AUDITING
288
Disclaimer
General
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from the textbooks & personal class notes. Please note that though these summaries are very thorough
they should only be used as a study aid in conjunction with your class examples, slides, textbooks &
attending class. They should by no means be used as a substitute for any of the above.
These notes were compiled for our own studying purposes to the best of our abilities so we apologize
should you find any errors. We hope they will benefit and assist you in your academic journey this year
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Audit 288
Cycles
By the end of auditing, second-year cycles will be your best friend. Find the most effective way for
yourself to understand and know the cycles off by heart. In these summaries you will find two different
ways namely - past memos (out of experience the best and simplest way to memorize them) and
theory. It’s important to practice weakness questions on cycles. If you study hard enough and practice
how to answer the questions you can do well.
Structure of the summaries regarding cycles:
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Sales & Receipts and Purchases & Payments – Theory of the cycle and then the perfect cycle
memo.
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Bank and Cash – memos are incorporated in the theory and there is a cash register overview at
the end.
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Inventory and Production – memos are incorporated in the theory and there is an extra summary
of the documents for the production cycle included at the end. Please note that the Payments &
Purchases cycle, as well as the Sales & Receipts cycle, is incorporated into this cycle and
therefore some of this cycle’s information will be a repetition of previous cycles.
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Salaries and Wages – memos are incorporated into the theory.
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Investment and Financing – was a self-study section, however, you can find typical questions
asked on this cycle at the end of the section in these summaries.
Ethics
Know this section off by heart, although it might seem impossible at first, it is manageable if you focus
on the key aspects of each section. Also, know which sections fall under which part of the act - there is
a summary of each section included.
When answering questions for Ethics:
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List the threats
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List 4 factors
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Apply these factors to the scenario
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Make a conclusion about the significance of the threat
See at the end of the section some useful memos and an overview of all the sections.
Audit risk
Use factors listed in the table as a guideline, note that there may be others and therefore it is important
to practice questions to make it easier to identify risks.
Audit materiality
Theory and memos are included at the end of the section in these summaries, you can memorise the
memo to help you answer questions.
Overall audit approach
Study memos at the end of the section.
HEBREWS 11:1
Table of Contents
TERM 1
1.
Introduction and background
2.
Internal control and introduction to cycles
3.
Revenue and receipts cycle
4.
Purchases and payment cycle
TERM 2
5.
Bank and cash cycle
6.
Inventory and production cycle
7.
Salaries and wages cycle
8.
Investment and financing cycle
9.
Ethics: Rules of improper conduct & Auditing profession act
TERM 3
10.
Ethics: Code of professional conduct
11.
Pre-engagement activities
TERM 4
12.
Audit risk
13.
Audit materiality
14.
Overall audit approach
15.
Audit evidence
1. INTRODUCTION AND BACKGROUND
Auditor
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Satisfy himself to the truth of bookkeeping of others.
Must remain independent. (NB!)
Duties and responsibilities of an auditor
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To communicate opinion;
to investigate annual financial statements;
to ensure that appropriate accounting records have been kept in accordance
with the Company’s requirements
that minute books and attendance registers in respect of company, directors’
and managers’ meetings have been kept in the appropriate form as required
by the Companies Act
to acquire all the information and explications that to his knowledge and
conviction are necessary for the purpose of the performance of duties;
to ascertain that annual financial statements agree with his accounting
records and accounts;
to investigate accounting records of company and to perform tests and other
audit procedures he finds necessary to ensure that annual financial
statements
reasonably reflect the financial position of the company and
the results of its operations - in accordance with generally accepted
accounting practice, applied on a basis that is compatible with that of the
previous year;
directors’ report: is not in breach of or its meaning distorted with a reasonable
interpretation of the annual financial statements and accompanying notes;
to adhere to any appropriate requirements of the Auditing Profession Act at all
times.
What is an audit?
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definition of an external audit
It is the systematic process of the
collecting and evaluating of evidence and information objectively
of assertions on economic operations and events made by management of
an entity.
in accordance with laid-down criteria, quantitative and or qualitative.
Results are communicated to users in writing.
Elements of the definition:
Systematic process
• An audit entails the auditor following an organised and logical process.
• Including: pre-engagement, planning, obtaining evidence, evaluation, conclusion and
reporting.
Obtaining and considering evidence and information
• that is: sufficient and appropriate about management’s assertions on for example: the
account balances, classes of transactions and disclosure.
It must be done objectively
• No personal interest or bias.
Evidence regarding assertions about economic events and actions
• Representation management regarding transactions and balances
Evaluate correlations of assertions with predetermined criteria (IFRS)
• Qualitatively
• Quantitatively
Communicate results
• Must be in writing
• Reflects audit opinion
To users
• E.g. Investors, financiers, shareholders, employees, government, creditors, debtors.
Objective of an audit
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Not:
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Purpose
To express an opinion on the financial statements
Providing assurance that they are free of material misstatements (e.g. error
or fraud), and
that they are a fair representation in all material aspects (reasonable
assurance)
of the financial position and performance of the company in accordance with
the appropriate financial reporting framework.
Guarantee existence of a company
No objective to defeat fraud
Explanation of the objective (discuss or comment on the objective of an audit)
The auditors’ opinion:
• Enhances the credibility of the financial statements, but
• Does not warrant the future feasibility of the business; and
• Does not warrant the capability and effectiveness with which management
manages the operations of the entity.
Reasonable assurance
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why can an auditor only provide reasonable assurance?
An audit is performed in accordance with IAS’s and provides reasonable
assurance that the statements are overall free from material misstatement.
The inherent limitations of an audit may, however, be the cause of material
misstatements not being traced.
Inherent limitations of an audit:
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TEST
The nature of financial reporting where management uses judgement in
preparing financial statements when applying IFRS and making estimate.
The nature of audit procedures performed when considering practical and
legal limitations on audit.
The fact that documentation and explanation provided by management on
which to base conclusions may be intentionally or unintentionally
incorrect.
Management may try to hide fraud.
Timeliness of financial reporting and balance between benefit and cost.
Reliability of evidence versus cost.
Time and resources available.
The use of sampling and not 100% testing when performing the audit.
Structure of accounting and auditing profession
Audit profession
SAICA
IRBA
(South African Institute of Chartered Accountants)
(Independent Regulatory Board of Auditors)
Main purpose is to protect and promote the
interest of CA’s in SA.
Main purpose is to protect and promote the
interest of investors, public as well as
support auditors.
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Mastery of intellectual skill
Acceptance of duties to society
Objective outlook
Rendering service to a high standard
Established in 1980.
Non-profit and voluntary.
Serve the interests of both CA’s and the
public.
Upholds the professional standards of
CA(SA) nationally and globally.
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Main activities of the board include:
- Sets and applies the requirements for
registration
- Sets and maintains auditing ethics based
on global standards
- Performs inspections of audit work
- Provides procedures for disciplinary
procedures
IFAC
IAASB
(International Auditing and Assurance Board)
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Different types of services
i.
Assurance
Reasonable assurance engagement, e.g.
financial statement audit.
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Registration is a requirement to practice as
an auditor.
Requirements for registration include
meeting the competency and professional
development requirements of IRBA.
Established by the Auditing Professions
Act of 2005.
(International Federation of Accountants)
Strive to comply with audit practices by
strengthening the audit profession and
developing strong international economies.
Attempts to harmonise audit practices
worldwide.
Speaking out on public issues where the
profession’s voice is most relevant.
Is also South African based.
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Management’s obligation to
shareholders:
- Reporting the company’s financial
performance, financial position and
cash flow position.
- In the form of financial statements
that comply with IFRS.
IFAC’s standard-setting committees.
Authority to develop and issue audit
standards (ISA’s).
Independent standard-setting body.
Promotes high-quality international
standards for auditing and assurance.
Harmonise audit practices globally.
• The external auditor’s (appointed by shareholders) duties:
- Express opinion on the fair presentation of management’s financial
statements i.t.o. compliance with IFRS.
- Provide a degree of confidence for the users of the financial statements (e.g.
audit report providing opinion over AFS)
Limited assurance engagement, e.g. independent review
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Auditor draws a conclusion and expresses an opinion in terms of suitable
criteria. (E.g. a financial reporting framework – IFRS)
Assurance provided is more limited.
Auditor applies a process prescribed by the International Standards on
Review Engagement (ISREs).
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ii.
Non-assurance
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Practitioners perform engagements where no opinion (assurance) is
provided. (E.g. compiling tax return)
• Consultation services
- Technology
- International
- financial planning
- taxation
• Compilation - preparing financial statements.
• Agreed-upon procedures.
Assurance engagements
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An engagement in which an auditor expresses a conclusion
designed to enhance the degree of confidence of intended users
about the outcome of the evaluation or measurement
of the information against predetermined criteria.
Different types of audits
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Financial statement audit
Compliance audit
Operational or Performance audit
The different types of auditors
i.
Independent auditor (external auditor)
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Not an employee of the entity - works for an external auditing firm.
Auditors express an independent opinion.
Provides third parties with assurance about the auditee’s financial statements.
Increases the level of confidence and willingness to use financial statements
as a basis for making economic decisions.
ii. Internal auditor
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An employee (or outsourced provider).
Provides the employer independent, objective assurance and consulting
services.
Designed to add value and improve employer’s operations.
Creates a systematic, disciplined approach to evaluate internal controls and
governance processes.
To ensure independence, the internal audit department reports to the audit
committee (comprises exclusively independent non-executive directors).
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External Auditor
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Audit (External)
Not employees of entity.
Report to shareholders.
Legislation: Companies Act & APA.
Independent
Provides assurance.
IRBA
Internal Auditor
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Internal management function.
Employees of entity.
Report to management. (Audit
committee)
Board of directors.
Independent (objective)
Provides assurance.
IIA
iii. Government auditor – Public auditor
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Objectively performs investigations of local and national government
departments.
Issues reports to the government.
Aim: increase the confidence of stakeholders in government departments’
functioning and reporting.
Government auditor of SA called the Auditor-General. (Kimi Makwetu)
iv. Forensic auditor
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Performs an independent investigation into fraud or fraudulent activities.
Forensic auditor issues report to the party that appointed him/her – report can
be used in a court of law.
Private audits
Public sector
External Audit
• Audit of entities (Companies, CC’s, Trusts
etc.)
• In terms of The Auditing Profession Act 26
of 2005
• Audit of:
- Financial statements
Auditor General
• Audit of government (National, provincial,
local)
• In terms of The Public Audit Act 25 of
2004
• Audit of:
- financial statements
- compliance with laws and regulations
- performance in terms of
predetermined objectives
Company act requirements
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Directors/Company:
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Fin year-end date
Accounting Records
Compile Annual Financial Statements (AFS)
Approve and Annual General Meeting (AGM)
Section 27-30
Section 27
Financial year
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Section 28
Accounting records
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Section 29
Financial statements
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Section 30
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Annual financial
statements
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Company must have a
financial year.
Financial year must be
a company accounting
period.
A company must keep
accurate and complete
accounting records in
one official language
of republic.
Financial reporting
standards (IFRS)
Fairly presented
Show companies
assets, liabilities,
equity, expenses and
income.
Accounting period.
Prepare AFS 6
months after year-end.
Public company AFS
must be audited.
Other companies i.t.o.
PIS-score/voluntary.
Auditor
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every public company must appoint an auditor and when PI score is more than 350.
with inception- members or directors
otherwise Registrar
annual appointment
access to records, books, documents, info & explanations
report to members
other responsibilities
Section 90-93
Section 90
Section 91
Appointment of Auditor
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Resignation of Auditor
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At Annual General Meeting
(AGM)
Registered Auditor (RA)
Designated individual.
Effective when notice of
resignation is filed.
Section 92
Rotation of Auditor
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Section 93
Rights and restrictions of Auditor -
Cannot be same individual/
designated auditor for more
than 5 years.
Unrestricted access to all
accounting records and
required information.
Public Interest Score (PIS)
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Method to assess companies public interest.
Act prescribes audit or review based on this.
Calculation:
- 1 point per employee.
- 1 point per R million or part thereof of Turnover.
- 1 point per R million or part thereof 3rd party liabilities at year-end.
- 1 point per individual who has a beneficial interest in the securities in issue
by the company.
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Summary for a private company:
Auditing postulates
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To postulate: to assume or claim as true, existent, or necessary.
These postulates provide the outline for the theory of auditing.
Also, the basis of the IFAC International Code of Ethics for Professional
Accountants.
It can be summarised as follows:
i.
Truth and fairness
• Financial statements and financial data is verifiable.
- It is possible to verify a client’s financial statements.
- Necessary to make it possible to perform an audit.
- Auditor verifies whether the financial statements are true and fair or not.
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Financial statements and other information submitted for verification are free
from collusive and other irregularities.
- Auditor can assume that management has taken necessary steps to ensure
that there has been no deliberate attempt to misstate financial statements.
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Consistent application of generally accepted accounting principles results in
fair presentation of financial position and the results of operations.
- Assumes that if clients apply one of the financial accounting frameworks
(e.g. IFRS), fair financial presentation will occur.
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In the absence of clear evidence to the contrary, what has held true in the
past for the enterprise under examination will hold true in the future.
- If no evidence is found to the contrary, the auditor assumes that the integrity
of the management of the company will stay the same in future years.
ii.
Independence
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There is no conflict of interest between the auditors and the management of
the enterprise under audit.
- Assumes that management and the auditor share the same goal, namely
that financial statements provide fair presentation.
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The professional status of the independent auditor imposes commensurate
professional obligations.
- The professional status of the auditor brings the responsibility of
professional behaviour, competence and due care, objectivity and integrity.
- Also assumes he/she is competent to perform audit.
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When examining financial data for the purpose of expressing an independent
opinion theron, the auditors act exclusively in the capacity of auditor.
- For audit opinion to be reliable, auditor must be reliable and objective.
- His focus is to express an opinion on the financial statements.
- Other services are excluded.
Audit Process overview
Accounting vs. Auditing
2. INTERNAL CONTROL AND INTRODUCTION TO CYCLES
A. Internal control system – Management
The process designed and effected by management to provide reasonable
assurance about achievement of entity’s objectives relating to:
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reliability of financial reporting
effectiveness & efficiency of operations
compliance with laws & regulations
Internal control can only provide reasonable
assurance due to following inherent limitations:
1. Cost vs. benefit
• Management can and only will implement
internal controls that are cost-effective to
the organisation.
• They will not implement all of them in the
case where some may not be feasible.
2. They are directed at routine repetitive transactions
• This is time-consuming
• Cannot be out of the ordinary transactions, as these are more susceptible to
error and fraud.
Can be asked to list limitations
or identify in a scenario
3. Human error
• Such as an employee’s misunderstanding of an internal control measure.
4. Collusion for the circumvention of internal control measures
• Where people from different departments work together in order to override
internal controls.
5. Abuse of responsibilities of internal controls
• Such as fraud or management overriding the system.
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Cost vs. benefit
Routine transactions
Human error
Collusion
Abuse of responsibilities
Inadequate control
6. Control becomes inadequate
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Due to change in environment, operating procedures, policies, the system
controls may become redundant and inadequate
Therefore, internal controls need to be changed over time.
B. Internal control system – Auditor
Reason for understanding Internal Control
An auditor should obtain an understanding of internal control for:
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Risk evaluation
Identify types of potential material misstatement.
Consider factors influencing material misstatements.
Quantifying and prioritising these risks.
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Response to controls as evaluated
React to risks in order to:
Influence the nature, extent and timing of further audit procedures.
Decreases the risk of material misstatement.
The entity must consider the risk appetite, which is how much risk they are
willing to accept to achieve their objectives and,
The level of risk tolerance the entity can handle.
The risk that remains after treating the risk with the appropriate response is
the residual risk.
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What this understanding is used for
WHY?
WHAT?
• Design and implementation of IC
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Controls design must be evaluated to ensure control is capable of preventing,
detecting, and correcting material misstatements.
Ensure controls exist and are used effectively by the entity.
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Evaluate applicability or risk
Risk assessment
Procedures to obtain audit evidence about risk pertaining to design and
implementation of controls such as inquiry, observation, inspection and
tracing.
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Tests and measurement
Only observation is not sufficient to obtain audit evidence.
Tests of controls must be performed to ensure the effectiveness of the
controls.
Internal auditor must:
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Understand why IC is needed = WHY
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Apply understanding = WHAT
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Know how to gain knowledge = HOW
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Generate documents = DOC
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Internal Auditor = focus on operational goal
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External auditor = focus on financial outcomes
HOW?
How is this understanding gained?
Sources of knowledge regarding the accounting system and internal controls can be
obtained from:
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Previous experience and knowledge from prior works papers.
Discussions and enquiries with staff to obtain feedback about the
feasibility of IC system.
Read manuals pertaining to internal controls regarding how each department
operates.
Inspect documentation and records to ensure authorisation and
responsibility and that it is signed.
Observation to view how internal control procedures executed.
Walkthrough tests by physically following the internal control procedures
from start to end.
Documentation required by internal auditor
Documentation
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Systems description
Detailed description of the system functions and operates.
Flow of information in a department.
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Internal control questionnaire
IC can be preventative (E.g. credit limits) or detective (E.g. reports on failed
controls)
Analysis of internal controls must be conducted, and questionnaire must be
filled in.
If yes = sound internal controls exist and function properly.
If no = there are weaknesses in the internal controls.
Provide suggestions as to how controls can be improved and consider
compensating controls.
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System flow charts
Charts used to describe the system using standardised symbols.
Displays the flow of documents.
Sequence of events.
Staff and department duties and responsibilities within the entity.
Actions by management
Implement
Design
Maintain
Internal control process
Actions by auditor
Understand
Process
Internal control components
COSO Model
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Evaluation of the environment is important because an effective internal
control system is not possible if a favourable control environment was not
created.
This helps us to access the risk of material misstatement of the financial
statements.
Management will use a combination of the five components to design a
suitable internal control system. This can be applied to all entities, even
though the risks may differ.
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• Characteristics of an internal control system:
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Integrity and ethical values
Commitment to competence
Board of Directors and Audit committee
Management’s philosophy and operating style
Organisational structure
Assignment of authority and responsibility
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Human resource policies and procedures
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The five internal control components of COSO:
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Control environment
Risk assessment process
Information system
Control activities
Monitoring of controls
Control environment
This focuses on the entity’s governance and management functions i.t,o
internal control.
The attitude of management and awareness amongst employees plays a
big role.
If the actions of those responsible for the governance on internal control are
not positive it will not filter through the entity’s activities, leading to risks.
Risk assessment process
Entity’s process for identifying risks relevant to the financial reporting
objectives and how they are addressed.
This should be used to minimise loss and maximise opportunity.
A systematic and documented assessment should be conducted once a year,
but it should be continuously monitored throughout the year.
Information system
Procedures and records established by entity to initiate, record, process
and report transactions.
It must contain procedures and records from the accounting cycle and
business cycle.
The reports must be communicated internally to relevant employees and
management. Communication is a requirement for sound financial reporting.
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Control activities
Policies and procedures ensure controls are in place to achieve internal
control objectives.
These are later discussed as SCRAM.
Monitoring of Controls
Process to assess effectiveness of internal controls over time.
The implementation and application must be measured to detect and correct
any risk.
The internal audit function is responsible for performing assessments of the
effectiveness of a system and for providing assurance reports to the board
and audit committee
Information system for reporting – “Audit trail”
The accounting system documents the path that each transaction follows in the entity from where
the transaction is initiated to where it is disclosed in the financial statements. It is a system
whereby the information can be collected, recorded, classified, analysed, summarised and
interpreted.
1. Initiate
• The physical activities relating to where the transaction is initiated (E.g. the
customer placing an order).
2. Execute
• The performing of activities to complete the initiated transaction (E.g.
collecting the goods to be delivered and then delivering them).
3. Record
• The information applicable to each activity is recorded.
• This can be done in hard-copy, such as completing an order form, or by
electronic means such as ‘real-time’ systems.
4. Process
• The transactions are processed, and corresponding entries are made in the
accounting records.
• The requirements of the Companies Act in respect of the accounting records
were discussed in chapter 1.
5. Reporting
• The transaction is now included in the financial statements.
• The financial statements embody the representations made by management
explicitly or otherwise regarding the entity. (Also known as assertions as
discussed in chapter 1).
Control Activities
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Refer to those internal control measures, policies
and procedures that management designs and
implements to ensure that their objectives are
achieved.
Thus, control activities prevent risks and
ensure that if risks take place that they are
detected and appropriately addressed.
Segregation of duties – distribution of work
S
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S
Segregation of duties
C
Access Control
R
Independent Review
R
Documentation and Records
A
Authorisation
M
Monitoring
The segregation of incompatible duties – duties
that would put a person in a position to commit
error/fraud.
Reduces the probability that one person can commit error/fraud and hide it as though it occurred in the normal course of business.
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Enforce segregation of duties by:
- Ensure that no transaction is performed by the same person from beginning
to end.
- Segregate the following functions:
▪ Authorisation of the transaction
▪ Execution of the transaction
▪ Recording of the transaction
▪ Control over the assets involved, where applicable.
▪ Safeguarding of asset (e.g. if the same person deals with the assets,
theft could occur)
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People who have completed work should sign as evidence that they have
completed the task.
Person who is in charge of the assets should not be in charge of the financial
records.
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In scenario: look at the function(s) each employee performs – can’t perform more than one.
C
Access Control
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The logical and physical security in order to limit access to records and
assets.
• This can be done by:
- passwords and user ID needed to gain access
- Use of safes and locked rooms
- Security guards
- Documents can be protected through stationary registers.
Independent Review – double review
R
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The review of work to ensure accuracy.
Second independent person checks work completed by the first person and
signs or initials as proof that this has been done.
E.g. when calculations are performed.
Person reviewing can’t be the first preparer.
Documentation and Records – record procedure
R
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Document design
- Different types of forms used in the accounting system and how they are
filled out i.e. “PAID” on the cheque after use.
- Pre-printed - minimum by hand
- Pre-numbered
- Design and layout logical
- Space for initials
- Numerous copies - sent to different divisions
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Stationary Control
- Safeguarded (e.g. in a safe)
- There should be a register; sign when collected and when brought back.
A
Authorisation
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In terms of company policy.
Specific authorisation levels must be set by the manager, for:
- type of transactions/amounts
- value of transaction
- credit sales (must be authorised by management)
• Evidence of authorisation required, e.g. signature or letter.
NB: know who can authorise what (isolation of duties).
M
Monitoring
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Ensures the effectiveness of the system and detects problems.
Comparison (e.g. actual vs. recorded) - assess the whole process at the end
to see if everything worked e.g. the inventory account compared to the stock
count.
Reconciliations (e.g. sub-ledger vs. general ledger)
Reasons for differences must be obtained.
Distinguish form independent review, e.g. does not include checking of calculations etc.
Last part of the process (financial statements)
Cycles
Internal Control Objectives
VAC
Three steps for management when designing a control system
What is management responsible for?
Types of cycles
How does the business work?
The following business cycles can be identified
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Revenue and receipts cycle
This deals with selling the entity’s goods or rendering services to customers.
The collection and receipt of payments for the goods or services.
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Purchases and payments cycle
The entity orders and receives goods or services from suppliers.
Making the required payments for these goods or services received.
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Inventory and production cycle
Manufacturing of goods and safekeeping of inventory.
Recording of costs associated with manufacturing.
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Human resources cycle
The appointment and dismissal of employees.
Keeping record of working hours.
Keeping record of remuneration
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Investment and financing cycle
Entity’s acquisition of non-current assets.
Raising of funds (E.g. through owner’s equity or long-term debt), and the repayment of this.
Accounting for related investment income and financing expenditure.
3. REVENUE AND RECEIPTS CYCLE
A. CASH SALES
Transaction types and functions
Sales on Cash or Credit Accounts: Sales and Trade Receivables and Bank
Risks
What Could Go Wrong (WCGW)
When we accept and process the order (Initiate)
RISK
1. Fictitious order
CONTROL OBJECTIVES
Validity
2. Orders accepted with no inventory in
store
Bad business
3. Received orders not processed or
not acted up on
Completeness
With the granting of credit (Initiate)
RISK
1. Credit is granted to an uncreditworthy person
CONTROL OBJECTIVES
Validity
2. Credit not granted, or limits
amended i.t.o policy
Validity
When the goods are dispatched (execution)
RISK
1. Dispatch the goods even though
they were not ordered (no approved
order)
CONTROL OBJECTIVES
Validity
2. Goods ordered not dispatched at all
Completeness
3. Incorrect dispatch (i.t.o amount and
type). Compare physical goods vs
delivery note
Accuracy
With the invoicing and recording (process and record)
RISK
1. Goods dispatched are not invoiced
CONTROL OBJECTIVES
Completeness
2. Goods invoiced without the proof of
delivery
Validity
3. Incorrectly invoiced i.t.o details
(Price, amount, type, debtors’
details)
Accuracy
4. Transaction recorded in the incorrect Completeness
financial period
5. Not all invoices are recorded
Completeness
6. Recording in the wrong account or
posted incorrectly from SJ to GL
Accuracy
Difference between internal control objectives and internal controls
Controls
1. ACCEPT AND PROCESS ORDER
Must always be two people involved as everything written down must be checked. This process
occurs in the sales division.
A. When we accept and process the order
•
•
•
•
Customer orders are either in person, via telephone, mail, fax or agent.
An order form or requisition form is used.
The order clerk prepares a pre-numbered order form.
This includes details of the purchaser, description and amount.
•
Copies:
- One goes to the customer as evidence of the order executed,
- One goes to the Accounting Department as evidence that the order has
been received;
- One goes to the warehouse so that the order can be prepared;
- One copy is left with the order clerk (for our own records and to draw up the
invoice).
•
The order must then be sent to the credit manager
- He checks all the information entered or checks whether the client is a
member.
- Ensures that clients fill in credit from or authorises credit.
- He must then sign.
•
The order form should include:
- Prices as quoted to the client.
- The prices must be according to the approved price lists.
- The previous year’s sales levels must be checked to determine whether the
person qualifies for the approved discount
•
After this, the credit manager must:
- Compare the prices with the approved price lists to ensure that the clients
who were granted discounts do qualify for it.
•
-
The copy that remains in the department must then be:
Filed in number sequence and there must be a number sequence check and;
Outstanding orders must be followed up on.
B. When the granting of credit occurs
• New client
- There should be a credit application and approval
- Credit checks
- A credit limit should also be set
• Existing client
- Available credit
- Additional credit
2. DISPATCHING OF GOODS – WAREHOUSE
Delivery note - before the order is accepted it should be checked whether there are
inventories available.
•
In the warehouse:
- The order is sent to the warehouse.
- The storeman then sends an email to the sales department to confirm
receipt of the order.
- The chief storeman then instructs the packers to pack the order.
•
The delivery note must be:
- Pre-numbered and prepared by one of the storemen.
•
-
The delivery note must include:
Date of dispatch
The purchaser
The address
The description and amount in fivefold
•
Copies:
-
-
Two copies of the delivery notes accompany the goods (with which the
quality, quantity and description have been checked) that are sent to the
client.
One copy of the delivery note must be signed by the client and returned
with the delivery staff to the warehouse.
The order must be signed by the delivery staff to ensure that he is happy
with the condition of the goods.
•
Exceptions:
If the customer is not at home, the items must not be delivered (goods should not be left
unattended) must be returned to the store and kept in a separate area in the store.
This must then be noted on the delivery note and the delivery staff should sign as he is
receiving the goods back and the goods should be arranged to be dropped off at a different
time.
-
One copy is sent to the sales department as evidence that the order has
been executed.
One copy remains in the warehouse as evidence that inventories have
been dispatched
One goes to the inventory clerk so that the inventory records can be
updated and as evidence that the order has been executed.
Sometimes the last two steps can be combined.
-
•
The delivery note must be authorised and signed by the chief store
manager.
• Before the goods leave the warehouse the other storeman:
- Compares the physical goods with the order and the delivery note.
- Check the quality, quantity and description of the physical goods. This
ensures that the correct stock is dispatched.
- If there are any differences between the order and the goods this should
be notified to the order clerk in writing (not verbally).
•
A list should also be kept of items that are not delivered (in cases where
goods are not available. As soon as they are available he needs to inform
the order clerk so that the customer can be contacted to replace the missing
goods (for when goods are not available).
•
The number sequence of the delivery notes must be checked by the chief
storeman and outstanding items must be followed up.
•
The delivery register must be reviewed on a regular basis to ensure that all
the orders are delivered, this must be performed by the security guard.
3. INVOICING AND RECORDING
Dispatch division and store: Compare authorised sales order, physical stock and delivery note.
Sales journal (posted to debtors and general ledger)
•
Sales invoice:
- The signed delivery note is forwarded to the Invoicing Clerk who checks
the signature on the copy and agrees the copy with the order.
A pre-numbered sales invoice in respect of the goods is then made out in
duplicate.
•
Details:
- Information of the purchaser
- Sales transaction
- Amount owing
- Payment conditions
•
Copies:
- One copy is sent to the customer so that he can pay for the goods
delivered.
- One copy remains in the Accounting Department as evidence that the
goods have been invoiced.
•
The number sequence of invoices must be checked by the accountant and
outstanding items must be followed up.
•
The other invoicing clerk or accountant (segregation of duties) must:
- Agree to the information on the invoice with the signed delivery note and the
order form.
Every document must be pre- Check castings and VAT
numbered, pre-printed and
- Compare the price with the authorised price list. checked with an independent
review.
•
A file with orders (suspense file) for which no signed delivery notes have
yet been received must be kept and the sales invoice clerk or accountant
must regularly check this file.
•
The accountant will then post the invoice to the sales journal and then to the
debtors and general ledger.
•
The accountant must then do a monthly reconciliation at the end of the
month between the debtors' control account and the debtors' ledger and
signs as proof that this has been done.
Account or monthly statement
•
•
This document is part of the monitoring of control objectives.
At the end of the month, a pre-numbered monthly statement must be created
in two-fold.
• It is a summary of the transactions for a period, sent by the business to a
customer.
• Includes the following details:
- Invoices issued
- Payments made
- Discounts allowed
- Returns granted
- The end balance on the amounts owing
• Copies:
- One copy goes to the customer to inform the customer of their account
history or balance.
- One goes to the accounting department as a record of statements issued.
