Governance, Audit and Assurance
ACC4025H
Week 1: Substantive Procedures
1.
2.
3.
4.
ISA 330
ISA 500
ISA 505
ISA 520
Overview of the Audit Process
● Directors responsible for FS and make claims on these (assertions)
● Auditors responsible for making an opinion
Stages the Auditor needs to go through:
1. Pre-engagement: Accept client or not?
2. Planning: Construct an audit plan - have a good understanding of business WHY? - to assess ROMM (overall FS level - influences planning materiality (if
high ROMM then lower Planning materiality) & assertion level), consider audit
strategy, approach (nature: SP or combined approach), plan, programme (list of
all procedures to perform)
3. Risk Response stage - gather sufficient and appropriate audit evidence
4. Evaluation & Concluding stage - Formulate audit opinion (assessing going
concern, unadjusted differences (what the auditor believes vs what the client
believes) - list compared to the final materiality level to identify whether the
unadjusted differences are material because these will influence the type of audit
opinion
King IV and Legislative issues are pervasive to the entire process
What is a Substantive Procedure?
● Detected material misstatements, without relying on controls
● They respond to the ROMM at an assertion level
○ By gathering audit evidence to support the assertions
● Categorised into:
○ Tests of Detail
■ Directly tests the underlying items making up the balance/
transaction for MM, without relying on controls
AND
○ Analytical Review Procedures (ARPs)
Substantive Procedures: Approach
Part 1 of 2 - General Approach to Formulate SP
- In Week 11 notes - done!
Step 1: General Procedures (Common Student Omissions)
● SSS AAAA EAT CRAP
● System
● Schedule
● Sample
●
●
●
●
Accounting
Arithmetic accuracy
Agree
Allowances
● Expert
● ARPs
● Tax
● Confirmation
● Representation
● Adjusting entries
● Present value
System
● In order for the auditor to obtain reliable audit evidence, information produced by
the entity that is used for performing substantive procedures needs to be
sufficiently complete and accurate. ISA 500
● If you are using information produced by the system to perform your substantive
procedures, you need to determine whether you can place reliance on
information produced by the system. (i.e. is the information accurate and
complete?)
● Procedure:
– Inspect the results of the working papers dealing with the operating effectiveness of
controls over the system to ensure that the system produces reliable information.
Schedule
● A schedule is a more detailed breakdown of an amount being audited
e.g. debtors balance broken down into individual debtor balances
● Procedures:
– Obtain a schedule of (what?) from (who?)
– Cast the schedule (adding down)
● May need to also cross-cast (adding across)
– Agree the total of the schedule to the trial balance, general ledger and AFS to
ensure consistency in the accounting records
– Inspect the schedule for discrepancies such as blanks, duplicates etc for
overall reasonability of the schedule
Sample
● This involves auditing less than 100% of the population.
● Do you need to audit a sample?
● Procedure:
– Select a sample of (what?) from (where?) and (describe the substantive
procedure(s) you will perform on the sample)
E.g. Select a sample of revenue transactions from the sales journal and
agree the amount recorded per the sales journal to the VAT exclusive
amount per the related invoice.
● When selecting your sample, take note of the direction of testing.
● This could be relevant if a question requires you to gather audit evidence to
support certain assertions.
Accounting
● Reminder!
● You will audit the accounting in step 2 of the approach.
Arithmetic Accuracy
● Procedures:
– Reperform the (what?) calculation for arithmetic accuracy
– Cast and cross cast the (what?)
● Ignore if already performed procedure under “schedule”
● Doesn’t matter whether you cover this under step 1 or step 2 of the approach.
● However, marks are capped.
Agree
● Procedures:
– Agree the opening balance to the prior year audited trial balance
● Ignore if the entity was incorporated in the current year i.e. opening
balances will be 0.
– Agree the closing balance/figure to the general ledger, trial balance and AFS
● Use common sense here.
● Not all figures can be agreed back to the trial balance/AFS as you need to
consider the detail that the trial balance/AFS will include.
