Review vs Agreed‑Upon Procedures

Engagement Type	Level of Assurance	Report Form	Typical Use Case
Audit	Reasonable	Positive opinion	Public interest entities, large companies, some NPOs
Review	Limited	Negative conclusion	SMEs where a full audit is not required
Agreed‑upon procedures	No assurance	Factual findings only	Specific procedures (e.g., verifying grant spend)
Compilation	No assurance	Compilation report	Accountant compiles FS from client records without verification

In South Africa, small private companies that are not “public interest entities” may opt for independent reviews instead of full audits, subject to the Companies Act and public interest score thresholds.

1.3 Assurance vs Non‑Assurance Services

Non‑assurance services include:

• Tax services (preparing tax returns, tax planning).
• Accounting services (bookkeeping, preparation of financial statements).
• Consulting/advisory (systems implementation, internal control design).

Exam questions for ODT 300 often focus on independence threats when a registered auditor provides both tax and audit services to the same client. You must be able to:

• Identify self‑review, self‑interest, advocacy, familiarity, and intimidation threats.
• Suggest safeguards (e.g. different engagement teams, independent reviews, limiting scope of non‑audit services).

1.4 The South African Regulatory Environment

Understand the main institutions and standards that shape auditing practice for UP ODT 300 students:

• IRBA (Independent Regulatory Board for Auditors):

  • Regulates registered auditors in South Africa.
  • Issues the Code of Professional Conduct for Registered Auditors.
  • Inspects audit firms and disciplines auditors.

• SAICA (South African Institute of Chartered Accountants):

  • Professional body for CAs(SA).
  • Issues technical guidance, but does not regulate auditors (that’s IRBA’s role).

• Companies Act 71 of 2008:

  • Prescribes when audits are compulsory.
  • Introduces concepts like public interest score (PIS) and independent reviews.

• International Standards on Auditing (ISAs):

  • Adopted in South Africa by IRBA.
  • Key standards include ISA 200, 210, 220, 230, 240, 250, 300, 315, 330, 500, 530, 540, 560, 570, 580, 700, 705, 706, 710, and 720.

1.5 Essential Definitions Frequently Tested

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

• Professional judgement is critical.
• Often based on a percentage of a benchmark (e.g. 5% of profit before tax, 1% of total assets).

Audit Risk
Risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. It is a function of:

• Inherent risk (IR): Susceptibility of an assertion to a misstatement, assuming no related controls.
• Control risk (CR): Risk that a misstatement will not be prevented or detected and corrected on a timely basis by the entity’s internal controls.
• Detection risk (DR): Risk that the auditor’s procedures will not detect a misstatement that exists.

Relationship:
Audit Risk (AR) = IR × CR × DR

The auditor can influence DR through the nature, timing and extent of substantive procedures.

Professional Skepticism
An attitude that includes a questioning mind and a critical assessment of audit evidence. Particularly important in areas of fraud risk, related party transactions, and complex estimates (e.g. deferred tax, impairment).

2. Ethics, Independence and Governance (with BCom Taxation Emphasis)

2.1 Code of Professional Conduct: Fundamental Principles

The IRBA Code (aligned with the IESBA Code) sets out five fundamental principles:

1. Integrity

   • Be straightforward and honest in all professional and business relationships.
   • Example: Not deliberately ignoring a material understatement of tax liabilities.

2. Objectivity

   • Do not allow bias, conflict of interest or undue influence to override professional judgements.
   • Example: Not letting a long‑term personal relationship with a tax manager affect conclusions.

3. Professional Competence and Due Care

   • Maintain professional knowledge and skill at the level required to ensure competent services.
   • Example: Keeping up to date with SARS rulings and tax law changes that impact financial statements.

4. Confidentiality

   • Respect the confidentiality of information acquired; do not disclose without proper authority.
   • Exceptions: Legal duty to disclose (e.g. reporting money laundering as required by FICA).

5. Professional Behaviour

   • Comply with relevant laws and regulations and avoid any conduct that discredits the profession.

Exam questions often give short scenarios and ask you to:

• Identify which principle(s) are threatened.
• Explain why it is a threat.
• Suggest appropriate actions or safeguards.

2.2 Independence: In Mind and Appearance

Independence of mind: State of mind that permits the provision of an opinion without being affected by influences that compromise professional judgement.

Independence in appearance: Avoiding facts and circumstances that are so significant that a reasonable and informed third party would conclude that integrity, objectivity or professional scepticism has been compromised.

Common threats to independence:

• Self‑interest threat:

  • Financial interest in the client (e.g. shares).
  • Dependence on audit fees (e.g. client represents 30% of firm revenue).
  • Large unpaid fees (like a loan to the client).