Payment advice slip
-
This is attached to the monthly statement indicating payment
This will be sent with the payment back to the business to match payment
to invoice.
B. Cash receipts
Transaction types and functions
Accounts: Bank and cash/debtors
Risks
What Could Go Wrong (WCGW)
Refer to control objectives.
When we receive money (initiate)
RISK
1. Theft of receipts
CONTROL OBJECTIVES
Validity
2. Receive the incorrect amount
Accuracy
When we deposit the receipts (execute and record)
RISK
1. All cash receipts are not banked
CONTROL OBJECTIVES
Completeness
Recording (process)
RISK
1. Recorded receipts never actually
occurred
CONTROL OBJECTIVES
Validity
2. Amount was recorded incorrectly
Accuracy
3. Amounts recorded in the incorrect
period
Validity
4. All receipts are not recorded
Completeness
Controls
1. RECEIVE MONEY
•
Cash receipt
- This is the payment by cash, cheque, and credit card, together with the
payment advice presented via mail or in person.
- To ensure good internal control, the mail must be opened by two people
and there should be a mail register.
•
Copies
- Once payment is received a pre-numbered cash receipt in two-fold is
issued.
- Details include: Details of the payee, the date and amount.
- One copy goes to the customer as proof of payment.
- One copy goes to the business’ own records of the accounting
department for recording the money received. This can be done in either a
receipt book or in a cash register roll.
•
The cash receipts must be kept safe and the accuracy is checked and
authorised by the manager and signed.
2. DEPOSIT RECEIPTS
Segregation of duties
Deposit cash daily
Cash receipts journal posted to GL and debtor’s ledger by a different person.
Bank reconciliation
Monitoring
Monthly reconciliations
•
-
Deposit slip
This is a bank document filled in by the business to record a deposit of
payments received from customers.
•
Details include:
- Date of deposit
- Details of the cheque
- Amount of the cash and cheque
- Total amount received
•
Copies
- This is printed by the accountant in two-fold.
- One copy goes to the bank for depositing of money received.
- One copy remains in the own records of the accounting department so
that the business can record money deposited.
•
The accuracy should be checked and authorised by management and
signed (SOD).
The depositing of cash should be done daily (SOD).
The deposit slip is then used to complete the cash receipts journal which is
posted to the GL and the DL (SOD).
•
•
•
Monitoring
- Monthly reconciliations must be conducted by the accountant.
- Bank reconciliation (between the cash book and the bank statement)
- Debtor’s reconciliation (debtors control vs. debtor’s ledger balance)
•
•
All these documents must be signed as evidence that they have occurred.
The recording and reconciliations of deposit slips must be done by
separate people.
C. RETURNS CYCLE
Transaction types and functions
Accounts: Sales and discount allowed or debtors
Risks
What Could Go Wrong (WCGW)
Receiving goods or granting a discount (initiate and execute)
RISK
1. Grant credit although goods are not
sent back
CONTROL OBJECTIVES
Validity
2. Discount not granted i.t.o policy
Validity
When the credit note is issued and recorded (record and process)
RISK
1. Incorrect discount on the credit note
CONTROL OBJECTIVES
Accuracy
2. All credit notes not accounted for
Completeness
3. Credit note incorrectly recorded
Accuracy
Controls
1. RETURNS AND GRANTING OF DISCOUNTS
•
Credit note
- When goods are received back from customers, the clerk checks the
returned goods (QQD) with the proof of purchase (invoice) and checks the
quality.
- A pre-numbered credit note is then issued.
• Details include:
- Details on the person returning the goods.
- Description of the goods and the amount. This acknowledges the reduction
in the customer’s account for non-payment reason.
•
Copies:
- The credit note is issued in four-fold.
- One copy goes to customer as evidence goods were returned.
- One copy goes accounting department so that the debtor's account can
be reduced
- One copy goes to the warehouse and inventory records so that the stock
levels and figures can be updated
- One copy remains in our own records (of the goods receiving department).
•
The credit note must be checked and authorised by the credit manager and
signed.
The credit note is then used to compile the sales return journal, which is then
posted to the ledgers.
The returned goods must then be sent to inventory department or
warehouse. The goods are checked by the storeman with the credit note
as well as a number sequence check and then missing orders are
followed up on.
The inventory records are then updated and include the goods returned.
•
•
•
•
D. ALLOWANCE FOR CREDIT LOSSES & WRITE-OFF OF BAD DEBTS
Transaction types and functions
Differences between provision for bad debt and bad debts
PROVISION FOR BAD DEBTS
• This is a calculation regarding
controls around debtors
• A policy is used
• Must be approved by senior
management
• Performing a calculation
•
•
•
•
BAD DEBTS
Dr bad debts Cr debtors
A list is used to identify
appropriate debtors
Must be approved by senior
management
Writing off assets
Risks
What Could Go Wrong (WCGW)
Allowance for credit losses of debtors
RISK
1. Incorrect calculation or incorrect
judgement used for the provision
2. Calculation not approved i.t.o the
policy
3. Incorrect recording (Journal
entries and general ledger)
CONTROL OBJECTIVES
Accuracy
Validity
Accuracy
Write-off of bad debts
RISK
1. Debts are not written off i.t.o the
policy
2. Write off bad debts while still
collectable
3. Not writing off bad debts that will
not be collected
4. Incorrect recording (journal
entries and debtors ledger)
Controls
CONTROL OBJECTIVES
Validity
Validity
Completeness
Accuracy
Provision for bad debts
•
Management must determine and calculate a figure for provision for bad debts,
by using the debtors' age analysis.
Management must authorise the provision for bad debts amount by issuing a
signed notice.
The amount must equal a percentage of the debtor’s balance.
The amount may need to be adjusted at the end of the period.
The provision must be correctly recorded in the SFP and SCI.
•
•
•
•
Authorised → Calculated → Adjustment of the provision → recorded in SFP & SCI
Write off debtor as a bad debt
•
When the debtor is not paying, and we have launched an investigation into
the probability of receiving our payment a write off occurs.
• A pre-numbered bad debt authorisation form must be compiled by a
committee or the minutes of meeting and presented in two-fold.
• Details must include:
- Information on the debtor
- The date ate
- The amount written off
• The debtors recording department will decrease the debtors account by the
amount stipulated.
• Own records of the committee authorising the write-off must be adjusted in
order to have a history of debt written off.
• The writing off of bad debts must be authorised by management after an
independent staff member has checked whether the client can pay or not.
• The write off must then be recorded in the SCI where the decrease of debtors
and increase bad debts occurs.
Types of questions can be asked in cycles
•
•
Design a system
Design around the documents
Study the perfect system (documents drive process)
Weaknesses
Compare to the perfect system (Something that is done wrong or something that is
missing).
- Consequences (Link to VAC, what is the impact if this is not done).
- Recommendations (Think of the process of designing the system)
-
•
-
Control objective question
Identify or name or formulate
Identify what it ensures (“to ensure that…”)
CASH SALES PERFECT CYCLE
S1.27 (SUGGESTED SOLUTION)
30 marks
PART 1: RECEIVING OF ORDERS FROM CUSTOMERS AND APPROVAL:
Receiving of orders from customers
1.
When the customer calls to place an order, the order clerk must prepare a prenumbered sales order form.
(1)
2. Sales order forms must contain complete details i.e.
▪
product codes
▪
quantity
▪
approved price, per the approved price list
▪
delivery date
▪
address and name of customer
(1)
(mark were only given if you provide approved price, per approved price list and any at
least 1 of the other detail)
3. A copy of the sales order form must be faxed or emailed to the customer and
signed by the customer and returned to GWPL before the sales order is
submitted for approval as proof that he/she is satisfied with the order.
(1)
4. The approved order form should be distributed in quadruplicate:
▪
one sent to customer to confirm order/evidence that the order has been
placed.
(1)
▪
one filed in sales department - for the number sequence check and follow
up of outstanding orders.
(1)
▪
one sent to the inventory store - to select the goods for delivery.
(1)
▪
one sent to accounting department - to match to the other documents
before invoicing.
(1)
(Note: If no reason is given why a copy must go to a specific destination -2 in total thus he/she
will get 2 out of 4 – no negative marking)
5. On a regular basis an independent person (for example the credit manager)
should
▪
review the number sequence of the sales order forms and investigate any
missing numbers;
(1)
▪
agree the approved delivery notes to the approved sales order forms and
follow up on long outstanding orders.
(1)
Sales approval for credit sales
1. The Credit Manager receives the completed sales order form, that has been
returned from the customer, and checks the following:
▪ the credit limits and the current outstanding balance of existing customers to
confirm that sufficient credit is available for the purchase and
(1)
▪ a creditworthiness investigation of new customers and sets credit limit.
(1)
2. Before the customer approved sales order form is distributed the Credit Manager
must perform the following
(2)
▪ check that there is appropriate inventory available in the store,
▪
▪
▪
check the accuracy of the order by re-performing all the calculations on the
order,
check the prices agree to the approved price list, and
sign the order as evidence of approval that client may purchase on credit
(should only 2 of the above checks be provided only 1 mark allocated)
AVAILABLE: 13
MAXIMUM: 13
PART 2: PICKING AND DISPATCH OF ORDERS BEFORE THE GOODS ARE
LOADED ONTO THE TRUCKS FOR DELIVERY BY THE DRIVER.
1. The approved sales order form is sent to an access controlled demarcated area
of the warehouse where the storemen pack boxes for dispatch and one of the
storeman then sends an email to the sales department to confirm receipt of the
order. The chief storeman then instructs the packers to pack the order
accordingly.
(1)
(must refer to approved sales order)
2. Pre-numbered, pre-printed delivery note is prepared by the storeman responsible
and then attached to the packed goods.
(1)
3. The delivery note includes the following information:
▪ order number
▪ quantity
▪ product code
▪ customer
▪ delivery date
▪ delivery address
▪ Storeman signed the delivery note as proof that all the inventory has indeed
been packed correctly and to assign responsibility
(1)
4. The chief storeman then compares the physical goods to the delivery note as well
as the approved sales order form and checks the quality, quantity and the
description is correct thereafter he signs the delivery note as evidence of doing
so.
(1)
5. The approved delivery note is then distributed as follows:
▪ Two copies of the delivery note accompany the goods to the client. One
copy of the delivery note must be signed by the client and returned with the
delivery staff to the warehouse. The signed copy is forwarded to the
accounting department so that the invoice can be prepared.(must state the
fact that a signed copy must be forwarded to accounting department to
obtain the mark)
(1)
▪ One copy is sent to the sales department as evidence that the order has
been executed.
(1)
▪ One copy remains in the warehouse as evidence that inventories have been
dispatched and for the number sequence check.
(1)
▪ One goes to the inventory clerk so that the inventory records can be updated
and as evidence that the order has been executed.
(1)
(Note: If no reason is given why a copy must go to a specific destination -2 in total thus he/she
will get 2 out of 4 – No negative marking)
6. The number sequence of the delivery notes must be checked by the chief
storeman (independent person) on a regular basis and outstanding items must be
followed up.
(1)
AVAILABLE: 9
MAXIMUM: 7
DELIVERY
1. The driver then packs the goods into the delivery vehicle ensuring the goods
match the delivery note,
(1)
2. he signs as evidence of doing this.
(1)
3. Before the delivery vehicle leaves the premises, the gatekeeper ensures that
all the physical goods have been provided with delivery notes that agree with
the delivery note; this can be documented on a gate register or the delivery
note.
(1)
ONLY ONE MARK FOR PRINCIPLE
4. The client must sign the delivery note as proof of receipt of the physical goods,
that the quality, quantity and description match what was ordered and what is
on the delivery note.
(1)
5. The client keeps one copy and the other copy is returned to the invoicing
department by the delivery vehicle.
(1)
6. Mr Frosting must review the number sequence of the delivery notes and
investigate any missing numbers.
(1)
PART 3: INVOICING AND SENDING OUT OF MONTHLY STATEMENTS:
1.
2.
One of the invoicing clerks prepares a pre-numbered invoice in triplicate on
account of the signed delivery note returned from the customer and the
approved sales order form.
(1)
Invoices include the following information:
▪ Order number
▪ Date
▪ Delivery note number
▪ Quantity
▪ Product code
▪ Price according to approved order.
▪ Signature of the preparer.
(1)
3.
The other invoicing clerk checks the calculations on invoices and compares the
prices on invoices with the approved sales order form and quantities and
descriptions with the approved sales order form and delivery note and then
signs as evidence of doing so.
(all of the detail must be provided to obtain the mark)
(1)
4.
One invoice is:
▪ sent to client - so that he know what the outstanding amount is / amount
payable.
(1)
▪ filed in sales department - as evidence of the transaction and the number
sequence check.
(1)
▪ sent to accounting department - so that they can record the sale in sales
journal and debtor’s ledger.
(1)
(Note: If no reason is given why a copy must go to a specific destination -2 in total thus
he/she will get 1 out of 3 – no negative marking)
5.
On a monthly basis the accountant (someone independent) prepares
prenumbered statements for credit clients. The monthly statement contains a
starting balance, a summary of invoices purchased during the month, interest on
the outstanding balance (if applicable), payments and returns during the month
and a closing balance.
(1)
6.
Two copies of the monthly statement are prepared:
▪ One remains in the accounting department for future reference.
▪ One is sent to the customer so that they have the remittance advice for
payment and for them to assess if the details are correct.
(1)
(1)
(Note: If no reason is given why a copy must go to a specific destination -1 in total thus
he/she will get 1 out of 2 – no negative marking)
AVAILABLE: 9
MAXIMUM: 8
Communications skills: Layout, structure and formulation of internal controls
(2)
4. PURCHASES & PAYMENT CYCLE
A. PURCHASES
Transaction types and functions
Purchases Accounts: Inventory/Purchases and Creditors
Risks
What Could Go Wrong (WCGW)
Placing an order
RISK
1. Order goods for private use
CONTROL OBJECTIVE
Validity & Authorisation
2. Order incorrect goods or goods that
are not required
Validity
3. Order not placed for most favourable Business control
conditions or in a timely manner
4. Order from fictitious supplier or
supplier that does not meet the
entities needs
Validity & Authorisation
5. All orders are not supported by an
approved and signed purchase
requisition
Validity
6. The quality, quantity and description
of the inventory on the purchase
order does not match the purchase
requisition
Accuracy
Receiving of goods
RISK
1. All orders placed are not received
CONTROL OBJECTIVE
Completeness
2. Receive quantities or type of goods
not ordered
Accuracy & Validity
3. Receive poor quality/damaged/
defective goods
Validity
Recording
RISK
1. Recorded receipts never occurred
CONTROL OBJECTIVE
Validity
2. Amount recorded incorrectly
(amount, classification etc.)
Accuracy
3. Amount recorded in the incorrect
period
Completeness
4. All receipts are not recorded in the
correct period
Completeness
Controls
1. PLACE AN ORDER
Purchase requisition - informs the purchasing department what goods are needed:
•
•
A pre-numbered purchase requisition made out by production/factory
manager (when the goods are needed) in a twofold approved and signed by
the head store manager.
It should contain details on: description of the items, amount, date and
department.
•
Copies:
One copy must go to the purchasing division in order to request the
goods.
- One copy must remain in the own records as a proof of goods requested.
-
Purchase order - completed by the purchasing department and addressed to the
supplier detailing goods requested:
•
A pre-numbered purchase order must be created in fivefold and must be
prepared by the purchasing clerk when the requisition is received and has
been signed and approved by the head store manager.
•
Details included:
- Supplier information
- Date
- Description of items
- Quantity ordered.
•
Copies:
- One copy must go-to supplier in order to request the goods. The order may
be faxed or posted.
- One copy must go to the accounting department (payment division) in
order to match the invoice to when the payment is acquired.
- One copy must go to the store manager in order to inform that the order
has been placed and so that he can update his list of outstanding
requisitions.
- One copy must go to the receiving division in order to match against the
delivery note from the supplier and to ensure that goods ordered are
accepted.
- One copy must go to the own records of the purchasing department in
order to record the orders placed.
•
Purchasing orders must be:
Prepared according to a list of approved suppliers (or quotations).
A policy must be laid down and complied with (for example, place with the
cheapest supplier or order the best quality).
- These suppliers should be contacted to confirm prices and stock
availability.
-
•
If there is not a satisfactory supplier on the approved list, the purchasing
clerk must first get a number of quotations (for example 3) before preparing
the order.
•
The purchasing manager must approve the purchasing order after he has
checked the details with the approved requisition and the list of approved
suppliers (or the list of quotations) and he must sign.
Purchasing orders exceeding a certain amount (e.g. R25 000) must also be
approved by the financial manager and signed.
Outstanding purchase orders must be placed in a suspense file in the
purchasing division and followed up regularly in order to ensure that all
orders are finalised timely.
•
•
2. RECEIVING OF GOODS
There should be segregation of duties, as different people should receive the
goods than to those that place the order.
Receiving division:
• There should be a separate area for the receiving of the goods.
• Two goods receiving clerks should receive the goods and check the quality,
quantity and description (QQD) as well as compare with the purchase order
and the supplier’s delivery note.
• The supplier’s delivery note must be signed after the following has been
done:
- Reject incorrect deliveries and identify rejections on both delivery notes and
purchase order and note shortages.
Goods received note (GRN):
Part where it says: “must agree to the supplier’s delivery note and physical goods” will not be
indicated in the question, so it is important to remember to compare the goods and the GRN
to the delivery note, a lot of questions are based on this.
•
•
The two receipts clerks must make out a prenumbered goods-received
note (GRN) in sixfold of which the details must agree with the supplier’s
delivery note and the physical goods received, and they should sign.
Both receipt clerks should initial the GRN to pin down responsibility.
•
Details included:
- Supplier information
- Description of the goods
- Quality/condition of the item.
•
Copies:
- One copy goes to the supplier as proof of goods received.
- One copy goes to the store manager (storeman) to check the physical
goods received.
- One copy goes to the inventory records for updating of the inventory
records to include new stock, and this must happen before the inventory is
placed on the shelves.
- One copy goes to the purchasing division in order to match to the
purchase order and as proof that it has been delivered, as well as compare
with outstanding orders.
- One copy goes to the accounting (payment) division as agreement with
the invoice and purchase order.
- One copy is kept in our own records as a record of the goods received.
•
•
Goods received must immediately be placed in safekeeping. (Access control)
Goods received notes must be pre-numbered and be in the periodical number
sequence that must be checked by the receipt clerks. All outstanding order
should also be followed up on.
Inventory and production cycle:
•
•
Inventory is then transferred from the goods receiving department to the
warehouse.
The inventory records are updated to include the new stock received.
3. RECORDING
Accounting division:
•
•
The recording is done by the accounting department.
The accountant or invoicing clerk will receive the supplier’s invoice/
monthly statement.
•
•
•
•
•
This supplier’s invoice must be compared with:
purchase order
delivery note
the goods received note (GRN)
The accountant should check the invoice prices against the approved price
list.
The accountant should also check the accuracy of the calculations, discounts
and returns on invoices. In order to ensure that the quantities and descriptions
agree.
The clerk or accountant who does the above must sign the invoice as proof
of performance.
The monthly statements should be checked by an independent person.
Monitoring (Reconciliation): There should be segregation of duties.
•
•
•
•
The invoice received is then used to compile the purchases journal by the
clerk/accountant.
The journals are then posted to the creditor’s ledger and general ledger.
There should also be a number sequence check of the goods received note,
in order to ensure that all purchases are recorded, and outstanding orders
should be followed up on.
NB: to remember that the posting to the journals must be done by an invoicing clerk (creditor
clerk).
However, the monthly bank reconciliations must be signed by the accountant.
•
•
•
•
•
At the end of the month, the following should occur:
Monthly reconciliations of:
- Invoices and the creditors' ledger
- Creditors control and the creditors' ledger
- Discrepancies should be followed up on
The accountant/credit manager must check and sign the reconciliations on
a regular basis.
Regular inventory counts must also be performed to ensure that inventory
and accounting records agree (otherwise there could be theft of goods as a
result of an incomplete inventory recording system).
B. PAYMENTS
Transaction types and functions
Payment Accounts: Creditors/ Expense and Bank
Risks
What Could Go Wrong (WCGW)
Make the payment
RISK
1. Pay more than once (duplications)
CONTROL OBJECTIVE
Validity
2. No payment made at all
Completeness
3. Pay the incorrect amount
Accuracy
EFT Funds Transfer/ Cheque
RISK
1. Payment of a fictitious supplier
2. Payment not authorised in terms of
the policy
CONTROL OBJECTIVE
Validity
Validity
Recording
RISK
1. Incorrect recording (inventory,
creditors, payments too much or too
little)
CONTROL OBJECTIVE
Accuracy
2. Payment not recorded at all
Completeness
3. Incorrect classification on recording
Accuracy
4. Payment recorded that did not occur
Validity
5. Not recorded in the incorrect period
Completeness
Controls
1. MAKE PAYMENT
Payments are compiled with reference to the statement/invoice with payment advice and other
supporting documentation (which we receive).
When we make the payment by cheque the following occurs:
Cheque requisition - completed by the creditors' section requesting that a cheque
be made out for a particular creditor.
•
•
When payment is required by the creditor for example within 30 days. A prenumbered cheque requisition must be prepared in twofold by the creditors'
clerk/ payment clerk A.
The cheque requisition should contain details on: the cheque, the supplier,
date, amount and reason for payment.
•
Copies:
- One copy should go to the cheque preparer in order to use the information
to compile the cheque
- One copy should be kept in the own records of credit section as a record
of cheques requested.
•
The cheque requisition must be signed and compiled by the payment
clerk A and must be approved by senior management (signed).
•
Cheque - The bill of exchange used to pay the supplier.
•
•
The payment clerk B must prepare a pre-numbered cheque in twofold.
Should contain details on: the supplier, date, amount in words and figures.
•
Copies:
- One copy should go to the supplier in order to make the payment.
- One copy should go to the own records of the accounting department
(payment division) as a record of cheques issued (the cheque counterfoil).
•
The details of the cheque (the correct amounts in words and figures, the
correct supplier and the correct date with the documentation) must be:
- Checked against the supporting documentation (suppliers’ monthly
statement and invoice) and;
- Signed and authorised by two members of senior management, with
reference to the vouchers.
•
•
•
•
•
•
The cheque must also be checked with reference to vouchers and cheques
marked “non-negotiable” (also called crossed).
The supporting documentation (monthly statement or invoice,) must then be
cancelled in order to prevent duplication of payment (can be cancelled with a
PAID stamp).
The accountant/senior management must view the list of suppliers to ensure
that the supplier actually exists.
The cheque books should be kept safe with a register to access (access
control) and the chequebook must be locked away at all times.
No cash cheques should be written out rather use a petty cash voucher.
In order to ensure that the payment is made to the right creditor, the
cheque should not be returned to the person who wrote it out but should be
mailed by somebody else (e.g. secretary).
- In order to ensure that the person who wrote out the cheque cannot change
the information on the cheque.
Independent review must always be performed (segregation of duties) by the senior bookkeeper
or Payment clerk B rand must be signed.
Payment by cash:
•
•
Done by either cashing a cheque (as discussed above), or
By issuing a petty cash voucher.
2. RECORDING
•
The CPJ should be compiled by the cash book clerk (Clerk C) based on the
cheque counterfoil.
• This must then be posted to the general ledger and creditors ledger.
• The accountant must:
- Review that all cheques have been recorded in the relevant journals and the
ledgers.
- He must sign as evidence of doing so and he must follow up on all
differences.
•
At the end of the month, the following should occur:
- Reconciliations between the bank statement and the cash book must be
conducted by the cash book clerk.
- Reconciliations between the creditor’s ledger, the creditors' control
accountant and the invoice must be done by the creditor clerk.
- The accountant must review the bank reconciliation and sign as evidence
of doing so.
- The accountant must also review the accuracy of the creditor’s
reconciliations and sign as evidence of doing so.
- Any differences should be followed up on.
C. PUBLIC vs. PRIVATE SECTOR
Procurement (Purchases in the Public Sector)
•
•
•
•
•
•
Section 1 of the PFMA (Public Finance Management Act) defines fruitless
and wasteful expenditure as expenditure which has been made in vain and
would have been avoided had reasonable care been exercised.
Vain – without value or substance.
Reasonable care – apply due diligence (caution, care full application).
Applicable to all departments, constitutional entities and public entities
listed in Schedule 2 and 3 of PFMA.
Accounting officer has responsibilities to discover, report, investigate and
remediate any fruitless and wasteful expenditure.
Guidelines for all procurement activities:
1. Value for Money
2. Open and effective Communication
3. Ethics and Fair Dealings
4. Accountability and reporting
5. Equity
So what is the difference?
•
•
•
•
•
Only difference for procurement for Public vs. Private Sector is in the
initiation phase (Placing of Order) of the purchases cycle.
Meet requirements as per PFMA ACT i.e. no fruitless and wasteful
expenditure to be incurred.
All suppliers should be registered on the applicable departments,
constitutional or public entities database.
Procurement done predominantly via tenders (offer by registered supplier to
provide goods or services at a fixed price).
B BBEE specific level requirements as per tender should be met.
PURCHASES PERFECT CYCLE
Placing of orders
•
A purchasing clerk must prepare purchasing orders on a prenumbered
purchasing order.
(1)
•
Only a purchasing clerk may prepare purchasing orders and only if he has
received a purchasing requisition, signed by the head store man.
(2)
•
Purchasing orders must be prepared according to a list of approved suppliers
and a policy must be laid down and complied with (for example, place with the
cheapest supplier or order the best quality).
(1)
•
If there is not a satisfactory supplier on the approved list, the purchasing clerk
must first get a number of quotations (for example 3) before preparing an
order.
(1)
•
The purchasing manager must approve the purchasing order after he has
agreed the details with the approved requisition and the list of approved
suppliers (or the list of quotations) and sign.
(2)
•
Purchasing orders exceeding a certain amount (e.g. R25 000) must also be
approved by the financial manager and signed.
(1)
•
The following 5 copies (of purchasing orders) should be generated:
[Only ½ mark is awarded if no reason is given for the generation of copies.]
- one: accounting division (for agreement with the invoice);
(1)
- two: the head store man (to update list of outstanding requisitions);
(1)
- three: receipts division (to ensure that only goods that have been ordered
are accepted);
(1)
- four: the supplier (to place the order – may be faxed or posted); and
(1)
- five: own records (as evidence that the order has been placed).
(1)
•
Outstanding purchasing orders must be kept in a suspense file in the
purchasing division and followed up regularly to ensure that all orders are
finalised timely.
Receipts of goods (Raw materials)
(2)
PAYMENTS & PURCHASES CYCLE
•
There should be a separate demarcated area for receiving goods.
•
Two receipts clerks must receive the delivered inventory.
•
The supplier’s delivery note must be signed after the following have been
done: (QQD)
(1)
(1)
-
Details (quantities and type of spice) on the delivery note from the supplier
must be compared with the delivered items and the details on the purchasing
order.
(1)
-
Goods that have not been ordered may not be received.
(1)
-
Quality aspects of the goods must be reviewed.
(1)
•
The two receipts clerks must make out a prenumbered goods-received note
(GRN) of which the details must agree with the supplier’s delivery note and the
physical goods received.
(1)
•
Both receipts clerks must initial the GRN to pin down responsibility.
•
The following 6 copies (of the GRN) should be generated:
(1)
[Only ½ mark is awarded if no reason is given for the generation of copies.]
- one: accounting division (for agreement with the invoice and the purchasing
order);
(1)
- two: accompanies the goods to the inventory store;
(1)
- three: purchasing division (for comparison with outstanding purchasing
orders);
(1)
- four: inventory clerk (for updating the inventory records);
(1)
- five: own records (file with purchasing order to show that order has been
received);
(1)
- six: to the supplier (if the supplier has not provided a delivery note).
(1)
•
Goods received must be placed in safe keeping immediately.
(1)
•
The receipt clerks must perform sequence checks and follow up on all
outstanding orders.
AVAILABLE: 29
MAXIMUM: 28
LANGUAGE AND PRESENTATION: 2
Recording
•
•
•
Done by accounting department – apart from receiving department.
Compare invoice from supplier with
Signed delivery note
(½)
signed goods received note
(½)
order forms
(½)
requisition
(½)
Ensure that quantities and description agree (above-mentioned documents) with:
- agree prices with approved price lists
(½)
- discounts and return on invoices.
•
•
•
•
check additions and cross castings on invoices. (calculations)
(½)
Ensure, by checking number sequences of goods receipt note in purchase
journal, that all purchases are recorded. And outstanding orders are followed up
on.
Reconciliate creditor ledger with creditor monthly statements at end of month.
Follow up any differences.
The accountant must check and sign reconciliations.
Creditor ledger must be compared with creditor control account and accountant
must check and sign reconciliation.
PAYMENTS PERFECT CYCLE
To ensure that payments are made to valid creditors only:
Make payment
1.
The monthly statement from the supplier must be reconciliated monthly with the
balance in the creditor ledger to ensure that the creditor balance in the creditor
ledger is correct. This must be done in writing by the creditor clerk.
(2)
2.
The accountant must review the reconciliations of the individual creditors and
signs them as evidence of review done.
(1)
3.
When the amount is due, e.g. within 30 days after the date of the monthly
statement, a cheque requisition must be prepared by the creditor clerk indicating
which invoices are paid.
(1)
4.
The cheque requisition, together with the creditor reconciliation, monthly
statement and purchase invoices, must be handed to the accountant who must
write and sign a cheque for it.
(2)
5.
The financial manager must review the cheque and ensure that the amount in
figures and words, the date agree with the documentation.
(1)
6.
The financial manager must also sign the cheque with reference to the vouchers.
The cheque must be crossed” non-negotiable”.
(2)
7.
To ensure that invoices are not presented as payment more than once:
•
The accountant must stamp the creditor reconciliation, monthly statement
and purchase invoices “paid" to ensure that invoices are not presented as
payment again.
(1)
•
No cash cheques must be written out.
(1)
•
The accountant must review the list of suppliers to ensure that the supplier
actually exists.
(1)
•
The cheque books must at all times be locked away if not in use (stationery
control).
(1)
To ensure that payment is made to the right creditor:
•
The cheque should not be returned to the person who wrote it out, but has
to be mailed by somebody else (e.g. secretary) i.e. the person who wrote
out the cheque, cannot change the cheque after it has been signed.
(1)
Recording
8.
