Professional Documents
Culture Documents
FINISH THE CHAPTER 2 PROF ACC RULES STUFF & CH 3 & CH4 IN SMALL PIECES AS YOU
WORK 9 A BIT EACH TIME YOU DO SOMETHING!!!! ALSO READ THROUGH SOME BOOK
ON “INTERNAL AUDITING “ TO GET THE IDEA ABOUT IT.!
TERMS: 14
INTRODUCTION 15
Definitions:.......................................................................................................................................16
WHAT is an AUDITOR?:.......................................................................................................................16
Reasonable Assurance.......................................................................................................................18
definitions.........................................................................................................................................22
INTRODUCTION..................................................................................................................................22
the ifac code of ethics................................................................................................................................................22
General guidance: Ethics and Professional Conduct...................................................................................................22
The Public Interest .....................................................................................................................................................23
Pronouncements relating to ethics and professional conduct in South Africa ............................................................23
CH 3 STATUTORY MATTERS 31
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SEC 34 Additional accountability requirements for certain companies...................................................................35
sec 35 LEGAL NATURE OF COMPANY SHARES & REQUIREMENT TO HAVE SHAREHOLDERS....................................35
SEC 36 authorisation for shares...............................................................................................................................35
SEC 37 preferences , rights, limitations and other share items................................................................................35
Sec 38 issuing shares...............................................................................................................................................36
Sec 39 subscription of shares:.................................................................................................................................36
Sec 40 consideration for shares:..............................................................................................................................36
SEC 41 shareholders approval f0r issuing shares in certain cases :.........................................................................36
SEc 43 Securities other than shares.........................................................................................................................36
SEC 44 financial assistence for subscription of securities.......................................................................................36
SEC 45 loans or other financial assistance to directors...........................................................................................36
SEC 46 DISRIBUTIONS MUST BE AUTHORISED BY BOARD........................................................................................37
SEC 47 capitalization shares ...................................................................................................................................37
Sec 48 company or subsidiary aquiring companies shares......................................................................................37
Sec 49 securities to be evidenced by certificates or uncertificated..........................................................................37
Sec 50 Securities register and numbering...............................................................................................................37
Sec 51/52/53 registration and transfer of certificated and uncertificated securities. ..............................................37
Sec 55 liability relating to uncertificated securites..................................................................................................37
SEC 57 INTERPRETATION AND RESTRICTED ApPLICATION OF THIS PART:................................................................37
sec 58 shareholders right to be present by proxy:...................................................................................................38
sec 59 record day for determining shareholders rights :.........................................................................................38
Sec 60 shareholders acting other than at meetings ................................................................................................38
SEC 61: Shareholders Meetings...............................................................................................................................38
SEC 62 NOTICE OF MEETING :..................................................................................................................................38
Sec 63 conduct of meetings.....................................................................................................................................38
SEC 64 Meeting quorum and Adjournment..............................................................................................................38
SEC 65 Shareholders Resolutions.............................................................................................................................39
SEC 66 BoD, Directors and Prescribed Officers.......................................................................................................39
Sec 67 First Director or Directors.............................................................................................................................39
Sec 76 : Standards of Directors Conduct :...............................................................................................................39
cc act................................................................................................................................................40
auditors act.......................................................................................................................................40
46
internal control.................................................................................................................................47
Introduction................................................................................................................................................................47
Definition of Internal control.......................................................................................................................................47
definition (per SAICA booklet :'guidance for directors:reporting on internal controls').............................................47
four ASPECTS of internal control from above definition...........................................................................................47
(ISA 315). 5 components of internal control (in ch 7)..............................................................................................47
internal control objectives..........................................................................................................................................47
limitations of internal control......................................................................................................................................47
the accounting system...............................................................................................................................................47
who is interested in what?..........................................................................................................................................47
The characteristics of good internal control................................................................................................................48
audit evidence...................................................................................................................................49
Sufficient appropriate evidence..................................................................................................................................49
sufficient evidence:..................................................................................................................................................49
appropriate evidence...............................................................................................................................................49
Influenceing factors in determining whether sufficient appropriate evidence has been obtained............................49
audit sampling..................................................................................................................................52
Definitions:.................................................................................................................................................................52
Intro............................................................................................................................................................................52
steps in the sampling exercise...................................................................................................................................53
Stages of the audit process: (know whole chapter per lecturer ) .........................................................54
Stage 1 : Preliminary engagement activities:.............................................................................................................54
stage 2 : Planning:....................................................................................................................................................54
Stage 3 : putting audit -Plan and strategy - into action............................................................................................54
Stage 4 : Evaluate & conclude....................................................................................................................................54
The 4 important elements dealt with in this chapter, each one gone through by unisa, : .....................61
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COMPONENT 2 : ENTITYS RISK ASSESSMENT PROCESS :.........................................................................................68
Component 3: Control Activities: (internal controls)................................................................................................68
Component 4: Monitoring of Controls:......................................................................................................................68
COMPONENT 5: THE INFORMATION SYSTEM:...........................................................................................................68
Significant risks : .( when understanding entity & environment )...............................................................................69
Communicating with ‘governance’ and management .( when understanding entity & environment)........................69
DOCUMENTATION : ( when understanding entity & environment).............................................................................69
from appendix : many fraud risk factor CHARACTERISTICS (do learn)there are also ‘indicators of fraud’ in
appendix 2, that is not written here in own notes- note ….it is a different thing really. (SEE APPENDIX OF
ias240 FOR WHOLE LIST)....................................................................................................................73
intro:..................................................................................................................................................................73
fraudulent financial reporting:..................................................................................................................................73
fraud risk factors relating to misstatements resulting from misappropriation of assets:..........................................74
COMPUTER AUDITING.........................................................................................................................75
iNTRO:........................................................................................................................................................................75
COMPUTER ENVIRONMENTS:......................................................................................................................................75
A BRIEF DESCRIPTION OF DIFFERENT COMPUTER ENVIRONMENTS:...........................................................................75
INTERNAL CONTROL IN COMPUTERISED ACCOUNTING SYSTEMS...............................................................................76
FACTORS PECULIAR TO COMPUTERISED SYSTEMS WHICH THE AUDITOR SHOULD BE AWARE OF..............................76
COMPUTER AUDITING.........................................................................................................................76
DEFINITION OF A GENERAL CONTROL:........................................................................................................................76
CATEGORIES OF GENERAL CONTROLS........................................................................................................................77
CONTROL ENVIRONMENT AND SECURITY POLICY:......................................................................................................77
ORGANISATIONAL STRUCTURE AND PERSONNEL PRACTICES.....................................................................................77
STANDARDS AND STANDARD OPERATING PROCEDURES...........................................................................................78
SYSTEMS DEVELOPMENT CONTROLS (NB know very well)..........................................................................................78
program change controls............................................................................................................................................79
p.................................................................................................................................................................................79
APPLICATION CONTROLS:...................................................................................................................79
iNTRO:........................................................................................................................................................................79
Definitions:.................................................................................................................................................................79
input, processing, output:...........................................................................................................................................80
PROCESSING METHODS:.............................................................................................................................................80
APPLICATION CONTROL FRAMEWORK : MASTERFILE AMENDMENTS...........................................................................80
NB..............................................................................................................................................................................80
APPLICATION CONTROL FRAMEWORK : INPUT ...........................................................................................................81
APPLICATION CONTROL FRAMEWORK : PROCESSING.................................................................................................81
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APPLICATION CONTROL FRAMEWORK : OUTPUT.........................................................................................................81
MENU AND DESCRIPTION OF CONTROLS above:.........................................................................................................82
summary....................................................................................................................................................................83
INTRODUCTION:.................................................................................................................................86
Trends in IT.......................................................................................................................................86
Networks..........................................................................................................................................86
Definitions:.......................................................................................................................................86
databases.........................................................................................................................................87
Definitions..................................................................................................................................................................87
THE INTERNET...................................................................................................................................88
Risks and controls:trading on the internet:.................................................................................................................88
Computer bureaux.............................................................................................................................89
Audit implications:......................................................................................................................................................89
VIRUS...............................................................................................................................................89
CATEGORIES of VIRUS:...............................................................................................................................................89
Kinds of .....................................................................................................................................................................89
AUdit and control implications:...................................................................................................................................90
INTRO:............................................................................................................................................117
COMPENSATING CONTROLS..............................................................................................................117
:AUDIT PLAN:...................................................................................................................................129
:OBTAINING INFO ON GOING CONCERN:***********..................................................................................................129
MITGATING FACTORS evaluating..............................................................................................................................130
audit report:.............................................................................................................................................................130
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SEMESTER II
Q1- what is yellow highlight below:ie: ”client held”
Q2-ask yellow why queries from debtors not by the person who is in charge of debtors ie:debtors clark , eg: the person in charge of creditors,
debtors, etc.
8-Recording of 1-bank deposit slip 1-deposits not 1-CRJ daily by date & number from receipts (if rec. issued)
Receipts 2-CRJ recorded/or timeously 2-Queries from debtors : by person independent of
3-DL 2-recorded deposits may 1’debtors’ & 2’banking&recording of cash functions.’
4-GL (a)inaccurate 3-recon1 bank statement TO cash book mnthly +
(?remittance (b)overstated(fictitious) independentof banking&recording employee + reviewed by
list/receipts (c)cr to wrong debtor senior official.
issued/customer 4-recon2 CRJ supervisor (a)CRJ vs gaps 1dates 2sequential
remittance advice)? (b) test CRJ to DL
5-recon3 DL to GL control acc. Independent employee
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regular
Assertion : valuation & allocation : isn’t it a bit similar to ‘classification and presentation’ , what the difference between italics.
1) What is a year end creditors recon? what is a creditors list- a ledger Y/N?
1. HOW DO the method for doing a inventory count while there is dispatch going on in the background?
2. What is the yellow here, so variable selling costs eg marketing or commission must be subtracted from ‘closing stock’ in the financial
statement or how??normall this is a period cost is it not :? Definition:Net Realisable value :
i. The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated
costs necessary to make the sale.
AUD 301 –
CH 2 – CODE FOR PROF. ACC
a. SEE PG 2/28&29 NO 13 .1 – HOW CAN AN AUDITOR DO THE BOOKS AS WELL AS DO THE AUDIT OF THE BOOKS?????
b. What if a private company may offer its securities to the public OR it does not restrict transfer of its shares- is it then a public
company?
CH 3 COMPANIES ACT
SEC 48 COMPANY OR SUBSIDIARY AQUIRING COMPANIES SHARES
1. A company may ‘buy back’ its own shares, but this is also a distribution and sec 46 must be adhered to (resolution +statement + liquidity&
solv. Test)
2. WHERE a buy – back has taken place,the following MUST happen :
2.1. ‘stated capital ‘ must be reduced by formula : [no. of shares acquired] * [stated capital/no. of issued shares]-why not just deduct IT
FROM STATED CAPITAL? WHY MUST YOU USE THIS FORMULA ? WHAT DOES IT MEAN OR DO SPECIAL OVER AND ABOVE PLAIN SUBTRACT’
2.2. The share certificates get cancelled and they revert to “authorised shares”
3.
1. Voting : to be done by either
1.1. Show of hands ( each member present has only 1 vote no matter how many shares.)(who gets to choose which method ? isn’t this a bit
unfair – bulldoze the meeting?-check the act)
1.2. Polling those present & entitled to vote. ( each member gets voting rights per number of shares)
SEC 64 MEETING QUORUM AND ADJOURNMENT
1. Sec 64 provides for both a votes quorum and a person quorum
1.1. Votes Quorum: a shareholders meeting may not begin until person holding 25% (MOI may specify higher or lower)of voting rights in at
least ‘1 matter to he decided’ are present.( eg preference shareholders may only be able to vote on matters affecting preference shares)
1.2. Person Quorum: if a company has over 2 shareholders , meeting may not begin OR a matter be debated until
1.2.1. Min 3 Shareholders present.
1.2.2. The ‘votes quorum’ explained above is satisfied (is it or OR is it AND here – check act)
1.3. Time : if person+votes quorum requirements are not met within 1 hr of meeting start time, it is auto postponed for 1 week ,without any 1-
motion to postpone 2- vote or 3- further notice.
SE 65 SHAREHOLDERS MEETINGS
1. There are only 2 types of resolution , either 1 - ordinary or 2- special resolution. Every resolution must be 1 of the 2.
2. BoD may propose ANY resolution to be considered by the shareholders AND may determine whether by :
2.1. Meeting OR
2.2. Written Consent ( no meeting)
3. Any 2 shareholders may propose a resolution on any matter on which they can exercise votes. ,(check act – can 2 old grannies or competitors
with 1 share each they just waste everybodies time interminably?)
GOING CONCERN :
1-see pg 15/12 , penciled in section???whats this mean?
2) IASB : international accounting standards board releases IFRS –international fin. reporting standards. (is this the old or new name- where
does ifac come into this?)
3) ISA –International standards on auditing (seems to now be called ISQC’s , not ISA’s – what is it actually?)
a) ISRE –review engagements
b) ISAE- Assurance angagements
c) ISRS- related services
d) IFAE :International Framework for Assurance Engagements
4)
a) INTEGRITY OF THE CLIENT : The above factor will include integrity of principal owners, key management and those charged with governance (ISA
220, par A8).
(1) Business Reputation : Client Unethical or lacks Integrity.
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(2) Business Practices eg. Illegal : eg money laundering OR : Not wish to be assosiated with eg. Porn/tobacco.
(3) Attitude To Accounting Standards. : acceptable financial framework : 'Fairest' OR 'most favourable picture' accounting
standards
(4) Audit Fees payment /if they will pay fair fees or not.
(5) Client Impose Limitations On Audit. Eg restrict access to information.
(6) Reasons For Change Of Auditors.; if suspect reasons
b) CLIENT INTEGRITY : other stuff trated separately by UNISA: ability of client to pay
(i) BUSINESS STANDING RISK : (what is this and what is ‘ illustration of good practice 10’ referred to in tut 102 pg 8???)
5) See tutorial letter 1 page 17 table of finacilal statement risks :
a) Isn’t 4 a control risk?
b) For the assetion question, what about ‘receivables’ incorrect if problem with receiving payment to keep factors happy, and understate
‘doubtful debts’ to increase profit?
6) Ias 320 materiality, why is A7 not high for profit and low for revenue, when profit is allsaws a smaller figure than the massive revenue? Error?
Visa versa?
7)
8)
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TERMS:
1) Verify: means determine somethings truth or falsity.
2) AUDIT OBJECTIVE
3) FORMING AN OPINION : make up your mind.