• Self‑review threat:

  • Providing both accounting/tax services and audit services on the same items.
  • Example: The firm prepares the tax computation and then audits the tax expense and liability.

• Advocacy threat:

  • Promoting client’s position (e.g., representing client in a SARS dispute).
  • Marketing or underwriting client shares.

• Familiarity threat:

  • Long association with client management.
  • Close family or personal relationships with client personnel (e.g. spouse is client’s CFO).

• Intimidation threat:

  • Management threatens to replace firm or reduce fees.
  • Dominant CEO exerts pressure on the engagement partner.

Safeguards include:

• Rotation of engagement partners after a set period (e.g. 5 years for listed entities).
• Using independent partners for quality reviews.
• Prohibiting certain non‑assurance services to audit clients.
• Disclosing relationships and obtaining audit committee approval.

2.3 Ethics and Tax‑Related Services: BCom Taxation Focus

BCom Taxation students often work in firms that provide both tax advisory and audit services. From an ODT 300 perspective, you must be able to recognise situations where tax work may compromise independence.

Common exam‑style issues:

1. Preparation of Tax Returns for Audit Clients

   • Usually allowed if:
     • Management takes responsibility for information.
     • Work is clearly separated from the audit team.
     • No material tax planning structures are being audited by the same team.

2. Aggressive Tax Planning

   • Could create an advocacy and self‑review threat.
   • Example: Firm designs a complex transfer pricing arrangement and then audits it.
   • Safeguards:
     • Independent review by a partner not involved in the planning.
     • Disclosure to those charged with governance.
     • Avoiding contingent fee arrangements.

3. Representation in SARS Disputes

   • If the firm represents the client in a significant dispute about tax treatment that also affects the financial statements, the independence risk is high.
   • Possible safeguard: Have a different firm handle either the dispute or the audit.

2.4 Corporate Governance and Audit Committees

South African auditors operate within the King IV governance framework, especially for listed and public interest entities.

Key governance bodies:

• Board of Directors: Overall responsibility for the entity.
• Audit Committee (for public interest companies):
  • Oversees the financial reporting process.
  • Monitors auditor independence.
  • Recommends the appointment/removal of external auditors.
  • Reviews the nature and extent of non‑audit services.

In ODT 300 exam questions:

• You may be required to explain the role of the audit committee in auditor appointment, rotation, and independence.
• You may have to discuss communication between the auditor and those charged with governance (ISA 260) — for example, communicating significant deficiencies in internal control.

2.5 NOCLAR and Reporting Obligations

NOCLAR: Non‑Compliance with Laws and Regulations.

Auditors have obligations when they become aware of NOCLAR that may have a material effect on the financial statements or raise serious public interest issues (e.g. tax evasion, money laundering, environmental violations).

Process (simplified for exam purposes):

1. Discuss with management and, if appropriate, with those charged with governance.
2. Evaluate the impact on the financial statements and the audit.
3. Consider whether it must be reported to an authority (e.g. SARS, FIC) as required by law.
4. Document all discussions and decisions thoroughly.

For BCom Taxation students, typical exam scenarios include:

• Discovery of unrecorded VAT liabilities.
• Evidence of intentional under‑declaration of income for income tax.
• Failure to withhold PAYE or SDL properly.

You must be able to:

• Identify NOCLAR.
• Distinguish between errors, negligence, and intentional evasion.
• Explain the auditor’s response and reporting responsibilities.

3. Audit Planning, Risk Assessment and Materiality

3.1 Overview of the Audit Process (ISA 300)

The audit process in ODT 300 is often tested in the order of:

1. Pre‑engagement activities (ISA 210, ISA 220).
2. Planning and risk assessment (ISA 300, ISA 315).
3. Responding to assessed risks (ISA 330).
4. Execution of tests of controls and substantive procedures.
5. Completion and reporting (ISA 560, 570, 580, 700‑706).

Exams usually give a scenario describing a company and require you to:

• Identify business and audit risks.
• Propose risk assessment procedures.
• Suggest further audit procedures for specific assertions.

3.2 Pre‑Engagement Activities

Before accepting a new audit engagement:

• Evaluate client integrity:

  • Reputation in the industry.
  • History of compliance with SARS and regulators.
  • Past relationship with previous auditors.

• Assess firm’s competence and resources:

  • Industry expertise.
  • Availability of staff, including tax specialists if complex tax issues.

• Independence checks:

  • Confirm no prohibited financial interests.
  • Identify potential conflicts of interest.

• Communicate with predecessor auditor (with client’s permission):

  • Inquire about reasons for change.
  • Ask about any issues like fraud, management integrity, disputes over fees.