Ensuring that all payments are recorded:
•
The cheques must be entered by the other clerk (cash-book clerk) and
reviewed by the accountant to ensure that all cheques have definitely been
recorded.
(2)
9.
At the end of the month the cash-book must be reconciliated with the bank
statement by the cash-book clerk.
(1)
10. The accountant must review the bank reconciliation and sign the reconciliation
as evidence of reviewing done.
(2)
11.
To ensure that payments have correctly been posted to the creditor and general
ledgers.
•
The accountant must review the journals that post the cash-book to the
general ledger and sign there as evidence of having reviewed for
correctness.
(2)
12. The creditor clerk must reconciliate the creditor ledger with the creditor control
account in the general ledger monthly and inspect all reconciliating items.
(1)
13. The accountant must review the creditor reconciliation monthly and sign there as
evidence of having found it in order.
(1)
AVAILABLE: 23
MAXIMUM: 22
LANGUAGE AND PRESENTATION: 3
TOTAL: 25
RECAP
REQUIRED
Describe the internal control measures you would recommend. Your answer must
include all control measures from the stage when the purchase transaction is initiated
to when the payments to creditors take place, including the recording and
reconciliations.
(25)
Order
•
•
•
•
•
•
•
Requisition made out by production/factory manager approved and signed.
Order form made out on the basis of requisition.
Purchase manager approve and sign
Purchase manager orders after search for best supplier (prices/quality).
Requisition and order forms prenumbered.
Requisition and order forms are filed by accounting department.
Requisition and order forms are held by accounting department.
Receipt of goods
•
Goods receipt note made out and signed for goods received.
•
Goods receipt note prenumbered.
•
Goods receipt note must be compared with requisition, order form and
delivery note from supplier. Sign delivery note of supplier.
•
Goods counted and compared with goods received.
•
Goods receipt note forwarded to accounting department.
•
Person in reception area not the same as one who placed order.
•
Person in receiving area should neither have access to accounting
records.
Recording
PURCHASES
•
Done by accounting department – apart from receiving department.
•
Compare invoice from supplier with
Signed delivery note
signed goods received note
order forms
requisition
•
Ensure that quantities and description agree (above-mentioned
documents) with:
agree prices with approved price lists
discounts and return on invoices.
check additions and cross castings on invoices. (calculations)
•
(½)
(½)
(½)
(½)
(½)
(½)
Ensure, by checking number sequences of goods receipt note in purchase
journal, that all purchases are recorded. And outstanding orders are
followed up on.
•
•
•
Reconciliate creditor ledger with creditor monthly statements at end of
month. Follow up any differences.
The accountant must check and sign reconciliations.
Creditor ledger must be compared with creditor control account and
accountant must check and sign reconciliation.
PAYMENTS
•
Cheque signed by two persons.
•
Documentation must be cancelled after payment.
•
Cheques must be crossed.
•
Documentation must be checked and signed by cheque assignees.
•
Cheque should not be handled after it has been signed by the creditor
clerk.
•
Bank reconciliation done monthly and checked by accountant.
Mark allocation (1 mark per fact unless indicated differently)
Presentation
Total
(28)
_(2)
(30)
5. BANK & CASH CYCLE
Transaction types and functions
A. CASH RECEIPTS
Accounts: Bank and cash/debtors
B. PAYMENTS
Payment Accounts: Creditors/ Expense and Bank
Risks
What Could Go Wrong (WCGW)
Cash receipts
RISK
Receive money
Theft of receipts
Receive incorrect amount
CONTROL OBJECTIVES
Initiate
Validity
Accuracy
Deposit receipts
All cash received is not banked
Execute
Completeness
Recording
Recorded receipts never occurred
Amounts are recorded incorrectly
Amounts are recorded in the incorrect period
Recording
Validity
Accuracy
Completeness
Process
All receipts are not recorded
Completeness
Process
Recap: Formulating control objectives
Which part of
transaction?
1
Not referring to people/
documents/ actions, i.e.
controls.
4
Cash receipts
2
Specific control
objective?
Validity, Accuracy, Completeness
3
Risks linked to
control objectives
See above.
To ensure that…
The control objectives relating to the receipts is as follow:
To ensure that…
1. All receipts are adequately safeguarded. (V)
(1)
2. All receipts are correctly calculated. (A)
(1)
3. All receipts are banked. (C)
(1)
4. All receipts are supported by underlying documents as evidence of actually
occurring. (V)
5. All receipts are recorded at the correct amount actually received. (A)
(1)
6. All receipts of cash are recorded timely in the correct accounting period. (C) (1)
7. All receipts are recorded in the accounting records and no receipts are
misappropriated or omitted. (C)
(1)
To ensure that all receipts are authorised is not an objective since the client does not
have control over receipts in its bank account.
(Available ½ per objective + ½ for formulation)
Payments
RISK
CONTROL OBJECTIVES
Make payment (cheque/EFT)
Payment not in terms of policy
Payment made to fictitious supplier
Pay more than once
Pay incorrect amount
No payment made at all
Validity
Validity
Validity
Accuracy
Completeness
Recording
Payment recorded did not occur
Incorrect classification on recording
Incorrect recording
Payment not recorded at all
Payment not recorded in the correct period
Validity
Accuracy
Accuracy
Completeness
Completeness
The control objectives relating to the payments is as follow:
To ensure that…
1. Payments are authorised in terms of the approved payment policy.
(1)
2. Payments are made to the correct suppliers.
(1)
3. Payment amounts are calculated correctly.
(1)
4. Payments are for transactions that actually occurred, and goods and services were
received.
(1)
5. Payments are classified in the correct accounts in the financial records.
(1)
6. All payments are recorded in the accounting records.
(1)
Types of General Ledger Accounts
•
Bank account
- for ordinary income and expenses
•
•
•
•
•
Petty Cash
For smaller specific expenses
Controls required
Fixed amount top-up
Cash on hand
Salary bank account
Advance accounts
Deposit/savings accounts
Internal control measures
The Perfect Cycle
1. GENERAL CONTROLS
1. There should be notices at a cashier counter or a policy (e.g. notice on insisting
on evidence/receipts).
2. Receipt’s/slips should be kept as a proof of purchase.
- Issued in triplicate:
1. One should go to the client has evidence of execution.
2. One should remain in own records as evidence of cash received.
3. One should go to the accounting department for bookkeeping.
3. There should be regular number sequence checks of theses receipts (and the
number sequence should be automatically created by the cash register).
4. There should be reconciliations between all accounting records: cash
register roll and the physical money in the cash register.
-
This should be done by an independent accounting senior person.
5. Cash should be cleared out of the cash register on a frequent basis (i.e. every
two hours) and placed in a drop safe with the one key being held on-site and the
other off the premises, until cash uptime.
(1)
Moreover, whenever money is moved it must be locked up.
(1)
6. The general manager should perform surprise inspections and cash counts to
determine whether the cashiers and office manager are performing their work. (1)
7. The manager should review the following: sales register, deposit slips, bank
reconciliation, etc. and follow up on the differences.
(1)
8. The staff should be well trained and should receive additional training as the
need arises. Furthermore, staff should be rotated on a frequent basis.
(1)
9. Adequate segregation of duties should be implemented between the following
functions:
• Making the sale: cashier
• Recording the receipt: bookkeeper
• Making the bank deposit: general manager and security guard
• Review of bank reconciliation: accountant
• Review of registers: general manager et cetera
(Max 3)
2. RECEIPTS
a. Credit card receipts
1. Online sales by credit card should be processed online to the banks (credit
card machine) or the cashier should review the credit card number against a
list of invalid or stolen credit cards (i.e. blacklisted credit cards) to ensure the
customer is creditworthy and has sufficient funds available.
(1)
Alternatively, the cashier could also request the client’s identity document or
driver’s license and review the client’s signature and details from the driver’s
license/identity document to the details on the credit card and credit card slip. (1)
2. The cashier could make an imprint or photocopy of the customer’s credit
card thus maintaining records of the customer’s details and the card’s security
code.
(1)
3. The cashier should review the:
(i)
customer’s signature
(ii)
details such as the expiry date, customer’s name on the back of the card
to the signature and details on the credit card slip.
(Max 2)
4. The credit card slips should be pre-numbered, and the manager should
perform a sequence review when the cash register is cashed up.
(1)
5. The payment should be followed up with the bank until payment is received.
b. Cash receipts
1. Cash registers should be used over cash drawers with the price and
amount due being displayed prominently, visible to the client.
(1)
(1)
2. Prices should not be rounded amounts (e.g. R19.95 and not R20.00) to force
the cashier to open the cash register and to give the customer change.
(1)
3. All sales on the cash register should be recorded on a cash register roll to
which the cashier does not have access.
(1)
4. The cash register should be lockable, with the cash register being removed if
the cashier goes on a break. The till should only be opened when an amount is
entered on the till or if the manager opens the till with his key.
(1)
Other cash register controls:
- Mounted fixed and securely
- Positioned at exit
- Items should be rung up in the presence of clients
- There should be copies of cash register slips
- There should be sufficient cash register rolls
- At the end of the day, the money in the drawer should be reconciled with the
cash register rolls.
5. The till role should be used to write up the accounting records, not the deposit
slips.
(1)
6. The manager should review the cash register roll for unusual amounts (e.g.
R0.05), or any altered transactions.
(1)
7. The following should occur with the cash that is received:
-
Should be deposited into the bank daily/weekly.
Safeguarded in the safe from the time of receipt until banking.
There should be segregation of duties between all the functions involving
cash (same as that of general controls).
c. Receipt of cheques by the post/mail and general receipt of cheques:
1. There should be at least 2 persons (1 of these persons should be
independent of all banking depositing and recording functions) who open the
post. They should review the details of the cheques such as:
-
Cheques are made out in the company’s name (and not that of the bank's
name)
is crossed (non-transferrable)
the date (post-dated cheques should not be accepted until payment is due)
Signatures on the cheque
Clients had been pre-approved by general manager.
2. A mail register should be kept and must record the following details:
- Date of the receipt
- Debtors name
- Amount received.
3. Both staff members who open the post should sign the mail register in order to
pin down responsibility.
4. They should hand the cheques received from the mail over to the cashier and
the cashier should sign the register as a proof of receipt.
5. The cheques should be inspected by the 2 staff members for any
amendments or endorsements. Alternatively, the banks could be contacted
directly to determine whether the cheques have been stolen.
6. There should also be a company policy in place to reject amended cheques.
7. The general manager should have copies of all their clients’ identity books or
proof of incorporations, contact details and address and there should be preapproval before cheques are accepted as well as approval by the bank.
Deposits
a. Depositing cash receipts
1. Chief cashier completes duplicate bank deposit slip indicating total cash
received.
- One copy should be sent to the bank in order to deposit the money
received.
- One copy remains in the own records, as evidence of cash being
deposited.
2. Cash kept securely in safe until collected.
3. Security company collects cash daily for banking (at least weekly) / banked by
guard.
4. The cashbook clerk should file the stamped deposit slip and compare it to
the carbon copy and investigate for any amendments. He should sign it after
doing so.
5. Person independent from cashing up and banking: Reconcile bank-stamped
deposit slip with company’s copy of deposit slip and cashing up sheets
(compiled by cashiers).
6. File deposit slip in date sequence and regularly review (person independent
from cash and bank function) for unbanked cash.
7. Update cash journal.
8. Reconcile bank statement with cash journal.
b. Direct deposits
1. The person responsible for funds (marketing manager) received should provide
the bookkeeper with details of the deals/ sponsorships negotiated in order to
clear direct deposits to the correct debtor account and to write up the journal.
(1)
2. A suspense account should be used for all uncleared/ unknown direct
deposits and follow up on un-cleared items.
(1)
3. List of unidentified deposits must be prepared by the cash book clerk.
4. The accountant should regularly reconcile the list of unidentified deposits
with unusual (recurring items).
3. PAYMENTS
a. Payment by direct bank transfer and electronic funds transfer (EFT)
•
There should be segregation of duties between the person that prepares
the details and the authorisation and the person who checks the details
when sent.
•
There should be strict access controls to the computer and its functions.
•
There should be double authorisation
1. From a senior member of management
2. Passwords and pins
•
The manager must check the details of the payment with the various
documents and inspect all payment terms.
•
Other controls applicable to documents still remain such as cancel all
supporting documents.
•
The underlying documents or the general ledger must be reconciled to the
actual amount stated on the bank statement.
b. Payments by cheque
•
There should be adequate stationary control over blank, pre-printed
unused cheques.
•
The cheque book should be locked away in safekeeping when not used.
•
There should be an authorised cheque requisition for all cheques.
•
•
•
The cheques should contain the following:
- Beneficiaries name
- Reasons should be clearly stipulated
- Crossed (non-transferrable)
Cash cheques (except for wages) and cheques with open spaces and noncrossed cheques should be rejected.
The cheque should be authorised by the payments manager and there
should be segregation of duties among the following functions:
- Preparing the cheque
- Signing the check
- Cheque should not be returned to the person requesting the cheque.
•
The cheque should be signed by a senior member of management
It should be signed only after it has been clarified whether the cheque is
authorised.
- The cheque requisition has been checked.
- The accuracy of the details of the cheque has been checked.
-
•
All supporting documentation should be cancelled (cheque requisition).
•
The payment terms should be inspected.
•
There should be a review and investigation by the manager:
- Number sequence check as well as following up on all missing numbers.
- All returned cheques should be investigated:
▪ Check number sequence
▪ The amount on the cheque agrees with the amount of the counterfoil.
4. PETTY CASH
10 MARKS
1. The responsibility of controlling the petty cash must be allocated to a single,
competent, independent person.
(1)
2. Petty cash should be kept secured in a lockable box.
3. The cash in the petty cash must not be mixed with other funds or activities of
the enterprise, specifically customer receipts.
(1)
4. A policy must be determined regarding the maximum amount and type of
expenses which will be allowed to be compensated from petty cash.
(2)
5. All cash expenses should be paid from the petty cash.
6. Petty cash receipts must be properly authorised (by referring to the amount
and the reason for the expense) and signed as proof of this.
(1)
7. The person in control of the petty cash must prepare a reconciliation in
which the cash in the petty cash is reconciled with the amount of the petty
cash advance, by adding the total amount of the petty cash receipts issued
(according to the petty cash journal). This person must do the reconciliation
once a month.
(2)
8. Surprise counts must be performed by the owner or independent person
who performs the reconciliation at that stage.
(1)
9. Any differences/errors/irregularities found by performing above-mentioned
reconciliation must immediately be investigated.
(1)
10. At the end of each month, the total amount of the petty cash receipts issued
(per petty cash journal) must be compensated from the cash-book by means
of a cheque that is cashed.
(1)
11. All petty cash slips already compensated must be cancelled to prevent
submission and compensation thereof.
(1)
12. Petty cash slips must be pre-printed and pre-numbered and an independent
person should perform a number sequence check on a regular basis and
follow up missing petty cash slips.
(2)
AVAILABLE: 11
MAXIMUM: 10
Communication skills – clear formulation of internal controls
(1)
•
Supporting documentation:
- The amount should be paid first and then the amount may be claimed from
the petty cash with a petty cash slip: or
- Money could be requested; the change is then brought back and then gives
a slip.
• Petty cash slips should be issued for each expense paid (when money is
taken from the petty cash journal a pre-numbered petty cash receipt must be
issued):
- Pre-numbered
- Date, requester, purpose, proof.
5. CASH COUNT
At the end of each shift and surprise occasions, the cashier and general
manager/supervisor (2 persons) should count the cash and the petty cash doing
the following:
•
Keep the cash takings in a till bag with a lock which should be sealed until it is
counted.
• Calculate the sales for the day from the cash register roll.
• Reconcile the cash received to the total sales calculated and recorded in
the general ledger according to the cash register roll in order to identify any
shortages and surpluses.
• Enter the details on the sales return form/reconciliation.
• The cash book clerk and the general manager/supervisor should sign the
sales return form/reconciliation/count sheet/roll as evidence of:
1. Cash being taken custody of
2. Reviewed
3. Evidence of this being accurately performed.
For calculation questions: How
do we calculate our cash
shortage?
Example: Calculation of cash shortage
Your audit senior asked you to do a surprise-cash count on 4 September 2009. The accountant
provided you with the following information in regard to the company’s cash- and equivalents.
• The monthly petty cash advance is R3, 000. (Float)
• Reconciled items in terms of the bank reconciliation as on 31 July 2009:
R
7,590
1,540
375
51
Outstanding cheques
Outstanding deposits
Bank cost
Interests received
•
Amounts appearing in the cash-book and on the bank statement:
Balance: 1 August
Deposits - August
Deposits - 1 Sept to 4 Sept
Cheque payments - August
Cheque payments - 1 Sept to 4 Sept.
•
Cash book
R
24,725
70,243
15,845
56,832
8,456
The surprise-cash count performed on 4 September 2009, provided the following results:
Notes and coins in the cash registers
Cheques in the cash registers
Cash in the petty cash tin
Petty cash slips in the petty cash tin
•
Bank statement
R
26,017
55,725
13,628
48,304
2,548
R
3,761
7,512
1,672
457
CALCULATION:
Physical cash
Notes and coins in cash registers
Cheques in cash registers
Cash in petty cash
TOTAL
3,761
7,512
1,672
12,945
How much cash there should be
Outstanding deposit
(70,243 – 55,725 + 1,540 = 16,058)
Money received
Money banked
Petty cash advance
Petty cash slips
TOTAL
15,845
(13,628)
3,000
(457)
20,818
Cash shortage (20,818 – 12,945)
7,873
16,058
6. BANK RECONCILIATION
•
What is it?
-
•
•
Monitoring of differences between balances in:
company records
cashbook and general ledger
balance according to bank
Controls:
- The bank reconciliation must be drafted on a monthly basis by an
independent person/cashbook clerk.
- An independent review (e.g. by the accountant) must be performed and
the following must be tested:
▪ The logic of the reconciliation
▪ Ensure that the reconciling items match the subsequent documentation
such as the bank statements.
▪ Investigate long outstanding items
Calculation:
7. Other important considerations: FRAUD
•
Cause
-
•
Occurs due to time span between transaction date & date recorded.
Purpose: to hide fraud or theft or to overstate bank.
Examples:
-
Lapping
Kiting
Window dressing
Fraudulent financial reporting techniques
•
Kiting
-
Company with > 1 bank account with different banks
Timespan to cash cheque and carry it over from one account to another
Manipulate transfers during y/e – to overstate the bank and cash balance in
the AFS.
Misappropriation risk
•
Rolling of cash / Lapping
-
Cashier takes cash paid by a debtor, covers the shortfall with a subsequent
debtor’s receipt.
- Higher risk in companies where:
▪ Cash and cheques are received from debtors;
▪ Poor SOD between cashier and recording of receipts functions;
▪ Lack of review over the abovementioned functions
•
Window dressing
-
Manipulate the ratio between current assets and liabilities
Write cheque out before y/e and give it to the creditor after y/e.
•
Theft of cash
•
Dishonoured cheques
-
•
A cheque is made out by a client, but there are no funds available in the
client’s bank account.
Fictitious deposits
-
Where clients can pay via direct deposit / EFT → Receive fictitious proof of
payment from the client and consequently deliver the goods/service to them.
General controls
•
Cashier must be allocated to a specific cash register.
•
The staff should be well trained and should receive additional
training as the need arises.
•
Staff should be rotated on a frequent basis.
•
General manager should perform surprise inspections and cash
counts to determine whether the cashiers are performing their
work.
20 MARKS
Cash register roll
•
Pre-numbered
•
Two copies: 1. Customer (evidence) 2. Accounting department
(bookkeeping)
Parties
•
Cashier
Must ring up cash received on cash register.
Amount received from client must be counted.
Access control
•
There should be a cameras monitoring the shop and a security guard
appointed.
•
Cash should be safeguarded in a safe from the time of receipt until
banking.
•
Cash should be cleared out of cash register frequently and placed in
a drop safe – one key on sit and one key off site.
•
Key of safe must be under the control of one person.
•
Cash register must be positioned at exit.
•
Mounted fixed and securely.
Cash Reconciliation
•
In writing
•
O/B (float included)
•
Movements (CRR + cheques)
•
C/B
•
Recon signed by parties.
•
-
Manager (Cash Reconciliation)
Count cash before opening.
Cash advance (float) must be taken into account.
Register kept pf cash drawer must be deducted.
Signed by both parties.
Count at the end of each day.
•
-
Customer
Must request receipt from cashier.
Must agree or disagree to amount in window. (Fraud)
6. INVENTORY AND PRODUCTION CYCLE
Introduction
Purpose
• Safeguard the inventory against theft and damage;
For manufacturing entities:
• Control the movement of inventory (raw material, work-in-progress and
finished goods) during the production process; and
• Control the production process itself (e.g. what and how many to
manufacture, spillage during the process and quality of the manufactured
goods.
Link with other cycles
•
Close link between the purchase
and payments cycle and the
sales and receipts cycle.
Transaction types and functions
INITIATE PRODUCTION
•
•
•
Production must be planned and
controlled by means of production
schedules
Raw materials must be transferred
from the store to the factory
Dr WIP
Cr Raw materials
MOVEMENT OF GOODS
•
•
•
•
•
•
Transfer of raw materials from the
store to the factory.
Conversion of raw materials into
finished goods.
Transfer of finished goods from the
factory to the finished goods store.
Dr
Finished goods
Cr
WIP
Includes the protection of finished
goods.
RECORD PRODUCTION AND
INVENTORY TRANSACTIONS
•
Determination and calculation of
production costs and cost units.
•
Control over inventory balancesquality and value.
Aspects and Internal Controls of importance
•
Store: Physical control over inventory:
- separate isolated area and restrict access.
• Transfer: documentation and records for transfer:
- Preprinted, numbered and designed, copies of documentation, must be
authorised.
- Movement: perpetual inventory records.
• Costing system: unit cost records.
Risks
What Could Go Wrong (WCGW)
RISK
CONTROL OBJECTIVES
1. Excessive/ incorrect production
Validity
2. Unauthorised use of inventory
Validity
3. Production hours not captured
Completeness
4. Theft of raw materials, WIP, finished goods
Validity
5. Production costs calculated incorrectly
Accuracy
6. Carrying value of inventory incorrect
7. Quantities of stock on hand incorrect
Completeness – if too low
Accuracy – if too high
Validity, Accuracy, Control
8. Inventory deteriorates in value
Validity
9. Delays in production
Validity, Accuracy
The Perfect Cycle
1. Placing of orders
PAYMENTS & PURCHASES CYCLE
Purchase requisition – informs the purchasing department what goods are needed:
•
A pre-numbered purchase requisition made out by production/factory
manager (when the goods are needed) in a twofold approved and signed by
the head store manager.
•
It should contain details on: description of the items, amount, date and
department.
•
Copies:
- One copy must go to the purchasing division in order to request the
goods.
- One copy must remain in their own records as proof of goods requested.
•
A purchasing clerk must prepare purchasing orders on a prenumbered
purchasing order.
(1)
•
Only a purchasing clerk may prepare purchasing orders and only if he has
received a purchasing requisition, signed by the head storeman.
(2)
•
Purchasing orders must be prepared according to a list of approved
suppliers and a policy must be laid down and complied with (for example,
place with the cheapest supplier or order the best quality).
(1)
•
If there is not a satisfactory supplier on the approved list, the purchasing clerk
must first get a number of quotations (for example 3) before preparing an
order.
(1)
•
The purchasing manager must approve the purchasing order after he has
agreed the details with the approved requisition and the list of approved
suppliers (or the list of quotations) and sign.
(2)
•
Purchasing orders exceeding a certain amount (e.g. R25 000) must also be
approved by the financial manager and signed.
(1)
•
The following 5 copies (of purchasing orders) should be generated:
[Only ½ mark is awarded if no reason is given for the generation of copies.]
- one: accounting division (for agreement with the invoice);
(1)
- two: the head storeman (to update list of outstanding requisitions);
(1)
- three: receipts division (to ensure that only goods that have been ordered
are accepted);
(1)
- four: the supplier (to place the order – may be faxed or posted); and
(1)
- five: own records (as evidence that the order has been placed).
(1)
•
Outstanding purchasing orders must be kept in a suspense file in the
purchasing division and followed up regularly to ensure that all orders are
finalised timely.
2. Receipts of goods (Raw materials)
(2)
PAYMENTS & PURCHASES CYCLE
•
There should be a separate demarcated area for receiving goods.
•
Two receipts clerks must receive the delivered inventory.
•
The supplier’s delivery note must be signed after the following have been
done: (QQD)
(1)
-
Details (quantities and type of spice) on the delivery note from the supplier
must be compared with the delivered items and the details on the
purchasing order.
(1)
Goods that have not been ordered may not be received.
(1)
Quality aspects of the goods must be reviewed.
(1)
-
(1)
•
The two receipts clerks must make out a prenumbered goods-received
note (GRN) of which the details must agree with the supplier’s delivery note
and the physical goods received.
(1)
•
Both receipts clerks must initial the GRN to pin down responsibility.
•
The following 6 copies (of the GRN) should be generated:
(1)
[Only ½ mark is awarded if no reason is given for the generation of copies.]
-
one: accounting division (for agreement with the invoice and the purchasing
order);
(1)
two: accompanies the goods to the inventory store;
(1)
three: purchasing division (for comparison with outstanding purchasing
orders);
(1)
four: inventory clerk (for updating the inventory records);
(1)
five: own records (file with purchasing order to show that order has been
received);
(1)
six: to the supplier (if the supplier has not provided a delivery note).
(1)
•
Goods received must be placed in safekeeping immediately.
•
The receipt clerks must perform sequence checks and follow up on all
outstanding orders.
(1)
AVAILABLE: 29
MAXIMUM: 28
LANGUAGE AND PRESENTATION: 2
•
The inventory records must then be updated to record new stock (raw
materials). Link
3. Storing of raw materials
•
Raw materials must be stored and protected until required in production.
•
Stock should be barcoded onto the perpetual inventory system (rather than
maintaining A4 pieces of paper).
-
-
•
To ensure that the physical stock can be checked against the theoretical
stock on a frequent basis (weekly) and to ensure that there is a tracking
system.
The system should record the following: Serial number, title, director,
description DVD etc. for smaller items (Just read)
All raw materials purchased and received must be stored and protected
until needed in the production process, the goods should be stored as follows:
- Stored in a separate isolated area.
•
-
Access to the material must be limited (Only one entrance from within the
shop)
-
Any doors or windows from the outside must be secured.
-
The shop must have security gate at the entrance that only opens with the
press of a button located at the cashier’s counter. It must also have an alarm
system for the evenings.
-
The shop (salesroom and storeroom) must be protected against fires and
there must be fire extinguishers and sprinklers on the premises.
Authorised and signed documentation (requisition) required for the
movement of the raw materials which will be addressed below.
4. Production cycle
WEAKNESSES QUESTION
a. Issuing inventory from the central inventory warehouse to the branches:
•
Branch managers/ manufacturing clerk must place an order at the central
inventory warehouse by making use of a pre-printed standard raw material
requisition (order form).
(1)
•
The raw material requisition must be prepared in triplicate:
RM
-
1 copy must be sent to the raw material warehouse for the warehouse to
prepare the correct quantity and type of product for dispatching and to
update their records regarding the movement of the inventory;
(1)
-
1 copy must be sent to the accounting department to update inventory
records.
-
1 copy is held at the branch/ warehouse as evidence of quantity and type
of product requested;
(1)
▪
▪
▪
▪
QQD ▪
must be pre-numbered;
contain the date of request;
contain the authorised signature of the branch manager;
indicate the branch name;
accurately explicate the quantity and description of product e.g.
code, size, colour, etc.
(½)
(½)
(½)
(½)
(½)
•
The warehouse assistant at the central warehouse prepares the items for
issuing to the branch/ factory on the basis of the raw material requisition
and completes a raw material transfer note (issue note) for the materials/
products that must be issued.
(1)
•
A raw material transfer note should be prepared in triplicate:
RMT
-
1 copy must be sent to the branch/ factory together with the items so the
branch can be sure of the quantity and type of materials/ products issued
to them;
(1)
1 copy is held at the central warehouse as evidence of quantity and type
of clothing issued to the branch;
(1)
- 1 copy must be sent to the accounting division after delivery in order for
them to update the inventory records. The copy also serves as proof of
delivery.
(1)
▪ contain the dispatching date;
(½)
▪ must be pre-numbered;
(½)
▪ contain the authorized signature of the warehouse reviewer of the
central warehouse after he compared it with the order form received;
▪ indicate the branch name;
(½)
QQD ▪ contain the quantity and description of clothing that has been
dispatched.
(½ )
-
•
With dispatch, the security guard/head store manager must compare the
items being sent with the information according to the raw material transfer
note and must not allow that any items leave the premises that do not appear
on the documentation and sign as evidence of doing so.
(1)
•
On a daily basis, the warehouse reviewer of the central warehouse must
check that all raw material transfer notes refer to and are supported by a
valid authorised raw material requisition.
(1)
•
Branch/Production managers must compare their duplicate raw material
requisition with the raw material transfer notes received with delivery on a
daily basis.
(1)
•
The warehouse reviewer and the branch/production managers
respectively must review the number sequence of raw material requisition
and raw material transfer notes and follow up on missing numbers.
(1)
PRESENTATION: (1)
AVAILABLE:
(17)
MAXIMUM:
(12)
Recording and processing
•
The inventory records must be updated to reflect the transfer of inventory.
-
•
Raw materials must be decreased.
Work in progress must be increased.
The inventory records must be updated by an independent accounting person
(accountant) not that of the inventory store or the production division.
b. Receipt of inventory at branches
•
The branch manager must be responsible for the receipt of the inventory
items from the central warehouse.
(1)
•
With receipt the branch manager must:
QQD - compare the quality and quantity of the items with the issue note and
order form.
- initial/sign as evidence that it has been checked and corresponds.
(1)
(1)
•
If there are any deviations between the physical items and the documentation,
it must be recorded on the issue note and signed by both the deliverer and
the branch manager.
(1)
•
The branch manager must keep the issue note and file it with the order form.
(1)
AVAILABLE: (5)
MAXIMUM:
(5)
c. Physical control over the inventory at the branches (half-finished goods
and half raw materials)
•
The branch manager must keep records of the inventory on hand. These
records must be updated with the issue note and sales invoices.