4) FAIR PRESENTATION of fin info/ fin stats : properly ,correct
5) Cycles of company.( in duty segregation)
6) Functions of company( in duty segregation)
7) material : do make a difference.
8) misstatement : wrong entry/number etc.
9) appropriately :
10) Corroborative Evidence : evidence which confirms/corroborates something eg: to obtain info from a debtor to confirm his account is
what it says.
11) ASSURANCE GIVER.
12) ASSURANCE ENGAGEMENT
13) Audit Differences : show a material misstatement in Fin.Stats. or Not.( OVERS AND UNDERS SCHEDULE)
14) OVERS AND UNDERS SCHEDULE: shows all the “Audit Differences” which are the differences between what the fin. Stats. Say and what
auditor works out to be the real figures.
1) Definition; ISA315 :risks that require : Special audit consideration
15) Emoluments :
16) Misallocate : eg an expense to wrong account
17) Batch Control System: system of controlling physical movement of data (eg invoices,wage cards,printouts output) to and from user
Depts.
18) Compilation engagement :
19) Agreed upon procedure engagement :
20) Conducted : done,eg employees conducted a control procedure
21) Casts: means addition in accounting of number of fields.
22) Extentions:
23) Allocate : overheads for job costing/manufacturing/std.costing. or allocate expenses etc to correct account in ledger
24) Accumulate : costs eg direct labour and materials, to each specific account by journalizing it for job costing or std.costing
25) Analogous /əˈnaləgəs/Adjective
1. Comparable in certain respects, typically in a way that makes clearer the nature of the things compared.
2. (of structures) Performing a similar function but having a different evolutionary origin, such as the wings of insects and birds.
26)
27)
28)
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INTRODUCTION
1. Text Book :Jackson & Stent :Auditing notes for SA students. + Graded Questions edition 9 from same authors second book.
2. Coursework semester 1: Chapter 1+5+7+8 then briefly back to 3 one or 2 sections
3. 2/3 tests +3/4 assignments
4. Lect: Mr Poopedi, 3rd floor Kblock 1st room on left.
5. Lectures :mon 1st ,wed 2+3 , fri some or other.
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Income Statement
Statement of Equity
-------------------------------------------------------------------------------------------------------------------------------------
DEFINITIONS:
1. #### 1) Auditor: ? ASSURANCE GIVER. : from word “audire” Latin means “to hear” from owner hear/audit to employ a auditor …. Is
an :
1.1.1.1. “independent professional accredited accountant who “
1.1.1.2. expresses a conclusion
1.1.1.3. designed to enhance the degree of confidence
1.1.1.4. of the intended users
1.1.1.5. other than the responsible party ,
1.1.1.6. about the outcome of the evaluation or measurement
1.1.1.7. of a subject matter
1.1.1.8. against the criteria (attempt to enhance credibility of a “statement; event ; figures)
2. Professional skepticism:ISA 200 : an attitude that includes
2.1. - a questioning mind,
2.2. 2being alert to conditions which could indicate possible misstatement due to fraud or error ,
2.3. and a critical assessment of audit evidence.
WHAT IS AN AUDITOR?:
1. An Auditor =Define : (SEE DEFINITION ABOVE IN ‘DEFINITIONS’) ASSURANCE GIVER. : from word “audire” Latin means “to
hear” from owner hear/audit to employ a auditor.
2. An Audit = ASSURANCE ENGAGEMENT. : it complies with all 5 aspects of an assurance engagement : subject matter, criteria, 3
way relationship, written report, sufficient appropriate evidence.
3.
1 “the independent professional accountant
2 expresses a conclusion
3 designed to enhance the degree of confidence
4 of the intended users
5 other than the responsible party ,
6 about the outcome of the evaluation or measurement
7 of a subject matter
8 against the criteria (attempt to enhance credibility of a “statement; event ; figures)
4. International Framework for Assurance Engagements : defines an assurance engagement as: “ in which the practitioner
expresses a conclusion designed to enhance the degree of confidence of the intended user…”
5. The basic premise = ‘Enhance credibility of information’ or ‘increasing degree of confidence of users’
#### 2) TYPES OF AUDITOR:
1- Independant of what
2- Enhance whos confidence
3-What do they do
4 anything else might want to add
a. EXTERNAL AUDITORS
i. 1-Independent of company audited opinion - 2- lend credibility + enhance confidence users of fin stats 3- fin
stat fairly present fin pos + results .4-for statutory purposes, more for external users needs,less ,but also,for
internal(head office confidence subsidiary)
b. INTERNAL AUDITORS
i. 1-Independent (of dept audited) assignments –2-for mngmnt confidence- 3- efficiency, economy, effectiveness –
business processes+ internal controls. ,4- for internal users not external,not for statutory purposes.
c. GOV. AUDITORS
i. 1-Independent of gov. dept. audited – 2 enhance senior Gov. confidence in lower -
d. FORENSIC AUDITORS
i. Independent of entity under investigation –2- for client eg police, court etc 3-investigate + gather evidence fin
mismanagement ,fraud, theft..
e. SPECIAL PURPOSE AUDITORS.
i. Environmental auditors(compliance enviro. Regulations) – Vat auditors(SARS) – enhance confidence SARS
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6. COMMON ESSENTIAL CHARACTERISTIC THREAD RUNNING THROUGH : 1. Characteristic of INDEPENDENCE. …….if not
independent=NOT A VALID AUDIT.
7. OTHER ESSENTIAL CHARACTERISTICS: IFAC code ethics for Prof. Accountants.
1 INTEGRITY :STRAIGHTFORWARD , HONEST , moral
2 OBJECTIVITY / INDEPENDENCE :UNBIASED ,HONEST impartial, fair, not influenced by prejudice/bias
(independent) . ……. UNBIASED ,HONEST impartial, fair, not influenced by prejudice/bias . If not
independent=NOT A VALID AUDIT.
3 PROFESSIONAL COMPETENCE and DUE CARE:maintain PROFESSIONAL KNOWLEDGE/SKILL AT
REQUIRED LEVEL &PERFORMING WORK DILIGENTLY.( eg auditors must attend min 1 symposium on IFRS per
year by SAICA law to be a member)
4 CONFIDENTIALITY: respecting the confidentiality of client information.
5 PROFESSIONAL BEHAVIOUR: COMPLY LAWS ®ULATIONS , AVOID BEHAVIOR which discredits the
profession.
1.2. ISA 200 warns :It is not an assurance of the future viability of the entity
1.3. ISA 200 warns objective is NOT to DISCOVER FRAUD or ENSURE COMPLIANCE WITH THE LAW.(this is mngmnts
responsibility.) auditor only : " reasonable expectation of detecting such if they affect fair presentation ie: if fin. info. contains
material misstatement.
Know the following – from an example question on objective of audit( tell friend if objective of audit guarantees good investment in
company)
1.3.1.1. The opinion of auditor does :
1.3.1.1.1. It enhances the credibility of the fin stats
1.3.1.1.2. Does not guarantee future viability of the entity
1.3.1.1.3. Does not guarantee efficiency or effectiveness with which management has conducted the affairs
of the entity
1.3.1.2. The audit provides reasonable but not absolute assurance that the statements taken as a whole are free
from material misstatement.
1.3.1.3. The inherent limitations of an audit affect the objective of an audit to some degree
1.3.1.3.1. Use of testing
1.3.1.3.2. Inherent limitations of Accounting & internal controls
1.3.1.3.3. Persuasive rather than conclusive
1.3.1.3.4. Subjectivity of AUDITORS work
1.3.1.3.4.1. Obtaining audit evidence – planning audit in different way
1.3.1.3.4.2. Conclusions he then made (each makes own conclusion)
REASONABLE ASSURANCE.
1) Auditor DOES NOT ever CERTIFY / or CONFIRM CORRECTNESS :he only EXPRESSES AN OPINION on it's FAIR PRESENTATION.
2) Reasonable assurance THAT NO misstatement done- NOT 100% correct to be sure! A REASONED OPINION IS GIVEN.
3) Why Auditor Cannot Certify Financial Statements: due to inherent limitations of the audit as follows : per ISA 200
4) #6) THE INHERENT LIMITATIONS OF AN AUDIT : ISA 200
a) Per lecturer answer:
i) Use of testing
ii) Accounting & Internal controls limitations
iii) Auditors Subjective judgement
(1) interpretation of the results could differ
(2) different ways of obtaining audit evidence/planning audit
iv) Evidence persuasive not conclusive
v) (add subjective eg depreciation/bad debts/inventory obsolecence + mangmnt not give all info + check all laws complied not easy
+ time vs cost benefits.
vi) THE NATURE OF FINANCIAL REPORTING : (subjectivity of financial statements & auditors approach to audit.- )
(1) Subjective account balances eg depreciation ,impairment, bad debts, inventory obsolescence.( Mngmnt must apply
judgement in the preparation of fin stats)
viii) TIMELINESS OF FINANCIAL REPORTING AND BALANCE BETWEEN BENEFIT AND COST
ix) The audit must be finished in a certain time after end of reporting period and benefit of doing this must not exceed the cost
to get it done in time(exhorbitant-1000auditors/hr)
ACCOUNTING BODIES IN SA
9) SAICA S A institute of chartered accountants.
a) Registeredwith IFAC international federation of accountants – looks after interests of professional accountants.(all types)
10) ACCA Association of chartered certified accountants.
11) CIMA Chartered institute of management accountants
12) IRBA Independant regulatory board for auditors brought intp being by Auditing Profession Act.to replace PAAB public accountants and
auditors board.public accountants and auditors act was repealed same time
a) Looks after intersts of auditors + pulic + discipline auditor members.
b) ALL AUDITORS must register with the IRBA after passing part 1+2 of saica exam and be member of saica-AS PER LAW.
c) Decides which publications etc and affiliations is accepted ie : IFAC publications are to be used etc.
13) IFAC : international federation of accountants - formed 1977, comprises various accounting and auditing boards for different issues ,
namely those listed below , also releases the Code of Ethics of professional accountants through te IESBA
a) IAASB- international auditing and assurance standards board formulate the: ISQC’s etc.
b) IAESB: international accounting education standards board – formulate all education for accounting stuff
c) IESBA: international ethics standards board for accountants – formulate the code of Ethics for professional accountants released by IFAC.
d) IPSASB: international public sector accounting standards board
e) Where does IFRS etc come into this???
14) IASB : international accounting standards board releases IFRS –international fin. reporting standards. (is this the old or new name- where
does ifac come into this?)
15) ALL auditing standards released by IFAC
a) ISA –International standards on auditing
b) ISQC : international standards on quality control( just the 1 that is in front of all the IAS’s, ie: there seems only to be 1 of these)
c) ISRE –review engagements
d) ISAE- Assurance angagements
e) ISRS- related services
f) IFAE :International Framework for Assurance Engagements
DIRECTORS
e) Running company
f) Reporting results OF THEIR STEWARDSHIP to shareholders.
AUDITOR
g) Independant opinion Fin info. fairly presents fin. Pos + fin Res.
h) Report to shareholdersl
SHAREHOLDE
DIRECTORS
RS
AUDITORS
#### 9) ASSERTIONS:
1) The REPORT to the SHAREHOLDERS from the DIRECTORS take the FORM of Fin.STATS. in form of GAAP(ifrs+isa) +CONTROLLED by
COMPANIES ACT (fin stats + 4th schedule)
2) EMBODIED in Fin.Stats. are the ASSERTIONS OF MANAGEMENT – are RERESENTATIONS on assets,liab.,transactions,events.
3) AUDITORS RESPONSIBILITY: 1- obtain SUFFICIENT APPROPRIATE EVIDENCE that that assertions embodied in fin stats are fairly
presented. 2-REPORT to Shareholders.
4) ASSERTIONS LAID DOWN IN ISA 315
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(1) Completeness
(2) Occurrence
(3) Existence
(4) Cut-off
(5) Accuracy
(6) Classification
(7) Rights and Obligations
(8) Valuation & allocation
(9) Presentation & Disclosure (this has been split into the following 4 sub-assertions)
(a) Occurance and Rights and Obligations : disclosed events&transactions&other matters have occurred and do pertain to
the entity
(b) Completeness : all DISCLOSURES (not events/assets/liabilities but disclosures) have occurred and do pertain to the entity
(c) Classification & Understandability : fin info is appropriately presented and described
(d) Accuracy and Valuation : fin and other info is disclosed fairly and at appropriate amounts
SUMMARY:
Scan in pg1/16 bottom
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INTRODUCTION
THE IFAC CODE OF ETHICS
1) From june 1996 saica adopted the IFAC (international federation of accountants) code of ethics for professional
accountants.So saica is using the professional accountants code now, not an auditors code.
2) Ifac places more emphasis on a conceptual framework than a rule based system: rules difficult to apply everywhere, but
concept /methodogy is for everything., otherwise basicly the same as the previous set of rules saica had.
3) Parts A,B,C are form IFAC.But member countries can add country specific sections if they wish- so saica added part D.
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5) questions to ask for an ethical question:
a) Greatest good for greatest no. of people
b) Would I be comfortable explaining my decision to a person I respected for their morals
c) Is decision honest & truthful
d) If my action to others Is it how I want others to act toward me
6) Issues affecting accountants: eg:
a) Did I act independently
b) Should I use confidential info from a client for my own advantage
c) Should I report a client who evades tax to the authorities
#### 1) NB
(i) The code has 5 fundamental principles: (whereas pre-eminent attributes are skills & integrity, these are the
principles-note independence not here)
1. INTEGRITY * straightforward honest fair truthful
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2. OBJECTIVITY /INDEPENDENCE Bias, conflict of interest, or undue
influence of others
3. CONFIDENTIALITY
NB
6. INTEGRITY sect 110 of IFAC code of ethics for professional accountants (SAICA code)
a. Straightforward honest fair truthful in professional and business relationships
b. Should not be associated with info. they believe is false, misleading(omission or inclusion) or
recklessly provided.
7. OBJECTIVITY (INDEPENDENCE) sect 120
a. Should not compromise their professional or business judgement because of Bias, conflict of
interest, or undue influence of others. Be fair, maintain professional scepticism.