• Agree terms of engagement and issue an engagement letter (ISA 210):

  • Objective and scope of audit.
  • Responsibilities of management (e.g. internal controls, preparation of FS, preventing fraud).
  • Responsibilities of auditor.
  • Applicable financial reporting framework.
  • Reference to form of opinion.

3.3 Understanding the Entity and Its Environment (ISA 315)

Risk assessment requires a thorough understanding of:

• Industry, regulatory and other external factors:

  • Tax environment: changes in VAT, corporate tax rates, transfer pricing rules.
  • Regulatory requirements: Companies Act, sector‑specific regulators.

• Nature of the entity:

  • Business model, revenue streams, major contracts.
  • Organisational structure, including tax function.

• Objectives, strategies and related business risks:

  • Expansion plans, financing strategies, tax planning strategies.
  • How these could result in material misstatements.

• Measurement and review of performance:

  • Key ratios and KPIs.
  • How tax is measured internally (effective tax rate, tax risk indicators).

Example (exam‑type):
A medium‑sized manufacturing company in Pretoria has rapidly expanded exports and uses complex transfer pricing arrangements with a related entity in Botswana. Business risks include:

• Non‑compliance with SARS transfer pricing rules.
• Incorrect measurement of deferred tax assets/liabilities.
• Potential under‑provisioning for tax.

The auditor’s risk assessment procedures might include:

• Reviewing contracts with related entities.
• Discussing transfer pricing methods with management and tax advisers.
• Analysing prior SARS audits and correspondence.

3.4 Identifying and Assessing Risks of Material Misstatement

Once the understanding is obtained, the auditor identifies:

• Risks at financial statement level (e.g., overall going concern issues, weak governance).
• Risks at assertion level (e.g., valuation of inventories, completeness of revenue, accuracy of tax expense).

Special category: Significant risks:

• Risks that require special audit consideration due to:
  • Fraud potential.
  • Complexity.
  • Subjectivity.
  • Unusual transactions.

Common significant risks in BCom Taxation‑related areas:

• Complex income tax and deferred tax calculations.
• Recognition of deferred tax assets based on future taxable profits.
• Related party transactions with tax implications.

3.5 Materiality and Performance Materiality

Setting planning materiality:

• Based on professional judgement using benchmarks such as:
  • 5–10% of profit before tax.
  • 0.5–1% of revenue.
  • 1–2% of total assets.

Performance materiality:

• Less than planning materiality.
• Used to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds planning materiality.

Example (with consistent figures):

• Company’s profit before tax: R4 000 000.
• Planning materiality at 5% = R200 000.
• Performance materiality set at 75% of planning = R150 000.

Exams may require:

• Explaining why a specific benchmark is chosen (e.g. profit vs revenue for loss‑making entities).
• Adjusting materiality during the audit if results differ significantly from expectations.

3.6 Audit Strategy vs Audit Plan

Overall audit strategy:

• Sets the scope, timing and direction of the audit.
• Considers:
  • Use of internal auditors.
  • Involvement of experts (e.g., tax experts).
  • Use of component auditors in group audits.

Audit plan:

• More detailed than strategy.
• Describes the nature, timing and extent of:
  • Risk assessment procedures.
  • Tests of controls.
  • Substantive procedures (analytical and tests of details).

In exam answers, show the link:

• “Given the assessed high inherent risk in revenue recognition and taxation, the overall audit strategy will be to place limited reliance on internal controls and increase substantive testing, particularly around revenue and tax provisions.”

4. Internal Control, Evidence and Sampling

4.1 Internal Control Systems (ISA 315 and ISA 330)

Internal control components:

1. Control environment:

   • Integrity and ethical values.
   • Commitment to competence (including tax and financial knowledge).
   • Participation of those charged with governance.

2. Entity’s risk assessment process:

   • How management identifies, analyses and responds to business risks (including tax risks).

3. Information systems and communication:

   • Processes for initiating, recording, processing and reporting transactions.
   • Integration of accounting and tax systems (e.g., whether VAT is correctly captured).

4. Control activities:

   • Authorisations, approvals, reconciliations, verifications, segregation of duties.

5. Monitoring of controls:

   • Internal audit.
   • Management reviews.

4.2 Tests of Controls vs Substantive Procedures

Tests of controls:

• Evaluate effectiveness of design and operation of internal controls.
• Examples:
  • Re‑performance of bank reconciliation controls.
  • Inspection of evidence of review and authorisation of tax computations.

Substantive procedures:

1. Substantive analytical procedures:
   • Reasonableness tests based on relationships (e.g., compare effective tax rate to prior year and to standard rate).
2. Tests of details:
   • Detailed vouching, tracing, confirmation, recalculation, etc.