(2)
•
The branch manager and sales assistant must frequently hold inventory
counts on a sample basis (rotate the specific items selected) and compare
the counted inventory per item with the quantity according to the inventory
records.
(1)
•
The internal auditor must perform inventory counts at the branches on a
surprise basis and he/she must compare the physical inventory with the
inventory records. The branch managers must be held liable for any
shortages.
(2)
•
The storeroom of each branch must only have an entrance from within the
shop. Any doors or windows on the outside must have security gates/be
closed with iron bars.
(2)
•
Staff must have access to the storeroom, but it is very important that staff
make sure that no delivery people or clients go into the storeroom.
(1)
•
The shop (sales area and storeroom) must be protected against fires and
there must be fire extinguishers and sprinklers on the premises.
(1)
•
The shop must have a security gate at the entrance that only opens with the
press of a button located at the cashier’s counter. It must also have an alarm
system for evenings.
(1)
•
Sales assistants must count the amount of items clients want to buy to
ensure that they come out with the same amount of items.
(1)
•
The layout of the shop must be designed in such a way that clients must
walk past the cashier before they step outside the door.
(1)
•
A security guard must be appointed, and all clients’ purchases must be
compared with the cash register slip and sales invoice before they may
leave the shop.
(1)
•
The staff’s packages must be examined when they leave to ensure that
they do not walk out with inventory items.
(1)
PRESENTATION:
AVAILABLE:
MAXIMUM:
(1)
(15)
(13)
For the question as a whole:
APPROPRIATE FORMULATION OF INTERNAL CONTROL measurements (1)
AVAILABLE:
(38)
MAXIMUM:
(30)
•
Production process reports must be generated for various reasons:
•
Daily production: materials used, wastage and down time.
Report of goods completed per shift, day, week, month.
Identify any differences from the production schedule.
Production reports must be authorised and signed.
5. Transfer to finished goods store
a. Finished goods transfer note
•
Record transfer of manufactured goods from the production division to the
finished goods store. (Better to use than an email)
•
A pre-numbered finished goods transfer note must be issued in 3 fold by
one of the production foremen and must be authorised and signed by the
production manager.
•
Contain details on:
- The quantity and description of goods
- Date
- Department sent to.
•
3 Copies
- One copy should go to the finished goods store whilst accompanying the
goods so that they can match to the physical goods received.
-
One copy should remain in own records (factory) as proof that the goods
have been transferred.
One copy should go to the accounting department to update inventory
records.
b. Stock records
•
Inventory records should be updated to reflect the transfer by an independent
accounting personal (accountant).
- Finished goods should increase.
- WIP decreases.
c. Cost system
•
Unit costs determined by a variety of methods
- Process costing
- Job costing
- Standard costing
• Each method requires different ways of accumulating costs and unit cost
calculations. (ManAcc)
d. Determination and calculation of production costs of finished goods
•
•
•
Production reports (made up of the calculations within them) provide
information concerning amount of raw materials used in production, labour
required to produce goods, and allocation of overheads.
Production cost will depend on the system in use.
Calculation of production costs must be checked and authorised (signed)
by management.
e. Additional (for that of a perpetual system)
•
•
•
•
•
The stock should be barcoded rather than maintaining A4 pieces of paper.
The barcoded physical stock must be checked against the theoretical stock
on a frequent basis (weekly) and have a tracking system, by the sales
assistant or branch managers.
There should be a designated accountant that should be employed to keep
record and update the perpetual system, when stock is received, sold,
destroyed, etc. This person should not have access to the stock.
The re-order level should be put into the system so that stock can be reordered when the levels are too low.
There should be frequent stock counts, this must be done in conjunction with
an independent person and shortages and surpluses must be reported to
the general manager for further investigation. The general manager must also
perform regular surprise stock takes.
6. Send finished goods to customers
SALES & RECEIPTS CYCLE
PICKING AND DISPATCH OF ORDERS BEFORE THE GOODS ARE LOADED
ONTO THE TRUCKS FOR DELIVERY BY THE DRIVER.
1. The approved sales order form is sent to an access-controlled demarcated area
of the warehouse where the storemen pack boxes for dispatch and one of the
storeman then sends an email to the sales department to confirm receipt of the
order. The chief storeman then instructs the packers to pack the order
accordingly.
(1)
(must refer to approved sales order)
2. Pre-numbered, pre-printed delivery note is prepared by the storeman responsible
and then attached to the packed goods.
(1)
3. The delivery note includes the following information:
▪ order number
▪ quantity
▪ product code
▪ customer
▪ delivery date
▪ delivery address
▪ Storeman signed the delivery note as proof that all the inventory has indeed
been packed correctly and to assign responsibility
(1)
4. The chief storeman then compares the physical goods to the delivery note as well
as the approved sales order form and checks the quality, quantity and the
description is correct thereafter he signs the delivery note as evidence of doing
so.
(1)
5. The approved delivery note is then distributed as follows:
▪ Two copies of the delivery note accompany the goods to the client. One
copy of the delivery note must be signed by the client and returned with the
delivery staff to the warehouse. The signed copy is forwarded to the
accounting department so that the invoice can be prepared. (must state the
fact that a signed copy must be forwarded to accounting department to
obtain the mark)
(1)
▪ One copy is sent to the sales department as evidence that the order has
been executed.
(1)
▪ One copy remains in the warehouse as evidence that inventories have been
dispatched and for the number sequence check.
(1)
▪ One goes to the inventory clerk so that the inventory records can be
updated and as evidence that the order has been executed.
(1)
(Note: If no reason is given why a copy must go to a specific destination -2 in total thus he/she
will get 2 out of 4 – No negative marking)
6. The number sequence of the delivery notes must be checked by the chief
storeman (independent person) on a regular basis and outstanding items must be
followed up.
(1)
AVAILABLE: 9
MAXIMUM: 7
DELIVERY
1. The driver then packs the goods into the delivery vehicle ensuring the goods
match the delivery note,
(1)
2. he signs as evidence of doing this.
(1)
3. Before the delivery vehicle leaves the premises, the gatekeeper ensures that
all the physical goods have been provided with delivery notes that agree with
the delivery note; this can be documented on a gate register or the delivery
note.
(1)
ONLY ONE MARK FOR PRINCIPLE
4. The client must sign the delivery note as proof of receipt of the physical goods,
that the quality, quantity and description match what was ordered and what is
on the delivery note.
(1)
5. The client keeps one copy and the other copy is returned to the invoicing
department by the delivery vehicle.
(1)
6. Mr Frosting must review the number sequence of the delivery notes and
investigate any missing numbers.
(1)
Inventory count sheets
Inventory count
-
Describe the inventory count procedures that you would recommend
Before count
•
•
•
•
•
•
•
•
•
•
•
•
Small Cars (Pty) Ltd must inform all persons concerned of the date on which
the inventory count will take place by means of written instructions. (1)
Inventory count has to take place as close as possible to year-end.
(1)
A planning meeting should be held with all persons concerned so that
everybody can know what their duties and responsibilities are (must take
place well in advance of inventory count date).
(1)
Based on the nature of the stock the following staff will be needed:
o 3 supervisors (one per store)
o 12 counters (two teams of two per store) or 6 counters (three teams
of two rotating)
o 1 coordinator
(1)
Staff involved in the inventory count should not be responsible for the daily
control and recording of stock items.
(1)
The three stores must be neatly packed before the inventory count so that
items can be counted easily.
(1)
Make sure that there are no open spaces on the shelves and that all items
are appropriately identifiable.
(1)
Stock should be marked in such a way that it can be identified during the
inventory count.
(1)
Access to the premises must be restricted to the counters, supervisors
and the coordinator.
(1)
If it is practically possible, there must be no movement of stock items on
the counting day.
(1)
If there is a movement of stock, it should be kept separately (for new
supplies received) and documented appropriately.
(1)
Two counting teams must be allocated per store. The counting teams that
have to follow up on differences must be appointed in advance.
(1)
During count
•
•
•
•
Pre-numbered, pre-printed counting sheets must be issued to the
counting teams by the supervisors and counters must sign for it.
(1)
Supervisors are responsible to ensure that all counting sheets (even
unused counting sheets) are handed in by the counters after the taking has
been concluded and that all counters have signed as confirmation of
delivery.
(1)
A counting sheet register can be used for the purpose of recording which
counting sheets have been issued to which counting teams.
(1)
The counting sheets should have headings so that the following information
can be recorded.
o Description of the items
o Location of the items
o Count per item
o Space for the signatures of the counters
(2)
•
•
•
•
•
Or
•
•
•
•
All counting sheets must be completed in ink. (No pencil, no tipex)
(1)
Unused lines must be crossed out.
(1)
Counters must make sure that they work through the store systematically
to ensure that all items in the store are counted.
(1)
After an item has been counted, it should be marked as counted to prevent
it from being counted twice (with a sticker).
(1)
All stock items must be counted by the second team.
It should be ascertained that the team members rotate their functions of
count and write.
(1)
Supervisors must continuously supervise the counting teams to ensure
that all procedures are appropriately followed.
(1)
If there are any changes to be effected on the counting sheets, the
supervisor must initial it after the change has been confirmed.
(1)
Counters must count in teams of two and rotate regularly (when six teams).
Or
•
•
•
Counters must rotate the counting and recording (when three teams). (1)
During the inventory, count counters must identify any obsolete or
damaged stock and stock held on behalf of third parties.
(1)
Counters must sign the counting sheets as evidence that counting has
been completed to pin down responsibility (NB!) and, according to the
counter, performed correctly according to the inventory count procedures.
(1)
After count
•
•
•
•
The supervisors receive the counting sheets and confirm that:
o all counting sheets have been received (check number sequence),
and
o there are no errors or missing numbers
and
o that no unauthorised changes have been made on the counting
sheets.
and
o that the counters have signed as confirmation.
(2)
After the supervisors have received all counting sheets, they sign the
counting sheet register and hand the completed counting sheets over to
the coordinator.
(1)
The coordinator confirms that all stores and items have been counted. (1)
The coordinator reconciliates the counting sheets of the two counting
teams and if there are any differences they are counted again (by the preidentified third counting team).
(2)
AVAILABLE: 33
MAXIMUM: 28
LANGUAGE AND PRESENTATION: 2
TOTAL: 30
•
•
•
•
•
•
•
No additional unauthorised changes may be made by the coordinator on the
inventory sheets once returned. (1)
The inventory manager should compare the figures from the first and second
count to confirm that the two figures are the same.
(1)
Teams may not leave the premises until all differences between the first and
second counts have been resolved.
(1)
The quantities on the inventory system and the physical count sheets
must be compared.
(1)
If the quantities do not correspond:
o the inventory item must be recounted; and
(1)
o the necessary corrections must be made on the system for example
theft or damaged goods. (1)
An independent person (e.g. the accountant) must review the comparison
and inventory corrections. (1)
S/he must sign as evidence of having performed the review. (1)
Production Cycle Documents
a. #
b. Details
c. Check
12 MARKS
Raw material Requisition (RM)
Pre-numbered
• Date of request
• Quantity
• Description of raw material
Raw material Transfer Note (RMT)
Pre-numbered
• Despatch date (transfer)
• Quantity
• Description of raw materials
despatched
• Cost of item
Finished goods Transfer Note (FGT)
Pre-numbered
• Despatch date (transfer)
• Quantity
• Description of order
•
•
•
•
Manufacture clerk prepares and
signs.
Production manager only
authorises by signing, after details
on the RM have been agreed to the
production schedule.
•
•
2 storemen pick and prepare RMT
and sign.
Match (compare) raw material
requisition to raw materials transfer
note and physical goods prepared.
(Raw materials foreman) QQD
Signed by storeman and head
storeman.
•
•
The factory storeman must
compare the RMTs quantity and
description to the FGT and then;
Compare it to the physical goods
and sign as evidence. QQD
Signed by the factory supervisor
and the production manager.
d. Copies
1. Raw material store
Prepare right quantity and type for
dispatching and update records
w.r.t. the movement.
2. Manufacturing
Evidence of quantity/type of RM.
3. Accounting department
Update inventory records.
1. Raw material store
Evidence of quantity and type of
raw material issued.
2. Manufacturing
To be sure of quantity and type of
raw materials issued by raw
materials store.
3. Accounting department
Update inventory records.
1. Finished goods warehouse
Evidence of quantity and type of
finished goods issued.
2. Manufacturing
As eveidence of the quantity and
type of finished goods issued.
3. Accounting department
Update inventory records.
e. Number
sequence
Production manager review number
sequence of raw material requisitions
and investigate missing or outstanding
numbers.
Head storeman review number sequence
of RMT (issue note) and investigate
missing or outstanding numbers.
Production manager must do a sequence
check for any outstanding or missing
numbers.
7. SALARIES AND WAGES CYCLE (HUMAN RESOURCES)
Introduction
What are salaries and wages?
•
•
•
•
•
•
•
•
•
•
•
Material expense
Wages influence stock valuation – cost allocation.
Impacts cash: fraud / theft.
Small amounts vs. high volume of transaction.
Internally generated transaction without physical documentation.
Salary
Fixed, pre-determined amount, not
affected by hours worked (basic
salary).
Paid monthly by cheque/ direct
deposit.
•
•
•
Wages
Paid for productive hours.
Timekeeping required.
Paid weekly with cash.
NB:
Time worked
Calculation
Payment
Control over cash
•
•
NB:
Calculation
Payment
Transaction types and functions
SCI: Expense accounts
• Salaries (nett, excluding fringe benefits);
• Wages (nett, excluding fringe benefits);
• Commission;
• Bonus;
• Leave pay expense;
Fringe benefits
• UIF;
and deductions
• Leave pay;
• Pension;
• Medical aid
SFP accounts
• Bank
• Accrual for deductions payable
• Provision for leave pay
Dr SCI
Cr Bank
Cr Provisions and accruals
Risks
What Could Go Wrong (WCGW)
When we accept and process the order (Initiate)
Appointments &
authorisation
RISK
1. Unauthorised appointments/dismissals
Calculation &
preparation of
payroll
Personnel
records
1. Unauthorised deductions /fringe benefits
2. Unauthorised & wrong changes to salaries/ wages
1.
2.
3.
4.
5.
6.
7.
8.
Employees dismissed remain on payroll
Employee paid for services not rendered
Employee paid at unauthorised scale/tariff
Deductions paid over incorrectly
Employee not paid for services rendered
Pay incorrect employee
Inaccurate calculations wrong wage scale or basic salary or hours or deductions
Ineffective control over unclaimed wages
Recording
1. Fictitious employees on salary & wage journals
2. Incorrect recording of information
3. Not all salary/wage transactions are recorded
Perfect system
1. Appointment and authorisation
•
INITIATE
•
•
Specific department/head of the personnel division
requiring employees informs the personnel division of the
position needing to be filled.
The personnel division will then do the following:
- Advertise the position (With authorisation from higher
management)
- Receive applications together with a CV (which should
contain their qualifications).
- Suitable candidates are then interviewed.
▪ The interview should be performed by the personnel
division.
▪ Two employees (1 from the personnel division and 1 from the division
requiring employees should conduct the interview).
▪ Aptitude tests must be performed.
The individual shall then be offered the job.
•
A pre-numbered appointment letter/contract of employment shall be
authorised and signed by the personnel manager in two-fold:
- 1 copy shall go to the new employee
- 1 copy should be kept by the personnel division
• Appointment letter/contract of employment should contain details on the terms
and conditions of the employment.
• It must be signed by the employee accepting the job.
•
The hourly wage shall be determined by the wage foreman and authorised
and signed by the personnel/wage manager.
Or factory foreman together with the personnel department must decide on a
wage and this shall be authorised and signed by management.
•
2. Personnel records
a. Employee file (or permanent file)
INITIATE
•
Information about every employee is kept in the personnel division within an
employee file
- Each employee shall have their own file.
- The file can be a physical paper file or a computerised file.
•
•
The following information should be kept in the files:
Personnel information
Employee number
Appointment date
Compensations
Fringe benefits
Deductions
Any amendment in wages must be recorded in the employee's personnel file
by the personnel department.
b. Deduction authorisation form (NB: signing)
•
A pre-numbered deduction authorisation form should be completed by
the wage foreman giving permission to the company to deduct certain
amounts of the employee's wage and to pay those amounts to 3rd parties on
his behalf.
• This should be signed by the employee as proof.
• This form must be authorised and signed by the personnel manager and
shall be issued in 2 fold:
- One copy shall be kept by the employee.
- One copy should be kept by the personnel division.
c. Compensation amendment form
•
-
Any change in the following functions:
Remuneration rate
Working conditions
Terms of employment
must be recorded in this document.
INITIATE
•
A pre-numbered compensation amendment form must be issued in 2 fold
and authorised and signed by the head of the personnel division:
- One copy shall go to the employee: in order to notify the employee of the
wage changes.
- One copy should be kept by the personnel division.
• Wage scale adjustments shall also be authorised by the wage foreman.
• Made out by two persons from the personnel division in writing.
• The following parties shall be notified in writing:
- The payment division/wages division
- The employee (compensation amendment form)
d. Termination of service form
•
When either party decides to terminate the employment contract, this must
occur in writing.
• This form can be completed by either parties:
- Employee upon resignation.
- Employer through retrenchment or firing.
• A pre-numbered termination of service form must be completed by either one
of the parties in 2 fold and must be authorised and signed by the head of the
personnel division.
- One copy should be kept by the employee
- One copy should be kept by the personnel division
- Both parties must sign.
WAGES
3. Timekeeping and checking hours worked
EXECUTE
a. Timecard/clock card/timesheet: records the hours of which a wage earner
has worked.
•
Cock cards/timesheets should be pre-numbered and prepared by the
personnel department using the employee list and must be authorised and
signed by the foreman/supervisor.
•
Details include:
-
Employee number
Name
Date
-
Amount of hours worked
Overtime hours worked
•
There should be control over the issue and receiving of clock cards namely
that there should be register for cards issued and received back.
The issuing of the time cards shall be done by Admin Clerk A and the
receiving of the time cards shall be done by Admin Clerk B of the personnel
division. (Segregation of duties over issuing and receiving)
The blank clock cards shall be kept secure in a safe.
•
•
b. Clock card machine
•
•
•
Location: Entry/Exit point (only in one location preferably).
Protected by a turnstyle mechanism – where employees must use their time
cards to swipe in and swipe out.
There should be adequate supervision by the supervisor/foreman:
- Only one clock card machine.
- Supervision during clocking in and out times to ensure that the employee
only swipes their own card and to ensure the validity of information
recorded.
•
All clock cards/timesheets must be collected at the end of the day (and not left
for a period of time).
Clock cards should be checked for errors and manipulation by the
supervisor/foreman which should be signed.
Overtime hours recorded on the clock cards should be checked by an
independent person and approved in terms of the company’s policy.
•
•
4. Calculation and preparation of payroll
RECORD
•
The wages journal/payroll should be prepared with reference to the hours
worked through the clock cards as well as with reference to the clock card
machine.
Calculation:
Hours (Clock card) X Tarrfif (Tariff form)
= Gross wage
(Deductions)
= Net wage
•
-
The following details should be included in the wages journal/payroll:
Employee number
- Amount of hours worked
- Overtime hours worked
Employee name
- Gross wage
Date
- Deductions
Tariff
•
The wage journal/payroll shall be checked and authorised by an independent
person/manager of the wage department for validity (common weakness):
- Recalculation
- Checked with reference to the budget
- Checked for unusual expenses
- Check that the hours indicated match that of the clock cards
- Any differences should be investigated by the supervisor/wage foreman
5. Payments
•
A cheque shall first be requested for total wages for week from the
personnel division and the wage journal/payroll should be sent as
proof/supporting documentation (which has been signed and authorised).
The supporting documentation should be cancelled to prevent double
recording.
A cash cheque shall then be issued by the payments division with evidence
of the money withdrawn such as a bank slip.
The cheque is then cashed immediately.
The cash should be kept in the safe until they are placed in the pay packets.
The wage manager must compare the total of the wage journal with the
cheques and cancel the wage journal in order to prevent double recording.
•
PROCESSING
•
•
•
•
a. Wage slip/wage record
•
The wages for the employees are placed in a pay packet by the wage clerk:
Wage clerk must sign as evidence of receipt of the cash.
The making up of the pay packets should be performed 2 wage clerks from
the payments division.
- The contents must be checked and authorised by the manager of the wage
department.
-
•
A pre-numbered wage slip shall be issued by the payment/wage clerk in 2
fold which indicates all the transactions applicable to the employee and the
totals of their wages to date. These shall be approved and signed by the
manager of the wage department.
-
One copy is sent to the employee.
One copy remains in the payments division.
b. Wage payout
1. The payout must be attended by the accountant and the foreman (i.e. two
persons).
(1)
2. Employees must identify themselves when they come to fetch their wages e.g.
by means of a personnel card of identity document.
(1)
3. Employees must sign the wage journal as evidence that they received their
wages.
(1)
4. The employee must immediately check the cash in the envelope under
supervision of the accountant and foreman and any differences must be
recorded immediately.
(1)
5. Wage envelopes must be handed to the employees in person only.
(1)
6. Wage envelopes, not fetched, must be taken back to the secretary who will
keep it safe together with an unclaimed wage register. Wage must be recorded
unpaid in wage journal and entered in the unclaimed wage register.
(2)
7. The unclaimed wage register and the wage journal must be reconciled weekly.
(1)
8. Similar procedures must be in place as in 1-4 above when the employee claims
his/her wage envelope at a later stage. Entries then in unclaimed wage register
only and not in wage journal.
(1)
9. The unclaimed wages must be banked again within a reasonable period. (1)
10. Long-outstanding wages must be checked by a senior member and reasons
must be obtained.
(1)
AVAILABLE
MAXIMUM
11
10
c. Unclaimed wages
•
•
•
The details of all unclaimed wage envelopes (employee name and number,
date of payout and amount of wages) must immediately be recorded in a
register of unclaimed wages and it must be indicated in the wage journal that
the relevant wage was not paid out.
(2)
The wage envelope, together with the register of unclaimed wages, must be
handed over to the accountant who must sign the register as proof of receipt.
(1)
Until it is claimed (or banked) unclaimed wages must be placed in, for
example, a safe.
(1)
•
If an employee comes to claim his/her wage:
- the employee must be identified property (by, for example, an employee card
or identity book);
(1)
- the employee must check his/her wage and sign the register as proof of
receipt of his/her wage; and
(2)
- the wage must be handed to the employee in person only.
(1)
•
All envelopes which are not claimed in a reasonable time (3-5 days), must be
handed to the cashiers, who must sign the register as proof of receipt of the
money.
(1)
The cash must then be deposited in the bank account of the company.
(1)
The unclaimed wage register and the wage journal must be reconciled weekly.
(1)
The register of unclaimed wages must be reviewed by the managing director
in order to identify and follow up on any long-outstanding wages or regular
unclaimed wages.
(1)
•
•
•
AVAILABLE
MAXIMUM
11
11
There should be segregation of duties in the following functions:
1. Preparing of the wage
2. Authorisation of the wage cheque
3. Payment of the wages
4. Recording
SALARIES
Salaries are similar to wages but:
1. there are no clock cards.
2. No unclaimed wages.
a. Calculation and preparation of the payroll
Calculation:
Basic salary (tariff form)
+ Fringe benefits
(Deductions)
= Net salary
b. Salary journal
•
•
A pre-numbered salary journal must be prepared by the payments division
with reference to the employee list provided by the personnel division, which
shall be authorised and signed by the head of the personnel division.
This shall be prepared a week before payment is made.
•
Details:
-
•
Employee number
Employee name
Date
Salary scale
-
Net salary
Fringe benefits
Gross salary
Deductions
The Salary journal shall be checked by the head of the personnel division
and authorised and signed:
-
Recalculated
Checked with reference to the budget
Checked for unusual expenses
Any differences shall be investigated
c. Payslip
•
A pre-numbered pay slip shall be issued in 2 fold by the payments division
in order to ensure that employees receive the correct amount.
•
Copies:
•
1 copy shall go to the employee
1 copy shall go the personnel division
Details:
-
Employee number
Employee name
Basic salary
Salary scale
-
Net salary
Fringe benefits
Gross salary
Deductions
d. Payments by cheque (refer to payments and purchases cycle)
•
•
•
•
•
•
•
The cheque shall be requested with the necessary supporting documentation
(cheque requisition).
Supporting documentation shall be cancelled to prevent double recordings.
The cheque number shall be noted in the salary journal, to note if the cheque
has already been paid.
The cheque shall be signed and authorised by 2 persons.
The cheque shall be made out in the employee's name and crossed (nontransferrable).
The cheque shall be compared with the salary journal to ensure the results
are the same before the cheque is signed.
A salary control account or separate bank account shall be used to pay
the salaries.
e. Payments by direct bank transfer and electronic funds transfer
•
•
•
•
•
•
•
This shall be performed by the responsible individual.
Should prepare an electronic funds transfer file and details shall be recorded
in the file such as: salary, name and number of the employee and banking
details, etc.
The manager of the payments division should review the file and compare
it to the salary journal, the file shall then be approved by a password being
entered.
The actual paying of the salaries should occur from a separate bank account
or a salary control account.
Proof of payment must be printed out as evidence.
The head of the personnel division/accountant should check for fictitious
employees.
There shall then be reconciliation between the separate salary control/bank
account and the transfer made by the accountant.
f. Payments of deductions to third parties
I. IRP 5 FORM: deals with the income tax of the employee.
•
•
Must be pre-numbered.
Details on: payments received by the employee for the year and the
corresponding tax deductions.
•
2 copies:
-
•
1 copy goes to the employee
1 copy goes to their own records (Accounting department)
Other deductions included should be checked and authorised by the head of
the payments division/accountant.
II. Monthly return: all deductions of company in total.
•
Includes: tax, pension funds, medical aid fund, RAF, RSC UIF (All these
amounts must be checked against the companies own records).
• Shall be checked, authorised and signed by the accountant of the
personnel division:
- Preparation and authorisation of the cheque (supporting documentation,
supporting documentation cancelled, signed by 2 persons etc.)
• The deductions shall then be paid over the 3rd party after being authorised
and signed.
• Late payments will lead to the business being liable for fines and penalties.
6. Account
REPORT
•
•
Preparation of the wage journal entries.
Processing of the wage journal entries to the general journal and general
ledger.
Additional theory to look at
List the controls that should be in place over the authorising and payout of bonuses
1. The directors’ resolution on the bonus issues (in detail per employee or per post
level) must be recorded in the minutes of the meeting.
(1)
2. Minutes must be approved and kept safe in a systematic manner.
(1)
3. A separate ledger account for bonuses must be opened so that the bonus payout is
easy to identify.
(1)
4. The financial accountant must:
a. Agree amount in ledger account with amount in minutes.
(1)
b. Select a sample of employees and ask the wage manager to provide him with
the payslips and IRP5 certificates of the relevant employees in order to check
that bonus amount per individual agrees with approved list.
(1)
5. The financial accountant must check the supporting documentation before he
authorises the bonus cheques.
(1)
6. The cheques must be approved by a member of management as second assignee.
(1)
Internal control objectives: Salary System
To ensure that:
• only authorised engagements of competent, qualified persons occur.
(1)
• payments take place at authorised, approved scales or tariffs.
(1)
• all salary calculations are accurate.
(1)
• all deductions and fringe benefits/ allowances are properly authorised.
(1)
• payments to employees (salary cheques) are properly authorised.
(1)
• all salary changes/increases/adjustments are properly authorised.
(1)
• all dismissals are duly authorised.
(1)
• no fictitious employees exist in the salary system (or that payments only occur to valid
employees).
(1)
• all salary transactions (salary expenses and payments) are properly (completely) recorded
in the accounting records.
(1)
• all salary transactions are recorded accurately in the accounting records.
(1)
salary journals are correctly cast and that all salary transactions are accurately posted to
the correct general ledger account.
(1)
• all salary transactions are recorded in time and are classified correctly in the accounting
records.
(2)
AVAILABLE
MAXIMUM
FORMULATION
13
8
1
Internal control objectives: Wages
To ensure that:
1. all wage pay-outs are prepared according to actual hours worked as per
authorised clock cards.
2. all wages are calculated at authorised rates.
3. all changes to wage rates are correct and authorised.
4. all deductions and fringe benefits are authorised.
5. all payments of deductions are correctly calculated.
6. all deductions are paid to the correct organisation.
(1)
(1)
(1)
(1)
(1)
(1)
7. all wage payments are correctly calculated.
8. all wage payments are made to actual employees of the organisation.
9. all wage payments are made to the correct employee.
10. all wage workers are paid for all services rendered.
(1)
(1)
(1)
(1)
AVAILABLE 10
MAXIMUM 10
8. INVESTMENT AND FINANCING CYCLE
FINANCING
Issue of shares (shares certificate)
Dividends
Raising a long-term loan
Finance charges and loan repayments
INVESTMENTS (Fixed assets)
Acquisition of PPE
Disposal of PPE
Depreciation and Net Asset Values
Property – Title deed
Equipment – Invoice
Market value – registered in your name
A. Initiation
•
Authorisation:
- Company policy and director’s resolution (minutes of director’s meetings).
• Adhere to any limitations set out in the MOI.
• Any requirements in the Companies Act (E.g. section 40 regarding the share
price).
• Cash flow considerations, budget preparation and cash flow statements.
• Liquidity and solvency must be considered.
B. Transactions types
i.
Investment Transactions
•
Acquisition and disposal of tangible non-current assets & financial instrument
investments
Acquisition, internal generation and disposal of intangible assets
Receipt and accrual of interest income and dividends received on investments
Accounting for the use of and changes in value of tangible and intangible
assets through:
•
•
•
-
Depreciation/ amortisation
Revaluation/ other fair value adjustments
Impairments and write-downs
Profits/losses on disposal
ii. Financing Transactions
•
•
•
•
Issue and repurchase of shares
Receipt of loan funding (and payment thereof)
Issue of debentures and subsequent repayments
Handling of/ accounting for the obligations that arise out of financing:
- Dividends declared and paid
- Finance charges accrued and paid (on loans)
- Finance charges and accounting adjustments in relation to debentures
Purpose of the transaction:
•
Ensure that an entity invests funds in non-current assets to commence and
operate a business and generate working capital that ultimately provides profits
for the entity (direct or indirectly).
Also invest funds in other investement assets to generate investment returns.
Ensure that an entity obtains sufficient financing in order to be able to
commence and operate a business.