(cannot agree back PPE acquisitions to the AFS or TB because the amounts represent
the total and does not breakdown the details per PPE acquisition)
Allowances
● Reminder! - asking whether or not you need to audit any impairment
● Do you have to audit impairment issues?
● Auditing impairment should come through when applying Part 2 of the approach
i.e. “subsequent measurement” when working through the accounting.
Expert
● Do you have to use an expert?
● Procedures:
– Use a (what expert) to perform (what task).
– Assess the competence, objectivity and capabilities of the expert by:
● Inspecting their qualifications/proof of membership to professional bodies
(if applicable) etc
● Through discussion with management and the expert
● Inspect their work performed for assumptions/methodologies used and
evaluate whether the results are reasonable in light of IFRS (specify what
IFRS?) and other audit evidence gathered.
● Reperform any calculations performed by the expert for arithmetic
accuracy (if applicable)
ARP
● Reminder!
You will cover ARPs in step 4 of the approach
TAX
● Unless the question has specific tax issues, usually only worth one mark.
● Procedure:
– Reperform any related tax calculations for arithmetic accuracy and
reasonability.
● If there are specific tax issues in the paper, cover the tax in step 2 of the
approach.
● Be guided by mark allocation and other issues in the question.
Confirmation
● Reminder!
● Send confirmations to relevant third parties/counterparties (if applicable)…
● You’ll cover this under step 2 of the approach.
E.g.
With the permission of the client, confirm, in writing, the loan value and related terms
and conditions with the bank to ensure the accuracy and validity of the loan.
Representation
● The auditor may consider it necessary to request management to provide written
representation about specific assertions in the financial statements. ISA 580
● Procedure:
– Obtain a management representation letter dealing with (mention the
applicable assertions) of (mention the specific account).
E.g.
Obtain a management representation letter dealing with the occurrence, accuracy,
classification and cut-off of revenue.
Adjusting Entries
● Reminder!
– If there are any adjustments processed by management related to the account
you are auditing, audit those adjustments.
● As a result of performing substantive procedures, the auditor may find
misstatements.
● Procedure:
– Transfer any unadjusted audit differences to the schedule of unadjusted audit
differences and discuss the effect on materiality with management.
● More on the schedule of unadjusted audit differences later in the course.
Present Value
● Reminder!
● When working through the accounting (step 2 of approach), do amounts have to
be present valued?
Exam Technique Tips 1
● Look out for procedures that have already been performed.
– These are usually scoped out by the required.
● Be guided by the mark allocation and the other issues in the question in terms of
how much to write.
● These marks will usually be capped.
● Writing out your answer:
General procedures
XXX
XXX
Revenue
XXX
XXX
STEP 2: WORKING THROUGH THE ACCOUNTING, TAX ETC
a. Using the Accounting/ tax etc as your starting point
Revise integration with other subjects to cycles
b. Identifying the source of info
Know the chain of source documents, journals, reconciliations and trial balance
for each cycle
Summaries worksheet provided
STEP 3: USING THE ASSERTIONS TO IDENTIFY ROMM
Lecture Video 4: Explaining the Assertions
Gone through previously
STEP 4: ANALYTICAL REVIEW PROCEDURES
Substantive analytical procedures
Read ISA 520
Definition per ISA 520:4
● Evaluations of financial information through analysis of plausible
relationships among both financial and non-financial data.
● Analytical procedures also encompass such investigation as is necessary of
identified fluctuations or relationships that are inconsistent with other
relevant information or that differ from expected values by a significant amount
Examples of types:
● Comparisons and analyses of ratios and relationships…
…among financial and non-financial data
● Trend analysis
● Actual vs auditor expectations
Formulate expectation that is appropriate in the circumstance and then compare this to
the actual figure for reasonability
● Compare actual figures to:
● Budget
● Industry data
● Prior year, etc.
In summary, ARP’s should relate to three categories
1. Prior period vs current period (eg. year on year. month on month etc)
2. Actual vs budget
3. Movement in key ratios
When can you do Substantive Analytical Procedures?