In ODT 300 exams, you must:

• Decide whether controls can be relied upon.
• If controls are strong and tested successfully, you may reduce the extent of substantive testing.
• If controls are weak, increase substantive procedures and treat assessed control risk as high.

4.3 Audit Evidence (ISA 500)

Characteristics of sufficient and appropriate evidence:

• Sufficiency: Quantity of evidence (affected by risk of misstatement and quality of evidence).
• Appropriateness: Quality of evidence (relevance and reliability).

General reliability hierarchy:

1. Evidence obtained directly by the auditor (e.g. physical inspection, recalculation).
2. Evidence from external independent sources (e.g. bank confirmations).
3. Internal documentary evidence.
4. Oral representations by management (least reliable, usually need corroboration).

Types of audit procedures:

• Inspection (documents or assets).
• Observation (watching processes being performed).
• Inquiry (seeking information from knowledgeable persons).
• Confirmation (obtaining direct written response from third parties).
• Recalculation (checking mathematical accuracy).
• Re‑performance (independently executing procedures or controls).
• Analytical procedures (evaluations of plausible relationships among data).

BCom Taxation relevance:

• Recalculation: Recompute tax expense, deferred tax, VAT outputs and inputs.
• Analytical procedures: Compare effective tax rates, VAT ratios, payroll tax trends.

4.4 Audit Sampling (ISA 530)

Sampling is often tested in practical contexts.

Audit sampling: Application of audit procedures to less than 100% of items in a population, such that all sampling units have a chance of selection, with the objective of drawing conclusions about the population.

Two general approaches:

1. Statistical sampling:

   • Uses random selection and probability theory.
   • Quantifies sampling risk.

2. Non‑statistical (judgemental) sampling:

   • Based on auditor judgement.
   • Does not quantify sampling risk, but still must be representative.

Key terms:

• Population: Entire set of data from which a sample is drawn.
• Sampling unit: Individual items constituting a population (e.g. an invoice).
• Stratification: Dividing a population into sub‑populations (strata) of similar items (e.g. high‑value vs low‑value invoices).

Sampling risk:

• Risk that the auditor’s conclusion based on a sample differs from the conclusion if the entire population were tested.

• Two types for tests of controls:

  • Risk of overreliance (assessing control risk too low).
  • Risk of underreliance (assessing control risk too high).

• For substantive testing:

  • Risk of incorrect acceptance (concluding no material misstatement when there is one).
  • Risk of incorrect rejection (concluding there is material misstatement when there is not).

In ODT 300 exams, you may have to:

• Identify appropriate population for sampling (e.g. after‑year‑end credit notes for revenue cut‑off).
• Decide on sample size factors:
  • Higher risk of misstatement → larger sample.
  • Higher tolerable misstatement → smaller sample.
  • Larger population variability → larger sample.

4.5 Example: Sampling for Tax‑Related Balances

Suppose an entity has 1 000 payroll transactions for the year, each subject to PAYE, UIF and SDL. The auditor wants to test compliance with SARS payroll requirements.

Steps:

1. Define population: All 1 000 payroll transactions.
2. Define sampling unit: Individual payroll transaction (e.g. monthly payslip per employee).
3. Determine sampling method:
   • Random sampling or systematic sampling (e.g., every 10th item) if no pattern is expected.
4. Determine sample size based on assessed risk and tolerable misstatement.
5. Perform selected tests:
   • Recalculate PAYE, UIF, SDL.
   • Check that correct tax tables and thresholds were used.
   • Trace payments to SARS and accounting records.
6. Evaluate results:
   • If misstatements are found, extrapolate to population.
   • Decide whether additional testing is required or whether misstatements are material.

4.6 Using the Work of Others

Internal auditors (ISA 610):

• Can be used for some testing if:
  • They are objective and competent.
  • Their work is adequate and reliable.
• External auditors remain responsible for the audit opinion.

Experts (ISA 620):

• May be needed for complex areas such as:
  • Actuarial valuations.
  • Environmental provisions.
  • Complex tax issues (advanced international tax planning).
• Auditor must evaluate:
  • Competence, capabilities, and objectivity of the expert.
  • Adequacy of expert’s work for audit purposes.

For BCom Taxation students, you should know when a tax expert is likely to be used:

• Complex deferred tax relating to business combinations.
• Highly specialised transfer pricing structures.
• Uncertain tax positions with material impact on the financial statements.

5. Key Cycles, Assertions and Exam‑Style Procedures (BCom Taxation Focus)

This section connects the auditing theory from ODT 300 with practical applications in core financial statement cycles, with a particular emphasis on areas relevant for BCom Taxation students, such as taxation, revenue, purchases, payroll, and provisions.