•
•
C. Characteristics of the cycle
•
•
•
•
Magnitude of transactions in this cycle are usual material on FS
Frequency of transactions are usually lower than for other cycles
Transactions not subject to routine IC
Many transactions are subject to management assumptions and estimates
and may involve complex calculations
• Since many transactions are done internally, often done without supporting
external documentation
• Transactions are governed by statutory and governance requirements such
as:
- Companies act 2007
- MOI
D. Functional Areas
i.
Financing
Issue of
shares
Purpose
To obtain
cashflows by
allowing potential
(or current)
shareholders to
purchase an
interest in the
company
•
•
•
•
•
•
Payment of
dividends
To provide returns
for shareholders
for their
investment in the
company
•
•
•
Activity
Approval of issue of additional
shares by board of directors
(approval must be had by parent
company and resolution be
minuted)
Above must be in accordance
with S38, s39 and s40 of
companies act
Shareholders agreement must
be drawn up and entered into by
new investors and the entity
Investor pays for shares in terms
of the agreement
Share certificate issues
Transaction recorded in
accounting records
Dividend is authorised by a
resolution of BoD (must comply
with S46 Companies Act.) Must
be minuted.
Settlement of dividend takes
place in accordance with
decision of BoD
Dividend recorded in accounting
records
People
1. Board of
directors
2. Company
secretary
3. Accountant
1. Board of
directors
2. Company
secretary
3. Accountant
Raising a
long term
loan
To obtain cash
flows from a bank
or lender for
funding purposes
•
•
•
•
Finance
charges
and loan
repayment
To account for
finance charges
and loan
repayments in
terms of
agreement
1.
2.
3.
4.
5.
Directors decide on the best
financial decision to acquire new
PPE
Obtain approval from board and
reach agreement with lender on
details of loan and repayments.
Documented in a formal
agreement.
Signing of loan agreement,
funds advanced and general
ledger accounts updated to
reflect transaction
Interest calculated by lender and
added to loan account.
Statement sent to entity on a
monthly basis (reflect monthly
interest charge)
Payment of interest takes place
automatically
Accounting records updated
monthly to reflect payment of
interest
Repayments have to be made in
terms of agreement. Take form
in monthly amount, usually
automatically paid.
Updates to accounts in general
ledger are made
1. Board of
directors
(specifically
financial
director)
2. Accountant
Main activity
Gaining approval from BoD
for significant transactions
Conducting feasibility studies
Acquisition process ensues –
invoice by supplier is
processed
Acquisition requisition
document is completed for
less significant acquisitions
All new PPE are recorded on
the fixed asset register and
GL
Significant transactions
require approval by BoD and
have to be within
memorandum mandate of
MOI
Once BoD approves sale,
asset is advertised for sale,
buyer is identified, invoice for
People
1. BoD
2. Department
head/
person
requesting
asset
3. Relevant
accounting
personnel
1. Accountant
ii. Investments
Acquisition of
PPE
Disposal of
PPE
Purpose
To invest funds in
non-current
assets to
commence and
operate the
business & to
generate working
capital that
provides for profits
for the entity
•
•
•
•
•
•
•
1. BoD
2. Accountant
3. Relevant
accounting
personnel
•
Accounting for
use of assets
and changes
in asset values
To account for the
use of and
changes in value
of PPE over time
•
•
•
•
•
the sale price issued by the
entity. Buyer settles the
invoice and takes delivery of
the asset
Original cost and acc dep of
asset must be removed from
GL account after sale.
Profit/loss must also be
recorded.
Depreciation os calculated
according to useful life of the
category of class of PPE
Accordingly, entity staff
estimate useful lives and
residual values
Recorded on fixed asset
register and GL
Qualified member of staff
consider the impairment of
assets annually
If no one is suitably qualified
– expert in the field may be
appointed by BoD
E. Documents and Records
i.
Investment activities
•
•
Receipt and custody of assets
-
ii.
Ordering and acquisition of assets
Capital Budget
MOI
Minutes of the board meeting
Asset Requisition
Specific purchase agreements/ contracts
Share certificate
Detailed Fixed Asset register
Master file amendment forms
Schedule Calculations
Financing Activities
•
Receipt of debt or equity funds
Minutes of board meeting
MOI
Specific financing agreement/ contract
• Holding of debt or equity funds
- Securities register
- Master File amendment forms
- Schedules of financing calculations
-
1. BoD
2. Production
managers/
directors
3. Accountant
4. Other
relevant
accounting
personnel
F. Risks (what could go wrong) in the cycle
i.
Investing activities:
• Fictitious or obsolete assets no longer used recorded in SFP
• Management manipulate asset values as IFRS estimates are subjective
• Inappropriate capitalisation of (expense) costs may occur
• Entity may record an asset it does not have rights to
• Am asset may need to be impaired due to a loss in value owing to various
internal and external factors (necessary write-down may be recorded
incorrectly)
• Accounting of complex financial instrument investments may be incorrect
• Misappropriation risk may arise because of theft of tangible asset s and
personal use of assets by management
ii.
Financing Activities:
• Failure to recognise financial liabilities at reporting date
• Understanding of value of loans/ debentures at reporting date
• Accounting of complex liabilities incorrectly
• Failing to account for accruals in relation to financing expenses (e.g. interest
expense and dividends declared)
G. Control
CONTROL
OBJECTIVE
VALIDITY
ACCURACY
CONSEQUENCES
INVESTMENTS
Invalid purchases or
capitalisation of assets.
- Overstatement of
assets due to fictitious
purchases.
- Invalid development
costs being capitalised.
-
-
-
COMPLETENESS
-
-
-
-
Purchases or
capitalisation of assets
recorded inaccurately =
overstatement.
Incorrect recording of
investment revenue
and expenditure.
-
Assets purchased are
omitted from recording
= understatement of
assets.
Incorrect recording of
investment revenue
and expenditure.
-
-
-
FINANCING
Unauthorised financing
obtained.
Overstatement of
owner’s equity and
liabilities.
Overstatement of
expenditure due to
invalid recording of
finances.
Inaccurate recording of
equity and loan receipts
or repayments.
Over or understatement
of owners equity.
Overstatement of
expenditure due to
invalid recording of
finances
Incomplete equity and
loan receipts or invalid
recording of loan
repayments =
understatement of
equity.
Incomplete recording of
financing expenditure.
QUESTION 2 (SUGGESTED SOLUTION) 15 Marks
PART 1: CONTROL OBJECTIVES FOR THE INITIAL RECEIPT OF THE LONG
TERM LOAN
To ensure that:
• The long-term loan is appropriately authorised and is allowed in terms of the
Companies Act. (1)
• The long-term loan relates to funds actually received by the business during
the current period. (1)
• The long-term loan is accounted for at the correct amount in the financial
records. (1) The long-term loan is classified correctly in the accounting
records. (1)
• The long-term loan is accounted for timeously in the accounting records. (1)
AVAILABLE: 5 MAXIMUM: 4
Communication skills: clear formulation “to ensure that” (1)
Note: No internal control objective for summarisation and posting is included as there is no
subsidiary ledger recording, no internal control objective for completeness (excluding timeliness) is
included as it is only one transaction that is recorded.
PART 2: INTERNAL CONTROLS FOR THE LOAN FROM ENTERTAINERS BANK
•
The approval must be given at a directors’ meeting and noted in the minutes of
the meeting. (1)
• Before the decision is authorised, the following must be considered:
- Statutory requirements such as the Companies Act; (1)
- The company’s policy and Memorandum of Incorporation; (1)
- The estimated cash requirements of the company supported by cash flow
estimations and budgets. (1)
- Any other valid point. (1)
• Legal advice should be obtained to consider any legal implications for the
company. (1)
• Contracts with all relevant terms and conditions must be signed by an
authorised staff member of TGS (one of the directors), as well as a
representative from the party advancing the loan. (1)
AVAILABLE: 7 MAXIMUM: 6
PART 3: AUTHORISATION VS INDEPENDENT REVIEW
Authorisation:
The approval by the board of directors of the specific property at the agreed price. (1)
Control objective(s): Validity (1)
Independent review:
The general ledger was updated with the purchase by the financial accountant (Mr
W.D. Wheeler) and this has been reviewed for accuracy and appropriateness by the
financial manager (Miss Zendaya). (1)
Control objective(s): Accuracy (1)
9. ETHICS: RULES OF IMPROPER CONDUCT & AUDITING PROFESSION ACT
1. INTRODUCTION
Definitions
A. An Audit
•
•
•
•
A systematic process of gathering and evaluating evidence and information
objectively to make evaluation.
It uses assertions about economic actions and situations (made by
management of the entity), and
Determines the correlation (of assertions) with predefined criteria, and
The results are communicated in writing to users.
B. Ethics
• It is defined as a set of principles of right conduct and a theory or system of
moral values.
• Morality defines personal values, whereas ethics refers to a social system in
which those morals are practically applied.
• Ethics can be rule-based which uses strict guidelines and compliance, or
principle-based that uses key objectives to set out ethical values.
Risks a profession would be exposed to if there was no code of ethics:
•
•
•
No communication of expectations and members would make decisions without guidelines
which would cause a variation in standards.
It is difficult to hold someone accountable.
The public’s trust and profession’s reputation can be damaged.
All these individuals will be registered with
SAICA.
C. Roles a CA(SA) can play
D. Difference between SAICA and IRBA
E. Registered auditor vs. non-registered auditor
Deals with the individual
REGISTERED
Individual s37
Firm (partnership or company) s38
Deregistered (firm or individual) s39
REGISTERED AUDITOR
NOT A REGISTERED AUDITOR
Subject to:
Applicable sections:
- RoIC
- APA
- APA s41 = prohibitions if not
registered and no profit sharing.
Requirements for an RA:
- S41: Appointment, letterhead, sign
documents, perform audit, share
profits.
- S44: When RA may express
opinion, conflict of interest.
- S46: liability
•
•
•
2. AUDITING PROFESSION ACT (APA)
APPLICABLE SECTIONS
S22
S37
S38
S39
S41
S44
S46
Limitation of liability
Duties in relation to an audit
Practice
Termination of registration
Committee for auditing standards
Registration of individuals as registered auditors
Registration of firms as registered auditors
Section 22: - Committee for auditing standards
Composition and purpose
(1) The committee must consist of a minimum prescribed members appointed by
the Regulatory Board:
•
•
•
•
•
•
Five registered auditors
One person with the experience of business
One person with the experience of teaching auditing at a university
One person nominated by any stock exchange
One person nominated by the Commissioner of SARS.
One person nominated by the Registrar of Banks.
(2) The committee must assist the Regulatory Board:
•
•
•
To develop, maintain, adopt, issue or prescribe auditing pronouncements;
To consider relevant international changes; and
To promote and ensure the relevance of auditing pronouncements.
(3) The committee may assist the Regulatory Board to influence the nature of
international auditing pronouncements.
Section 37 – Registration of individuals registered as RAs.
(1) An individual must apply on the prescribed application form to the
Regulatory Board.
(2) For successful registration the applicant must:
•
•
•
•
•
Have completed the prescribed education, training and competency
requirements
Have arranged for continuous professional development (CPD)
Resident in the Republic
Fit and proper person to practice the profession
The applicant must pay a fee for the auditor’s name to be entered on the
register and he shall receive a certificate of registration.
(3) The Board may refuse registration if:
•
•
•
•
•
Not fit and proper
Been removed from an office of trust on account of misconduct
Convicted of theft, forgery, fraud, corruption and sentenced for imprisonment
Incapable or unsound mind
Is disqualified for registration under a sanction imposed under this act
The applicant is an unrehabilitated insolvent if:
- He entered into a compromise with his creditors or,
- Was provisionally sequestrated.
Section 38 – Registration of firms as registered auditors
(1) The only firms that may be registered are:
(a) Partnerships of which all the partners are registered auditors
(b) Sole proprietors if the proprietor is a registered auditor
(c) Companies of which:
•
•
•
•
Focus is on the individuals in the firm
Only individuals who are registered auditors are shareholders;
All shareholders are directors and all directors are shareholders;
In the MOI it stated that all directors will be jointly and severally liable for
debts; and
The articles of association state that the company may purchase any shares
from anyone who holds shares in the company.
Section 39 – Termination of registration
The Regulatory Board will cancel registration of an RA individual under the
following circumstances:
•
•
•
•
•
•
•
•
Who, subsequent to registration becomes guilty of disqualifications in
S37(3) or,
Whose registration was made in error or on information subsequently proved
to be false or,
Who, prior to registration, has been guilty of improper conduct and therefore
not a fit and proper person to be an RA or,
Whose estate is sequestrated or enters a compromise with creditors or,
Who ceases to be a member of an accredited professional body.
Prior to cancelling the registration, the board must give between 21 and 30
days’ notice.
Where an RA is in a partnership, the sole proprietor or company, registration
automatically lapses when the RA contravenes S38(1).
Registration of an RA automatically lapses when the RA fails to pay a
prescribed fee or portion thereof.
•
At written request of the RA, the Board must remove the RA’s name from the
register.
Cancellation of registration does not exempt the RA from disciplinary
proceedings for conduct committed while registered.
ASAP after cancellation of registration, the Board must publish a notice
specifying the RA’s name.
•
•
Section 41 – Practice
Only a registered auditor may engage in public practice or hold out as a registered auditor.
(1) A person who is not a registered auditor may not:
•
•
•
•
Perform any audit
An RA may provide instructions, control and supervision to non-RA’s during
the performance of an audit.
Pretend to be a registered auditor,
Use the title of a registered auditor,
Make people believe that you are registered
(3) However the above does not apply to:
Any person who is not a registered auditor
is not prohibited from doing the following
•
•
•
Internal Auditor as a title,
Accountant as a title,
A member of a club which is not carried out with the view to profit
- Provided that no fee is received (honorary auditor).
• Auditor general appoints a person to carry out an audit on his behalf (i.t.o.
Public Audit Act 20014).
(4) A Registered Auditor may not without consent of the board knowingly employ a
person to practice who:
•
•
•
Was suspended from public practice, or
Is not registered as registered auditor and was previously registered, or
The board refused to register.
(6) A Registered auditor may not:
(a) Practice under a firm’s name or title unless on every letterhead bearing the
first name and title there appears:
•
•
•
The first names or initials and surname of the registered auditor.
In case of partnership, at least first names or initials and surname of
managing partners.
In terms of a company, the names of the directors according to S171 of the
Companies Act.
(b) Sign account, statement, report document unless work performed by:
•
•
•
•
Him or herself, or
Under his or her supervision or direction, or
That of his or her partners.
Must be in line with the relevant auditing standards.
(c) Perform audits unless there are sufficient risk management practices in
place.
(d) Engage in public practice if suspended from public practice, or
(e) Share in profits or practice in a partnership in respect of audit with a person
that is not registered with IRBA.
Section 44 – Duties in relation to an audit
(1) Where the RA which is firm is appointed to perform an audit:
•
•
The firm shall assign an individual a RA who will be responsible and
accountable for the audit.
The individual's name and surname must be made available to the firm (client)
and IRBA on request.
(2) The RA may not, without such qualifications as may be appropriate in the
circumstances, express an opinion unless (s44(3)):
(3) The following criteria is met:
a) Audit carried out free of restrictions whatsoever, in compliance with the
applicable auditing pronouncements.
b) The auditor is to satisfy him or herself of the existence of all assets and
liabilities in the financial statements.
c) Proper accounting records (complete) and have been kept in at least one of
the official languages of RSA.
d) All information, vouchers and documents necessary for the proper
performance of his duties were obtained.
e) Any reportable irregularity that existed at the date of the report, had been
properly disclosed and reported.
f) Where an undertaking is regulated by law, this must have complied with all
requirements of that law.
g) He or she has satisfied him or herself to the fairness, truth and correctness of
the financial statements.
When answering a question where the above criteria has been breached, end of the question as follows:
“As the above criteria has been breached, no audit opinion should have been issued.”
(4) If the RA or if the RA is a member of a firm, he or she is responsible for the
bookkeeping of that firm,
• And this must be indicated on any report related to business or financial
affairs.
• As well as who prepared what.
(5) It is not regarded as keeping books if he or she only performs:
• Closing entries, or
• Assists with adjustments or
• Framing any financial statements.
(6) A RA may not conduct an audit if a conflict of interests exists.
Section 45 – Duty to report irregularities
Have awareness of this section
and know it briefly.
Definition of an irregularity
•
Any unlawful act or omission committed by,
•
Any person responsible for the management of an entity which,
•
Has caused or is likely to cause financial loss to the following parties:
-
•
The entity or its partner
Members or stakeholders
Creditors or investors.
An irregularity is fraudulent or amounts to theft.
•
Represents a material breach of any financial duty owed to:
- The entity or its partner, member, stakeholder, creditor or investor,
- Under any law applying to the entity or the conduct of management thereof.
• Report to the IRBA otherwise there will be liability in terms of section 46.
Steps for reporting:
-
First report to IRBA about the irregularity.
Then tell the client and provide evidence within three days.
The auditor must then discuss it with the client.
Then send a second report to IRBA within a reasonable period.
Section 46 – Limitation of liability
During an audit where an opinion, report or statement is made there will be no
liability unless:
•
A third party relies on the opinion, report or statement and,
•
Suffers a financial loss as a result of the above and,
•
A2S1
Can prove that opinion, report or statement is issued pursuant to a negligent
performance of the RA’s duties and the RA:
- Knew, or could reasonably have been expected to know, at the time of the
negligence,
- That the third party will rely on the opinion, report or statement and that they
will make decisions based on the reliance.
•
•
There is a liability if there’s no reportable irregularity reported i.t.o. S45.
May not limit or reduce liability that auditor may incur by means of an
agreement or any other way.
Q: When will an auditor have a liability under s46?
-
If he is negligent in performance i.t.o standards.
Malicious or fraudulent actions.
Third party suffers financial loss as a result.
Auditor knew the third party was reliant on the
opinion.
Then apply each of these to the specific scenario.
3. RULES OF IMPROPER CONDUCT
Know details of sections but
not the actual numbers
A. Introduction
B. Rules of improper conduct
i. Extent to which it applies:
• All members registered at IRBA (including IRBA trainees)
ii. A registered auditor is guilty of improper conduct if:
•
•
Contravenes any laws or acts (APA, Any other Act in performance of
services).
Dishonest in the performance of his duties or found guilty by court.
•
Contravenes audit pronouncements or Professional Code of Conduct.
•
Fails to perform services with the degree of professional competence, due
care, skill that is required.
•
Tax evasion:
- Self or client
- Knowingly or recklessly
- Prepares or sign false statements (oral or writing) or false books or records.
•
If the registered auditor's name is used or linked to an estimate of current
earnings based on future transactions in a way in which leads to the belief
that the registered auditor supports the accuracy of the estimate.
Places a restraint of trade on a training accountant upon completion of his
contract.
•
-
Unless: It is for a period of less than a year from the date of ceasing to be
in the registered auditor's employment,
For the act soliciting of professional services or accepting an
engagement of any kind from an existing client of that registered auditor.
• Where the registered auditor receives any payment or reward to cancel the
training contract of a new trainee accountant.
•
Requests or orders are sent from IRBA and others:
- Not responding to the regulatory board within a reasonable time.
- Not comply with requests from the regulatory board within a reasonable
time.
•
If the RA refuses to resign:
- From client, and transfer books or,
- Upon a Reportable Irregularity (APA)
•
•
•
Failure to pay money due to IRBA
Abandons practice without making any arrangements.
Unprofessional behaviour that brings the auditing profession into
disrepute.
-
-
Receipt of payment is not allowed
For the cancellation of a training
contract
By the trainee or other party
-
Restraint of trade is only allowed if
Restraint < 1 year
Soliciting
Professional services
Any other engagement
Existing client
C. Summary of contraventions (Rule 2.1-2.17)
Contravenes any
act of provision of
the APA.
Contravenes any
other act.
Found guilty of
theft, fraud or
forgery.
Dishonest in
performance of
duties.
2.1
2.2
2.3
2.4
Contravenes
auditing
pronouncements.
Fails to comply
with Code (CPC).
2.5
2.6
Degree of
professional
competency, care
and skill.
Tax evasion either
for oneself or
others. Signs and
prepares false
records. 2.8
Contingent
earnings - name is
asscociated with
estimate. 2.9
Restraint of trade
on a prospective
RA for
> 1 year 2.10
Payment for
cancellation of
training contract.
Fails to respond to
communication or
requests from
IRBA.
Fails to comply
wIth an order form
from IRBA.
Fails to resign on
request of client.
2.13
2.14
Fails, after
demand to pay
money due to
IRBA (subcription
fee). 2.15
2.7
2.11
Behaviour brings
the profession into
disrepute.
2.17
2.12
Abandons public
practice without
notifying clients.
2.16
4. ADDITIONAL INFORMATION
Steps for answering a question
Tips:
State what was done right and what was done wrong – state which section it deals with and how it
was contravened.
Then do the following for both the APA and IRBA:
- List theory
- Apply it to the scenario
- Conclude
NB!
Get marks for stating what is not wrong, e.g. that the person is registered.
If section 2.1 of IRBA is contravened, then s44 of the APA act will always be contravened (2
marks).
Term 2 focus:
2.1-2.17 of RoIC and 7 sections of APA
RA’s and training contracts to be an RA
10. ETHICS: CODE OF PROFESSIONAL CONDUCT
SAICA CONSTITUTION
DEFINITIONS
Associate
•
•
Has certain levels to complete.
A person who has satisfied the requirements for associateship
pursuant to the By-laws and who has been granted associateship of
the Institute.
Student (Trainee
•
•
Busy with articles.
A person or learner who is in the permanent employment of a training
office and who is serving under a training contract.
Trainee accountants do not have any rights to use any of the
designations reserved for the members of the Institute.
Accountant)
•
Membership,
associateship &
designations
•
Only a chartered accountant who is a member in good standing is
entitled to use the designations reserved for members of the Institute.
Associates: Cannot do audits, they may only look at FS. They usually
take on a supervisory role.
Trainee accountants do not have any rights to use any of the
designations reserved for the members of the Institute.
•
•
•
No longer exists but there were two types of associates: College of general
accountants, College of accounting technicians.
•
•
Completion of AAT certificate = Accounting Technician AAT (SA)
Associate: College of General Accountants = Associate General
Accountant (South Africa) - AGA(SA)
A. OBJECTIVES OF SAICA
•
•
•
•
•
•
Promote the interests of the members of the Institute.
Support the development of the South African economy
Create a pipeline of trainee accountants who are representative of the
country’s economically active population.
Advancement of accountancy.
Preserve independence.
Encourage a high standard of professional behaviour.
SAICA BY-LAWS
A. DISCIPLINARY PANEL AND PROFESSIONAL CONDUCT AND
DISCIPLINARY COMMITTEES
• Disciplinary panel consists of members of the Institute (of SAICA) to hear
disciplinary matters.
B. POWERS AND DUTIES OF PROFESSIONAL CONDUCT
•
The committee shall consider any complaint which is brought against:
- A member, associate, trainee accountant or former member (accused)
- That may have committed an offence under these By-Laws.
•
If the accused is registered with IRBA, the matter should be referred to IRBA.
C. POWERS AND DUTIES OF THE DISCIPLINARY COMMITTEE
•
On receipt of a formal complaint:
- Give the accused notice of the intention to consider the complaint.
- The accused is given the opportunity of being heard before the Committee.
•
Where investigated and found guilty through IRBA, specific terms will be
adhered to once referred to the Disciplinary Committee (see par 20.2).
D. RECORD AND PUBLICATION OF FINDINGS AND DECISIONS
•
All findings and decisions of the Professional Conduct and Disciplinary
Committees shall take effect when they are made and shall be reported to the
Board (of SAICA).
E. PUNISHABLE OFFENSES
PUNISHABLE OFFENSES Par 34
IRBA
1. Members of IRBA –
• Contravention of rules or regulations of IRBA.
• Current or former members of IRBA –
contravention of the foregoing if he or she were so to be registered with IRBA (APA 44 Duties).
CA(SA)
2. Gross negligence –
• in connection with any work performed in his or her profession or employment.
• (More reasonable than reasonable person expects)
3. Certifying or reporting without checking corrections.
• On accounts, statements, reports or other documents
• without taking reasonable steps
• to ensure the correctness of such certificate or report.
5. Commission paid
• directly or indirectly
• to any person, other than a member in public practice
• for bringing the member work.
6. Commission received
• without knowledge and consent of the client
• in respect of professional or commercial business referred to others.
7. Improperly obtaining work.
8. Advertise in a manner not permitted by the Rules or Code of Professional Conduct.
11. Failing to account for any money or property received for or on behalf of someone else.
12. Discreditable, dishonest or unworthy conduct.
TRAINEE
14. Imposing restraints on trainee accountants
• Before or during period of training
• Impose a restraint
• Applicable after the contract.
15. Payment for of trainee accountants
• Directly or indirectly
• Money (payment) receive
• From trainee accountant or another person on his/her behalf
• For the cancellation of the trainee contract.
SAICA
4. Contravening the provisions of the Chartered Accountants’ Designation (Private) Act, No.
67 of1993
• only a CA(SA) may use the designation of CA(SA).
9. Refuse or fail to perform any of the provisions of the By-laws.
10. Breaching any Rules or Code of Professional Conduct (CPC)
• prescribed by the Board
• from time to time or
• after being previously warned, continuing to commit a breach.
13. Failing to comply with any regulation, By-law, article or Code of Conduct.
OTHER
16. Failing to resign when requested by client.
17. Failing to answer correspondence from Institute. (In reasonable time.)
18. Failing to comply within reasonable time with a requirement from the Institute.
19. Failing to pay any fees to the Institute.
CODE OF PROFESSIONAL CONDUCT (CPC)
PART 1 – General application of Code
Accountants in business
•
-
Professional accountants who are:
employees, contractors, partners, or
directors and who are salaried
employees or directors in an employing
organization and who may be involved in
preparing financial statements.
Accountants in public practice
•
Public practice is defined in the CPC: ‘the
practice of a professional accountant who
places professional services at the disposal
of the public for reward.’
- Includes: professional services, including
accounting, auditing, taxation,
management consulting and financial
management services.
- Therefore, registered accountant at IRBA
as an RA will also fall within this
definition, i.e. provide auditing services.
DEFINITIONS (ET 11 – 20)
Assurance engagement
•
•
•
An engagement in which a CA in the public
practise expresses a conclusion
designed to enhance the degree of
confidence of the intended users
other than the responsible party about the
outcome of the evaluation.
Non-assurance engagement
•
•
Direct financial interest
•
•
Owned directly or under control of individual
or entity.
Beneficially owned through collective
investment vehicle, estate or trust that can
influence investment decisions.
Not reliable or credible
E.g. Filling in a tax form or compiling
Financial Statements.
Indirect financial interest
•
•
No control and cannot influence investment
decision.
Can also be beneficially owned.
Contingent fees
•
•
•
Pre-determined fees
Fee depending on a future event; not a fixed
fee.
Not allowed for an audit.
Calculated on a predetermined basis
relating to the outcome of a transaction or
the result of the services performed by the
firm.
Immediate family
•
Close family
•
Spouse or equivalent or dependant.
•
Chartered accountant – business
•
•
Parent, child (that is no longer dependent),
sibling.
No immediate family.
Chartered accountant – public practice
Works anywhere other than public practice.
E.g. bank
•
Provides professional services.
Professional activities
Professional services
•
Services requiring accountancy or related
skills performed by a CA, including:
Tax
Accounting
Auditing
Management consultancy
Review
Audit
•
•
•
A reasonable assurance engagement in
which a
CA in the public practice expresses an
opinion
whether financial statements are
prepared, in all material respects in
accordance with an applicable financial
reporting framework.
•
•
•
An assurance engagement, conducted in
accordance with international standards, in
which a
CA in the public practice expresses a
conclusion
on whether anything has come to the CA’s
attention that causes the belief that the
financial statements are not prepared, in
all material respects in accordance with an
applicable financial reporting framework.
CPC: STEPS
STEP 1
STEP 2
Conceptual
Framework
Evaluate level of
threat
1A: Identify Threats for 1B
• Self interest
• Self-review
• Intimidation
• Familiarity
• Advocacy
STEP 3
Implement
steps to address
threat(s)
1B: Fundamental Principles
• Integrity
• Objectivity
• Professional behaviour
• Professional competence
and due care
• Confidentiality
STEP 1 – CONCEPTUAL FRAMEWORK
1A. IDENTIFY THREATS
Advocacy
Self-review
Intimidation
Promoting of a position of
a client to such an extent
that objectivity might be
compromised.
CA does not evaluate the
results of a prior decision
or services delivered on
which the CA will rely
when forming judgement
as part of a current
service.
CA is deterred from acting
objectively by real or
perceived pressures,
including attempts to
exercise undue influence
over the CA.
Fundamental Principles:
Confidentiality
Professional
Competence
and Due Care
Professional
Behaviour
Integrity
Objectivity
Self-interest
FOCUS ON CLIENT
Familiarity
Threat that CA become
too sympathetic towards
the interests of a client or
too accepting of their work
due to a long or close
relationship with them.
Financial or other interests
of Chartered Accountant
can influence CA’s
judgement and/or
behaviour improperly
1B. FUNDAMENTAL PRINCIPLES
INTEGRITY (S111)
PROFESSIONAL COMPETENCE AND DUE
CARE (S113)
•
Requirement to (113.1):
Attain & maintain professional
knowledge and skill
Act diligently in accordance with
applicable technical and professional
standards
Maintenance: 113.1 A2
Diligence to act in accordance with (113.1
A3):
Requirements of an assignment
thoroughly
careful
on a timely basis
Take steps to ensure those working under
authority have (113.2):
appropriate training &
supervision
Make parties aware of limitations (113.3)
•
•
•
-
•
•
•
•
-
-
Straightforward & honest
Fair dealing & truthfulness
Not associated with (111.2):
Materially false or misleading
statements
Furnished recklessly
Omits or obscures which could be
misleading
Not in breach of par 111.2 if a
modified report is provided (111.2
A1).
OBJECTIVITY (S112)
•
•
Not compromise business judgement
because of bias, conflict of interest or
undue influences.
Avoid situations that impair objectivity.