● Considerations on whether analytical procedures are suitable for use. (ISA 520:
A6 – A10)
● Reliability of the data (ISA 520: A12 – A14)
● To address a significant risk, you cannot do substantive analytical procedures
alone (Must do tests of details or test controls as well)
Writing out a Substantive Analytical Procedure
Perform the following analytical review procedures:
1) Applied detail (eg compared.. to..)
2) Applied detail (eg compared .. to..)
Discuss any unusual or unexpected movements with management and corroborate their
explanations received by inspecting supporting document (provide an applied example
here eg. new sales contracts)
Substantive Analytical Procedures
- Potential risk of material misstatement.
- Follow up reasons
- Do additional audit procedures
APPLYING THE GENERAL APPROACH TO GOODWILL
Practical Example:
Q: Describe the Substantive Procedures (ToD & ARPs) for goodwill arising from the
cash acquisition of 100% of the share capital of a listed company
Risk: Incentive to manipulate - Overstate of assets
Approach:
1. Have I covered the general SP?
General Procedures:
a. Obtain goodwill calculation
i. Cast
ii. Agree to GL, TB and AFS
b. Obtain mgt rep. Letter
2. Do I have to audit the accounting/ tax etc?
a. Initial Recognition of goodwill
i. When?
1. Accounting issue:
a. Recognise goodwill when control is obtained = date of
transfer of 100% of the share capital
2. Source of information (where you getting the info’ from)
a. Purchase contract
b. Share register
c. SENS announcement - listed company
3. What can go wrong? (ROMM)
a. Goodwill is recognised but no control has been
obtained
4. What can you do to sleep at night? (Test of details)
a. Inspect the purchase contract (source of info’) for:
i. Names of acquirer and acquiree
ii.
Terms and conditions associated with the sale
(give details)
iii. Signatures of both parties
b. Inspect the share register for:
i. Date of transfer of the shares and
ii.
The applicable % transferred
c. Corroborate by inspecting SENS announcement
(because it's listed, a way of backing up the sale)
ii.
Amount?
1. Accounting issue:
2. Source of information:
a. Purchase contract/ bank statement
b. Management of acquiree/ management accounts of
the acquiree
c. Valuation expert
d. IAS 12 and Income Tax Act
3. What can go wrong? (ROMM)
a. Goodwill incorrectly calculated due to:
i. Incorrect inputs (ROMM)
ii.
Arithmetic errors (ROMM)
4. What can you do to sleep at night? (Test of detail)
a. Agree the following inputs per the goodwill calculation
i.
ii.
Purchase price to the purchase contract and
bank statement
Book value to management accounts of the
acquiree
1. Corroborate the above through with the
management of the acquiree
b. Use a valuation expert to obtain the FV of the Net
Assets acquired
i. Assess the competence, ethical and reliability
of the expert and their work performed
1. Through inspection of work performed &
qualifications
2. Discussions with others (experts, expert
themselve, management (if own), in
field)
c. Reperform the deferred tax on the FV Adjustments
d. Reperform the calculation of goodwill
Presentation and Disclosure
4. Are analytical review procedures applicable?
They are within the scope of the question, however the are n/a because it is a once of
transaction.
PY = 0
CY = 100
Also no actual vs budget because will not appear in budget
SUBSTANTIVE PROCEDURES: EXAM TECHNIQUE
Analysing the required
● Audit procedures
– Tests of controls (Are there controls to test?)
– Substantive Procedures
● Substantive procedures
– Tests of detail
and
– Analytical review procedures
● Look out for audit procedures that have been scoped out
Sampling
You may need to perform your substantive procedures and ToC on a sample basis.
“Select a sample of (what?) from (where?)”
E.g. Select a sample of revenue transactions from the sales journal…
Take note of the direction of testing – covered in Week 10.
Tests of detail
1) Audit Verb
2) What document/thing
3) For what information
4) For what purpose
Select a sample of revenue transactions from the sales journal and inspect the related
delivery notes for the date of delivery to ensure the revenue was earned.