5.1 Management Assertions

For each class of transactions, account balance and presentation/disclosure, management makes implicit assertions.

1. Assertions about classes of transactions and events:

   • Occurrence: Transactions recorded actually occurred.
   • Completeness: All transactions that should be recorded have been recorded.
   • Accuracy: Amounts and other data are recorded appropriately.
   • Cut‑off: Transactions recorded in the correct accounting period.
   • Classification: Transactions recorded in proper accounts.

2. Assertions about account balances:

   • Existence: Assets/liabilities exist at period end.
   • Rights and obligations: Entity holds rights to assets and owes obligations.
   • Completeness: All assets/liabilities that should be recorded are recorded.
   • Valuation and allocation: Assets/liabilities recorded at appropriate amounts.

3. Assertions about presentation and disclosure:

   • Occurrence and rights and obligations.
   • Completeness.
   • Classification and understandability.
   • Accuracy and valuation.

In exam questions, you often need to:

• Identify relevant assertions for a given risk.
• Design audit procedures to test those assertions.

5.2 Auditing the Taxation Cycle

For BCom Taxation students in ODT 300, auditing the taxation cycle is central and frequently tested.

5.2.1 Key Components of Taxation in Financial Statements

1. Current tax:

   • Income tax payable or recoverable for the current and prior periods.
   • Based on taxable profit per tax laws.

2. Deferred tax:

   • Deferred tax assets and liabilities arising from temporary differences.
   • Examples of temporary differences:
     • Different depreciation rates for tax vs accounting.
     • Provisions not yet deductible for tax purposes.
     • Assessed losses carried forward.

3. Tax disclosures:

   • Reconciliation between accounting profit and taxable profit.
   • Reconciliation of effective tax rate to standard tax rate.
   • Disclosure of significant temporary differences and tax losses.

5.2.2 Inherent and Control Risks in Taxation

Typical inherent risks:

• Complexity of tax laws and frequent changes.
• Judgement involved in estimates (e.g., realisability of deferred tax assets).
• Risk of non‑compliance with SARS requirements.
• Potential management incentive to understate tax expense to show higher profit.

Typical control risks:

• Lack of tax expertise in-house.
• Weak review of tax computations.
• Inadequate reconciliation between accounting records and tax returns.

5.2.3 Audit Objectives and Assertions (Tax)

For current tax (income tax payable/receivable):

• Completeness: All tax liabilities have been recognised.
• Accuracy/valuation: Tax expense and liabilities are calculated correctly.
• Existence: Recognised tax assets/liabilities exist.
• Rights and obligations: Entity has obligation to pay or right to recover tax.
• Cut‑off: Tax expense is recognised in the correct period.

For deferred tax:

• Existence: Deferred tax assets and liabilities represent real temporary differences.
• Valuation:
  • Deferred tax assets are recoverable (sufficient future taxable profits).
  • Deferred tax liabilities are not understated.
• Completeness: All material temporary differences identified.
• Presentation: Proper classification into assets/liabilities; disclosure of components.

5.2.4 Substantive Procedures – Current Tax

Key audit procedures (exam‑style answer points):

1. Obtain and inspect the current year’s tax computation and tax return.
2. Reconcile:
   • Accounting profit per financial statements.
   • Adjustments for non‑deductible expenses and non‑taxable income.
   • Resulting taxable income and tax expense.
3. Recalculate:
   • Tax expense using applicable tax rates (e.g. 27% corporate tax rate).
   • Any additional tax (e.g. capital gains tax) where applicable.
4. Trace:
   • Tax expense to the statement of profit or loss.
   • Tax liability/asset to the statement of financial position.
5. Inspect correspondence with SARS:
   • Assessments, queries, objections, appeals.
   • Check for any unrecorded tax liabilities or penalties.
6. Analytical procedures:
   • Compare effective tax rate with prior year and with statutory rate.
   • Investigate significant differences (e.g. large non‑taxable income or non‑deductible expenses).

Example:
If accounting profit is R5 000 000 and tax expense in FS is R1 100 000, effective tax rate = 22%. If statutory rate is 27%, the difference of 5% must be explained (e.g. exempt income, special allowances, foreign tax credits).

5.2.5 Substantive Procedures – Deferred Tax

1. Obtain a schedule of deferred tax balances:
   • By temporary difference (e.g. PPE, provisions, tax losses).
2. Evaluate and test:
   • Reasonableness of temporary differences.
   • Correct application of tax rates to temporary differences.
3. Review:
   • Forecasts of future taxable profits to support recognition of deferred tax assets.
   • Reasonableness of assumptions.
4. Check consistency:
   • With prior years and changes in tax laws.