CONFIDENTIALITY (S114)
PROFESSIONAL BEHAVIOUR (S115)
CONFIDENTIALITY
NB! Always asked
A. Chartered Accountants are required to respect information acquired as a result
of professional and business relationships and:
•
Be alert to inadvertent disclosure in social environment, business associate
and immediate family
• Maintain confidentiality of information:
- within firm or employing organisation.
- disclosed by a prospective client or employing organisation.
•
The professional accountant should refrain from:
- Disclosing confidential information without specific authority
- Using confidential information for own personal advantage or for third
parties advantage. In respect of information obtained from prospective client
- Using or disclosing confidential information after relationship ended.
•
Take reasonable steps to ensure that personnel in control or persons whose
advice and assistance was used respects confidentiality.
B. Exclusion paragraph: Circumstances where it may be required to disclose
confidential information:
•
-
•
Permitted by law or authorised by client, for example:
Production of documents in legal proceedings or
Disclosure to public authorities of infringement (including reportable
irregularities – s45 APA)
Professional duty or right to disclose if not prohibited by law:
- To comply with the quality review of the Regulatory Board or professional
body
- To respond to an inquiry or investigation by the Regulatory Board or other
regulatory body
- To protect the professional interests of a chartered accountant in legal
proceedings
- To comply with technical standards and the requirements of the Code
C. In deciding whether to disclose confidential information, consider:
•
•
•
•
If the interest of all parties (including third parties) can be harmed if client
consents to disclosure.
If all information is known and substantiated, and if not use professional
judgement to decide on the type of disclosure.
Type of communication and to whom it is addressed.
Are the recipients to whom the information is communicated to, appropriate?
EXCLUSION PARAGRAPH
• With permission of the client
• Legal obligation to disclose
EXCLUSIONS
• Professional duty
• Any parties interest harmed
• If information is known and substantiated
DISCLOSURE CONSIDERATIONS
• Type of communication expected
• Recipient deems it appropriate
PROFESSIONAL BEHAVIOUR
A. Comply with relevant laws and regulations
•
The professional accountant should avoid:
- Bringing the profession into disrepute by knowingly engaging in such
practices.
- Actions that bring that a reasonable informed third party would be likely to
conclude as having adverse effects on the reputation of the profession.
- How would a reasonable and informed third party have reacted weighing all
the specific facts and circumstances available?
Examples
Recruiting → May not directly or indirectly offer employment to an employee of another charted
accountant without informing the latter.
Responsibility to Colleagues → Promote good relations with other CA’s, help others to comply
with the code.
B. Publicity, advertising and solicitation
•
•
•
•
Marketing and promoting themselves and their work
They must not bring the profession in discredit or disrepute but must be
honest and truthful.
Not make exaggerated claims for services able to offer, qualifications or
experience.
Not disparaging references or unsubstantiated comparisons to the work of
others.
Examples
Material’s content and presentation:
• Objective
• Good taste
• Medium consistent with profession
Advertisements may refer to the basis on which professional fees are calculated, but hourly rates
are not allowed to be published.
C. Multiple Firms
•
•
•
•
Chartered Accountants may be associated with more
than one auditing or professional service firm, but there
must be a clear distinction of the firms.
May practice under different firms’ names for different
offices – as long as it is not misleading.
Must be distinction between firms and members who are
not registered, auditors.
Must comply with S 41(1) and/or S 41(2) of APA.
If not an RA, may not:
•
•
•
•
Perform audits
Present themself as RA
Not use RA to describe
themselves
Lead people to believe
registered as RA
D. Signing convention of reports
•
An accountant shall not delegate the power to sign an audit, review or other
assurance reports to any person who is not a partner or fellow director.
• Exceptions: If an emergency arises, in such a case the full circumstances for
the need to delegate must be reported to the client and IRBA.
• Any audit, review or report must contain:
- The accountant's full name
- The capacity in which the person is signing
- CA(SA) or other designation under the person’s full name
- Firms name of accountant if it is not set out on letterhead
E. Recruiting
•
May not directly or indirectly offer employment to an employee of another
charted accountant without informing the latter.
F. Responsibility to colleagues
•
•
•
Conduct in a manner which will promote co-operation and good relations.
Help others to comply with the code.
Co-operate with appropriate disciplinary authorities in applying the code.
STEP 2 – EVALUATE THE LEVEL OF THE THREAT
Identify the threat and assess the factors causing the threat
STEP 3 – IMPLEMENT STEPS TO ADDRESS THE THREAT
Address threats by eliminating or reducing them to an acceptable level:
•
•
•
Eliminate the circumstances creating the threat.
Apply safeguards.
Decline or end the specific professional activity.
If threat is too significant for safeguards to reduce threat to an acceptable
level:
• A chartered accountant in pubic practice must resign from the engagement.
• A chartered accountant in business must resign from the organisation.
FUNDAMENTAL PRINCIPLES
THREATS
•
•
•
•
•
•
•
•
•
•
Self-interest
Self-review
Familiarity threat
Advocacy threat
Intimidation threat
Objectivity
Professional behaviour
Competence and due care
Integrity
Confidentiality
Threats to
fundamental
principles
EVALUATE THREATS
•
•
•
•
•
•
•
ADDRESS THREATS
Qualitative and quantitative
factors
Current policies and
conditions
Corporate governance
Education and training
Complaint systems
Reporting breaches
Disciplinary systems
•
•
•
•
Eliminating or reducing them
Eliminate circumstances,
interests and relationships
Apply safeguards to reduce
threats
Decline or end activity
The professional accountant must:
•
•
•
Exercise professional judgement
Remain alert to new information and changes
Use reasonable and informed third party test
Professional judgement
•
Application of relevant training,
professional knowledge, skill and
experience.
Reasonable and informed third party test
•
Would the same conclusions be reached by
reasonable and informed third party?
•
•
•
Considerations:
Concern that information is missing
Inconsistencies between facts and
circumstances, and expectations
If professional accountant’s expertise
and experience is sufficient
Further consultation required
Information provides reasonable basis
for conclusion
Preconceptions or bias
Other possible reasonable conclusions
•
•
•
Weighs all relevant facts and
circumstances available at the time.
Does not have to be professional
accountant but relevant knowledge and
experience.
Evaluates appropriateness of conclusions in
an impartial manner.
Doesn’t need to be a professional but must
be well informed.
Must have practical and theoretical
knowledge – must be trained or educated in
the field of work.
PART 2: Chartered accountants in business
Examples of threats
Advocacy
Self-review
Intimidation
Familiarity
Self-interest
• Opportunity to
manipulate
prospective
information to
obtain
favourable
financing.
• Determining
appropriate
accounting
treatment for
business
combination
after performing
feasibility study.
(e.g. performing
the feasibility
study on a new
joint venture
and then
deciding on the
accounting
treatment of the
joint venture.)
• Threat of
dismissal or
replacement
over a
disagreement
about
application of an
accounting
principle or the
way in which
reporting on
financial
information is
conducted.
• Dominant
personality
attempting to
influence
decisionmaking
processes.
• Responsible for
financial
reporting when
family member
makes
decisions that
affect the
entity’s
financial
reporting.
• Long
association with
business
contacts
influencing
business
decisions.
• Financial
interests, loans
or guarantees.
• Incentive
compensation
arrangements.
• Inappropriate
personal use of
corporate
assets.
• Gift or special
treatment
offered from
supplier.
• Holding shares
in the employing
company.
Evaluation of threats
Family member refers to close or immediate family.
A. Conflict of interest
THREAT
•
EXPLANATION
•
•
DISCLOSURE
•
•
AND
DOCUMENTATION •
FACTORS
•
•
•
SAFEGUARDS
•
•
•
CONFLICT OF INTEREST – s210
Conflict of interest creates a threat to objectivity and possibly
other fundamental principles.
The CA undertakes a professional activity related to a particular
matter for two or more parties whose interests regarding the
matter are in conflict.
The interests of the CA regarding a particular matter and the
interests of a party for whom the CA undertakes a professional
activity related to that matter are in conflict.
How threats were addressed to relevant parties.
Consent from relevant parties (also implied).
Nature of conflict of interest.
The nature of relevant interests and relationships between
involved parties.
The activity and its implication for involved parties.
In general: more direct connections cause threats to be more
likely not at an acceptable level.
Withdrawing from decision-making process.
Restructuring/segregating responsibilities and duties.
Obtaining appropriate oversight.
B. Preparation and Presentation of Information
PREPARATION AND PRESENTATION OF INFORMATION – s220
THREAT
• Preparing misleading information creates self-interest and
intimidation threats to objectivity, integrity and professional
competence and due care.
EXPLANATION •
•
•
FACTORS
•
•
•
SAFEGUARDS
•
•
•
•
•
•
Preparing misleading information creates self-interest and
intimidation threats to objectivity, integrity and professional
competence and due care.
Prepare or present the information in accordance with a relevant
reporting framework, where applicable.
Prepare or present the information in a manner that is intended
neither to mislead nor influence contractual or regulatory outcomes
inappropriately.
Not omit anything with the intention of rendering the information
misleading or of influencing contractual or regulatory outcomes
inappropriately.
Exercise professional judgment to:
- Represent facts accurately and completely in all material
respects,
- Describe clearly the true nature of business transactions or
activities, and
Classify and record information in a timely and proper manner.
Discuss concerns with superiors, management or those charged
with governance.
Discuss the policies and procedures of the employing organisation
on how to address the matter internally (especially whistleblowing policies).
Consulting with SAICA (a relevant professional body), the internal
or external auditor of the employing organisation and/or legal
counsel.
Determining whether any requirements exist to communicate to
third parties, including users of the information and regulatory and
oversight authorities.
If these safeguards cannot be implemented, the professional
accountant shall refuse to be or to remain associated with the
information.
In such circumstances, it might be appropriate for a professional
accountant to resign from the employing organisation.
C. Acting with sufficient expertise
THREAT
ACTING WITHOUT SUFFICIENT EXPERTISE – s230
• Acting without sufficient expertise creates a self-interest threat to
compliance and due care.
FACTORS
•
•
•
SAFEGUARDS •
•
The extent to which the professional accountant is working with
others.
The relative seniority of the professional accountant in the business.
The level of supervision and review applied to work.
Obtaining assistance from someone with the necessary expertise,
and
Ensuring that there is adequate time available for performing the
relevant duties.
D. Inducements, including gifts and hospitality
INDUCEMENTS – GIFTS AND HOSPITALITY – s250
THREAT
•
Offering or accepting inducements might create a self-interest,
familiarity or intimidation threat, particularly to integrity,
objectivity and professional behaviour.
FACTORS
•
The nature, frequency, value and cumulative effect of the
inducement.
Timing of when the inducement is offered relative to any action
or decision that it might influence.
Whether the inducement is customary or cultural practice in
the circumstance.
Whether the inducement is an ancillary part of a professional
service.
•
•
•
SAFEGUARDS •
•
Inform senior management or those charged with governance
of the employing organisation.
Amend or terminating the business relationship with the
offeror.
PART 3: Chartered accountants in public practice
Examples of threats
Advocacy
• Promoting the
interests or
shares of a
client.
• Acting as an
advocate on
behalf of an
audit client in
litigation/dispute
s with third
parties.
• Lobbying in
favour of
legislation on
behalf of client.
Self-review
• Issuing an
assurance
report on the
effectiveness of
the operation of
financial
systems after
designing or
implementing
the systems.
• Preparing the
original data
used to
generate
records that are
the subject
matter of the
assurance
engagement.
Intimidation
• Threatened with
dismissal or
replacement
from client
engagement.
• Feeling
pressured to
agree with
client’s
judgement as
client has more
expertise.
• Threat by
partner that
planned
promotion will
not occur.
• Accepted a
significant gift
from a client,
and now
threatening to
make
acceptance
public.
Familiarity
Member of the
engagement team
has:
• Close/immediat
e family who is
director/officer
at client.
• Director/officer/
employee with
significant
influence
recently served
as engagement
partner.
• Long
association with
assurance
client.
Self-interest
• Direct financial
interest in
assurance
client.
• Quoting such a
low
engagement fee
that it might be
difficult to
perform
according to
requirements.
• Significant close
business
relationship with
assurance
client.
• Having access
to confidential
information
which can be
used for
personal gain.
• CA discovering
significant error
when evaluating
results of
previous
professional
service
performed by
member of CA’s
firm.
Examples of safeguards
A. Conflict of interest
THREAT
•
•
FACTORS
CONFLICT OF INTEREST – s310
Threat to objectivity may be created when a CA competes
directly with a client or has a joint venture or similar
arrangement with a major competitor of a client.
A threat to objectivity or confidentiality may also be created
when a CA performs services for clients whose interests are in
conflict or the clients are in dispute with each other in relation to
the matter or transaction in question.
•
Before accepting a new client, engagement or business
relationship the professional accountant shall:
- Take reasonable steps to identify conflict of interest.
- Identify the nature of interests and relationships as well as the
service and its implications for relevant parties.
• The existence of separate practice areas for speciality functions
within the firm – which may act as a barrier for passing
confidential information.
• Policies and procedures to limit access to client files.
• Confidentiality agreements signed by personnel and partners.
• Separation of confidential information physically and
electronically.
• Specific and dedicated training and communication.
DISCLOSURE
• Disclosure and consent may take different forms:
- General disclosure to clients that a professional accountant
AND
cannot provide professional services exclusively for one client.
DOCUMENTATION
- Specific disclosure to affected clients of the conflict of interest
and how threats will be addressed – enabling the client to
make an informed decision.
-
•
SAFEGUARDS
•
•
•
•
Implied consent by the client’s conduct after a detailed
presentation of the circumstances has been made to the client
and if they do not raise an objection to the existence of the
conflict.
Having separate engagement teams who are provided with
clear policies and procedures for maintaining confidentiality.
Having an appropriate reviewer who is not involved in
providing the service or affected by the conflict of interest that
can review the work and assess key judgements.
Notifying the client of the firm’s business interest or activities
that may represent a conflict of interest and obtaining their
consent in writing to act in such circumstances.
Notifying all known relevant parties that the CA is acting for
two or more parties in respect of a matter where their respective
interests are in conflict and obtaining their consent to so act
Where a conflict of interest creates a threat cannot be
eliminated or reduced the CA shall not accept a specific
engagement or shall resign from one or more conflicting
engagements.
B. Professional appointments
THREAT
•
•
•
FACTORS
•
•
•
•
CLIENT ACCEPTANCE s320.3
Client may be involved in illegal activities, dishonesty, questionable
financial reporting practices or unethical behaviour.
Creates a self-interest threat to integrity or professional
behaviour.
If the engagement team does not process or cannot acquire
competencies to perform professional services:
- Creates a self-interest threat to professional competence
and due care.
Knowledge and understanding of the client, the industry, the
owners, management and those charged with governance and
business activities.
The client’s commitment to addressing the questionable issue, for
example through improving corporate governance practices and
internal control.
Experience with relevant regulatory and reporting requirements.
There must be an appropriate understanding of:
- The nature of the client’s business
- The complexity of its operations
- The requirements of the engagements, and
- The purpose, nature and scope of the work.
- Knowledge of relevant industries.
- Experiences with relevant regulatory or reporting requirements.
SAFEGUARDS •
•
•
THREAT
Assigning enough engagement personnel with the required
competencies.
Agreeing on a realistic time frame for performance.
Using experts where needed.
CHANGES IN PROFESSIONAL APPOINTMENT s320.4-8
• If a threat created by facts and circumstances cannot be corrected
by applying a safeguard.
• Self-interest threat to compliance with the principle of professional
competence and due care if:
- An account accepts the engagement before knowing all the
facts.
- Acts on incomplete information.
•
Whether the client states before accepting the engagement contract
that contact with the previous accountant must be requested in order
to obtain relevant information.
SAFEGUARDS •
Asking the current or previous account to provide any known
information that the proposed accountant should be aware of before
accepting the engagement.
Obtaining information through other sources such as inquiries of
other parties or background investigations of senior management
and governance of the client.
The proposed accountant shall treat information in confidence and
give weight to any information provided by the existing accountant.
FACTORS
•
•
ADDITIONAL
•
•
•
•
•
•
•
Confidentiality should be respected during changes in
appointment.
The new accountant needs the client’s permission to initiate
discussions with the previous auditor.
The old accountant must ensure the client’s permission is obtained
and also whether the legal and ethical requirements are met.
If the client refuses permission, the new auditor should decline the
position, unless there are exceptional circumstances.
Other means of enquiry include: Third parties and performing
background checks.
If it is a recurring client engagement – must continuously review
whether to continue with the engagement.
If the work of an expert is used:
- Determine whether the use is warranted.
- The skills, resources and experience of the expert.
- Their ethical standards and reputation.
C. Second Opinions
THREAT
•
FACTORS
•
SAFEGUARDS •
•
•
SECOND OPINIONS – s321
A self-interest threat to the compliance with the principle of
professional competence and due care can be created if the
second opinion is based on inadequate information.
The circumstances of the request and all the other available facts
and assumptions relevant to the expression of a professional
judgement.
With permission from the client, obtaining information from the
existing or predecessor accountant.
Describing the limitations surrounding any opinion in
communications with the client.
Providing the existing or predecessor accountant with a copy of the
opinion.
D. Fees and other types of remuneration
THREAT
•
FACTORS
•
•
SAFEGUARDS •
•
THREAT
•
FACTORS
•
•
•
•
•
LEVEL OF FEES s330.3
The level of fees creates a self-interest threat to compliance with
the principle of professional competence and due care if the fee
quoted is so low that it might affect the ability to perform the
engagement up to the expected standards.
Whether the client is aware of the terms of the engagement and the
basis on which the fees are charged.
Whether the level of the fee is set by an independent third party
such as a regulatory body.
Adjusting the level of fees or the scope of the engagement.
Having an appropriate reviewer to assess the work performed.
CONTINGENCY FEES – s330.4
These are fees charged for certain non-assurance services which
create a self-interest threat to objectivity.
The nature of the engagement and the range of possible fee
amounts.
The basis for determining the fee.
Disclosure to the intended users of the work performed.
Quality control policies.
Whether an independent third party is used to review the outcome
and set the level of fee.
SAFEGUARDS •
•
EXPLANATION •
•
•
•
Having an appropriate reviewer who is not involved in performing
the non-assurance service review.
Obtaining an advance written agreement with the client on the basis
of remuneration.
REFERRAL FEE OR COMMISSION – s330.5
A fee is paid to another accountant for the purposes of obtaining
new client work if the accountant requires specialist services not
offered.
A fee received for referring a continuing client to another accountant
or expert if the existing accountant cannot provide the services
required.
Commission received from a third party in connection with the sale
of goods or services of the client.
NB! An accountant shall not charge contingent fees for the preparation of
or amendment to any tax returns as contingent fees for these services
create a self-interest threat to objectivity that cannot be eliminated and
safeguards are not capable of reducing the threat.
THREAT
•
A self-interest threat to compliance with the principles of
objectivity and professional competence and due care is
created if the accountant:
- Pays or receives a referral fee or,
- Receives commission relating to a client.
FACTORS
•
Whether the client is aware of the terms of the engagement and the
basis on which the fees are charged.
Whether the level of the fee is set by an independent third party
such as a regulatory body.
•
SAFEGUARDS
•
•
Obtaining an advanced agreement upfront and in writing from the
client for commission agreements.
Disclosing to clients upfront and in writing any referral fees or
commission agreements paid to or received from other accountants.
E. Inducements, including Gifts and Hospitality
INDUCEMENTS INCLUDING GIFTS AND HOSPITALITY – s340
INDUCEMENTS WITH INTENT TO IMPROPERLY INFLUENCE BEHAVIOUR
THREAT
• Self-interest or familiarity threat is created to integrity,
objectivity and professional behaviour when an auditor or their
immediate family is offered gifts by a client.
• An intimidation threat to objectivity is created when the client
threatens to make these offers public.
FACTORS
•
•
•
•
•
•
•
SAFEGUARDS
The intention behind the gift.
The nature, frequency and value
The timing of when it is given
Whether it is customary or cultural or an ancillary part of the service
The degree of transparency
Whether it is limited to the recipient or available to the broader
group
Apply the reasonable third-party test
•
Informing senior management who are charged with governance of
the client regarding the offer.
• Amending or terminating the business relationship with the client.
INDUCEMENTS WITH NO INTENT TO IMPROPERLY INFLUENCE BEHAVIOUR
THREAT
• Self-interest or familiarity threat is created to integrity,
objectivity and professional behaviour when an auditor or their
immediate family is offered gifts by a client.
• An intimidation threat to objectivity is created when the client
threatens to make these offers public.
EXPLANATION •
•
•
FACTORS
•
•
•
•
•
•
•
SAFEGUARDS
•
•
•
•
Self-interest: The auditor is offered hospitality from a client while
providing services.
Familiarity: Regularly takes the client to sporting events.
Intimidation: Accepts hospitality – the nature of which could seem
inappropriate if publicly disclosed (RTP).
The intention behind the gift.
The nature, frequency and value
The timing of when it is given
Whether it is customary or cultural or an ancillary part of the service
The degree of transparency
Whether it is limited to the recipient or available to the broader
group
Apply the reasonable third-party test
Declining the offer (eliminates)
Transferring the service to another auditor whose connection with
the client would not be deemed to be inappropriate (eliminates).
Being transparent with senior management (reduces).
Registering the inducement in a log monitored by senior
management (reduces).
F. Custody of client assets
THREAT
•
SAFEGUARDS
•
•
CUSTODY OF CLIENT ASSETS – s350
BEFORE TAKING CUSTODY
A self-interest threat to professional behaviour and objectivity can
arise from holding client’s assets while providing services to them.
Make enquiries about the source of the assets and
Consider legal requirements such as the client’s proof of residence
and identification as set out by FICA.
AFTER TAKING CUSTODY
A self-interest threat to professional behaviour and objectivity can
arise from holding client’s assets while providing services to them.
THREAT
•
EXPLANATION
•
A professional accountant is required to:
- Comply with the relevant laws and regulations
- Keep the assets separate from personal and firm’s assets
- Use the assets only for their intended use
- Be ready at any time to account for the assets
•
For all client’s monies for which the accountant is liable:
- The monies cannot be referred to as being in a ‘trust account’ =
misleading.
- Separate bank accounts must be registered
- The accounts must be separately named
- The money must be deposited into an appropriate bank account
without any delay
- All records must be maintained and readily available
- Reconciliations between the designated bank account and the
client’s monies ledger accounts.
- The money should not be held indefinitely
•
For property other than money for which the accountant is
liable:
- The monies cannot be referred to as being in a ‘trust account’ =
misleading.
- All records must be maintained and readily available
- All documentation should be safeguarded against unauthorised
use.
•
•
Utilise umbrella accounts with sub-accounts for each client.
Open separate accounts with power of attorney if the money is kept
for long periods.
Ensure the firm’s indemnity and fidelity insurance is sufficient, and
The risks and responsibilities should be addressed in an
engagement letter if there is one.
SAFEGUARDS
•
•
PART 4A – Independence for audit and review arrangements
•
•
•
410
420
510
511
520
521
522
523
524
525
540
600
Assurance engagement (Audit or Review)
Mainly deals with management decisions
During the engagement period and financial period being audited
EXAMPLES OF THREATS TO INDEPENDENCE
Fees, compensation and evaluation policies
Gifts and hospitality
Financial interest
Loans and guarantees
Business relationships
Family and personal relationships
Recent services with audit client
Serving as director or officer of an audit client
Employment with an audit client
Temporary personnel assignments
Long association of senior personnel
Provision of non-assurance services to audit clients
DEFINITIONS
• Independence (Individual or firm)
INDEPENDENCE OF MIND
INDEPENDENCE IN APPEARANCE
The state of mind that permits the
expression of a conclusion without being
affected by influences that compromise
professional judgement, thereby allowing
an individual to act with integrity and to
exercise objectivity and professional
scepticism.
The avoidance of facts and circumstances
that are so significant that a reasonable
informed third party (RTP) would be likely to
conclude that a firm or an audit or
assurance team member’s integrity,
objectivity or professional scepticism
has been compromised.
Independence = objectivity + integrity
Audit = positive assurance + reliable information
Review = negative assurance + feasible information
A. Fees
THREAT
•
FACTORS
•
•
•
SAFEGUARDS •
•
FEES – RELATIVE SIZE – s410
Self-interest or intimidation threat might be created for
independence (objectivity) when the total audit fees of a client
represent a large part of the firm’s total income.
Operating structure of the firm
Whether the firm is well established or new
Significance of the client qualitatively and or quantitatively to the
firm.
Increase the client base
Have an appropriate reviewer
THREAT
•
FACTORS
•
SAFEGUARDS •
•
OVERDUE FEES– s410.7
Self-interest threat might be created for independence if the fees
are due by the client and not settled before the auditor’s report for
the following year is issued.
Whether the overdue fees are regarded as a loan to the client
Obtaining partial payment of overdue fees
Having an additional professional accountant who was not on the
audit team who reviewed the work.
B. Gifts and Hospitality
THREAT
•
FACTORS
•
•
•
•
•
•
SAFEGUARDS •
•
•
•
GIFTS AND HOSPITALITY – s420
Self-interest, familiarity or intimidation threat to the compliance
with the fundamental principles of integrity, objectivity and
professional behaviour.
The intention behind the gift.
The nature, frequency and value
The timing of when it is given
Whether it is customary or cultural or an ancillary part of the service
The degree of transparency
Whether it is limited to the recipient or available to the broader group
Do not accept gift
Policy to prevent accepting gifts
Any gifts accepted must be approved by firm’s quality review panel
and senior management must be informed.
Amending or terminating the business relationship with the client.
C. Financial interest
•
SHARES – s510
Financial interests may include direct and material indirect financial
interest in the client held by an audit team member, immediate
family members of the team or the audit firm.
Includes owning shares and collective investments.
THREAT
•
Creates a self-interest threat to independence.
FACTORS
•
•
•
The role of the person holding the interest
Whether it is a direct or indirect interest
The materiality of the interest
SAFEGUARDS
•
Selling the direct financial interest or selling a sufficient portion of
the material indirect financial interest in order to make it immaterial
to the accountant and their close or immediate family.
EXPLANATION •
•
•
Having another professional accountant review the work done by
the accountant with the interest.
Removing the individual who is faced with self-interest threats.
D. Loans and guarantees
EXPLANATION •
•
•
LOANS AND GUARANTEES – s511
This applies to the firm, individuals on the audit team and their
immediate family members.
If the audit client is a bank or similar institution:
- The firm may only have a loan or deposits or a brokerage
account unless it is made under normal lending conditions and
procedures.
- However, if it is material to the client it may still create a selfinterest threat.
If the audit client is not a bank or similar institution:
- The firm shall not have a loan from the client or any director or
officer of the client unless the loan is immaterial to the firm and
client.
THREAT
•
Creates a self-interest threat to independence.
FACTORS
•
The materiality of the loan or guarantee to the individual and their
immediate family members.
SAFEGUARDS
•
Having the work reviewed by an appropriate reviewer who is not an
audit team member and is not a beneficiary to the loan.
E. Business relationships
EXPLANATION •
BUSINESS RELATIONSHIPS – s520
Examples include:
- Financial interest in a joint venture
- Arrangements to combine one or more products or services
- Distributing or marketing arrangements for the client or firm
THREAT
•
Creates a self-interest or intimidation threat to independence if
there is a close business relationship between the client,
management or the immediate family of the audit team member.
FACTORS
•
•
The materiality of the financial interest and,
The significance of the business relationship.
SAFEGUARDS
•
Having the work reviewed by an appropriate reviewer who is not an
audit team member and is not a beneficiary to the loan.
Eliminating or reducing the magnitude of the transaction.
Removing the individual from the audit team.
•
•
F. Family and personal relationships
THREAT
FACTORS
FAMILY AND PERSONAL RELATIONSHIPS – s521
• Self-interest, familiarity or intimidation threat might be created
by family and personal relationships threat to independence
(objectivity).
•
•
•
SAFEGUARDS •
•
ADDITIONAL
•
The nature of the relationship between the audit team member and
close family member.
The position held by the close family member.
The role of the audit team member.
Remove the individuals from the audit team
Structuring the responsibilities of the audit team so that the team
member does not deal with matters relating to close family
members.
Close or immediate family members of an audit team member is:
- A director or officer of the audit client
- An employee in a position to exert significant influence over the
preparation of client’s accounting records or the financial
statements.
G. Recent services with an audit client
THREAT
RECENT SERVICE WITH AN AUDIT CLIENT – s522
• Creates a self-interest, self-review and familiarity threat if an
audit team member has recently served as a director, officer or
employee of the audit client.
FACTORS
•
•
•
The position of the individual held with the client
The length of time since the individual left the client
The role of the audit team member
SAFEGUARDS
•
The audit team should not include an individual who at any time
during or before the audit report served as a director, officer or
employee to the client where they would have been able to exert
significant influence on the decisions.
Have an appropriate reviewer review the work performed by the
audit team member.
•
H. Serving as a director or officer of an audit client
SERVING AS A DIRECTOR OR OFFICER OF AN AUDIT CLIENT – s523
EXPLANATION • The Code forbids an employee or partner of an audit firm to act as
an officer or director of an audit client.
• They shall also not serve as a company secretary for an audit
client of the firm. (See exceptions)
THREAT
•
•
•
EXCEPTIONS
•
•
•
Director or officer: Self-review and self-interest threats for
objectivity are created.
Secretary: Self-review and advocacy threats.
Therefore, it is too significant for a safeguard to bring the threat to
an acceptable level.
Specifically allowed by local laws and professional rules and,
Management makes all the decisions and
Company secretary’s responsibilities are limited to routine and
administrative tasks.
I. Employment with an audit client
EXPLANATION •
EMPLOYMENT WITH AN AUDIT CLIENT – s524
A significant connection remains between the firm and the
individual, unless:
- The individual is not entitled to any benefits or payments
- Any amount owed to the individual is not material.
- The individual no longer participates in any related business
activities.
THREAT
•
Creates a self-interest, self-review and familiarity threat if the
member was a director, officer or an employee with significant
influence.
FACTORS
•
•
•
•
The position of the individual held with the client
The involvement of the individual in the audit team
The length of time since being a member of the team
The former position of the individual within the team or firm.
