Abstract
Orientation: Auditors have to exercise complex, multi-dimensional evidence-planning judgements. Research purpose: Drawing on social closure theory, the aim of this study is to develop a model to inform the flexible exercise of judgement regarding the types, extent and combinations of audit procedures implemented to gather sufficient appropriate audit evidence to respond to the assessed risks of material misstatement. Motivation for the study: The exercise of considerable judgements by auditors may mean that little consistency is achieved regarding the quantity and quality of the audit evidence obtained, especially in the public sectors of developing countries (which are often plagued by corruption), and where auditors and auditees have limited skills and experience. Research approach, design and method: The study employs a theory-building approach to develop a model intended to guide public sector auditors (following an audit risk approach), to exercise planning judgements for a class of transactions, account balance and/or disclosure. Main findings: The model clarifies the audit evidence decision-making sequences, interrelationships and contingent dependencies of the different audit procedures, and quantifies the compensatory inter-relationships between the types of audit procedures to be performed and the overall levels of assurance desired in response to the assessed risks of material misstatement. Practical and managerial implications: The model could aid public sector auditors to reduce uncertainty, ambiguity and judgement errors during their planning decision-making. Contribution or value-add: The model has been incorporated into the audit methodology of the Auditor-General of South Africa, and has been assessed for compliance with the International Standards on Auditing by the Independent Regulatory Board for Auditors in South Africa.
Highlights
Skills development is a fundamental necessity in developing countries, as it is central to capability enhancement and industrialisation, both of which increase national prosperity (Edigheji 2010)
This is reflected in the membership statistics of the South African Institute of Chartered Accountants (SAICA): of its 32 079 members, only 1415 (4%) members work in the public sector, and of the 10 189 members practicing as auditors, only 584 (6%) are in the public sector (SAICA 2016)
The model is aligned with the current International Standards on Auditing (ISAs), it relates better to the traditional audit risk approach than to the currently preferred business risk audit approach of large audit firms (Fogarty & Rigsby 2010)
Summary
Skills development is a fundamental necessity in developing countries, as it is central to capability enhancement and industrialisation, both of which increase national prosperity (Edigheji 2010). This study employs a theory-building approach (Strauss & Corbin 2008) to develop a model capable of guiding public sector auditors in the exercise of their planning judgement decisions for a class of transactions, account balance and/or disclosure. This article reports on a model developed to guide public sector auditors when required to exercise planning judgement for a class of transactions, account balance and/or disclosure. The extent of audit evidence required to obtain reasonable assurance that the financial statements do not contain a material misstatement varies inversely with the auditor’s materiality judgement (Blokdijk, Drieenhuizen & Dan 2003): First building block: Based on a risk assessment at the overall financial statement level, perform a risk assessment at assertion level for classes of transactions, account balances and disclosures, and distinguish between two risk categories, namely, ‘significant’ and ‘non-significant’.
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