If the entity has an assessed loss of R2 000 000, at a rate of 27%, deferred tax asset could be R540 000. Auditor must evaluate if it is probable that sufficient taxable profits will be available to utilise the assessed loss.

5.2.6 Tax‑Related Contingent Liabilities and Provisions

• Evaluate whether potential tax disputes or SARS audits are adequately provided for or disclosed.
• Procedures:
  • Discussions with management and tax advisers.
  • Review of SARS correspondence.
  • Legal opinion where necessary.
• Assertions:
  • Completeness: All significant potential tax exposures identified.
  • Valuation: Provision amount is reasonable.
  • Disclosure: Adequate disclosure of significant tax contingencies.

5.3 Auditing the Revenue Cycle

Revenue is a high‑risk area in most audits because of fraud incentives and complexity.

5.3.1 Key Assertions – Revenue

• Occurrence: Recorded revenue actually occurred.
• Completeness: All revenue that occurred is recorded.
• Accuracy: Revenue is recorded at appropriate amounts.
• Cut‑off: Revenue recorded in correct period.
• Classification: Revenue correctly classified (e.g., local vs export, tax‑exempt vs taxable).

BCom Taxation perspective: Revenue affects VAT, income tax, and sector‑specific taxes (e.g., fuel levies).

5.3.2 Common Controls – Revenue

• Serially pre‑numbered invoices and delivery notes.
• Segregation of duties between sales, dispatch, and receivables.
• Regular reconciliation of sub‑ledgers to general ledger.
• Management review of monthly revenue figures and gross margins.

Tests of controls might include:

• Inspecting evidence of authorisation.
• Re‑performing reconciliations.
• Observing processes for issuing invoices.

5.3.3 Substantive Procedures – Revenue

1. Cut‑off tests:

   • Select sales recorded just before and after year‑end.
   • Trace to delivery notes and customer acknowledgements.
   • Ensure revenue is recognised in correct period.

2. Substantive analytical procedures:

   • Compare revenue per month to prior year and budget.
   • Calculate gross profit margins and investigate unusual fluctuations.

3. Tests of details:

   • Vouch a sample of revenue transactions from ledger to supporting documents (invoices, delivery notes, customer orders).
   • Confirm significant balances with customers (debtor confirmations).

BCom Taxation link: For VAT audits, ensure that VAT output is correctly calculated on taxable supplies and that zero‑rated and exempt supplies are handled correctly.

5.4 Auditing the Purchases and Payables Cycle

Similar structure to revenue, but from the expenditure side.

5.4.1 Key Assertions – Purchases and Payables

For purchases (expenses):

• Occurrence: Recorded purchases occurred.
• Completeness: All purchases that occurred are recorded.
• Accuracy: Amounts correctly recorded.
• Cut‑off: Recorded in correct period.
• Classification: Correct expense category.

For trade payables:

• Existence: Payables that are recorded exist.
• Completeness: All obligations that exist are recorded.
• Valuation: Payables recorded at correct amounts.
• Rights and obligations: Obligations are obligations of the entity.

5.4.2 Substantive Procedures – Purchases/Payables

• Supplier statement reconciliations:

  • Reconcile supplier statements to ledger balances.
  • Investigate differences (e.g., unrecorded invoices).

• Search for unrecorded liabilities:

  • Examine payments after year‑end to identify liabilities relating to the audit period but not recorded.
  • Inspect unmatched GRNs (goods received notes) and invoices.

• Analytical procedures:

  • Compare purchases and gross margins with prior year.

BCom Taxation: Ensure VAT input is correctly claimed and that non‑deductible input VAT (e.g., certain entertainment expenses) is not claimed.

5.5 Auditing Payroll

Payroll is significant in many entities and directly linked to taxation (PAYE, UIF, SDL).

5.5.1 Key Assertions – Payroll

• Occurrence: Wages and salaries recorded were paid to valid employees for work done.
• Completeness: All payroll costs incurred are recorded.
• Accuracy: Amounts (including deductions) are correctly calculated.
• Cut‑off: Payroll recorded in correct period.
• Classification: Payroll costs appropriately classified (e.g., direct vs administrative).

5.5.2 Substantive Procedures – Payroll and Payroll Taxes

• Recalculation:
  • Check sample of employees’ gross pay, deductions (PAYE, UIF, SDL), and net pay.
• Reconcile:
  • Total PAYE deducted to SARS EMP201 returns and EMP501 reconciliations.
• Verify:
  • Existence of employees (inspect HR files, ID documents).
  • Approvals of salaries and rate changes.