8. CONFIDENTIALITY sect 130
a. professional accountants should not
i. * disclose confidential information acquired as a result of a professional or business
relationship, without specific authority or unless there is a legal or professional duty to do so.
ii. * use confidential information acquired as a result of professional and business relationships
to their own personal advantage or the advantage of third parties.
b. 4.2 professional accountants must maintain confidentiality in a social environment and must be alert to
the possibility of unintentially disclosing confidential information to friends, long-term business associates or a
close family member (parent, child or sibling), or an immediate family member (spouse or dependent).
c. 4.3 a professional accountant should attempt to ensure that staff under his or her control and anyone
from whom advice or assistance is obtained in respect of an assignment, respect the duty of confidentiality.
d. 4.4 if a relationship between a professional accountant, a client or employer ends: the duty of
confidentiality remains.
e. 4.5 disclosure of confidential information is permitted when
i. * disclosure is permitted by law and is authorised by the client or emplcer in the case of a professional
accountant in business)
ii. * disclosure is required by law e.g.
• providing evidence in the course of legal proceedings
• disclosing infringements of the law to the appropriate public authority.
iii. * there is a professional duty or right to disclose e.g.
when reporting on the quality review of a member body
iv. • in response to an enquiry or investigation by a member body or regulatory body
v. • to protect the professional interests of a professional accountant in legal proceedings or
vi. • to comply with technical standards or ethics requirements
f. 4.6 In deciding whether to disclose confidential information a professional accountant should
i. consider whether the interests of all parties could be unnecessarily or unjustly harmed by the
disclosures
ii. * whether all relevant information is known and substantiated (disclosing unsubstantiated facts or
incomplete information could be unfairly damaging to other parties and is unprofessional)
iii. whether the method or type of communication is appropriate and the recipient of the information is
appropriate.
9. PROFESSIONAL BEHAVIOR sect 140
a. 5.1 This fundamental principle requires that professional accountants
comply with relevant laws and regulations
b. * avoid any action that may bring discredit to the profession (acts in a way which negatively affects the
good reputation of the profession)
c. * market and promote themselves in an honest and truthful manner
10. PROFESSIONAL COMPETENCE AND DUE CARE sect 150
professional accountants are required to
a. * maintain professional knowledge and skills at a level which ensures that clients or employers
b. (in the case of professional accountants in business) receive competent professional in service
c. * act diligently in accordance with applicable technical and professional standards when
d. providing professional services.
e. 3.2 to maintain professional competence a professional accountant must remain abreast of relevant
technical, professional and business developments.
f. 3.3 acting diligently (with due care) requires that the professional accountant act carefully, thoroughly
and in accordance with the requirements of the assignment.
g. 3.4 a professional accountant must ensure that those working under his or her authority in a
professional capacity have appropriate training and supervision.
THREATS
#### 2) NB
THREATS
Now that the fundamental principles have been described, it is necessary to consider the circumstances which can
threaten compliance with the fundamental principles. The code categorises them as follows:
1. SELF-INTEREST THREATS, -self & close & immediate family -which may occur as a result of the financial or
other interests of a professional accountant or of an immediate or close family member, e.g. the professional
accountant has shares in a company which is about to become an audit client.
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2. SELF-REVIEW THREATS, which may occur when previous work needs to be re-evaluated by the professional
accountant responsible for that work, e.g. the professional accountant has written up the accounting records of a
client for which he or she has also been appointed to audit
3. ADVOCACY THREATS, -means not to be biased -which may occur when a professional accountant promotes a
position or opinion to the point that his or her subsequent objectivity may be compromised, e.g. a professional
accountant values a client’s shares and then leads the negotiations on the sale of the client’s company.
4. FAMILIARITY THREATS, which may occur when, because of a close relationship, a professional accountant
becomes too sympathetic to the interests of others; e.g. the professional accountant fails to report a fraud at a
client because the perpetrator is a close friend.
5. INTIMIDATION THREATS, which may occur when a professional accountant may be deterred from acting
objectively by actual or perceived threats, , e.g. a professional accountant in business fails to report a fraud
perpetrated by his section head because he fears he himself will be dismissed by the section head.
NOT ALL THREATS NEATLY FALL INTO THE ABOVE CATEGORIES! THIS DOES NOT MEAN THEY ARE NOT
THREATS, AND MUST STILL BE ADDRESSED.
(ii) As per Conceptual framework approach-It then provides the approach they should adopt for threats &
safeguards.
SAFEGUARDS
NB
SAFEGUARDS
Unless the threat is clearly insignificant, the professional accountant is obliged to apply safeguards which will eliminate or reduce
the threat to an acceptable level.
1 How does the professional accountant decide whether a threat is clearly insignificant? There is no magic
formula or “hard and fast” rule. The decision
1. professional judgement as per definition of matter –firstly it will be a matter of his own professional
judgement
2. public interest -must take into account the public interest — if the public interest is threatened , it is most
likely to be significant.
3. reasonable and informed third party -should be one which a reasonable and informed third party having
knowledge of all relevant information would make.
2. Safeguards fall into two categories
2.1 By : 1-Profession or 2-Law (legislation or regulation) -safeguards created by the profession,legislation or
regulation eg:the Companies Act which presents a professional auditor in public practice from being a director in
his/her audit cient
2.2 work environment -safeguards in the work environment : eg a company has sound procedures to protect an
employee (a professional accountant in business) from intimidatory threatsfrom the employees manager
3. If no suitable safeguard can be put in place, the prof.accountant will be obliged to withdraw from the business
relationship.-employee or assurance engagement.
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#### 3) SECTION 210 PROFESSIONAL APPOINTMENT
1.1. CLIENT ACCEPTANCE: ( Section 210 Professional Appointment)
1.1.1. RESPONSIBILITY : to consider if accepting would threaten compliance fundamental principles
1.1.2. THREATS : 1- integrity+professional behavior (dishonest business) 2- objectivity( independent) –no shares held or
family relationships.
1.1.3. SAFEGUARDS :screening client- as per ISQC1+ISA220 have suitable procedures to check 1- screen 2- independence
problems , Method: discuss bankers,lawyers, managers,ALSO you are allowed to /should ask last accountant or auditor , search
internet etc.
1.2. ENGAGEMENT ACCEPTANCE: sect 220
1.2.1. RESPONSIBILITY : competent/ facilities to do it
1.2.2. THREATS: professional competence & due care : threat to : “Self Interest”
1.2.3. SAFEGUARDS: prodedures+ policies by firm- enough skills on team, experts, enough time frame.
1.3. CHANGES IN PROFESSIONAL APPOINTMENT:
1.3.1. : :NEW: get clients permission and define boundries of what may be discussed : in writing to discuss his affairs fully and
freely with the old accountant- if he is hiding something he wont give this permission and probably should not be taken on.To be
asked of old accountant: eg if client has poor relationships with his professional advisors. OLD:1-
get client permission & boundries to discuss with new accountant in writing from client. 2- be honest and unambigous 3-
assign senior to handle transition to prevent bad professional behavior eg crtitisism.4- there is a danger of divulging
confidential information of clients to the new proposed accountant.
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SECTION 280 OBJECTIVITY — ALL SERVICES 2/17
1.22. sect 280 is in effect a preamble to sect 290, , which is about “independence” per se .\
ie:
IDENTIFY THREATS TO THE COMPLIANCE WITH 5 FUNDAMENTAL PRINCIPLES : Identify threats to independence,
THREATS: 1-self interest / 2-self-review /3-familiarity/ 4-intimidation / 5-advocacy
EVALUATE WHETHER SIGNIFICANT, apply safeguards if not significant : 3 checklist to decide:(as per usual) 1 has
requirement of independence in MIND and APPEARANCE been maintained. 2- Any public interest in matter? 3-
what would a reasonable 3rd party’s viewpoint be.
SAFEGUARDS: 1-policy 2-leadership 3- disciplinary 4-employee complaint/question avenue - 5-use clients
structures in place eg audit committee
THE FOLLOWING ARE THE RULES FOR INDEPENDENCE IN DIFFERENT CIRCUMSTANCES, EACH BROKEN DOWN INTO THE
CONCEPTUAL PARTS
See textbook pg 2/17 for long TABLE of examples below for Sect. 290. : the headings are all named here below but no time to do all-
only some are done
1. Numbers to learn :
3.1.1.0. SAME AUDIT PARTNER FOR 7 YEARS : NB: Key aduit partner not allowed for audit not longer than 7 years , then 2 ears
not member of team NOR just consult nor key partner for client. BUT extra year at max allowed (ie 8) if new audit partner is
eg sick. BUT if independent regulator (the law) in country allows it due to special circumstances ( eg too few auditors) he can
stay key partner for over 7 yrs, provided regulator specifies safeguards.
3.1.1.1. h
3.1.1.2.
2. DIRECT/INDIRECT FINANCIAL INTEREST IN AUDIT CLIENT :for any type of assurance engagement, not just statutory
audit : (SELF INTEREST)
3.1.2.0. Immediate family member may not have a direct/indirect financial interest in audited entity BUT
3.1.2.1. Close Family member may – if client is informed&independent review is done of his work.
3.1.2.2. If held in capacity of trustee by firm or team itself the : may if 1-they’re not beneficiaries 2- interest is
not material 3-trust cannot influence client 4 auditor does not have significant influence over the trust ELSE resign.
3.1.2.3. Individuals linked to team :May do audit but: 1-must notify client structures(audit committee)& 2-
independent review of his work 3-policies to stop this &removing member from team is also good though, but not 100%
necessary.
3. Firm Itself has FINANCIAL INTERESTS IN FINANCIAL STATEMENT AUDIT CLIENTS. : (SELF INTEREST)
3.1.3.0. Firm has direct interest in fin stat audit client : MUST DISPOSE
3.1.3.1. Firm has material indirect interest in fin stat audit client ; MUST DISPOSE till immaterial amount
left
3.1.3.2. Firm has material fin interest in entity which has a controlling interest in a fin stat audit client:
MUST DISPOSE till immaterial amount left
3.1.3.3. Firm & client(or director or controlling owner) have a financial interest in any same 3rd party(they
are ‘partners’. MUST DISPOSE till/unless immaterial amount left OR none can exercise significant influence over 3rd
party
3.1.3.4. Partners who have a financial interest in a financial statement audit client of the firm and
3.1.3.4.1. Assist with audit or provide non-assurance services : must dispose of
3.1.3.4.2. Provide no services -1-if in same office then dispose,(even if held by immediate family) but if in
different office /etc then each case is handled on its own-no single answer (as per book.)
4. FIRM HAS FINANCIAL INTERESTS IN NON- FIN STAT AUDIT CLIENTS: (SELF INTEREST)
3.1.4.0. Firm has Direct interest: : MUST DISPOSE
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3.1.4.1. Firm has Indirect Interest: MUST DISPOSE till immaterial amount left
3.1.4.2. Firm has Material interest in entity with a controlling interest in client : MUST DISPOSE till
immaterial amount left
6. CLOSE BUSINESS RELATIONSHIP WITH AUDIT CLIENT (SELF INTEREST & INTIMIDATION )
3.1.6.0. Firm or team with client or client mngmnt : eg joint venture or auditor distributes clients product
as well : TERMINATE or REDUCE MAGNITUDE o
3.1.6.1. Firm or team purchase goods from client on arms length basis in normal course of business ; NO
THREAT – unless not arms length/significant magnitude or nature /normal course business then NO, REDUCE & INFORM
CLIENT OR REMOVE FROM TEAM.
7.FAMILY & PERSONAL RELATIONSHIP
8.EMPLOYMENT WITH ASSURANCE CLIENTS
9.RECENT SERVICE WITH AN ASSURANCE CLIENT
10. SERVING AS AN OFFICER OR DIRECTOR ON THE BOARD OF AN ASSURANCE CLIENT
11. LONG ASSOCIATION OF SENIOR PERSONELL WITH ASSURANCE CLIENT
12. FIN STAT AUDIT CLIENTS THAT ARE LISTED ENTITIES
13. PROVISION OF NPN-ASSURANCE SERVICES TO ASSURANCE CLIENTS
14. PREPARING ACCOUNTING RECORDS AND FIN STATS FOR AN ASSURANCE CLIENT
15. VALUATION SERVICES
16. TAXATION SERVICES TO FIN STAT AUDIT CLIENT
17. PROVISION OF INTERNAL AUDIT SERVICES TO A FIN STAT AUDIT CLIENT
18. PROVISION OF IT SERVICES TO A FIN STAT AUDIT CLIENT
19. TEMPORARY STAFF ASSIGNMENTS TO FIN STAT AUDIT CLIENTS
20. PROVISION OF LITIGATION SUPPORT SERVICES TO A FIN. STAT AUDIT CLIENT
21. PROVISION OF LEGAL SERVICES TO A FIN STAT AUDIT CLIENT
22. RECRUITING SENIOR MANAGEMENT ON BEHALF OF AN ASSURANCE CLIENT
23. CORPORATE FINANCE AND SIMILAR ACTIVITIES
24. FEES AND PRICING
25. GIFTS AND HOSPITALITY
26. ACTUAL OR THREATENED LITIGATION BETWEEN FIRM AND AUDIT CLIENT
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c) SAFEGUARDS : use safeguards listed under ???sect. 310.??? & obtain advice what to do or get training.
a) RESPONSIBILITY:
b) THREATS:
c) SAFEGUARDS:
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CH 3 STATUTORY MATTERS
COMPANIES ACT 2008:
SEC 1 DEFINITIONS:
SEC 2 RELATED & INTERRELATED PERSONS AND CONTROL
1. Individual :
1.1. An individual is related to another individual if they are : married, or live together in a relationship similar to marriage, or
1.2. Or are separated by no more than 2 degrees of natural or adopted consanguinity of affinity.
2. Jurustic person
2.1. An individual is related to a juristic person if he controls the juristic person directly or indirectly
2.2. Juristic is related to juristic if :
2.2.1. Either of them direct or indirect controls the business of the other
2.2.2. Or both are controlled by the same individual , or the business in them is controlled by the same individual.
3. Control :
3.1. as used in these definitions could be due to majority shareholding
3.2. OR due to as shareholders agreement
SEC 3 SUBSIDIARY RELATIONSHIPS
1. A juristic person is a subsidiary of another juristic person if:
1.1. Either : It is able to directly or indirectly exercise a majority of the voting rights pursuant to a shareholders agreement or
otherwise OR
1.2. OR : has the right to appoint or elect directors of that company who control the majority of the votes at a board meeting.
SEC 4 SOLVENCY AND LIQUIDITY TEST
1. If , concerning all reasonable foreseeable circumstances of the company :
1.1. Assets fairly valued EQUAL OR EXCEED the liabilities fairly valued (the fair value of the assets & liabilities MUST include any
reasonably foreseeable contingent assets & liabilities)
1.2. It appears it will be able to pay its debts as they become due in the ordinary course of business FOR A PERIOD OF 12 MONTHS
following this test.