SAFEGUARDS
•
•
•
Modifying the audit plan
Having an appropriate reviewer to check the former team’s work
Assigning to the audit team to individuals who have sufficient
experience relative to the individual who joined the client
J. Temporary personnel assignments
TEMPORARY PERSONNEL ASSIGNMENTS – s525
EXPLANATION • A firm shall not loan personnel to an audit client unless
- It is for a short period of time
- The personnel are involved in providing non-assurance services
- The personnel do not assume management responsibility
THREAT
•
The loan of personnel to an audit client creates a self-review,
advocacy or familiarity threat.
FACTORS
•
•
It may be acceptable if the secondment is only for a short time or,
If the staff member is not involved in management or non-assurance
activities
In certain secondments, the firm becomes too closely linked to the
audit client – in which case it should not take place.
•
SAFEGUARDS
•
•
Conducting an additional review of the work performed by the
loaned person to address a self-review threat.
Not including the loaned personnel as an audit team member to
address a familiarity or advocacy threat.
K. Long association with audit client
LONG ASSOCIATION OF SENIOR PERSONNEL WITH CLIENT – s540
THREAT
• Familiarity and self-interest threats for objectivity will be created
if person is on audit for a long period of time.
FACTORS
•
•
•
•
•
•
•
•
•
SAFEGUARDS
•
•
•
•
The length of time that the individual has been on the team
The role of the individual on the team
The extent work is directed, reviewed and supervised by senior
personnel
ability to influence outcome of audit
closeness of relationship
nature, frequency and extent of interaction
Whether the nature and complexity of the client’s accounting and
reporting issues have changed
Whether the client’s management team has changed
structural changes in client’s organisation impacting nature,
frequency and extent of interaction
Changing role of individual on audit team or nature and extent of
tasks
Rotate senior staff off the engagement team
Appropriate reviewer
Regular independent internal or external quality reviews
L. Provision of non-assurance services to an audit client
THREAT
FACTORS
PROVISION ON NON-ASSURANCE SERVICES – s600
• Creates a self-review, self-interest and advocacy threat for
objectivity and independence.
• Remember if it is so significant that safeguards cannot reduce the
threat, the engagement must be rejected.
•
•
•
•
•
SAFEGUARDS
•
•
•
•
•
Type of client (audit client, public interest etc.)
Type of non-assurance services to be provided (e.g. tax services)
Who provides the non-assurance service
The extent to which the non-assurance service impacts the financial
statements and internal controls
The level of expertise of the client’s employees with respect to the
service provided
The person performing the services may not be on the audit team
Procedures and policies prohibit participation in management
decisions
Source documents must be prepared by client
Audit committee must approve appointment members of the team
A senior staff member with experience and who is not on the audit
team must review the work of that person.
Ethics: Useful memos to study
Confidentiality
The disclosure of confidential information creates a self-interest threat for
confidentiality and professional behaviour.
(3)
Sec 114.1 of the CPC requires of a professional accountant to comply with the
principle of confidentiality, which requires a professional accountant to respect the
confidentiality of information acquired as a result of professional and business
relationships, and
(1)
Not use or disclose any confidential information, either acquired or received as a result
of a professional or business relationship, after that relationship has ended.
(1)
The disclosure of information is only permitted in the following circumstances:
• Disclosure is required by law;
(1)
• Disclosure is permitted by law and is authorised by the client or the employing
organisation; or
(1)
• There is a professional duty or right to disclose, when not prohibited by law.
(1)
In the consideration of whether confidential information should be disclosed, the
following factors must be considered:
• Whether the interest of parties will be harmed if the information is disclosed. (1)
• Whether the information is known and substantiated.
(1)
• The type of communication expected.
(1)
• Whether the person is an appropriate recipient.
(1)
Miki should apply the confidentiality principle in M&M and consequently not share
information with Mini because she is his partner.
(1)
The information Miki disclosed relates to a former client. The obligation of
confidentiality is of long duration even after conclusion of the audit.
(1)
In this scenario, the disclosure of the information is not appropriate, since:
▪ Pluto Ogies Limited (Pluto) did not give Miki permission to disclose the information;
(1)
▪ The disclosure of the information relating to Pluto’s future growth, was not
requested by legislation, and
(1)
▪ There isn’t a professional obligation on Miki to disclose the information.
(1)
Miki did not consider the following before disclosing the information:
• The client, Pluto’s, interest were harmed when information regarding the potential
growth of his business was disclosed.
(1)
• The information in respect of the possible growth of Pluto is not known and not
substantiated.
(1)
• The information was disclosed in the cafeteria of the firm, while Miki and Mini were
drinking coffee, which is not an appropriate means of communication.
(1)
• Miki’s partner, Mini, is not suitable receiver of information.
(1)
Therefore the level of the threat will be significant.
(1)
No safeguards will decrease the threat to an acceptable level and consequently the
information must not be disclosed.
(1)
Communication skills: layout and structure
AVAILABLE: 23
MAXIMUM: 20
(1)
Marketing of professional services
This situation could create a self-interest threat to professional behaviour.
(2)
The CPC S115 requires Professional Behaviour of professional accountants, also
when undertaking marketing or promotional activities:
• to conduct it in a way that does not bring the profession in discredit
(1)
• to be honest and truthful
(1)
• not to make exaggerated claims in relation to services, qualifications or
experience,
(1)
• not to make any disparaging references or unsubstantiated comparisons to
the work of others.
(1)
In this scenario:
• Chrome Partners’ marketing campaign includes a statement that brings the
profession into disrepute by their actions,
(1)
• Chrome Partners makes an exaggerated claim and
(1)
• a disparaging reference by making the statement that they “provide the best
services at the best prices, by the best specialists”.
(1)
Therefore the level of this threat is significant.
(1)
Pressure to breach the fundamental principles S270
The pressure put on Zaid creates an intimidation threat to professional competence
and due care (CPC 270.2).
(2)
A professional accountant shall not allow pressure from others to result in a breach of
compliance with the fundamental principles (CPC R270.3).
(1)
Factors that are relevant in evaluating the level of threats created by pressure include:
• The intent of the individual who is exerting the pressure and the nature and extent
of the pressure.
(1)
• The application of laws, regulations, and professional standards to the
circumstances.
(1)
• The culture and leadership of the employing organisation including the extent to
which they reflect or emphasise the importance of ethical behaviour and the
expectation that employees will act ethically.
(1)
• Policies and procedures, if any, that the employing organisation has established,
such as ethics or human resources policies that address pressure. (270.3 A4)
(1)
Furthermore, discussing the circumstances might assist the professional accountant
to evaluate the level of the threat. These discussions include:
• Discussing the matter with the individual who is exerting the pressure to seek to
resolve it.
(1)
• Escalating the matter within the employing organisation, including when
appropriate, explaining any consequential risks to the organisation, for example
the internal or external auditors or those charged with governance.
(1)
• Disclosing the matter in line with the employing organisation’s policies, including
ethics and whistleblowing policies.
(1)
• Consulting with a colleague, superior, human resources personnel, or another
professional accountant; relevant professional or regulatory bodies or industry
associations; or legal counsel.
(1)
In this scenario:
• The intent of Mr Julius is to pressure Zaid in order to breach the fundamental
principles.
(1)
• The CPC contains specific requirements for professional accountants for acting
with sufficient expertise, and in preparing and presenting financial information. (1)
• The leadership style of Julius does not promote ethical behaviour.
(1)
• There is no indication or policies or procedures which address the pressures. (1)
Therefore the level of the threat is significant.
(1)
Custody of client’s assets
In terms of SAICA’s Code of Professional Conduct:
Holding client assets can create a self-interest threat to professional behaviour and
objectivity (CPC 350.2).
(3)
Money for clients held should be accepted only if the law permits and able to comply
with legal duties (R350.3).
(1)
As part of client and engagement acceptance procedures related to assuming custody
of client money or assets, a professional accountant shall:
Make inquiries about the source of the assets, and
(1)
Consider related legal and regulatory obligations.
(1)
The CPC also requires of the professional accountant to (R350.4):
• comply with laws and regulations relevant to holding and accounting for the
assets;
(1)
• keep assets separate from the firm or personal money;
(1)
• only be used for the purpose for which it was intended; and
(1)
• must be ready at all times to account for the assets and any income,
dividends or gains generated
(1)
In this scenario:
• The source of the money is from the sale of Annie’s business.
(1)
• Comply with laws and regulations relevant to holding and accounting for the
assets
(1)
• The money was deposited into Adrian’s personal account.
(1)
• Adrian did not follow the instruction of only using the Australian supplier.
(1)
• Adrian could not provide the records for his transactions.
(1)
Therefore the level of the threat is significant.
(1)
No steps can be taken to bring the level of the threat to an acceptable level.
(1)
In terms of IRBA’s Rules of Improper Conduct:
Adrian is guilty of unprofessional conduct and brought the auditing profession into
disrepute with his actions.
(1)
Therefore he is in violation of IRBA’s Rules of Improper Conduct.
(1)
Furthermore, by contravening the requirements of SAICA’s Code of Professional
Conduct, he also violated the Rules for Improper Conduct.
(1)
AVAILABLE: 18
MAXIMUM: 15
Communication skills: Layout and structure
(1)
ETHICS: Code of Professional Conduct Section Overview
PART 2: Chartered Accountants in business
210
220
230
Conflict of interest
Preparation and Presentation information
- Self-interest
- Intimidation
Acting with sufficient expertise
- Self-interest
-
Objectivity
-
Objectivity
Integrity
Professional competence & due
care
-
Compliance and due care
240
Financial interests
250
Inducements, including gifts and hospitality
- Self-interest
- Familiarity
- Intimidation
-
270
Integrity
Objectivity
Professional behaviour
Pressure to breach fundamental principles
PART 3: Chartered Accountant in public practice
310
Conflict of interest
-
320
321
330
Professional appointments
• Client acceptance
• Changes in professional appointments
- Self-interest
-
Second Opinion
- Self-interest
Fees
•
•
•
Levels of fess
Contingency fees
Referral fee or commission
-
Objectivity
Confidentiality
Integrity
Professional behaviour
Professional competence and
due care
Principle of Professional
competence and due care
-
340
350
Self-interest
-
Principle of Professional
competence and due care
-
Objectivity
-
Principles of Objectivity and
Professional competence and
due care
Inducements, including Gifts and Hospitality
- Self-interest
- Familiarity
- Intimidation
Custody of client assets
• Before taking custody
• After taking custody
- Self-interest
Integrity
Objectivity
Professional behaviour
-
Professional behaviour
Objectivity
-
Independence (objectivity)
Gifts and Hospitality
- Self-interest
- Familiarity
- Intimidation
-
Integrity
Objectivity
Professional behaviour
Financial interest
• Shares
- Self-interest
-
Independence
Loans and guarantees
- Self-interest
-
Independence
-
Independence
-
Independence (objectivity)
Part 4A: Independence for audit and review arrangements
410
420
510
511
520
521
Fees
•
•
-
Relative size
Overdue fees
Self-interest
Intimidation
Business relationships
- Self-interest
- Intimidation
Family and personal relationships
- Self-interest
- Familiarity
- Intimidation
522
Recent services with an audit client
- Self-interest
- Self-review
- Familiarity
523
Serving as a director or officer of an audit client
- Self-review
- Objectivity
- Self-interest
524
Employment with audit client
- Self-interest
- Self-review
- Familiarity
525
Temporary personnel assignments
- Self-review
- Advocacy
- Familiarity threat
540
Long association with audit client
- Familiarity
- Self-interest
600
-
Objectivity
Provision of non-assurance services to an audit client
- Self-review
- Objectivity
- Self-interest
- Independence
- Advocacy
11. PRE-ENGAGEMENT ACTIVITIES
Learning outcomes
• Provide an overview of the audit process – not in detail
• List & practically discuss the considerations before accepting an engagement (20 marks)
• Explain the purpose of an engagement letter – not in detail (tutorial in question pack)
• List the content of an engagement letter – not in detail (tutorial in question pack)
Objectives of an audit
•
•
•
•
•
•
To obtain reasonable assurance whether the
Financial statements
As a whole are free from material misstatements, whether due to fraud or error
Enabling the auditor to express a (professional) opinion whether the
AFS as prepared in all material aspects
In accordance with an applicable financial reporting framework (IFRS)
Materiality: can influence economic decisions of users.
Professional opinion
•
The opinion has to be supported by evidence.
•
-
The opinion carries weight because of the profession of the auditor
Professional bodies (SAICA, IRBA)
Academic knowledge (PGDA, ITC, APC)
Practical application of knowledge
-
Users “trust” auditor’s opinion
Why? Professionalism, independence.
Code of Ethics: live by fundamental principles.
•
What the auditor needs to know
•
•
•
-
Accounting knowledge (IFRS)
Client prepares the AFS using IFRS, thus auditor need to know IFRS, i.e. know what you
are checking.
Auditing Standards (ISA’s)
ISA’s provide steps auditor must follow throughout the audit process.
Ethical Requirements (CPC)
All actions and decisions made by the auditor to uphold the principles of SAICA and the
CPC.
Principles
•
•
•
Audit strategy – establishes and documents in broad and general terms (big picture): scope,
timing, direction.
Audit plan – establishes the nature (what), timing (when) and the extent (how much) of the
audit procedures necessary to perform risk assessment procedures, respond to risk and
comply with other requirements of the ISA. (Detailed execution of the strategy)
Audit process – see below.
Overview of the Audit Process
•
Activities:
1. Investigate client
(new and existing)
2. Requirements for
skills and ability
3. Terms of the
engagement and
the engagement
letter (ISA 210)
•
•
-
•
•
-
-
-
•
•
Terms of the audit
engagement (ISA
•
210)
•
Quality control of
the audit of F/S
•
(ISA 220 & ISQC 1)
•
Terms of engagement
Knowledge &
understanding of
the business (ISA
315)
Understanding of
the accounting &
internal control
system
Risk evaluation
Inherent risk (IR)
(ISA 330)
Control risk (CR)
Auditor’s
reaction on risk
assessment (ISA
330)
Planning
materiality (ISA
320)
Formulate
Audit strategy
(Scope, timing,
direction → Big
picture)
Audit approach
(Substantive or
Combined
Approach)
Audit plan (List
of audit
procedures)
Audit approach
(Combination depends
on audit approach)
• Test of Control
(ToC)
• Substantive
Procedures (SP)
Evaluate, conclude &
report
• Overall review
(audit
differences)
• Conclusion
• Reporting
Results of procedures
and plan for further
work if needed.
Audit report and
management letter –
opinion.
Audit risk = IR + CR x DR
International Standards on Auditing
Knowledge of the
• Auditor’s response
business (ISA 315)
to risks (ISA 330)
Risk assessment
• Audit evidence
(ISA 315)
(ISA 500) (Control
Materiality (ISA
tests and/or
320)
substantive tests)
Formulate audit
• Audit Sampling
approach
(ISA 530)
Audit approach & audit
plan
Audit 378
Audit 378
•
Results of procedures
and plan for further work
if needed
Evaluation and
reporting (ISA 450)
Audit report &
management letter
PRE-ENGAGEMENT ACTIVITIES
STEP 1: Client investigation (Client)
STEP 2: Knowledge and competence assessment (Auditor)
STEP 3: Terms of engagement and engagement letter (Ethics)
PRE-ENGAGEMENT ACTIVITIES
Questions: Discuss the aspects you would consider before deciding to accept the
appointment as auditor of XXX.
FORMAT IN WHICH QUESTIONS SHOULD BE ANSWERED
1. Does the auditor want to do the audit?
•
Prohibitions on performing the audit
- Must be aware of any pre-conditions not met or scope of the limitations
- Preconditions for an audit (ISA 210:6)
•
Financial reporting framework (IRFS) must be applied in preparation of the financial
statements to ensure they are acceptable (IFRS).
•
Obtain an agreement from management regarding their responsibilities
-
Preparation of AFS i.t.o the applicable financial reporting framework.
-
Responsible for internal control to enable preparation of financial statements that are free
from material misstatements.
-
To provide the auditor with the required information, such as:
▪ Access to all information
▪ All additional information needed
▪ Unrestricted access
•
Association with the industry
- Nature of the industry
•
Association with the owners and management
- “Consider whether the directors and managers have the competency to
manage the company, e.g. industry experience vs. qualifications”
- Reputation, attitude towards good governance and indicators
•
Nature of client-auditor relationship
- Consider relationship with previous auditor
- Reasons for change of previous auditor
•
•
•
•
•
•
Internal control
Financial reporting system and audibility
Import transactions
Complex calculations
Manipulate financial statements
Significant risks of material misstatement
- Identify any indicators
- “Since the company uses an internal audit, proper internal controls will
most likely be in place.”
- “Evaluate the entity’s financial reporting system and auditability – if
business previously audited, it is likely that the reporting system is
acceptable and that a sufficient audit trail exists.”
- Exposure to exchange rates causes complex accounting treatment –
errors.
-
•
Indication of profit manipulation (indicates risk): MAX 2
▪ Low inventory turnover speed
▪ Speed of inventory becoming obsolete & loss of income
▪ Going concern problems
Auditor’s perspective
Sound business decision
- Potential users of the reports and the implications on them (JSE, loan
providers)
- Stability and cashflow pressure of the client, e.g. high inventory levels.
- Client able to settle the audit fees on a timely basis
- Change in suppliers creates concern regarding the quality of the goods
- Any associated costs in taking on the engagement, e.g. additional training.
- Going concern
2. Can the auditor perform the audit?
•
Evaluate necessary expertise to perform the audit
- “Identify services required by the client”, e.g. recommending and
implementing a new computer system.
- Consider whether the audit team has the necessary knowledge to render the
service.
- Client industry, e.g. similar clients.
- Separate teams: services and audit.
•
Identify the audit team (staff members)
- Ensure that sufficient qualified staff members are available
•
Resources other than staff
-
Whether any specialists need to be appointed
-
Hardware, software
Audit deadline (enough time)
-
3. Are there any ethical reasons why the auditor should not accept the
engagement?
•
Evaluate Independence (Any threats)
- “Check that there is no family or ties between the shareholders and any of
the partners.”
- Are you independent of the potential client?
- If relationship: scope & risks of the service or any other relationship
(safeguards & significant of risk)
•
Conflict of interest
- CPC: Any conflict of interest to consider (Identify possible Conflict of
Interest)
- Audit and accounting services – cannot recommend & implement and also
express an opinion (audit).
•
-
Information from previous auditors (CoPC) or third parties
Communicate with the previous auditor
Is the available information positive or negative
Always investigate why certain events happened
4. Are there any statutory reasons why the auditor should not accept the
engagement?
•
Eligibility to conduct audits
- In terms of APA and Companies Act, i.e. an auditor should be registered with
IRBA.
- “Mr ____ is registered with the IRBA, and is therefore allowed to conduct
audits.”
•
Companies Act requirements regarding the removal of the outgoing
auditor and appointment of new auditor (N/A) – normally excluded in the
question.
Procedures to obtain knowledge
Explain briefly how you as an independent auditor will obtain knowledge of the
business as well as the industry in which it operates.
(4)
• Enquiry from persons in the entity
- e.g. management, internal audit staff
(1)
• Enquiry from experts outside the entity
- e.g. industry economists, legal advisers
(1)
• Analytical procedures
(1)
- assist the auditor in obtaining knowledge about fluctuations or trends in the
figure, and identifying extraordinary fluctuations
• Observation
- e.g. visit the client’s premises, observation of operating activities
(1)
•
Inspection of documents and records
(1)
- e.g. minutes of meetings, procedure manuals, marketing documentation,
previous years’ financial statements etc.
•
Other information sources
(1)
- Previous auditor’s working papers
- Publications and media (e.g. industry-related magazines, financial press)
- Legislation
AVAILABLE: 6
MAXIMUM: 4
Compliance with standards
ISQC 1 and ISA 220: Quality control for firms that perform audits and reviews of
financial statements require that the firm complies with the following:
C • Consider the integrity of:
-
The client’s principal owners, key management and those charged with
governance of the entity.
Reputation and attitude of these individuals should be evaluated.
A • Determine whether the firm is competent to perform the engagement
-
Assess their knowledge of the industry and
Their technical competence
Consider whether audit deadlines are in reach
A • Comply with ethical requirements
-
Possible conflict of interest
Threats to independence
ISA 220 further suggests that significant
matters that have arisen during current or
past engagements should further be
considered in accepting or continue with the
engagement
Provide three aspects that Mr de Witt had to obtain reasonable assurance of, by the
performance of the quality control procedures before he could accept the audit engagement.
(3)
QUALITY CONTROL (see ISQC 1.28)
The audit firm’s quality control procedures must be designed to provide reasonable
assurance that the firm will only accept engagements where:
-
The client’s integrity has been considered and no information has been found that
could lead to the conclusion that the client lacks integrity.
(1)
-
The auditor/firm is competent to perform the audit and has the necessary skill, time
and resources; and
(1)
-
The auditor/firm can comply with all ethical requirements.
(1)
AVAILABLE: 3
MAXIMUM: 3
MAKE A DECISION WHETHER TO ACCEPT THE CLIENT OR NOT
Engagement letter requirements
•
Question 3.5
The following content is required by ISA 210:
- The objective and scope of the audit of the financial statements
- The responsibilities of management
- The responsibilities of the auditor
- The identification of the applicable financial reporting framework
- The expected form and contents of any reports issued by the auditor
Issues for all audit or
related services
ENGAGEMENT LETTERS (ISA 210)
• Letterhead of the auditor
• Addressed to
• Confirm acceptance of the engagement
Objective and scope of
audit
•
•
•
•
•
Purpose and type of audit opinion
Arrangements w.r.t planning and execution of audit
Deadlines
Basis of calculation of the audit fee.
Distinction between management and auditor’s responsibilities
Management
responsibilities
•
•
•
•
•
Confirmation of auditor’s independence
Material weaknesses in controls will be brought under
management’s attention
Involvement of other parties/specialists
Other services which will be provided
Designated auditor if applicable
•
•
Complied to audit standards & statutory requirements
Definition of audit & conducting audit procedures
Auditor responsibilities
(scope of the audit)
•
•
•
•
Only provide reasonable assurance
Appropriate framework: IFRS & Co act: management
Form of the report or result of the audit
Inherent limitations of the audit and internal controls
Additional information
•
•
•
•
•
Report to management
Representations by management
Documents issued with financial statements
Fees
Invoice arrangements
Closure
•
•
Dated and signed
Request return
Expected form and
contents of report
12. AUDIT RISK
What can be asked?
• Describe audit risk
• Name and describe components of
audit risk
• Identify the factors that influence the
components of audit risk and apply
practically
• Describe the relationship between
audit risk and audit evidence
A. BUSINESS RISKS (ISA 315)
•
Business risks can arise from:
- Objectives – e.g. profit targets
- Strategies – e.g. Credit sales (collectability and valuation of debtors)
- Nature of business activities e.g. Technology obsolescence of products
 Influences the company’s power negatively.
 Includes risk of material misstatements = IR and CR and the impact on
AFS and the auditor.
• Management’s responsibility = identify & address
B. AUDIT RISKS (ISA 200)
Risk that the auditor gets something wrong
•
Definition: Risk that auditor expresses an inappropriate opinion when
financial statements are materially misstated.
• Plan the audit and conduct to bring Audit Risk (AR) to an acceptable level
- AR = As low as possible (determines how much work must be done)
- Must be appropriate & sufficient audit evidence
• Audit risk and assurance level have an inverse relationship.
• Audit risk model
Audit Risk = IR x CR x DR
•
Components
- Inherent risk(IR)
- Control risk (CR)
- Detection risk (DR) = only element that the auditor can control
•
Audit risk consists of
- Risk of material misstatement (IRxCR) in financial statements and
- Material misstatement is not found by auditor (DR)
C. INHERENT RISK (ISA 200)
•
Definition: Susceptibility of an assertion for misstatement (possibly material)
on the assumption that there are no internal controls
Inherent to the type of business
Assertions that management has made about the financial statements
•
•
•
Consider factors which could lead to misstatement
- Foreign exchange trans = complex calculations;
- Inventory valuation = figures based on estimates;
- Cash flow challenges = going concern,
• Auditor no control over IR
• See ISA 315 Appendix 2 (risk table summary)
D. CONTROL RISK (ISA 200)
•
Definition: Risk that misstatement was not prevented or detected and
corrected timeously by internal controls, which could be material.
- This is split into control environments (e.g. cash business) and cycle level
(e.g. bank once a week)
• Dependant on internal control design and functioning
• Evaluate circumstances by using judgement
• CR = High, except if controls exist and tested by ToC, thus control is working
• CR can never be ‘nil’ = controls can never be full proof
• Auditor has no control over it
E. LINK AND RELATIONSHIP BETWEEN IR AND CR
•
Link between IR and CR
-
•
Both entity’s risks relate to the risk of misstatement as the ISA’s do not refer to
separately.
Auditor may evaluate together as RMM or separate.
If evaluating separately
- First IR identify and evaluate
- If there are any controls addressing risk, must evaluate controls
•
-
Evaluation
Can be done quantitatively (%) or qualitatively(H/M/L)
F. RISK EVALUATION (ISA 315)
Risk-based audit approach
•
Identify IR and CR risk’s that may lead to material misstatements in the
financial statements. E.g. products are stolen = IR vs. products are valued
incorrectly = CR
• Motivate how this impacts (can have more than one motivation):
- Financial statements as a whole or
- Link to specific account balances and assertions (3rd year)
• Evaluate the likelihood of the misstatement (3rd year)
• Basis for audit approach (nature, extent & timing)
EVALUATE THE TWO LEVELS
Financial statement level
Accounting balances and transactions
Effects financial statements as a
• For each assertion or each account
whole
balance
Continuous- can cause misstatements
• E.g. Imports value of inventory and
w.r.t numerous accounts & assertions
purchases
E.g. listed company = aggressive
management
•
•
•
G. DETECTION RISK
•
Definition: Risk that auditor does not detect a material misstatement that
exists (new client, time pressure, specialists)
• Function of effectivity
- Relates directly to amount of work
- DR can’t be 0% = there are limitations on the system and don’t test 100% of
transactions. Results are analysed and are subjective.
• Balancing factor
- Risk evaluation to evaluate IR & CR with professional judgement,
- To reduce Audit Risk to an acceptable level by using DR,
- To determine how many substantive procedures must be conducted
F. RISK OF MATERIAL MISSTATEMENT (ROMM)
•
•
•
•
Audit risk(AR) = IR x CR x DR
Want AR = L, where any combination of H/M/L to keep audit risk low
IR and CR are not controllable
DR is controllable by the auditor as the balancing figure
ANSWERING AN AUDIT QUESTION
Identify a risk factor with a reason or motivation
•
Discuss or evaluate:
- ID Factors & Impact(s) of Risk
- NB: Factors that increase and decrease risk
- No consequence
• And evaluate:
- Discuss factors above and draw a conclusion per component of audit risk
• Identify and describe or describe:
- Only factors that increase risk
Important points to include:
•
•
•
Distinction between individual components or not
Indicate: Factors that increase or decrease risk
Conclusion:
- IR = H/M/L, CR = H/M/L, AR = LOW
- “For acceptable level of audit risk, DR should be H/M/L”
Factors that will cause cash flow issues in the future
INHERENT RISKS (Absence of internal control)
RISK FACTORS
IMPACT (WHY?)
LINK TO AFS
Staff competence
Staff are not competent
Increase risk of errors in the
AFS
Staff or management
Lack integrity and are thus
Increase risk to manipulate
integrity
likely to make unethical
AFS
- Non-compliance with decisions which may
laws
indicate manipulation of
AFS
Staff experience
If they have the relevant
Decrease risk of errors in
experiences to apply to
the AFS
business decisions
Complexity of
transactions or unusual or
difficult transactions
Examples:
- Foreign exchange
Complex calculations or
Increase risk of errors in the
transactions
calculations for which staff is AFS
- Large assets
not qualified
- Provisions for
guarantees
- Contingent liabilities
Management or staff
incentives or
aggressive financial
targets
Example:
- Management
cannot reach
budgeted figures
- Business has
suffered a loss
New client
Established client
(Rule of thumb 24m)
Overstated income or
assets and understated
liabilities and expenses
Increase risk to manipulate
AFS
Client - may not be well
established and may have a
small market share
There is no proven track
record of profits.
Increase going concern risk
and increase errors in AFS
Auditors - spend additional
time gaining knowledge on
the business
Well established with
proven track record = high
probability of certainty about
future cash flows
Increase errors in AFS
Decrease going concern risk
and decrease errors in AFS
New industry
Types of products and
services
- Luxury
- Seasonal (demands
drops)
-
Unique
Obsolete due to
technology
Location and
geographical distribution
Examples:
- Products imported
from overseas
suppliers
-
-
-
Products are sold to
poorer countries
Staff does not have
knowledge of the business
system or know the risk
profile = team will make
errors and will not identify
Increase errors in AFS
Limited market share
Impact on cash flow and
profits as demand drops
High demand for product
and have competitive
advantage
Write down inventory to
NRV (complex
calculations) = overvalued
and thus errors in AFS
Loss due to the inability to
sell products
Increase going concern risk
Increase going concern risk
Forex exchange risks and
delays due to an increase in
complex calculations
Decrease their market share
and affect cash flow
Increase going concern risk
and increase errors in AFS
Competitive advantage
Decrease going concern risk
Difficult to implement and
monitor IC = leads to poor
IC
Bias judgement calls and
familiarity of the parties may
result in manipulation of
figures
Increase errors in AFS and
increase control risk
Cash flow issues
Increase going concern risk
Loss of market share
(reputation) and thus cash
flow issues. Complex
Increase going concern risk
Increase errors in AFS
Decrease going concern risk
Increase going concern risk
Located in all main
centres within SA
Widely distributed
Related party transactions
Cashflow challenges or
financial position
Example:
- Business makes a
loss
- Poor quality of
equipment
purchased
▪ Less popular
Increase risk to manipulate
AFS
▪
▪
Clients submit claims
Leading to
contingent liabilities
▪ Inventory valuations
Level of sophistication of
information system
Age of the information
system
History of misstatements
Management integrity
Transactions that require
judgement or estimates
Examples:
- Inventory valuations
Loans being obtained
False marketing
Non-compliance with laws
- Environmental laws
calculations and valuations
may be over or undervalued
High degree of
computerisation and
transactions via the internet
New systems may be new
to staff and errors may
occur or loss of data
Impact the current year’s
AFS if there are prior
misstatements
Legal actions may be taken
against the entity and they
may lose their market share
causing cash flow issues
Increase errors in AFS and
increase the risk of fraud in
AFS
Increase errors in AFS
If there are poor quality
goods, the NRV may be
estimated to be too high or
too low
Increase errors in AFS
Accumulating interest
resulting in cash flow issues
Contravene the CPA and
management integrity is
questioned = indicates the
possibility of the
manipulation of AFS
Must be compliance with
regulations otherwise =
legal liability, losses and
cash outflow.