Analytical procedures:

• Compare payroll expenses as percentage of revenue to prior year.
• Analyse overtime trends, bonuses, and tax deductions.

Tax‑specific exam angle:

• Identify potential under‑deduction of PAYE or incorrect tax codes.
• Evaluate whether benefits (e.g., company car, medical aid contributions) are correctly taxed per SARS rules.

5.6 Provisions, Accruals and Contingent Liabilities

Provisions and accruals often involve significant judgement and are hot spots for exam questions.

5.6.1 Definitions (IAS 37 Context)

• Provision: Liability of uncertain timing or amount, recognised when:

  1. Present obligation from past event.
  2. Outflow of economic benefits probable.
  3. Reliable estimate can be made.

• Contingent liability: Possible obligation (or present obligation not recognised) because:

  • It is not probable that an outflow will be required, or
  • The amount cannot be measured reliably.

BCom Taxation emphasis: Many provisions have tax implications (e.g., provisions for bonuses may be deductible only when paid).

5.6.2 Audit Procedures – Provisions

1. Obtain schedule of provisions and compare to prior year.
2. Discuss nature and basis of each provision with management.
3. Inspect supporting documentation:
   • Contracts, legal letters, board minutes.
4. Evaluate reasonableness of assumptions.
5. Check subsequent events (post year‑end cash payments or settlement) for evidence of obligation and amount.
6. Assess tax treatment:
   • Whether provision is tax‑deductible now or only when paid (affects deferred tax).
   • Ensure appropriate deferred tax asset or liability is recorded.

Typical exam example: Provision for warranty costs, provision for legal claims, provision for restructuring.

5.7 Completion and Reporting

Although this section overlaps with general audit completion topics, ODT 300 exams often emphasise how completion procedures affect tax balances and disclosures.

5.7.1 Subsequent Events (ISA 560)

Two types:

1. Adjusting events:

   • Provide further evidence of conditions existing at year‑end.
   • Require adjustment of financial statements.
   • Example: SARS finalising a tax assessment after year‑end regarding a dispute that existed at year‑end.

2. Non‑adjusting events:

   • Arise after year‑end.
   • Do not relate to conditions at year‑end but may require disclosure.
   • Example: New tax legislation enacted after year‑end that will affect future periods.

Procedures:

• Read board minutes after year‑end.
• Inquire of management and legal advisers.
• Inspect subsequent management accounts and SARS correspondence.

5.7.2 Going Concern (ISA 570)

Assess whether:

• The entity will continue as a going concern for at least 12 months from reporting date.
• There is significant doubt (material uncertainty) about going concern.

For BCom Taxation students, consider:

• Large outstanding tax liabilities.
• SARS disputes that, if lost, could threaten solvency.
• Tax payment arrears and penalties.

Audit procedures:

• Evaluate cash flow forecasts.
• Inspect post year‑end tax payments.
• Obtain written representations regarding going concern.

If a material uncertainty exists, the auditor’s report should include either:

• A separate section to highlight the material uncertainty (if adequate disclosure is made), or
• A qualified or adverse opinion if disclosures are inadequate.

5.7.3 Written Representations (ISA 580)

Obtain management representation letter confirming:

• Responsibility for financial statements.
• Disclosure of all relevant information.
• Completeness of related party information.
• Acknowledgement of tax positions and contingencies.

Note: Representations do not replace other audit evidence and are the least reliable form of evidence.

6. Auditor’s Reports, Modifications and Exam Techniques (ODT 300 Focus)

Although earlier sections covered the process and evidence, ODT 300 frequently tests your ability to draft and interpret auditor’s reports and to apply theory in exam conditions.

6.1 Standard Unmodified Opinion (ISA 700)

Elements of a standard auditor’s report:

1. Title: “Independent Auditor’s Report”.
2. Addressee: Usually shareholders or those charged with governance.
3. Opinion:
   • States that financial statements present fairly, in all material respects, in accordance with applicable framework.
4. Basis for Opinion:
   • Reference to ISAs.
   • Independence and ethical responsibilities.
5. Key Audit Matters (KAMs) (for listed entities).
6. Responsibilities of Management and Those Charged with Governance.
7. Auditor’s Responsibilities for the Audit of the Financial Statements.
8. Report on Other Legal and Regulatory Requirements (e.g. Companies Act).
9. Signature, auditor’s address, and date.

BCom Taxation intersection:

• KAMs may relate to complex tax balances, contingent tax liabilities, or significant judgements about deferred tax assets.

6.2 Modified Opinions (ISA 705)

Three main types:

1. Qualified opinion:

   • Misstatement is material but not pervasive, or
   • Inability to obtain sufficient appropriate evidence is material but not pervasive.