SEC 8 CATEGORIES OF COMPANIES:
As per Act ONLY 2 types of companies may be formed, : profit & non-profit ,with various SUB-TYPES thereafter.
1. PROFIT COMPANY : incorporated only for the financial gain of shareholders
1.1. STATE –OWNED COMPANY : Abbr : SOC Ltd.
1.2. PRIVATE COMPANY: Abbr : (Pty) Ltd. Or Proprietry Limited
1.2.1. MOI must
1.2.1.1. Prohibit offering shares to public
1.2.1.2. Restrict transferability of shares( eg: an existing shareholder may have to get permission from other
shareholders to sell his shares)
1.2.1.3. Cannot be a SOC
1.2.1.4. At least 1 directors
1.3. PERSONAL LIABILITY COMPANY: Abbr : Inc. or Incorporated
1.3.1. MOI must
1.3.1.1. Meet criteria of private company
1.3.1.2. AND state it is a personal liability company in MOI – clause which directors & past directors are jointly &
severally liable with company for debts in terms of office eg auditor, lawyer etc.
1.3.1.3. At least 1 director
1.4. PUBLIC COMPANY: Abbr : Ltd. Or Limited
1.4.1. A profit company which is not a Pty or SOC or Inc.
1.4.2. At least 3 directors
2. NON- PROFIT COMPANY : Abbr : NPC
2.1. incorporated for public benefit, income & property not distributable ONLY as compensation for services rendered.( to directors
,members etc)
3. There are two other types of company that are ‘recognized’ or basicly ‘implied’ by the ACT due to certain ‘provisions’ in the act .
3.1. Companies where all shares are owned by related persons – which results in a diminished need to protect minority shareholders.
3.2. Where all shareholders are directors – which results in a diminished need to seek shareholder approval for certain board actions.
CHAPTER 2 OF 2008 COMPANIES ACT.:
SEC 11 : CRITERIA FOR NAMES OF COMPANIES :
1. May Be : Any language + certain symbols + brackets
2. May not BE :
2.1. Not the same/similar to company , cc, registered trade mark , mark/word/expression protected under any act ,
2.2. Not mislead into believing it is associated with another Person , Entity , the State, Foreign State , Head of State , Head of Gov or
International Organisation.
2.3. No word constsiutes : propaganda for war , incite violence or harm , advocate hatred based on race/ethnicity/gender/religion.
SEC 13 : RIGHTS TO INCORPORATE A COMPANY :
1. You need so many people to incorporate a company :
1.1. Profit : One or more persons
1.2. Non-Profit : three or more
2. Procedure : complete & sign the MOI (or proxy) , FILE a Notice of INCORPORATION , PAY THE FEE.
3.
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SEC 14 REGISTRATION OF A COMPANY
1. COMISSIONER ASSIGNS : registration no, puts info on companies register, endorse NOI and MOI, issue & deliver a registration certificate.
2. The registration certificate is evidence – complied with requirements & registered.
SEC 15 MOI
1. Each provision of MOI must be consistent with Act or it is void
2. MOI deals with :
2.1. Details eg : date& type of company
2.2. Alteration of moi
2.3. Authorized shares number & class
2.4. Authority to issue debt instruments (of board to)
2.5. Shareholders meetings eg notice, quorum, resolutions,locations
2.6. Directors : composition of board, meetings,committees, compensation
2.7. Own Specified Things : eg not allow dealing in derivatives etc. , or stricter quorum requirements etc.
3. In Addition to the MOI : the board may add rules NOT addressed in the MOI or Act. These rules must be :
3.1. consistent with ACT & MOI or THEY ARE VOID
3.2. Published in terms of requirements for publishing rules contained in the MOI.
3.3. They take effect:
3.3.1. 20 business days after rule has been published OR on date specified in rule itself
3.3.2. Binding on interim basis till next shareholders meeting , then if ratified at meeting by ordinary resolution – binding on permanent
basis.
3.3.3. If not ratified , directors may not make a substantially similar rule within 12 mnths from unless approved in advance by an ordinary
shareholders meeting.
4. THE MOI and RULES are binding between :
4.1. Company & shareholder
4.2. Among shareholders
4.3. Between company & director/prescribed officer or any person on AUDIT COMMITTEE or on ANY COMMITEE OF THE BOARD.
SEC 16 AMENDING THE MOI:
1. The MOI may be amended if a special resolution to amend it—
1.1. (i) is proposed by—
1.1.1. (aa) the board of the company; or
1.1.2. (bb) shareholders entitled to exercise at least 10% of the voting rights that may be exercised on such a
resolution; and
2. (ii) is adopted at a shareholders meeting, or in accordance with section 60, subject to subsection
(3).
3. Notice of amendment + prescribed fee
4. If Court order to amend – no resolution needed –board just effects
Q
16. (1) A company’s Memorandum of Incorporation may be amended—
(a) in compliance with a court order in the manner contemplated in subsection
(4);
(b) in the manner contemplated in section 36(3) and (4); or
(c) at any other time if a special resolution to amend it—
(i) is proposed by—
(aa) the board of the company; or
(bb) shareholders entitled to exercise at least 10% of the voting rights
that may be exercised on such a resolution; and
(ii) is adopted at a shareholders meeting, or in accordance with section 60,
subject to subsection (3).
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SEC 22 :RECKLESS TRADING PROHIBITED.
1. A person may not carry on business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose ,OR
trade under insolvent circumstances.
2. The COMISSION has the power to give the company 20 days to answer why it should be allowed to carry on trading, if they believe ther is a
problem.
3. Note- many companies go through a period of “temporary insolvency”, - it is assumed that the commission will allow the company to carry on
trading under ‘temporary’ circumstances like this- not very clear- must research
SEC 23 REGISTERED OFFICE :
1. Must continually maintain a office in the republic- must file notice of change of address.
SEC24 FORM AND STANDARDS OF COMPANY RECORDS.
1. Company must keep for 7 years in written, or electronic form which allows it to be converted to written in a reasonable period, all docs in
terms of this act OR OTHER REGULATION.- either at registered office or other location in republic- if not at registered office or if they are
moved, notice of location of records must be filed with CIPRO.
2. DOCS as per act to be kept:
2.1. MOI copy + amendments + RULES
2.2. Record of directors :
2.2.1. Name & former names
2.2.2. ID no. or Date of birth.
2.2.3. Passport no & nationality if not a south African.
2.2.4. Occupation
2.2.5. Date of most recent appointment as director( ?? for this company or any one??)
2.2.6. Name & retistration no. of every other company or foreign company of which he is a director.
3. Copies all reports presented at AGM
4. AFS
5. Acc. Records as required by ACT.
6. Notice & minutes of shareholders meetings, inc. all resolutiions adopted &supporting docs thereto.
7. Written communications sent to shareholders(all share classes)
8. Minutes of directors meetings & directors committees & audit committee.
9. Every PROFIT company must maintain
9.1. a SECURITES REGISTER.
9.2. Register of company secretary & auditor - if they are supposed to have these 2 types.
SEC 26 ACCESS TO COMPANY RECORDS:
1. A shareholder or person who has a beneficial interest in any securities may copy & inspect info in records as listed to be stored for 7 years
above sec 24.- also for any other records specially named in MOI .
2. This right of access DOES NOT EXTEND TO : minutes of meetings & resolutions of directors, directors committees or the audit committee.
3. This right is in addition to OTHER RIGHTS GRANTED BY THE ‘PROMOTION OF ACCESS TO INFORMATION ACT’ , OR SEC 32 OF CONSTITUTION,
OR ANY OTHER REGULATION.
4. It is an offence by company to attempt to frustrate, impede,refuse or interfere- if someone want to exercise such right.
SEC27 FINANCIAL YEAR OF COMPANY
1. Accounting period- in notice of incorporation- may change it
SEC 28 ACCOUNTING RECORDS:
1. Accurate & complete in one of the official languages.
2. Swatisfy requirements of ACT & any other law to facilitate preparation of financial statements
3. Must include any prescribed accounting records eg: fixed asset register.
4. COMPANY is GUILTY of an OFFENSE to : with intention to mislead/deceive any person :
4.1. fail keep accurate or complete records.
4.2. Falsify or ALLOW to be falsified
4.3. Keep other than in the prescribed manner & form
Subsection (4) of sec 30 : The annual financial statements of each company that is required in terms of thisAct
to have its annual financial statements audited, must include particulars showing—
(a) the remuneration, as defined in subsection (6), and benefits received by each director, or individual
holding any prescribed office(company secretary/etc.) in the company;
(b) the amount of—
(i) any pensions paid by the company to or receivable by current or past directors or individuals who hold
or have held any prescribed office in the company;
(ii) any amount paid or payable by the company to a pension scheme with respect to current or past
directors or individuals who hold or have held any prescribed office in the company;
(c) the amount of any compensation paid in respect of loss of office to current or past directors or individuals
who hold or have held any prescribed office in the company;
(d) the number and class of any securities issued to a director or person holding any prescribed office in the
company, or to any person related to any of them, and the consideration received by the company for those
securities; and
(e) details of service contracts of current directors and individuals who hold any prescribed office in the
company.
Subsection (5) of sec 30 The information to be disclosed under subsection (4) must satisfy the prescribed
standards, and must show the amount of any remuneration or benefits paid to or receivable by persons in respect
of—
(a) services rendered as directors or prescribed officers of the company; or
(b) services rendered while being directors or prescribed officers of the company—
(i) as directors or prescribed officers of any other company within the same group of companies; or
(ii) otherwise in connection with the carrying on of the affairs of the company or any other company within
the same group of companies.
Subsection (6) of sec 30 For the purposes of subsections (4) and (5), ‘remuneration’ includes—
(a) fees paid to directors for services rendered by them to or on behalf of the company, including any amount
paid to a person in respect of the person’s accepting the office of director;
(b) salary, bonuses and performance-related payments;
(c) expense allowances, to the extent that the director is not required to account for the allowance;
(d) contributions paid under any pension scheme not otherwise required to be disclosed in terms of subsection
(4)(b);
(e) the value of any option or right given directly or indirectly to a director, past director or future director, or
person related to any of them, as contemplated in section 42;
(f) financial assistance to a director, past director or future director, or person related to any of them, for the
subscription of shares, as contemplated in section 44; and
(g) with respect to any loan or other financial assistance by the company to a director, past director or future
director, or a person related to any of them, or any loan made by a third party to any such person, as
contemplated in section 45, if the company is a guarantor of that loan, the value of—
(i) any interest deferred, waived or forgiven; or
(ii) the difference in value between—
(aa) the interest that would reasonably be charged in comparable circumstances at fair market rates in an
arm’s length transaction; and
(bb) the interest actually charged to the borrower, if less.
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SEC 33 ANNUAL RETURN
1. Must submit in prescribed form/fee/time period after Fin Year End specified
SEC 34 ADDITIONAL ACCOUNTABILITY REQUIREMENTS FOR CERTAIN COMPANIES
1. Public & SOC must comply Ch 3 of ACT
1.1. Auditor + audit committee + company secretary
2. Private +personal liability+ non-profit need not comply with extended requirements in Ch3 of act unless MOI requires it
PART D of CH2 – CAPITALISATION OF COMPANIES
SEC 35 LEGAL NATURE OF COMPANY SHARES & REQUIREMENT TO HAVE SHAREHOLDERS
1. A SHARE IS movable property, transferrable in any manner provided for in act or other legislation.
2. A share does not have Par Value or Nominal value- only no-par value shares are allowed anymore.
2.1. Old par value shares still retain their rights & description, but will need to be converted to no-par value in due course- the transition rules
have not yet been established yet.
3. A Company may not issue shares to itself
4. An authorized share has no rights associated with it until it has been issued.
SEC 36 AUTHORISATION FOR SHARES
1. MOI must set out:
1.1. Classes & no. of shares that company is authorized to issue
1.2. A distinguishing designation (name ) for each type of share
1.3. -The preferences of shares (eg to dividends – ie preference shares procedures)
1.4. & The limitations of shares (eg: aspects of voting)
1.5. & 3-Rights of shares (eg: voting)
2. EXCEPTIONS : The MOI may authorize a certain no. of shares for subsequent classification by board or specify a class without specifiying
preferences/limitations/rights , but only if unissued
3. CHANGES TO SHARES : AUTHORISATION/ number /classification & preferences ,rights ,limitations may only be changed by :
3.1. Change MOI by Special resolution OR
3.2. OR By Board (unless MOI prohibits it)
3.2.1. IF any of these actions are carried out the board MUST amend the MOI and file a notice of amendment.
SEC 37 PREFERENCES , RIGHTS, LIMITATIONS AND OTHER SHARE ITEMS.
(1) All of the shares of any particular class authorised by a company have preferences, rights, limitations and other
terms that are identical to those of other shares of the same class, except to the extent that the company’s
Memorandum of Incorporation provides otherwise.
(2) Each issued share of a company, regardless of its class, has associated with it one general voting right, except to
the extent provided otherwise by—
(a) this Act; or
(b) the preferences, rights, limitations and other terms determined by or in terms of the company’s Memorandum
of Incorporation in accordance with section 36.
(3) Despite anything to the contrary in a company’s Memorandum of Incorporation—
(a) every share issued by that company has associated with it an irrevocable right of the shareholder to vote on
any proposal to amend the preferences, rights, limitations and other terms associated with that share; and
(b) if that company has established only one class of shares—
(i) those shares have a right to be voted on every matter that may be decided by shareholders of the company;
and
(ii) the holders of that class of shares are entitled to receive the net assets of the company upon its liquidation.
(4) If a company’s Memorandum of Incorporation has established more than one class of shares the Memorandum of
Incorporation, in setting out the preferences, rights, limitations and other terms of those classes of shares, must
provide that—
(a) for each particular matter that may be submitted for a decision to shareholders of the company, at least one
class of the company’s shares has voting rights that may be exercised on that matter; and
(b) the holders of at least one class of the company’s shares, irrespective of whether it is the same as any class
contemplated in paragraph (a), are entitled to receive the net assets of the company upon its liquidation.
(5) Subject to any other law, a company’s Memorandum of Incorporation may establish, for any particular class of
shares, preferences, rights, limitations or other terms that—
(a) confer special, conditional or limited voting rights;
(b) provide for shares of that class to be redeemable, subject to the requirements of sections 46 and 48, or
convertible, as specified in the Memorandum of Incorporation—
(i) at the option of the company, the shareholder, or another person at any time, or upon the occurrence of any
specified contingency;
(ii) for cash, indebtedness, securities or other property;
(iii) at prices and in amounts specified, or determined in accordance with a formula; or
(iv) subject to any other terms set out in the company’s Memorandum of Incorporation;
(c) entitle the shareholders to distributions calculated in any manner, including dividends that may be cumulative,
non-cumulative, or partially cumulative, subject to the requirements of sections 46 and 47; or
(d) provide for shares of that class to have preference over any other class of shares with respect to distributions,
or rights upon the final liquidation of the company.