Use of audit verbs – ISA 500
•Inspect A14 – A16
–This includes “Agree”
•Observe A17
•Confirm A18
–See also ISA 505
–“With the client’s permission”
•Reperform A19 – A20
•Enquire A22 – A23
When using the word “assess”
● You may need to use the audit evidence gathered from substantive procedures to
form an idea of the amount or treatment of a balance/transaction
– This is usually used when the amount/treatment is subjective
● You will form the idea using a point of reference
– Through inspection of the description of costs on purchase invoices and
discussion with management regarding the nature of the costs incurred, assess
whether the costs meet the criteria to be capitalised in terms of IAS 16 (this is
your point of reference).
Analytical review procedures
ARP normally applicable for large routine transactions
Covered in GAA II
See ISA 520
Ignore ARP if required asks for “tests of detail”!
More applicable for:
● Large volumes of transactions that tend to be predictable over time A6
● Avoid generic answers from A1 and A2 – must apply
Perform the following analytical review procedures:
● (Detail)
● (Detail)
● (Detail)
Follow up on any discrepancies identified through discussion with management.
Corroborate the responses received by management by inspecting relevant source
documents such as… (specific source documents linked to account)
Financial Reporting Class Notes
ACC4023W
Week 1: Groups (Subs with PS, Vertical Holding, Changes in
SH)
●
●
IFRS 10: para 1-2, 6, 19-24 (including B86 to B96)
RE-READ paragraph B95 again: "If a subsidiary has outstanding cumulative preference
shares that are classified as equity and are held by non-controlling interests, the entity shall
compute its share of profit or loss after adjusting for the dividends on such shares, whether
or not such dividends have been declared."
An investor is a parent if it controls an entity irrespective of the nature of the
involvement in that entity i.e. a parent could control another entity even if it legally owns
no shares in that entity (see IFRS 10:5). Further, an investor has control if it has (B2):
●
●
●
power over the investee,
exposure, or rights, to variable returns from its involvement with the investee, and
the ability to use its power over the investee to affect the amount of the investor’s
returns.
Taxation Class Notes:
ACC4002H
Week 1 - VAT
VAT Registration
Vendor
● Any person who is or is required to be registered for VAT in terms of the Act
Refer to the registration requirements (s23):
s23(1) Compulsory Registration
s23(3) Voluntary Registration
1. Person: NP, JP, CC, etc
1. Person
2. Enterprise
2. Enterprise
3. Value of TS > R1 000 000
3. Value of TS > R50 000
(have exceeded R1m in the previous 12
month period or have reason to believe
that it (must be written contracts in place)
will exceed R1m in the following 12m
period)
(previous/ following)
● VAT registration is attached to the legal person (an individual/ company/
partnership as a whole).
● Therefore, if there is an individual that carries on multiple enterprises, each as
sole proprietorships, the VAT registration would attach to the individual and not
the separate enterprises.
● This is because the individual will be the legal person in this case and not the
enterprises.
● This means that if an individual registers at a VV, then the individual will be
a VV in respect of all the enterprises that are carried on by that individual.
ALTERNATIVELY,
● In the case of a Company, VAT registration would register to the company as a
whole, irrespective of whether the company's enterprise is carried on in separate
branches, divisions ro enterprises.
● Example, Company A has 3 separate Branches [ Branch 1 (CT), Branch 2 (Jhb),
Branch 3 (Dbn)], therefore if Company A was to register as a VV, it would be for
the company as a whole and not its separate branches because Company A is a
legal person and not the separate branches
● It follows then that any inter-company transaction between the separate
branches are transactions within the same legal persona and VV. therefore
between Company A and Company A itself. And these intercompany
transactions will thus not attract VAT.
Input Tax
Module 1 - Example 4
CSARS v Respublica
CSARS v Master Currency
Stellenbosch Farmers’ Winery v CSARS
XO Africa Safaris v CSARS
ICA & Rental Agreements
Transfers to Foreign Branches
CSARS v British Airways PLC
The Connected Person Rule
The VAT Consequences of Fixed Property
Module 2 - Example 7
CSARS v De Beers
Imported Services
Change in use adjustment