2. Adverse opinion:

   • Misstatements are material and pervasive.
   • FS do not present fairly.

3. Disclaimer of opinion:

   • Inability to obtain sufficient appropriate evidence is material and pervasive.
   • Auditor does not express an opinion.

Scenarios with tax relevance:

• Qualified opinion – misstatement:

  • Entity refuses to adjust a material understatement of income tax liability, but the misstatement is limited to tax and not pervasive to the entire FS.

• Adverse opinion:

  • Widespread intentional misclassification of income and expenses to evade tax, affecting multiple line items and disclosures.

• Disclaimer:

  • Records destroyed (e.g., in a fire) including key supporting evidence for revenue, expenses and tax balances; alternative procedures cannot provide adequate evidence.

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

Emphasis of Matter:

• Draws users’ attention to a matter presented or disclosed in the financial statements that is fundamental to their understanding.
• Does not modify the opinion.
• Example: Significant uncertainty related to a major SARS dispute that is adequately disclosed.

Other Matter:

• Refers to matters not presented or disclosed in the financial statements but relevant to users’ understanding of the audit, auditor’s responsibilities, or auditor’s report.

In exam questions:

• Clearly differentiate between modified opinions and Emphasis of Matter paragraphs.
• Explain why an uncertainty about tax liability that is adequately disclosed generally results in an Emphasis of Matter rather than a modified opinion, unless the disclosure itself is inadequate.

6.4 Integration with South African University Modules

Although this document focuses on UP’s ODT 300 in the BCom Taxation programme, the content aligns with typical topics found in:

• UNISA:

  • AUI2601 (Auditing Theory and Practice) and AUI3702 (Advanced Auditing).
  • Exam questions often mirror ODT 300 in testing ethical issues, audit risk assessment and reporting.

• Central University of Technology (CUT):

  • AUD300 (Auditing 3) for BTech/BCom students.
  • Emphasis on internal control systems, sampling, and reporting, with a similar risk‑based approach.

Understanding these alignments helps BCom Taxation students who might use resources such as “AUI3702 exam pack”, “AUI2601 past exam questions”, or “CUT AUD300 study guide” as supplementary material to strengthen their grasp of ODT 300 concepts.

6.5 Exam Technique for ODT 300 (BCom Taxation)

To perform well in ODT 300 exams:

1. Read the entire scenario carefully:

   • Identify which cycle (taxation, revenue, purchases, payroll, provisions) is being tested.
   • Highlight risks and key facts (e.g., rapid growth, SARS disputes, changes in tax law).

2. Use structure in written answers:

   • For risk identification: Start with risk, then explain why it is a risk.
   • For audit procedures: Verb + what + how + purpose.
     • Example: “Recalculate the current tax expense by applying the applicable 27% corporate tax rate to taxable income as per management’s tax computation, to verify the accuracy of the tax expense and the income tax payable balance.”

3. Link auditing to taxation:

   • When asked for audit procedures, include specific tax‑focused procedures where relevant (e.g. checking SARS correspondence, recalculating PAYE and VAT, examining deferred tax schedules).

4. Clearly mention assertions:

   • Tie each procedure to a specific assertion (completeness, existence, accuracy, valuation, rights and obligations, cut‑off).

5. Time management:

   • Allocate time according to marks.
   • Do not write full essays for low‑mark questions; focus on clear, concise bullet points.

6. Use South African terminology and context:

   • Reference SARS, IRBA, Companies Act 71 of 2008, and King IV.
   • Use local examples such as VAT rates, corporate tax rates, PAYE, UIF, and SDL.

6.6 Common Pitfalls to Avoid

1. Confusing tax compliance with audit:

   • Exam questions often ask for audit procedures, not how to prepare a tax return.
   • Focus on verifying information, not computing returns, unless the computation itself is the object of testing.

2. Ignoring independence issues:

   • When describing firms providing taxation services to audit clients, always consider independence threats and safeguards.

3. Vague procedures:

   • Avoid generic statements like “Check tax.”
   • Instead: “Obtain the SARS income tax assessment for the current year and agree the assessed amount to the income tax payable balance in the financial statements.”

4. Not updating for legislation and rates:

   • Ensure you use current tax and VAT rates applicable to the exam year, as indicated in your course material or exam paper.

These ODT 300 auditing exam notes provide a comprehensive, South African‑contextualised framework for BCom Taxation students at the University of Pretoria. Mastery of these concepts, combined with consistent practice of past papers and application to realistic scenarios, forms a solid foundation for success in ODT 300 and subsequent professional examinations in auditing and taxation.