(6) The Memorandum of Incorporation of a company may provide for preferences, rights, limitations or other terms of
any class of shares of that company to vary in response to any objectively ascertainable external fact or facts.r
(7) For the purpose of subsection (6)—
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(a) ‘‘external fact or facts’’ includes the occurrence of any event, a variation in any fact, benchmark or other point of
reference, a determination or action by the company, its board, or any other person, an agreement to which the
company is a party, or any other document; and
(b) the manner in which a fact affects the preferences, rights, limitations or other terms of shares must be expressly
determined by or in terms of the company’s Memorandum of Incorporation, in accordance with section 36.
(8) If the Memorandum of Incorporation of a company has been amended to materially and adversely alter the
preferences, rights, limitations or other terms of a class of shares, any holder of those shares is entitled to seek relief
in terms of section 164 if that shareholder—
(a) notified the company in advance of the intention to oppose the resolution to amend the Memorandum of
Incorporation; and
(b) was present at the meeting, and voted against that resolution.
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2.3. For all directors are shareholders company : any matter decided by majority quorum board does not need to be referred to a shareholders
meeting- they may decide it on the spot anytime/anywhere – but if these conditions not satisfied then shareholders meeting must be
held.
SEC 58 SHAREHOLDERS RIGHT TO BE PRESENT BY PROXY:
1. Shareholder may appoint proxy for : vote / participate / speak in meeting + give consent outside a meeting
2. Proxy appointment must ;
2.1. In Writing, Dated , Signed by shareholder.
2.2. Can be given anytime
2.3. Valid 1 year, unless longer/shorter was stated in the proxy agreement.
2.4. Contain a restriction on transferability of proxy’s authority to another person.
2.5. Must be communicated to the company itself (delivered) before proxy can exercise his rights.
2.6. The proxy need not be a shareholder.
SEC 59 RECORD DAY FOR DETERMINING SHAREHOLDERS RIGHTS :
1. The “record date” is the exact time when it is decided which shareholders are to receive notice of shareholders meeting + receive dividends
etc. (cut-off date).this is important because in listed companies the shareholders change all the time.
SEC 60 SHAREHOLDERS ACTING OTHER THAN AT MEETINGS
1. A resolution (except AGM)which can be voted on at a shareholders meeting may instead be submitted to the shareholders and they can then
vote on it in writing ( no need to hold a meeting)
1.1. Must be voted on within 20 days of submission to shareholders
1.2. Same voting & quorum & effect as if it was done at a meeting
1.3. Election of a director may also be done in this way.
1.4. Results & resolution adopted Must be communicated to EVERY shareholder within 10 business days.
2. Anything in Act or MOI that is supposed to be conducted at AGM may not be done like this ie: by post – it must be at a standard AGM.
SEC 61: SHAREHOLDERS MEETINGS
1. The board or any person specified in RULES or MOI may call a shareholders meeting at any time.
2. As per Act : a shareholders meeting MUST be held for: (subject to sec 60 above)
2.1. When board is required by ACT or MOI to refer a matter to the shareholders for decision
2.2. To fill a vacancy on the board
2.3. If MOI requires it at any time
2.4. For AGM
2.5. If 1 or more written demands from shareholders holding min. 10% of shares which are entitled to vote on the matter at hand. The
demand must describe the specific purpose for the meeting AND frivolous or vexatious demands can be set aside by by the court.
3. Unless MOI specifies otherwise the meeting can be in a local or foreign country, and the BOD can determine the location of the meeting.
4. The AGM :
4.1. Initially max 18 mnths from incorporation, then every fin. Year thereafter. Never more than 15 mnths after the last AGM – if the 18 mnths
rule caused some weird time lags/mix ups
4.2. AGM must at a minimum provide for the following business to be transacted :
4.2.1. DIRECTORS REPORT
4.2.2. AUDITED FIN STATS.
4.2.3. AUDIT COMMITTEE REPORT
4.2.4. ELECTION OF DIRECTORS TO EXTENT REQUIRED BY MOI OR ACT
4.2.5. APPOINTMENT ODAYS F : AUDITOR & AUDIT COMMITTEE
4.2.6. ANY MATTERS RAISED BY SHAREHOLDERS (WITH OR WITHOUT ADVANCE NOTICE TO THE COMPANY)
SEC 62 NOTICE OF MEETING :
1. TO EACH SHAREHOLDER : PUBLIC OR NON-PROFIT = 15 DAYS , ANY OTHER TYPE OF COMPANY = 10 DAYS BEFORE.
2. MOI MAY PROVIDE FOR LONGER PERIOD.
3. AGM NOTICE TO INCLUDE : summary of fin stats + info where to get the copy of originals from.
4. Notice of any shareholders meeting must include:
4.1. Date/time/location/record date(ie: cut – off).
4.2. General purpose of meeting & any specific purpose a shareholder demanded the meeting for where applicable.
5. Copy of proposed resolution & notice of % of voting rights (ie : ordinary or special) required to adopt it.
6. A reasonable prominent statement that :
6.1. A shareholder may appoint a proxy
6.2. A proxy need not be a shareholder
6.3. It is a requirement of the act that personal identification by shareholders/proxys ids required
6.4. Notice that the meeting provides for electronic communication if applicable
SEC 63 CONDUCT OF MEETINGS
2. Before shareholder/proxy may join meeting:
2.1. Present identification
2.2. Person presiding must reasonably satisfied verified
3. Unless MOI prohibits
3.1. Shareholders meeting electronic communication
3.2. Only 1 or 2 shareholders by electronic, the rest not, provided method enables all persons(using¬ using) to communicate with each
other effectively .
4. Voting : to be done by either
4.1. Show of hands ( each member present has only 1 vote no matter how many shares.)(who gets to choose which method ? isn’t this a bit
unfair – bulldoze the meeting?-check the act)
4.2. Polling those present & entitled to vote. ( each member gets voting rights per number of shares)
SEC 64 MEETING QUORUM AND ADJOURNMENT
2. Sec 64 provides for both a votes quorum and a person quorum
2.1. Votes Quorum: a shareholders meeting may not begin until person holding 25% (MOI may specify higher or lower)of voting rights in at
least ‘1 matter to he decided’ are present.( eg preference shareholders may only be able to vote on matters affecting preference shares)
2.2. Person Quorum: if a company has over 2 shareholders , meeting may not begin OR a matter be debated until
2.2.1. Min 3 Shareholders present.
2.2.2. The ‘votes quorum’ explained above is satisfied (is it or OR is it AND here – check act)
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2.3. Time : if person+votes quorum requirements are not met within 1 hr of meeting start time, it is auto postponed for 1 week ,without any 1-
motion to postpone 2- vote or 3- further notice.
SEC 65 SHAREHOLDERS RESOLUTIONS
4. There are only 2 types of resolution , either 1 - ordinary or 2- special resolution. Every resolution must be 1 of the 2.
5. BoD may propose ANY resolution to be considered by the shareholders AND may determine whether by :
5.1. Meeting OR
5.2. Written Consent ( no meeting)
6. Any 2 shareholders may propose a resolution on any matter on which they can exercise votes. ,(check act – can 2 old grannies or competitors
with 1 share each they just waste everybodies time interminably?)
6.1. AND may require that the resolution be considered at
6.1.1. A Meeting demand by shareholders
6.1.2. The next shareholders meeting
6.1.3. By written consent.
7. All Proposed Resolutions should be expressed with sufficient clarity and specificity and be accompanied by sufficient info. to enable
shareholder to decide whether to participate & influence outcome of vote.
8. ORDINARY RESOLUTION:
8.1. 50 % of voting rights to win.
8.2. MOI can specify anything over 50% for different things, eg 60 % for investment decisions, 70% for capital expenditure, BUT for removal of
Director the 50% CANNOT be changed at all by law.
9. SPECIAL RESOLUTION : 75% of voting rights exercised on resolution.
9.1. MOI can specify lower (??higher too??) % for different matters but there must at all times be a difference of Min. 10 % between
ordinary/special
9.2. A special resolution ,not ordinary, is required to:
9.2.1. Amend MOI
9.2.2. Approve voluntary winding up of the company.
9.2.3. Approve any proposed fundamental transactions as per Ch 5 of Act eg:
9.2.3.1. Mergers
9.2.3.2. Amalgamations or mergers
9.2.3.3. Schemes of arrangement
9.2.4. Other matters in Act as well may require spec. resolution: 1-financial assistance to a director, 2-issuing shares to a director.
9.2.5. MOI can stipulate matters.
SEC 66 BOD, DIRECTORS AND PRESCRIBED OFFICERS.
1. The business and affairs of company must be under a BoD.
2. BoD has the ‘authority’ to exercise the powers and perform the function of the company, unless the MOI provides otherwise.eg MOI may
prohibit company and thus BoD from from acquiring financial derivatives.
3. Number of Directors:
3.1. Private Company : at least 1 director
3.2. Public Company : at least 3 directors
3.3. MOI may stipulate higher minimum no. of directors..
4. MOI may specifically provide for :
4.1. allow that any person specially named in the MOI may directly appoint & remove one or more directors - BUT in a ‘profit’ company MOI
must provide for at least 50% of directors and any alternates to be elected by shareholders (can these 50% be fired by appointed
person though? –check up do not know yet???/)
4.2. A person may be allowed to be an ex-offico director by virtue of his status & position in company
4.3. The appointment of alternate directors
5. Person ineligible /disqualified may not be director- must be nullified
6. A Director Must consent in writing to be a director.
7. Remuneration for services as director
7.1. Company may pay remuneration to directors for services as directors unless MOI states otherwise.
7.2. may only be paid in accordance with a special resolution passed in last 2 years.
SEC 67 FIRST DIRECTOR OR DIRECTORS
1. Each incorporator of a company is a director and will serve until sufficient other directors have been appointed.
CC ACT
AUDITORS ACT
2.1. It requires the auditor to appropriately qualify the audit report where a reportable irregularity existed or exists.
2.2. It requires the registered auditor to take into account all information that comes to attention of the auditor.
2.3. If there is a criminal act, IRBA informs director Public Prosecutions, who informs Commercial Branch of SAPS, then since there is
NO client confidentiality protection in the law for Auditors, he must hand over all documents to the SAP. HE MUST SEEK LEGAL ADVICE
IMMEDIATELY.
2.4. Sec 45.4 says IRBA must inform the appropriate regulator immediately of anything he hears from auditor- this MEANS there are
MANY GOV OR OTHER BODIES THAT COULD BE INFORMED HERE.
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Fairness
Accountability
Responsibility
Transparency
COMPANIES ACT:
May not be auditor:
1) Director.officer,employee of company
2) Director.officer,employee of company or of any company offering secretarial work to the company.
3) Partner, employee,employer of any director of the company
4) Person or partner or employee of regular bookkeeper/secretarial work of company.
5) At any time in fin year was a director or officer of company.
a) Unless : if habitually a bookkeeper/secretary:
i) Private company
ii) Shareholders agree writing
iii) In audutiors report
iv) No shares owned by public company
v) Auditor registered IRBA
1) Rotation of auditors: 5 yrs , or if >2 yrs, then stop , then must wait further 5 years.
2) Removal of auditors:auditor appointed casually or by directors or first appointment – can be removed on 28 days notice ,before AGM
umless he suspects any reportable irregularities.,
a) BUT auditor normally appointed may not be removed exept at AGM by ¾ majority of those present
3) Right of access by auditor: at all times & may require explanations as he /she thinks necessary of directors& officers.BUT: audiror of
Holding company ONLY has access to old Financial Stat. of subsidiary , not books /records books and records or premises of company :
because he is not the auditor.But he may require explanations + REQUEST INFORMATION from the directors of the subsidiary company as he
deems necessary.
4) General Meetings of company for Auditors: auditor has right of access to ;
i) Attend all such meetings
ii) Receive all notices regarding such meetings
iii) Be heard at such meetings on any business of the meeting which CONCERNS HIM AS AUDITOR.
5) Auditors duties: report on all such matters said by act or any other acts.
a) Examine afs and gafs to be laid before AGM
b) Ensure proper acc. Records and returns received from branches not visited.
c) Minute books and attendance registers of meetings kept as requires by act
d) Register of directors interests in contracts have been kept.and entries agree with minutes of meetings.
e) Existence of securities
f) All info + explanations auditor deems necessary.
g) AFS in accordance acc. Records& returns
h) Gafs comply with act
i) Tests to Gafs &Afs fairly present
j) Directors report – conflict fair presentation / distort meaning of fin stats
k) Not carrying on business+ no intention= report to registrar
l) Comply any other duty imposed by act on him
m) Comply auditing profession act
6) ####ASSSOSIATION AGREEMENT :
a) To regulate the internal affairs of corporations
b) Voluntary
c) Binding on all new & present members
d) No constructive notice
e) Amendments & dissolutions in Writing & signed by members
f) May be amended & ddissolved
CC Act
1) Founding statement: basic document bring cc into being = memorandum of company but simpler
i) Name
ii) principle business
iii) postal + physical address
iv) full name + ID of each member
v) % of each members interest
vi) Contribution
vii) Accounting officers name& address
viii) Fin year end date.
2) Disposal deceased members interest:
a) Executor to heir if he qualifies(not mad)+ other members consent
b) If no consent in 28 days : he may sell it to
i) Corporation(cc)
ii) Any other remaining member
iii) Any other person who qualifies both ways as above.( if members disapprove then may purchase themselves)
3) Cession of membership by order of court: on application to
a) Incapable of performi9ng role eg unsound mind
b) Guilty of conduct prejudicial : eg reckless/negligence
c) Impractical to other members: eg such member never present
d) Other circumstances render just & equitable to cease to be eg acts in own interests detriment cc.
All For ‘not pull their weight’ , and also court decides on payment
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INTERNAL CONTROL
INTRODUCTION
1) ISA 315- before an auditor can audit a thorough understanding of a clients internal control systems should be obtained –(do a walk
through)
2) Internal Contols: + acc.sys. produce balances & totals –good acc.sys. = generates good ( 1-valid,2-accurate,3-complete,4-timeous =
“FVACT”) info.
3) Auditor more interested in acc. info. less in other info : eg sales analysis,budgeting info,marketing info etc.