Increase going concern risk
Increase errors in AFS
Increase going concern risk
Increase the risk of fraud in
AFS
Increase going concern risk
Prevent, detect and correct – “systems or operations”
CONTROL RISK (Absence of internal control)
RISK FACTORS
IMPACT (WHY?)
LINK TO AFS
New accounting system or Complexity of
Increase errors in AFS
internal control
implementation of new
systems (for the users of
technicality of system)
New accounting
Staff doesn’t know how to
Increase errors in AFS
personnel
operate the system
Degree to which duties
are segregated
Good internal control
activities
Weak internal control
activities
Example:
- New company =
internal controls not
well established
- New accounting
system
Good internal control
environment
Weak internal control
environment
Many mistakes
Few mistakes
Types of payments
- Only cash sales
permitted
-
Large amounts of
cash
Lack of SOD results in one
person performing
incompatible functions and
higher chance of ROMM
and incomplete accounting
records.
Improvement in IC due to
positive attitude of
management
Good control activities will
prevent, detect and correct
misstatements from
reaching AFS
Increase risk of errors in
AFS and increases the risk
of theft or fraud
Weak internal control or lack
of monitoring means there is
never any improvement
leading to many
misstatements not being
prevented and the business
may not succeed
Management places
emphasis on sound internal
control and staff members
are aware and thus fewer
misstatements
Management doesn’t place
emphasis on sound internal
control and misstatements
are generally overlooked by
staff and likely to occur
May indicate similar
mistakes in the AFS
Indicates that there will likely
be limited mistakes in the
AFS
Imports (NB!) – See below
Increase risk of errors in
AFS
Increase going concern risk
There are no receivables =
simplified administration and
thus no risk of bad debts
Decreases going concern
risk
Large amounts are held on
the premises
Increases the risk of fraud or
theft
Increases the risk of fraud or
theft
Decrease risk of errors in
AFS
Decrease risk of errors in
AFS
Decrease risk of fraud of
AFS
Increase risk of errors in
AFS
Increase risk of fraud of AFS
Increase risk of errors in
AFS
Decrease errors in AFS
-
-
How is cash kept
safe?
How are
transactions
accounted for?
Easy access to the safe and
staff could, therefore, steal
easily
Cash receipts only
accounted for upon request
of staff = incomplete AFS.
May indicate a bad attitude
of management towards IC
Increase the risk of errors in
AFS
Increase the risk of errors in
AFS
Only discuss factors that will increase DR
DETECTION RISKS (Absence of internal control)
RISK FACTORS
IMPACT (WHY?)
LINK TO AFS
New industry
Don’t have enough
Increase the detection risk
New system
knowledge of the businessNew client
relevant experience and
don’t know the risk profile
No experience with similar
audits
Time pressure
Contact with previous
auditor
Pressure on auditor
-
Risks not being identified
and increase ROMM in FS
remain undetected
Risk that there won’t be
enough time to perform a
proper audit
Could obtain needed
information which will
decrease the ROMM in the
FS will remain detected
May influence objectivity
and independence
RISK FACTORS SUMMARY
INHERENT RISK
CONTROL RISK
Business integrity,
- New accounting
reputation and nature
system/internal
controls
New or established
business
- New accounting staff
Type of product/service
- Good/weak internal
control
Location
- Many/few mistakes
Related party
made
transactions
Complex transactions
Transactions requiring
judgement
Financial position
Increase the detection risk
Decrease the detection risk
Increase the detection risk
-
DETECTION RISK
New client, industry or
system
Pressure on auditor
(time and integrity)
Contact with previous
auditor
Imports
•
•
•
•
•
Reliability of supplier to
Quality of product
Impact on CF
Complexity of calculations
Question may only test one or two = only risk at assertion level and not overall
FS level
•
Reliability of foreign suppliers to provide products on time and of correct
quantity and to render proper after-sales services which may result in delay of
productions and sales (which leads to loss in market share) which will
increase going concern risk
•
Quality of imported parts and equipment may be poor since it's imported from
overseas which may lead to manufacturing defects and a loss in the market
shares that will increase the going concern risk.
•
Impact on CF – Imports are exposed to ER fluctuations that can influence
prices and profits negatively which will impact profits negatively which will
increase going concern risk.
•
Complexity of transactions - Foreign exchange transactions = complex
which may increase the probability of errors in AFS
Lawsuit IAS37 (One of two scenarios)
•
Lawsuit against the company can negatively influence the future financial
results (cash flows) should a significant claim be awarded which will increase
going concern risk due to an outflow of CF.
•
Lawsuit may result in contingent liabilities that need to be recorded in the
FS which are complex in nature which could lead to errors in AFS
Non-compliance with law (CPC)
•
•
•
•
Lawsuit
Management integrity
Product may be withdrawn = no sales = cash flow impacted
Provisions (contingent liabilities) = cash flow and complex accounting
treatment which will lead to errors in the AFS
- Outflow = losses = Accounting treatment
- Accounting treatment = complex = errors in AFS
- Contingent liabilities = disclosure wrong = errors in AFS
13. AUDT MATERIALITY
•
•
•
•
Discuss the concept of materiality and apply in practical situations.
Describe the role that materiality plays in the different stages of the audit.
Calculate the materiality figure (with discussion of the factors which were evaluated).
Describe the relationship of materiality with audit risk and apply practically.
Underlying principles
What is materiality?
A. General definition
•
Information in the financial statements must not be aggregated or
disaggregated in a manner that obscures useful information.
• Materiality requirements apply to the statements of:
Definition
- Profit or loss and other comprehensive income,
Important & needing to be
- Statement of financial position
considered
- Statement of cash flows and
Information affects plans or
- Statements of changes in equity and to the notes.
decisions in a noticeable
• When an IFRS requires a specific disclosure, the
way (e.g. She omitted
resulting information must be assessed to determine
information that was material
whether it is material and consequently whether
to the case)
presentation or disclosure of that information is
warranted.
B. Definition in an audit context
•
Information is material if:
- Omission thereof or the misstatement thereof can influence the economic
decisions of users made on financial statements.
•
The materiality depends on:
-
The size (rand value) of item or of the mistake (quantitative) or
Nature (qualitative) E.g. Payments to directors or fraud committed by
management or if cannot continue to operate your business or profession.
Judged in surrounding circumstances
Professional judgment
Why is materiality necessary?
A. Why is it needed?
•
An auditor does not provide 100% guarantee, only performs sample-based
testing to determine which items will affect the decision of users.
Auditors only provide reasonable assurance that the financial statements are
free from material misstatements.
•
B. Planning: determine acceptable materiality level
•
•
For the detection of quantitative material misstatements
Determining factor = Extent of audit tests
-
What will cause the AFS to be materially misstated?
Help determine which financial items to inspect and which audit procedures
to follow.
Detection risk effects testing: The lower materiality = more testing will be
done vs higher materiality = less testing
When is materiality calculated?
•
When the overall FS are affected the materiality should be calculated.
Planning
(ISA 320)
Reviewing
(ISA 315)
• Materiality during
planning of the audit
(preliminary
examination)
• Helps identify which
financial statements
items to investigate.
• Determine which
audit procedures
• Not audited
• A review is done
during the audit to
re-evaluate.
Completion
(ISA 320)
•Materiality during
finalisation of the audit.
•Audited figures
•Have more knowledge
and circumstances can
change.
•Evaluate audit
differences
•Audited
How is materiality calculated?
Apply professional judgement – SCI vs SFP
•
Quantitative indicator: Calculate figure
- Follow the framework
- Provide cut-off point or threshold = to determine the nature, timing and
extent of audit work on the specific balance (Audit approach)
•
-
•
-
Qualitative considerations:
Consider nature of item or mistake, for example:
 Inadequate/ improper disclosures;
 Related party transactions, etc.
‘Material account balance’
Contains risk of material misstatement and is
Based on size (quantitative) or qualitative characteristics
Influence on the audit
Inverse relationship between materiality figure and audit evidence needed.
Influence the nature, extent & timing of audit procedures
Framework – Five-step approach
1. Which set
of financial
inofrmation
to use
2. Which
bases
financial
information
to use
3. Choose
the most
suitable
base
(users)
4. Calculate
figures
based on
the chosen
base
5. Decide
on the
materiality
figure
Step 1: Financial information for calculation purposes
•
Basic principle: Use financial information which best reflects business
activities for the current financial year.
•
The following choices are available:
▪
▪
▪
-
Current year – not yet audited (Apportionment)
Current year (actual) – Whole year or portion of the year.
Current year (preliminary figures)
Current year (budgeted must always be compared to prior year) and must
then decide to adjusted or original.
Previous year – audited
▪ Only previous year
▪ Average 3-5 previous years
Step 2: Which bases financial information should be used?
•
Firm policy (Will be provided)
- Use bases
- for margin (top & bottom)
- Will differ for different types of companies (indicator as to which statement
to use, then determined which % to use)
Base
Turnover
Profit before tax
Gross profit
Total assets
Equity
Percentage interval
0,5-1%
5-10%
0,5-1%
1-2%
2-5%
Step 3: Which base is the most suitable?
•
Basic principle: Which component represents the company and which
component would the users be the most interested in?
•
Determine whether all bases are applicable:
Problem with the base
Negative figures
Noticeable errors
Expected future problems
Actual errors and quantify
E.g. Classifying current asset as a fixed
asset vs. classifying an asset as a
liability
More volatile figures
What to do with the base
Indicates a net loss
Ignore the base
Do not adjust – be more conservative
Adjust or not adjust
Less likely to use it as a base (process
of elimination)
Important questions:
•
•
Whether to use the Statement of Comprehensive Income (SCI) vs
Statement of Financial Position (SFP).
Users:
Users of financial statements = will focus on the profitability of SH and
investors (look at ST and LT debt, solvency and liquidity, capital growth)
- Shareholders: Expect dividend, profitability and capital growth (SCI)
- Bank: Loan obligations and the profitability and stability thereof (SCI & SFP)
-
•
Size of the business
- Rand value of statements
•
Nature of business
- Income-driven = sales = SCI
- Manufacturing company = PPE = SFP
- Value of items on SFP vs SCI
•
Funding: (Considered under users)
- How is the company funded and what are the financiers interested in?
- New loans granted. For what purpose are loans granted?
▪ Extensions (SFP) or
▪ Provide employment i.e. salaries (SCI)
▪ Always for loans: SCI = repayments and interest and SFP = assets
•
Stability of basis:
- Negative figures = Ignore
- Reflects grown or fluctuations
•
Apply professional judgment
- Decide on a single basis
- Is it a volatile company = Usually use PBT only if the company is a going
concern. Using PBT indicates that it is a profit-driven company.
- If the combination of the users, nature of the business and funding indicate
that SCI is important and turnover, profit before tax and gross profit are all
stable and there are no negative figures then refer to ISA 320
ISA 30 - “When profit before tax from continuing operations is volatile, other
benchmarks may be more appropriate, such as gross profit or total revenues”
Step 4: Calculate possible figures based on suitable bases
-
Calculate the most suitable basis
Top & bottom margin
Remember to round figures to the nearest rand at all stages
Step 5: Decide on the materiality figure
•
Consider the level of Detection Risk (DR) the auditor is willing to accept
based on IR & CR evaluation:
- DR low = bottom limit
- DR medium = average figure
- DR high = top limit
•
One figure - for AFS as a whole (Except for exceptional cases)
- Round to nearest rand / R’00
- Minimum value of error = material misstatement
•
Users of the financial statements are very important – already taken into
account
How to answer a question on the five steps
Discussion question
•
•
•
Question can combine audit risks and materiality
If asked to discuss – only do step 1 and 2; do not to step 3, 4 and 5.
Do a basic financial statement analysis – Check whether ratios have been adjusted for the
current year
STEP ONE
•
General:
-
State if the information if available
State and identify whether there are any changes
State whether the information is appropriate to use or not
Compare the actual and budgeted figures (if they are not equal = always
use actual)
Do this process separately for the current year, budgeted and audited
figures.
•
-
Current year information:
Is it available?
Significant changes (eg. Info given that assets increased, or unusual sale
made).
•
-
Current year budget:
Is it available?
However actual figures are a better representation, too much variance.
•
-
Audited Annual Financial Statements:
Available or not?
Not appropriate if there has been movement either an increase or a decrease
= means it is not a stable base.
If it is a continuous business = must use net profit
•
Conclude: Whether the current information should be used.
STEP 2:
• Bases are generally given
STEP 3: Which base to use? (Always state what they are interested in and why)
•
-
Users: Shareholders
The shareholders are interested in future profitability and the SCI is
important. (1 mark for both)
-
They will also consider dividends and capital growth as shown in the
statement of P/L and OCI.
•
Users: Debt providers
- Whether assets exceed liabilities.
- Whether you will be able to repay the capital payments and interests.
- The debt providers are one of the principal users that will be interested in:
▪ The assets (SFP): That may be assessed or reposed when the
company experience financial difficulties (SFP).
▪ The firm's profitability: That might have an impact on the company’s
repayment ability (interest and capital repayments) in terms of the
statement of P/L or OCI.
•
Nature of the business
- State what the company’s main source of business is (type of company).
- Manufacturer – High asset base and capital intensive = interested in SFP.
- Retailer (Main business if the sale of products) – Revenue or turnover
will be very significant = interested in SCI
•
Size
- “The figures in the SCI are more significant in relation to the figures in the
SFP.”
- Decide which statements are more significant.
- This is supported by the fact that the value of the amounts on the SCI
exceed the amounts on SFP.
•
Stability of bases
If both the assets SFP and the SCI increased then:
-
•
The GP is not stable
The income is not stable
The asset is not stable
And therefore should use Net P.BT as the base (Will always be an outlier
to indicate which base you should use.)
Turnover: Has a consistent growth pattern and therefore is suitable and
will be the chosen base.
All users are interested in the SCI, as value of the company lies in the
turnover
Net income before tax = suffered a loss then it is not a suitable base (loss)
Conclude:
- The majority of the indicators show that the value of the company lies in
the SFP and SCI. Therefore the Net P.BT will be used to calculate
planning materiality.
- All users are interested in the SCI, as value of the company lies in the
turnover.
STEP 4: Calculation
Turnover: 0,5% to 1% of R6167000 = R30,835 (LOW margin) to R61,670 (HIGH
margin) then average the answer in order to get to the Medium level
STEP 5: Decide on the materiality figure
•
•
•
Detection risk goal = medium
Medium lies halfway between margins
Therefore R46,253
MATERIALITY MEMO
Step 1: What financial information is used?
Current year: The current year’s figures are available and there is no indication that
these figures will change significantly, except for the classification errors which can be
adjusted.
(1)
Current year budget: The current year budgeted figure are available and budgeted
sales have been exceeded and consequently the budgeted figures are not
appropriate.
(1)
Previous year: Figures of the previous financial year are available and have been
audited, but cannot be used as the company’s financial situation has changed
significantly from the previous year as a result of the record sales in the promotion
month.
(1)
Conclusion: The actual figures for 2014 are the most accurate indication of the
company’s substance, because it reflects the change in the company’s operations best
and will be used, once the classification errors have been adjusted***.
(1)
Step 2: Bases as set out in the question
o
o
o
o
½% to 1% of revenue;
1% to 2% of gross profit;
5% to 10% of profit before tax; and
1% to 2% of total assets
Step 3: Which base to use
Users of the financial statements – Shareholders: The company is listed therefore
the shareholders will be interested in the statement of comprehensive income and the
firm's profitability and dividends paid out to them, as well as the capital growth of the
company.
(1)
Users of the financial statements – Debt suppliers:
The debt providers (bank who provided loans), as one of the principal users will be
interested in particularly two factors:
i.
assets, that may be assessed when the company experiences financial
problems (statement of financial position); and
(1)
ii.
the firm's profitability that might have an impact on the company's repayment
ability (statement of profit and loss and other comprehensive income).
(1)
Therefore, the statement of profit and loss and other comprehensive income and the
statement of financial position will be of interest to them, but not the equity figure.
Nature of the business: The company’s main business is the manufacture and sale
of inventory, as such the non-current assets and the inventory are what drive the
business. This is supported by the significant investment made in non-current assets
in the current year.* (statement of financial position)
(1)
However, the size of the revenue in relation to the other elements of the financial
statements is significant and the company is income driven, placing emphasis on the
statement of comprehensive income.
(1)
Stability: The income were stable in the previous two years, however in the current
year there was a sharp increase as a result of the sale.
(1)
The gross profit figures were stable in the previous two years, however in the
discounted sales prices have decreased the gross profit percentage in the current
year.
(1)
There has been a significant investment in the assets during the current year, thus the
asset figures are not stable and suitable to be used
(1)
The profit before tax figures is fairly stable, the net profit before tax would be an
acceptable basis. Users are interested in the statement of comprehensive income,
NPBT would be used.
(1)
Errors:
Reclassification error: The R 1 million classification error has no impact on the
selection of the basis, as it does not affect any of the bases used by the audit firm.(1)
Conclusion: Since all users are interested in the statement of comprehensive
income, we will use the statement of comprehensive income.
Profit Before Tax will therefore be the preferred basis.***
(1)
Step 4: Calculations
5% to 10% of Profit before Tax (R 12 600 000 * 5% and 10%)
R 630 000 – R1 260 000 ***
(1)
Step 5: Decision on materiality figure
Inherent risk was already evaluated as high.
and control risk provisionally evaluated as medium. (provided)
You will therefore be willing to accept a low level of detection risk*** to reduce audit
risk to an acceptable level. The figure at the lower end of the range will therefore be
selected.
(1)
Conclusion: Therefore, the planning materiality figure for the 2014 audit is:
R 630 000
(1)
14. OVERALL AUDIT APPROACH
•
What is audit approach
•
Reasons for Audit Approach
Why formulate
- co-ordinate audit
- limit audit risk
- audit evidence in cost-effective way
- determine nature/extent/timing of audit procedures
Using what?
- knowledge of business, industry & IC
- planning materiality
- risk evaluation
•
Overall audit approach
Background
Nature – most important consideration
WHAT?
•
Based on risk evaluation.
•
Test of Controls
- Purpose: Test the operating effectiveness
- If CR < HIGH must gather evidence.
- Intend to rely on Internal Control Systems.
•
Substantive procedures
- Purpose: To detect material misstatements
- Types:
▪ Substantive analytical review
▪ Test of detail (balances & transactions)
- MUST be performed for all material items.
-
Two possible approaches:
Overall audit approach
A. Combined audit approach/ System-based
B. Substantive audit approach
approach
• Consider reliance on system, thus mainly
• Consider little or no reliance on internal
ToC.
controls.
• Results of ToC will determine substantive
• Detailed substantive procedures.
procedures.
• BUT substantive procedures must still be
performed for all material balances.
Rebuttable presumption: Revenue = fraud present.
1. Design: Prevent, detect,
correct
PLANNING
Understanding of Accounting
system & internal control
2. Implementation: control
working throughout period
EXECUTION
WTA – Auditor willing to accept:
HIGH CR
can not rely on controls
Extensive substantive testing
NATURE: Substantive
approach
Test of details
Substantive procedures
Analytic procedures
Start with CR
Does this control work?
Test of Controls (ToC)
LOW CR
can rely on controls
NATURE: Combined
approach
Test of details
Substantive procedures
Limited substantive testing
Analytic procedures
Timing
WHEN?
•
General rule
- interim date (before y/e) – if can rely on controls – or year-end.
•
Exceptions
- Higher risk for material misstatement → closer to or at year-end.
•
If Interim → evidence for remainder.
Extent
•
•
•
•
HOW MUCH?
Planning materiality
E.g. sample sizes
Determined by professional judgment.
I.e. substantive vs. extensive testing.
Class example:
The audit team is busy with the planning for the audit for the year ending 31 March 2015.
The partner in charge of the audit made the following known to the audit team:
 Preliminary risk evaluation is as follows:
- Inherent risk as high
- Control risk for all cycles is low
 Stock with a book value of R182 000 was included in Finished Goods, which should have
been shown as Work in Progress.
Required:
Briefly formulate the overall audit approach.
Risk
Determined by…
Class example
Audit
Auditor
Inherent risk (IR)
Company & Market
Control risk (CR)
Controls & ToC
H
Combined approach
L
Perform more ToC
Nature
Extent
Timing
Extensive
During year
(interim) & after
year-end
Detection risk (DR)
Substantive
procedures
M/H
Less substantive
procedures, more
analytic procedures.
Limited/ reduced
At or after year-end
Questions
1. Formulate and motivate the audit approach you would follow for the current year's audit of
Freeze-Free Proprietary Limited, based on the assumption that both the control and
inherent risks have been evaluated as high.
(4)
Communication skills- formulation
(1)
Solution
1. Control risk for the audit has provisionally been evaluated as high, which means that a
good system of internal controls is not in place.
(1)
2. Therefore, no reliance will be placed on the system of internal control and no test of
controls will be performed.
(1)
3. Since the inherent risk has been evaluated as high it means that the detection risk must
be reduced to a low level in order to reduce audit risk to an acceptable level.
(1)
4. It is attained by following a substantive approach, therefore, performing substantive
procedures.
(1)
5. Extensive substantive procedures will be performed.
(1)
6. The testing will be done after year-end.
(1)
AVAILABLE: 6
MAXIMUM: 4
Communication skills - structure of argument (all elements of audit approach is addressed)
(1)
2. Describe and motivate the audit approach you would follow for the current year's audit of
Suzette DIY Limited, based on the assumption that both the control and inherent risks
are evaluated as high.
(5)
Communication skills - structure of argument
(1)
Solution
•
•
•
•
•
•
Control risk was provisionally evaluated as high, which means that there is no proper
system of internal control in place.
(1)
No reliance can, therefore, be placed on the system of internal, consequently
(1)
no tests of control will be performed.
(1)
Since inherent risk and control risk are both evaluated as high, it means that the detection
risk the auditor will be willing to accept to bring the audit risk to an acceptable level will be
low.
(1)
This will be achieved by following substantive based audit approach.
(1)
Extensive substantive procedures will be performed.
(1)
All audit procedures will be performed after year-end.
(1)
AVAILABLE: 7
MAXIMUM: 5
3. Describe and motivate the audit approach you would follow for the current year's audit of
Tim & Pumba Limited, based on the preliminary risk assessment.
(6)
Inherent risk was already evaluated as low and control risk provisionally evaluated as low.
Solution
1. Control risk for the audit has provisionally been evaluated as low, which means that a good
system of internal controls appears to be in place.
(1)
2. A combined or control based audit approach will be followed
(1)
3. and therefore, reliance will be placed on the system of internal control.
(1)
4. Extensive test of controls will be performed.
(1)
5. The test of controls will be performed before year-end.
(1)
6. As the inherent risk has also been evaluated as low, it means that you will be willing to
accept a higher level of detection risk in order to maintain audit risk to an acceptably low
level.
(1)
7. Therefore, limited substantive procedures will be performed.
(1)
8. Some of the substantive testing can be done before year-end with early verification and
the rest will be done at or after year-end.
(2)
AVAILABLE: 9
MAXIMUM: 6
15. AUDIT EVIDENCE
Understand and define the management assertions
-
Representations by management, explicit or otherwise,
that are embodied in the financial statements,
as used by the auditor to consider the different types of potential misstatements that may
occur.
In representing that the FS are in accordance with applicable financial reporting framework,
management makes assertions regarding the recognition, measurement, presentation and
disclosure of various elements of the FS and related disclosure.
Assertions relating to classes of transactions
and events and related disclosures for the
period
• Occurrence: Transactions and events that
have been recorded or disclosed have
occurred and such transactions and
events pertain to the entity;
• Completeness: All transactions and
events that should have been recorded
and all related disclosures that should
have been included in the financial
statements have been included;
• Accuracy: Amounts and other data have
been recorded appropriately and related
disclosures have been appropriately
measured and described;
• Cut-off: Transactions and events have
been recorded in the correct accounting
period;
• Classification: Transactions and events
have been recorded in the proper
accounts.
• Presentation: Transactions and events
are appropriately aggregated or
disaggregated and clearly described, and
related disclosures are relevant and
understandable in the context of
requirements of the applicable financial
reporting framework.
Assertions about account balances, and
related disclosures at the period end
•
•
•
•
•
•
Existence: Assets, liabilities and equity
interest exists;
Rights and obligations: The entity
holds/controls the right to assets, and
liabilities are the obligation of the entity;
Completeness: All assets, liabilities and
equity interest that should have been
recorded are recorded and all related
disclosures that should have been
included in the financial statements have
been included;
Accuracy, valuation and allocation:
Assets, liabilities and equity interests are
included in the financial statements at
appropriate amounts and any resulting
valuation or allocation adjustments have
been appropriately recorded, and related
disclosures have been appropriately
measured and described.
Classification: assets, liabilities and
equity interests have been recorded in
the proper accounts.
Presentation: Assets, liabilities and equity
interests are appropriately aggregated or
disaggregated and clearly described, and
related disclosures are relevant and
understandable in the context of
requirements of the applicable financial
reporting framework.
Link management assertions to audit objectives
Audit
• Systematic process
• Gather & evaluate evidence
and information objectively
to make evaluation.
Management assertions
• assertions about economic
actions and situations (made
by management of the
entity)
• determine correlation (of
assertions) with predefined
criteria
How to gather audit evidence?
Refer to Audit Approach

Through the performance of audit procedures to achieve audit objectives
Audit procedures: Obtaining audit evidence
1. Risk assessment procedures
•
Knowledge of environment and internal controls
2. Tests of Internal Control “TOC”
•
Purpose: to test working of controls
- want to place reliance on controls based on preliminary assessment → collect evidence to
substantiate
- In cases were substantive procedures alone does not provide the sufficient evidence
required.
3. Substantive Procedures (SP)
•
•
•
Purpose: to detect material misstatements.
Perform based on risk assessment of misstatement and results of TOC.
Types of substantive procedures:
- Analytical procedures
- Test detail of transactions
- Test detail of balances
- Disclosure
Example: Management assertions, audit objectives and nature of audit procedures
Audit evidence
•
What is it?
- All information used by the auditor
- To make conclusions
- On which the audit opinion is based
•
-
•
Why?
Fundamental to audit function
Necessary to support audit opinion regarding assertions management makes in the
financial statements
Conducting audit procedures by using the following techniques:
Test of Controls
Techniques:
• Inspection
• Enquiry
• Re-performance
• Observation
Substantive procedures
1. Substantive analytical procedures
2. Substantive procedures:
Test of detail: Techniques
• Inspection
• Enquiry
• Re-performance
• External confirmation
• Recalculating
Audit evidence: Requirements
Sufficient
How much?
 Professional judgment is involved
 Based on the Audit approach’s required
level of evidence required.
Appropriate
Quality (how good?)
 Reliability (Source?)
 Relevance of audit evidence obtained in
terms of the assertions that are required
to be tested.
Level of audit evidence required is influenced by:
•
•
•
•
•
Risk evaluation (IR & CR)
Materiality of an item
Previous experience
Results of other audit procedures
Reliability & source
- Reliability influenced by:
▪ Source (Internal or external)
▪ Nature
▪ Written vs. Verbal / Original vs Photocopy
• Cost vs benefit
Various types of audit evidence:
•
•
•
•
•
•
•
Physical evidence vs Electronic evidence
Cashbook, General Ledger
Reconciliations
Minutes of meetings
Written declarations vs Oral evidence
Confirmations from 3rd parties
Reports of analysts
Audit working papers
•
Purpose: To support audit opinion
•
Why Compile? → to obtain audit
evidence that:
- Supports the audit opinion
- Complies with audit standards
•
Contents & Format:
Heading/Subject
Date
Clearly identify the
information/subject matter
- Prepared by
- Reviewed by
- Cross-references
-
Questions
Example 1
You are busy with the planning of the current audit of Argus Limited. You have formulated the
following audit objectives based on the assertion’s management make on the financial
statements.
1.
All salary and wage transactions are included in the Statement of profit and loss
and other comprehensive income. Completeness
2.
Salary and wage transactions included in the Statement of profit and loss and
other comprehensive income took place and relate to Argus Limited.
Occurrence
3.
Salary and wage transactions were recorded in the correct accounting period.
Cut off
4.
All salary and wage transactions were carried over correctly from the source
documents. (NB!) Accuracy
5.
Only salary and wage transactions were recorded in the account.
Classification – Proper account
6.
All corrections made to salary and wage transactions in the period were
recorded. Completeness
7.
Appropriate disclosures have been made concerning directors’ salaries.
Presentation
8.
Debtors represent amounts receivable from valid customers on the Statement
of financial position date. Existence
9.
Creditors at the Statement of financial position date represent legal claims of
the entity on customers for payment. Rights/ Obligations
10.
All payments made to creditors during the period were recorded.
Completeness
REQUIRED
Identify the specific management assertion from which each of the specific audit objectives
were derived.
(10)
Example 2
Suzette recently found a YouTube video clip of an audit manager preparing the owners of a
new business, who are not familiar with accounting concepts, internal controls and audit
objectives, for a visit from their external auditors by providing them with examples of audit
objectives. Suzette asked you to link the following audit objectives with the relevant
assertions.
•
•
•
•
•
To test that all sales transactions (all workshop and ‘do-it-yourself’ kits) were recorded
in the correct financial period.
To test that all sales transactions (all workshop and ‘do-it-yourself’ kits) were recorded
at the correct quantities and amounts.
To test that all operating expenses incurred in the financial year, were actually
recorded.
To test whether all clients who attended the workshops were included in the sales
figure and that all transactions were recorded accordingly.
To test that sales relating to amounts still outstanding at year-end, were only made to
debtors who were approved as being able to settle their debts.
REQUIRED
Comply with Suzette’s request by linking each of the audit objectives to the most relevant
assertion.
(5)
Solution
Management assertions
a. Cut-off
b. Accuracy
c. Completeness
d. Completeness
e. Accuracy, valuation and allocation
(1)
(1)
(1)
(1)
(1)
AVAILABLE: 5
MAXIMUM: 5