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INTERNAL CONTROL
FOR THE BUSINESS
AS A WHOLE
OPERATIONS:
ECONOMY INTERNAL COMPLIANCE WITH
EFFICIENCY
EFFECTIVENESS FINANCIAL LAWS AND
CONTROL REGULATIONS
ACCOUNTING CONTROL
SYSTEM PROCEDURES
1) Control Environment (strong) : Attitude and awareness of managers & directors to internal controls and their importance to entity.
1. Eg: fin accountant does not bother to check recon of creditors ledger to creditors statements made by creditors clerk
PROPERLY ,only HALF,before paying ,.So soon clerk wont bother to actually reconcile properly.
2. ISA 315: says good control environment characterised by:
i) Mngmnt Commitment/implements/employ : Integrity and Ethical values.
ii) Mngmnt Commitment/implements/employ : Competent staff
iii) Mngmnt Acts/displays : Integrity & Ethical.
iv) Mngmnt Acts/displays : Leadership , Sound judgement , (+Ethical behaviour).
v) Organisation Structure promotes this : Authority + Responsibility + Reporting : relationships
vi) Organisation Structure promotes this : Planning + Execution control + Review
vii) Good HR policies : Training & development , Compensation fair & benefits ,get competent ethical staff.
2) Competent ,Trustworthy Personnel. – esp. at internal controls.
3) Segregation of Duties. – collusion is necessary.
1. Eg: E.F.T. control, or storeman signs a gate pass delivery note+ falsify stock record+takes goods
2. A TRANSACTION PASSES THROUGH 4 STAGES:
i) Authorising
(1) Purchase order authorised by chief buyer
(2) Checking & approve supporting docs. For a payment to a creditor.
ii) Executing
(1) Order placed with supplier by the order clerk
(2) Preparing the cheque realisation and cheque (SEPARATE CUSTODY OF CHEQUE)
iii) Custody of Asset
(1) Goods rec. by receiving clerk & placed in store.
(2) Signing cheque (NB person who has signing power auto has SEPARATE HAS CUSTODY OF CASH)
iv) Recording
(1) Transactions entered into acc. records by acc. clerk.
(2) Recording payment in records & posting to ledgers.
3. MOST IMPORTANT DIVISION : 3 & 4 are the most 'incompatible'. 'Defalcation' is easiest if both are same ou. Esp:
SMALL BUSINESSES.
i) NEXT BEST is 2 & 3 & 4. :For the same reasons.
ii) 1 & 2 can be combined most easily : because if the others are segregated ,defalcation is likely to be identified.
iii) GOOD SEGREGATION : starts with divide the companies CYCLES into FUNCTIONS , then further segregate duties
within FUNCTIONS. ( each Function = Segregated duty./a New person and each cycle =
authorisation/executing/custody/recording)
4) Isolation of responsibility –
1. FULLY AWARE OF THEIR RESPONSIBILITIES : Internal controlsER must be .
2. ACCOUNTABLE FOR THEIR PERFORMANCE ; Internal controlsER must be .
3. Acknowledge in writing that they have peformed control procedure :IDENTIFY & ISOLATE employee responsible.
i) SIGNITURE fulfils 2 functions :(or fingerprint login)
(1) ISOLATE+IDENTIFY which person was responsible for delivery.
(2) ACKNOWLEDGEMENT of delivery.from supplier . to purchaser.
5) Custody / Access Controls.
1. ONLY to PROTECT COMPANIES ASSETS.( policies & procedures)
i) PHYSICAL & NON PHYSICAL ASSETS.Cash in Bank(only entry in book to show), Investments (only papers to show), Debtors (only
an entry in book to show).
ii) Custody/access controls designed to;
(1) Prevent damage to
(a) NON-PHYSICAL : Debtors get legal dont pay status from too long time wait to pay,with no court action.
(b) Physical :
(2) Prevent deterioration of
(a) NON- PHYSICAL ASSETS eg: debtors get behind in payments.
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(b) Physical Assets.
(3) Unauthorised USE , THEFT , LOSS. Eg security
(a) NON-PHYSICAL : limit no. of personell with powers to cash payment / or sell investment. Or prevent DEBTORS LEDGER
from being altered.
(b) Physical :
6) Source Document Design: ('PAPER')
1. Properly designed docs. can assist in achieving good internal control. by have following features -Esp. Fin Control.
i) Pre-printed – format leaves MINIMUM AMOUNT OF INFO. to be filled in.
ii) Pre-numbered- facilitates IDENTIFICATION OF MISSING /Added FORMS (used by skelms)–by data entry clerk end week.
iii) Logicaly designed : eg : Prominent 'important info' spaces , + blocks per digit in acc. no. so allways 10 get put in.
iv) Contain Prominent Block each for 1-authorising / 2-approving / 3-preparer etc etc to sign in.
v) (a) MULTI-COPIED (vi)CARBONISED SELF COPYING , (vii)DIFFERNT COLOURS EACH SHEET.-sales clerk fills form for : 1-
picking slip to stores 2 +to accounting, all in one go.
7) Comparison and Reconcilliation.
1. 1-FREQUENT AND 2-TIMEOUS comparison & recons.
2. INDEPENDANT from functions & records kept.
Following 2 make all recons far less effective as a control:
3. AGAIN REVIEWED BY SENIOR PERSONEL.
4. FOLLOWED UP / investigated and pursued.(+ report where it went or auditors fees go up!).
5. Following recons & comparisons ARE IMPORTANT.
i) Stock & fixed assets to records. Eg: stock cycle counts.
ii) Bank and investments accounts to Bank statements eg bank recon.
iii) Creditors accounts to creditors statements.
iv) Subsidiary ledgers to general ledger.
8) Efficient internal control risk identification & monitoring system : ADDED later from a later chapter :: eg audit committees,
internal control design committees, risk officer/manager/supervisor/appointee, internal audit
AUDIT EVIDENCE.
• Audit evidence is absolutely crucial to audit function to Support opinion.
• ISA 500R- "The Auditor should obtain SUFFICIENT APPROPRIATE EVIDENCE to be able to draw a reasonable conclusions on
which to base audit opinion." : KEY PHRASE = sufficient appropriate evidence.
• Evidence usally relates to Assertions on Fin Stats.
SUFFICIENT EVIDENCE:
1) SUFFICIENT means if QUANTITY of evidence is enough.
2) Evidence is Cumulative : eg debtors test = 1-debtors circularisation +2-test if debtors pay( very good evidence they exist!)
3) To calc. quantity of evidence needed =NO hard and fast way ,only :USE professional Judgement + statistical methods.This is done as
part of the "AUDIT PLAN" stage.
APPROPRIATE EVIDENCE.
1) APPROPRIATE means if QUALITY of evidence is enough. Further broken down into:
a) RELIABILITY (source & nature)
b) RELEVANCE (to assertion being tested)
r
2) RELIABILITY : Hierarchy of Reliability of Evidence:
a) Most Reliable =Developed by auditor : eg inspect stock.
b) Reasonably Reliable =Evidence from 3rd party(not client) if 1-Independant 2-Reputable 3-Competent eg attorney
c) Less Reliable = From 3rd party BUT passed through client. Eg: bank statement.
d) Less Reliable = Evidence from clients SYSTEM and where related controls it passed through were Effective
e) Least reliable = Evidence provided by client (lacks independance)
f) Written more reliable than oral.(easy denied)
g) Original documents More than Photocopies /facsimiles.
Also, REM these are guidelines, eg if competence +integrity of directors&employees are strong &acc.sys and internal controls are strong,
evidence from client could be very reliable.
Eg sheet to shelf = existance BUT shelf to sheet =completeness.
3) RELEVANCE :
a) Evidence MUST be MATCHED to assetion tested : eg; self stock count= 'existence'+some 'valuation' BUT not 'rights' eg could
be uncollected but sold .NOR 'completeness' yet eg must first be traced to records to determine if all were included in records.
b) Eg tests of controls as to accuracy will not prove validity or completeness.
c) A single procedure could be relevant to more than 1 assertion though.
1) THE ASSESMENT of Inherent Risk and Control Risk at the client. :if higher risk – more evidence from most reliable source needed.
2) THE MATERIALITY Of Item Being Examined :eg if stock is very material – auditor must get more of appropriate evidence.-why –
greater likelihood of material misstatement.
3) Experience from Previous audits (at same client). HISTORY
4) Results of audit procedures ALREADY CONDUCTED. – eg if test of debtors was good , then do less other tests.
5) RELIABILITY and Source of info.available. if no reliable tests available, then much more of less reliable tests must do.
6) PERSUASIVENESS of the audit evidence : eg: evidence gathered on one section of audit which is Supported by evidence from
another section = more persuasive .If it Contradicts it = less pesuasive.
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FINANCIAL STATEMENT ASSERTIONS:
1) The OBJECTIVE of an audit : is for an auditor to EXPRESS an OPINION on whether the FINANCIAL STATEMENTS are FAIRLY PRESENTED.
In all MATERIAL ASPECTS after comparing it to an IDENTIFIED REPORTING FRAMEWORK (check other definitions of this before)
2) Embodiment of Assertions: the financial statements are the EMBODIMENT of the ASSERTIONS of the DIRECTORS of the COMPANY ,in
the PRESCRIBED FORMAT , on the FINANCIAL RESULTS and PERFORMANCE of OPERATIONS ,which they are managing on behalf of
shareholders.
3) ISA 500R : the auditor should use assertions for classes of transactions ,account balances,and presentation and disclosure,in sufficient
detail to form a basis for the assesment of risks of material misstatement and the design and performance of further audit procedures.
4) It is the Auditors duty to gather sufficient evidence to support assertion being audited.
5) Every assertion should be considered for audit, but those assert. presenting highest risk of MATERIAL MISSTATEMENT by the AUDITOR in
his'"OPINION on ... ", must be concentrated on.
DIAGRAM OF ASSERTIONS:
TRANSACTION PRESENTATION
ASSERTION ACCOUNT BALANCES
EVENTS DISCLOSURE
1 COMPLETENESS (ALSO ?
# # #
VALIDITY)
2 OCCURRENCE # #
3 EXISTENCE #
4 ACCURACY # #
5 CUT OFF #
6 CLASSIFICATION (and for
Pres.& Disclosure : # #
UNDERSTANDABILITY)
7 RIGHTS and
# #
OBLIGATIONS
8 VALUATION and
ALLOCATION # #
2. Auditor self stock count= 'existence'+some 'valuation' BUT not 'rights' eg could be uncollected but sold .NOR 'completeness' yet because
must first be traced to records to determine if all were included in records.
3. sheet to shelf = existance BUT shelf to sheet =completeness.
4. Tests of controls specificaly as to accuracy will not prove validity(?occourence /existence? ) or completeness.
TESTS OF CONTROLS
1) CATEGORIES OF TESTS OF CONTROLS:
i) REPERFORMANCE : repeating 1-Wholly 2- In Part control procedures eg: reperform bank recon.
ii) INSPECTION : verify on docs. if contrl procedures did happen : eg: verify if transaction authorisation signiture is there.
iii) ENQUIRY; ask person CONCERNED with control procedure as to effective operation of.,NOT just accept mngmnts word.
Eg : find out who performs each procedure and what they do.
iv) OBSERVATION: watch process/procedure being performed eg:watch what a receiving clerk does when supplier delivers
goods.
2) Tests of Control are performed to obtain evidence of whether
i) Controls suitably Designed to
(1) PREVENT
(2) DETECT
(3) CORRECT material misstatements
ii) Operated effectively THROUGHOUT PERIOD AUDITED.
3) Good results reduce control risk and hence audit risk , then less time need spent on substantive tests.
4) LIMITATIONS OF : tests of controls:
a) Good when checked but not in the rest of the Fin. Year.
b) Inherent risk? ch7eg 1-only test some 2- subjectivity-auditor own method 3-
5) LIMITATIONS OF : internal controls:
i) Cost exceed benefit –limits capacity of int.controls.
ii) Directed at routine transactions. –miss non-routine eg sell copier.
iii) Human error. – eg: calc. discount after vat.
iv) Collusion- eg fraudulent paypacket- collude wage clerk,foreman,personell mngr.
v) Mngmnt Override /Abuse of responsibility over internal control.- eg mngr overrides stop on purchases for overdue acc.
vi) Changes in CONDITIONS causes INADEQUATE controls.- sales clerk not check credit record/overdue acc. due to volume
6) Example:
a) If control procedures in credit purchase procedure are sound- related balances/transactions rec. will be sound
51
5252 | P a g e Auditing Notes AUDI 101
i) Ie: control when purchase acc and creditors acc debited /reconciled authorised, also controls at creditor payment and creditor
acc. DR etc.
SUBSTANTIVE PROCEDURES.
1) Tests controls cannot provide 100% assure so sustant.tests need be done.
2) SUBSTANTIVE TESTS BROADLY DISTIGUISHED INTO;
a) Tests Of Detail.
b) Analytical Procedures.(very powerful tool)
3) CATEGORIES OF SUBSTANTIVE PROCEDURES:
i) REPERFORMANCE : repeating 1-Wholly 2- In Part same procedures performed by client eg:debtors age analysis.
ii) INSPECTION : inspect 1-docs+records, or 2-tangible assets eg: inspect fixed asset to verify existence or inspect .
"Confirmation Of Balance Certificate" from long term loan creditor.
iii) ENQUIRY : 1-oral or 2-formal written : to inside or outside entity to get 1-Corroborative evidence or 2-Plain knowledgeable
person inside or outside entity.
iv) CONFIRMATION : procedure of obtain response to an enquiry to corroborate info. in the acc. records. knowledgeable person
inside or outside entity
v) RECALCULATION : check arithmatic on source docs & records. Eg: check depreciation calc.
vi) ANALYTICAL PROCEDURES : analysis of ratios + trends , then investigate inconsistent deviations .(statistics)
4) Substantive procedures are performed on
a) Balances Assertions= ; Existence, Completeness,Rights&Obligations,Valuation&Allocation.,
b) Transactions Assertions= ; Occourence,Completeness,Cut-off,Classification&Understandability,Accuracy
5) Financial stat. consist of only
a) Collection of balances - bal sheet
b) Summary of totals – inc.stat
6) VOUCHING AND VERIFYING:
a) Vouching: (To Vouch) TRANSACTIONS auditing.
b) Verifying : BALANCES auditing.
c) Example:
i) VOUCH – a sales transaction = inspect docs + enquire discounts + recalculate
ii) VERIFY – a debtors balance = confirmation in writing from debtors + enquiries as to calc. of prov.bad debts. +reperform aging
analysis of debtors.
7) DUAL PURPOSE TESTS : some tests can be a test of control and substantive test at same time eg: bank recon. Reperform = test of
control(recon is a control) and substantive test (bank balance).
AUDIT SAMPLING
DEFINITIONS:
1) From ISA 530 : 'audit sampling and other means of testing': gives definitions
2) AUDIT SAMPLING
a) application of PROCEDURES to LESS THAN 100% OF ITEMS in balance or class of transactions ,to EVALUATE AUDIT EVIDENCE on
the some characteristic of sample to form CONCLUSION ON POPULATION
3) ERROR:
a) 1-Test of Controls =Control deviations 2-Substantive testing= Misstatements OR
4) TOTAL ERROR :
a) 1-Rate of Deviations 2-Total Misstatement . AND
5) ANOMOLOUS ERROR:
a) ERROR FROM ISOLATED EVENT,not representative of population.
6) POPULATION :
a) Total set of data from which samples are selected.eg all items in an account balance or class of transactions.
7) SAMPLING RISK:
a) RISK THAT the auditors conclusion is not true for total population because sample is not representative of the total
population .(Sample could be selected by stat or non-stat approach-any).There are 2 types of Auditing Risk:
i) Risk 1-tests of control =auditor judges them to be more effective than they actually are. 2- Tests of Detail- error exists where it
does not : this type 1-AFFECTS AUDIT EFFICIENCY :causes more work for auditor to establish that initial conclusions were
incorredt.
ii) Risk 2-tests of control = auditor judges them to be less effective than they actually are. 2- Tests of Detail- error does NOT exist
where it does. : This type2-AFFECTS AUDIT EFFECTIVENESS : more likely to lead to an inappropriate audit opinion than assesing
risk to be higher than it is..
8) NON-SAMPLING RISK : risk of
a) apply sampling plan incorrectly, or
b) used inappropriate procedure
c) misunderstood results of sampling exercise.
9) SAMPLING UNIT.
a) :INDIVIDUAL ITEMS making up a population eg: cheques listed on deposit slips/credit entries on bank statements.
10) STATISTICAL SAMPLING :
a) any approach that has following characteristics or it is non-statistical.
i) Random selection of a sample.
ii) Use of probability theory -to evaluate sample results (INCL.MEASUREMENT OF SAMPLING RISK.)
11) STRATIFICATION :
a) DIVIDING a population into sub-populations each with similar characteristics eg : debtors balance >1000.
INTRO.
1. Only some items all are tested eg:loans to directors,but mostly sampling is used due to Resource & Time efficients.
2. Sample results must be EXTRAPOLATED over population(3 mistakes * xxx= 1000 mistakes total) statistical sampling will result in more
defensable results than non-statistical sampling.
3. Other evidence is used together with sampling results like a jigsaw puzzle eg: Analytical procedures on same population.
4. ISA 500 –says auditor must selecyt appropriate means of selecting samples when design audit procedures.
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5353 | P a g e Auditing Notes AUDI 101
STEPS IN THE SAMPLING EXERCISE.
1) Determine objectives of procedure
2) Determine procedure
3) Confirm population is appropriate & complete
4) Define units
5) Get sample size
6) Select sample
7) Perform audit procedure
8) Analyse nature & cause of errors
9) Project results over population
10) Evaluate
11)
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5454 | P a g e Auditing Notes AUDI 101
STAGE 2 : PLANNING:
1) AUDIT STRATEGY :Establish an overall audit strategy.
2) AUDIT PLAN :develop one.to be in a position to develop one audit team must first do the next 3 things:
3) Obtain Understanding : of Entity and Environment incl. Internal Control.
4) Risk : of Material Mistatement :Assess risk of in the financial statements.
5) Materiality : Determine guidelines.
(1) DECIDE WHETHER TO CONTINUE/ESTABLISH : ISA 220 R +ISQCI +ISA200 + IESBA CODE OF CONDUCT :
STIPULATE :
(i) ETHICAL (OF YOURSELF) :Evaluate if Firm can comply with ethical requirements. Ie: independence + 5 principles : eg:
client director is family of auditor.
ONLY 3 things for ethical:
a. FUNDAMENTAL PRINCIPLES :
i. Per S210 Code of Prof.Conduct : make sure the engagement will complies with the FUNDAMENTAL
PRINCIPLES, if it does not then :
1) Evaluate significance of THREATS
2) Apply SAFEGUARDS to eliminate /reduce threats to acceptable levels (eg obtain more
knowledge of enterprise, or secure client commitment to improve governance etc
ii. Fundamental Principles are : shall make sure all these principles are complied with before
accepting / continue with client
INTEGRITY;
OBJECTIVITY;
PROFESSIONAL COMPETENCE AND DUE CARE;
CONFIDENTIALITY
PROFESSIONAL BEHAVIOUR
b. INDEPENDENCE : Per ISA 200 .14 : it says do the fundamental princilples above PLUS also make sure it
complies with requirement of ” INDEPENDENCE “ Add this to the fundamental principles because it is very
important. It is basicly ‘objectivity’ , BUT just qute about it alone on its own – it must be mentioned (appears in
ISA 200, but not in IESBA’ Code of Professional Conduct., there it is called objectivity. Just REM to mention it A
LOT) : ISA 200.a16 : to be independent in (A) + mind (B) + appearance , It : enhances 1-integrity + 2-
objectivity + 3-prof.scepticism , by removing ‘influences’ per ISA200..
i. Threats to independance :of team,auditor,experts /or if adequate safeguards possible to stop threats.
ii. Conflicts of interest : eg both offer same services to same market.\
c. ANY LOCAL REGULATIONS /LAWS : of country that might add other things to the above
(ii) INTEGRITY OF THE CLIENT : The above factor will include integrity of principal owners, key management and those charged with
governance (ISA 220, par A8).
a. Business Reputation : Client Unethical or lacks Integrity.
b. Business Practices eg. Illegal : eg money laundering OR : Not wish to be assosiated with eg. Porn/tobacco.
c. Attitude To Accounting Standards. : acceptable financial framework : 'Fairest' OR 'most favourable picture'
accounting standards
d. Audit Fees payment /if they will pay fair fees or not.
e. Client Impose Limitations On Audit. Eg restrict access to information.
f. Reasons For Change Of Auditors.; if suspect reasons
55
5656 | P a g e Auditing Notes AUDI 101
(iii) ETHICS & CLIENT INTEGRITY : other stuff trated separately by UNISA: ABILITY OF CLIENT TO PAY
(iv) ETHICS & CLIENT INTEGRITY : other stuff trated separately by UNISA BUSINESS STANDING RISK : (what is this and
what is ‘ illustration of good practice 10’ referred to in tut 102 pg 8???)
(v) a ETHICS & CLIENT INTEGRITY : other stuff trated separately by UNISA SIGNIFICANT CHANGES IN
ENTITY AUDITED :for existing clients (ISA 220, par A8).If auditor became aware of any changes during current/previous
audit that may affect decision to carry on with client.
(vi) ETHICS & CLIENT INTEGRITY : other stuff trated separately by UNISA COMMUNICATION WITH THE PREDECESSOR
AUDITOR .: any info from here that may stop you taking job
(vii) ETHICS & CLIENT INTEGRITY : other stuff trated separately by UNISA VACANCY PER COMPANIES ACT (Sec 91 of the
Companies Act : ACT :).if all the rules of companies act regarding vacancies are complied with: ie 1- board must give
names of potential auditors to audit committee within 15 bus. days 2- may only appoint if audit committee did not
refute/disallow that auditor within 5 bus. days of getting the name.
(b) :ESTABLISH IF AUDITOR HAS THE CAPACITY / RESOURCES / IF CLIENT CAN BE APPROPRIATELY SERVICED OR NOT. :ISA220 PARA A8-A11
CAPACITY
(i) ONLY : check if compliance with fundamental principles : by doing the below . (eg self – interest
threat to professional competence & due care if not enough capacity available)
1. USE OF AN EXPERT : (this comes MORE into audit planning in the audit strategy stage UNDER ‘SCOPE’
AND ALSO ‘DIRECTION’)
ISA 610: Using the work of internal auditors (par 8-9; par A4-45).
ISA 600: Special considerations – Audits of group financial statements (including the work of component auditors) (par 12-14; par A10-A21).
ISA 620: Using the work of an auditor’s expert (par 7; 9; 12-13; par A10-A13l A32-A40)
Code of Conduct 210.8.
a. the auditor MUST use an expert if it is needed as a safeguard in upcoming audit, and if auditor wishes to use
an expert, he must determine if such reliance is warranted by using following Factors to Consider: per Code of
Conduct 210.8.
i. Reputation of
ii. Expertise of (member of an association)
iii. Resources of ( expert has enough to be able to do the work)
iv. Applicable Professional & ethical standards ( to that kind of exerts work – check if he fits in right
with the standards)
2) TERMS OF ENGAGEMENT SEE ISA 210 WHICH IS ON “AGREEING TERMS OF ENGAGEMENTS”, PARA 9-12 AND APPENDIX 1 FOR EXAMPLE LETTER IN DETAIL
a) This is formalising terms of engagement into an engagement letter, and having it signed.
b) When answering questions on preliminary engagement activities, we recommend that when you arrive at step 3, list the
following: ( the full engagement letter is on page
i) Issue an “ENGAGEMENT LETTER” to those charged with governance highlighting the following:
(1) Management and auditor’s responsibility.
(2) Duty to report to IRBA any reportable irregularity.
(3) (also per ISA210 ., but not per unisa, : (3) OBJECTIVE & SCOPE of audit (4) APPLICABLE FRAMEWORK
as reference eg GAAPor other (5) REPORTS to be issued after)
c) EXACTLY IS THE FOLLOWING :
d) Audit commitee of client must understand terms exactly
i) 'Expectation Gap' : Confused if objective is : find fraud / terminology misunderstand( eg compilation engagement,agreed upon
procedure engagements etc., Or if an opinion is to be given or NOT(eg for a review)
e) ISA 210 –auditor right to decide , but client must agree to how audit will be conducted.
f) The 'Letter of Engagement' should contain reference to:
i) Objective :Implied or Stated :ie to express an opinion on the fin.stats.
ii) Managements Responsibilities
(1) Preparation of Fin.Stats : plus refer to basis of preparation ie: IFRS. international fin.reporting standards.
(2) Accounting Records Maintenance of.
(3) Accounting Policies selecting
(4) Safeguarding Assets.
(5) Internal controls.
iii) Scope of Engagement + refer to laws etc eg:ISA's.: outline of what is to be done.
iv) The Form of Reports : that will be produced.
v) Inherent limitations , risk not detecting misstatements : sampling methods +internal controls
vi) Auditors Independance : auditor chooses tests + must be given access to all info needed.
vii) Managements duty prevent illegal acts + auditors duty : Reportable Irregularities to Gov.
viii) Written confirmation of oral representations by client: auditor expects this from client.
ix) Weakness in internal control will be brought to mngmnts attention.
x) Other parties Involvement : experts, previous auditor, other auditors,internal audit.
xi) Other services to be rendered: eg tax – and if delivered late etc.- must state if clients fault for not providing documents , or if
auditors fault , and penalties etc
xii) Name of Auditor responsible : not just the firm, but person himself responsible.
xiii) Performance Arrangements : Stockcount dates, meetings dates to be held.
xiv) Any Audit Deadlines.
xv) Fee's : basis of computation and invoicing arrangements.
xvi) Must sign letter.
1) INTRODUCTION:
a) ISA 300R in this ISA on ‘audit planning’ , see para 7 says : "the auditor should plan the audit work so that it will be
performed in an effective manner"
b) AUDIT STRATEGY & PLAN is formulated by : KEY EXPERIENCED TEAM MEMBERS ONLY
i) AUDIT STRATEGY : Risk of Misstatement at FINANCIAL STATEMENT level : CORRECTED BY : AUDIT STRATEGY :
(words= SCOPE + TIMING + DIRECTION)
ii) AUDIT PLAN : Risk of Misstatement at ASSERTION level : CORRECTED BY : AUDIT PLAN :
(words= Nature + Timing + Extent)
d) IMPORTANCE OF PLANNING:
i) Attention -: Plan to give enough to important areas of audit.
ii) Potential Problems : Identify & resolved.
iii) Audit team : Properly assembled
iv) Supervision +Review : and proper review of their work ,of audit team , facilitated
v) On time : completion of work planned
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5858 | P a g e Auditing Notes AUDI 101
1) REM “Materiality “ is basicly officially done in THIS PHASE of the audit... strategy
2) PER unisa & IAS300 :In establishing the overall audit strategy, the auditor shall: (these+MANY examples are all shown very neatly
in ISA300 appendix- and you marked it)
1. SCOPE : I.D. THE : Identify characteristics of the engagement that defines its scope;
For instance:
i) if it is maybe a statutory audit , or maybe JSE listed company , so securities exchange commission requirements to be
adhered to
ii) The financial reporting framework (ifrs, sa gaap, grap, etc).
iii) Industry-specific reporting requirements (compliance with jse regulations), government regulations environmental,
labour, etc.) Etc.
iv) Number of locations for expected audit coverage.
v) need to outsource some experts
2. TIMING : REPORTING OBJECTIVES : Ascertain the reporting objectives of the engagement to plan the timing of the audit
and nature of communication required;
For instance:
i) companies Year End /interim reporting schedule
ii) Meetings
iii) timing +types of Reports
iv) Entity’s reporting timetable for interim financial results and year-end financial results.
v) Meetings with management and those charged with governance.
vi) Communicating with auditors of components regarding the time deadlines.
3. DIRECTION : OF ENGAGEMENT TEAM : consider significant factors in directing engagement team;
The significant factors will include for instance the following:
i) Materiality.
ii) Areas with higher risk of material misstatement.
iii) Volume of transactions.
4. PLUS ADD :PRELIMINARY ENGAGEMENT ACTIVITIES : Consider results of preliminary engagement activities;
5. PLUS ADD : RESOURCES : ascertain nature, timing and extent of resources necessary to perform engagement. staff-
experience,+management of eg :meetings, quality control reviews,evaluations etc.
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5959 | P a g e Auditing Notes AUDI 101
(ii) TIMING of Procedures : either before yr-end (interim), OR at and after yr-end, or early verification just prior to yr-end
and roll forward at yr-end OR at interim and at end after yr-end.+ can incorporate Unpredictability element.
(iii) EXTENT of Procedures : Refers to how many or how detailed you will perform your tests or audit procedures.
iii) ANY OTHER P ROCEDURES NEEDED: plus this , to comply with any ISA’s
d) DOCUMENTATION: ALL AUDIT PLAN + AUDIT STRATEGY : must be documented for: (to contain : 1-audit plan 2- audit strategy
3- signifiacnt changes made to them)
i) REFERENCE FOR TEAM
ii) PROOF OF PROPER PLANNING BY TEAM
iii) RECORD OF KEY DECISION MADE
b) RESPOND RISK ASSERTION. LEVEL :By carrying out Tests Of Controls +Substantive Tests (to gather sufficient
evidence to reduce risk to an acceptable level.)
i) eg: valuation of stock, existence of debtors, completeness of of sales
ii) Auditors Toolbox : this is where he uses it, ie; 1-substantive tests 2- tests of controls, both done by:
(1) Inspection : check records /assets etc
(2) Observation : watch internal controls
(3) Inquiry and Confirmation : ask receiving clerk about controls, debtors circulation
(4) Recalculation: : eg discounts on sales invoices
(5) Analytical Procedures : check ratios+stats etc
(6) Reperformance : eg reperform year –end bank recon.
c) RESPOND TO SIGNIFICANT RISKS : By carrying out Tests Of Controls +Substantive Tests Tests (to gather sufficient
evidence to reduce risk to an acceptable level.) eg check for laws and regulations etc.j
2) Q UICKLY READ PG 6/10 , FROM NO . 3, TO 6.12 BOTTOM . VERY FAST - SOME QUICK FACTS . J
i) SUFFICIENT APPROPRIATE EVIDENCE : was obtained(to reduce audit risk to acceptable levels)(qualified opinion or
disclaimer issued if not able to obtain sufficient evidence)
iii) FIN POS + FIN PERF + CASH FLOWS FAIRLY PRESENTED. OR NOT .
(1) Accounting policies : 1-IFRS + 2-correctly done + 3-correct for business type.
(2) Estimates :by client correct
(3) Relevant +Reliable + Comparable + Understandable : acc. Info is / or Not
(4) Disclosure : whether sufficient to enable users to understand or not.
(5) Statutory Requirements & Regulations : complied or not
4) AUDIT REPORT :
a) Formulate Audit Report. : senior decides , on basis of reviews in course of audit and final outlook- what type of opinion
to give:
i) Exept for
ii) Adverse
iii) Disclaimer
iv) Other additions eg inclusion of an ‘emphasis of matter paragraph.’
(DONE IN CHAPTER ON REPORTING LATER)
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6060 | P a g e Auditing Notes AUDI 101
1.1. Planning process & changes of audit
1.2. Auditors understanding of accounting system & controls
1.3. Internal audit : assessment of work of
1.4. Inherent & control risk assessments & revisions thereof
1.5. Evidence work of assistance – when it was performed & that was supervised
1.6. Evidence of nature timing extent of audit procedures performed & identify items tested +results of test.
1.7. Evidence of WHO performed these procedures & when
1.8. Procedures on work of other auditors on related fin stats ( eg subsidiary)
1.9. Analysis of transactions
1.10. Analysis of significant trends & ratios
1.11.
2. Legal & organizational structure
3. Info on economic & legislative & industry ENVIRONMENT
4. Copies of important minutes, agreements & legal documents
5. Copies of financial statements
6. Copies of auditors report
7. Copies of all communications with experts, 3rd parties , other auditors
8. Copies of letters , notes to Entity incl. terms of engagement discussions, weaknesses in internal control etc.
9. Letters of representation – from the entity
10. Conclusions reached by auditor on : significant aspects of audit , esp exceptions & unusual matters were resolved & treated
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6161 | P a g e Auditing Notes AUDI 101
2) Remember though : When using auditors toolbox – substantive tests + tests of controls :same type procedures used
THE 4 IMPORTANT ELEMENTS DEALT WITH IN THIS CHAPTER, EACH ONE GONE THROUGH BY
UNISA, :
a) Risk in the audit ie : audit risk
b) Materialty concept
c) Understanding entity & environment
d) Auditors responsibility with fraud
2) Overcome by put control activites in place: eg segregation duties, access control, control environment.
ASSERTION LEVEL:
1) Possible reasons:
a) Account Type : eg involve high degree of estimation: stock count fresh vegetables,or provision bad debts
b) Complex Transactions : eg sale &leaseback , contract accounting
c) Estimation /Judgement Involved : bad debts provision
d) Asset Vulnerability : eg cash
e) Near Year End :of fin period.Unusual OR Complex transactions : to manipulate transactions.
f) Non-Routine/Unusual Transactions: sale of old assets
g) Fin Stat level ‘problems’ can also affect this level directly by eg : Other could be added eg: mngmnt
integrity(completeness assertion :liabilities) /technology obsolete stock(valuation assertion:
inventory )etc.
2) Possible solutions:
a) Address the risk relating to possible assertion directly eg: more samples , or get expert to valuation assertion
for technology stock.
LEVELS OF RISK
1) TYPES OF LEVELS:
a) ISA’s only give ‘significant’ Definition; ISA315 :risks that require : Special audit consideration
b) Some audit firms have : high,medium,low
c) Some have :pervasive
d) Some have increased or decreased risk
2) Must have some or all of Following Characteristics: (see characteristics of significant risk IAS 315.27)
1. Fraud :Risk–to do with risk-
2. Recent Events : + Significant Related to in economic,acc,other –to do with risk-eg new IFRS standards, recession etc.
3. Complex :transactions From–to do with risk-merger/acquisition/unbundling
4. Related : parties , significant transactions with –to do with risk- eg: inter-company transactions
5. Estimation :/ Subjectivity/ High degree: in measurement of fin. Info. –to do with risk-estimate provision bad debts.
6. Outside Normal Operations :/unusual Transactions –to do with risk-eg: BEE transactions
NOTE THE FOLLOWING TABLE BY UNISA :RISKS AT THE FINANCIAL STATEMENT LEVEL : WE MUST BE ABLE TO SAY COLUMN 2 &3 AS THE
ANSWER .
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6464 | P a g e Auditing Notes AUDI 101
NOTE THE FOLLOWING TABLE BY UNISA :RISKS AT THE ASSERTION LEVEL (SEE APPENDIX 2 OF ISA315 FOR MANY MORE EXAMPLES ) : WE
MUST BE ABLE TO SAY COLUMN 2 &3 AS THE ANSWER .
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6565 | P a g e Auditing Notes AUDI 101
1. Determine which figures to use: You are least likely to use the budgeted figures and/or figures that entail material misstatements, like unaudited
figures.
(1) budgeted figures;
(2) un-audited figures of current year; or
(3) prior year audited figures.
2. Consider the indicators and perform the calculations:
i) Turnover ½ - 1%
ii) Gross profit 1 – 2%
iii) Net income 5 – 10%
iv) Total assets 1 – 2%
v) Equity 2 – 5%
The above percentages are obtained from DP6. (The DP6 has, however, been withdrawn and we only use it to serve as a guide on which to base the materiality
calculation.
Remember to consider the nature of the business. In entity that is capital incentive you are likely to use total assets for your materiality calculation. The materiality
calculation bases will differ from audit firm to audit firm.
3. Determine the materiality Remember there is an inverse relationship between materiality and audit risk. Always substantiate your materiality figure selected.
Marks will be awarded for this, even if your calculations are wrong.
PLANNING MATERIALITY AND FINAL MATERIALITY
1) ISA320 says Auditor must consider materiality at 2 places:
a) PLANNING STAGE: DURING the “ STRATEGY STAGE “when determining nature,extent + timing of testing (planning
materiality)
b) FINAL STAGE :when evaluating the effect of any misstatement (final materiality)
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6666 | P a g e Auditing Notes AUDI 101
PLANNING MATERIALITY
EACH AUDIT FIRM USES ITS OWN TYPE OF MATERIALITY PLANNING: EITHER ONE OF THE FOLLOWING:
a) GENERAL WAY In a: just take the biggest money accounts, less for smaller money accounts.
b) PERCENTAGE AS a % : of account balances
c) FORMULA use a.
SETTING PLANNING MATERIALITY LEVELS :
(a) Materiality
(b) The Plannning materiality level is INVERSE to audit risk) : ie Low Materiality Level =1% High Materiality level = 10 %
so if level is high ,( ie 10% of revenue of 1000 is R100, so only things above 100 not below, BUT 1% of 1000 is 10, so ALL
things above 10 – that’s a lot more stuff to be checked! That is why it is INVERSE) risk is low and visa-versa.
(c) After studying firm you get an idea of disclosures to look out for and plan accordingly.eg:litigation,licences , economic
conditions,attention focused, key disclosures- eg R&D costs for pharmaceutical, asset intensive then assets etc. .see IAS 320
for MANY.
(d) There are 3 kinds of Planning materiality and Final materiality :
1) FINANCILAL STATEMENT AS A WHOLE MATERIALITY
(i) Decide which item to use as the overall major indivcator, mostly profit for profit companies, or revenue for non-profit
companies, or assets for asset heavy public entities or profit before remuneration& tax for small owner salaried
business.
2) ASSETION LEVEL TRANSACTION/BALANCE/PRESENTATION MATERIALITY
(i) If there are any transactions/balances that are special due to following reasons, then materialty for each one can be
measured individually as well, in addition to overall materiality.
1. LAW /REGULATION : eg JSE rules
2. KEY DISCLOSURES : eg key disclosures- eg R&D costs for pharmaceutical
3. ATTENTION FOCUSED : on fin stat separately disclosed item eg: newly acquired business
3) PERFORMANCE MATERIALITY :
(i) Copied fron Unisa : “Please note that the performance materiality calculated will be lower than the materiality calculated
during the planning phase of the audit. This enables the auditor to minimise the risk of expressing an incorrect audit
opinion. “
(ii) This is where you add up the materialites of EITHER :
1. WHOLE FINANCILAL STATEMENT LEVEL :many small materialites making up the WHOLE FIN STAT materiality ,
choosing those that where many IMMATERIAL materialites could all together cause a MATERIAL materiality.
2. ONLY ASSERTION SPECIFIC BALANCE/TRANACTIONS LEVEL : same as for above, you add smaller ones that
make up the whole, using prof judgement to choose which to add up – which could together cause a material thing-
but individually would be immaterial at thye same levels.
THE 4 FACTORS TO BE CONSIDERED WHEN QUANTIFYING PLANNING MATERIALITY
a) USE OF PRESET GUIDELINES: eg % or formulas
b) SPECIFIC INFORMATION : its importance to users (special additional info. Eg conditions of loans)
c) LEGAL/REGULATORY REQUIREMENTS : eg special figures for JSE must be carefully audited
d) PRELIMINARY /FINAL FIGURES : if clients final figures differ a lot, materiality might have to be adjusted a bit
FINAL MATERIALITY
THE AUDITOR MUST DO THE FOLLOWING TO MAKE A FINAL MATERIALITY DECISION:.
e) AS THE AUDIT PROGRESSES THE AUDITOR if he finds more problems with some area than he thought would happen
when he decoded on his first materiality level, then he must re-calclate the materiality again and carry out extra procedures
as required by the ne level he now sets. The final level he ends up with is at the end of the audit , where PRELIMINARY
/FINAL FIGURES : if clients final figures differ a lot, materiality might have to be adjusted a bit , can happen, and he will
finally end up with the final figure that will not change again. This must be documented.
i) ANALYSE AND Project :the errors in sample over population specified
ii) DECIDE IF FURTHER TESTS :should be carried out or whether client should be asked to check the population in detail
for further errors.
iii) DISCUSS WITH CLIENT MNGMNT :all misstatements in detail with management in order to attempt to have them
rectified .If client does NOT correct them , it could be for following reasons: (then auditor will have to qualify his report IF it is
material )
(1) Disagree with Auditor : eg eg client says stock is not obsolete, or something is not a financial lease per IAS
17 so not to be capitalized etc.
(2) Do not regard as Material : client says it would not influence a user
(3) Directors Crooking the Books : eg want some ratio, so get stubborn
(4) Regard it as ‘too much hassle’ to make changes. : all the fin stats
(5) Do not care if Fin Stats. Are Qualified. :stuff you
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FACTORS TO BE CONSIDERED IN EVALUATING UNRESOLVED AUDIT DIFFERENCES (IN BOOK , NOT TUT OR IAS)
i) Known errors and likely errors : known = sales invoices wrong period(strong ground) Likely= provision bad
debts(weak ground for auditor)
ii) Misstatements should not be considered in isolation: seek patterns
iii) Statutory and other contractual obligations :eg directors emoluments,contractual obligation need keep fixed ratio
iv) Nature of the misstatement.: eg: IFRS standards important, misallocate expense less, director cheat more,
v) Impact of the misstatement: Specificly on Popular figures & ratios eg :EPS (earnings per share)
vi) The absolute and relative size of the misstatement.: if 1 milllion is Relatively – unimportant , But Absolutely – just
too much , then auditor takes action anyway.
Basicly , to overlook some misstatement because client will be unhappy is Unprofessional.
CONCLUSION
1) No magic formula, takes years of experience , confidence grows as experience increases.
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i) ISA 240R Title: “The auditors responsibility to consider fraud in an audit of fin stats.” States objective of
auditor is to:
(1) I.D. risk of material misstatement due to fraud
(2) Gather sufficient appropriate evidence regarding assessed risks
(3) To respond appropriately to fraud or suspected fraud in the audit
b) Eg: directors deliberately understate liabilities and overstate assets to secure a loan, or manipulate earnings to reduce
taxation , or to get performance bonus’s.
Eg: if you sign on delivery invoice for goods received ,it is easy to commit fraud, just slip in a false delivery note.stop this by using a
‘goods Receiving Note’ : sequential numbering hard to slip in a duplicate.If no numbering though- just print a new document then slip it
in ,+ must use special printing & special paper, to stop photocopying.
6) These can all be done at Financial statement & Assertion level : Identify and Assess Risk of Material Misstatement due to
FRAUD at level of
EVALUATION OF EVIDENCE:
1. After initial audit procedures : reconsider at end if anything in evidence might indicate fraud
1.1. Acc records discrepencies :non-timeous recons, unauthorized trasactions eg travel
expense,unneeded access to records possible by eg foreman,tips /complaints
1.2. Conflicting evidence : unexplained recon items,unusual ratios eg commission up but sales
same,implausible explanations from employees,excessive charges /payments to eg lawyers/suppliers
1.3. Missing evidence missing purchase orders,
1.4. Management-auditor : Problematic or unusual relationships between auditor and : deny
access to records,overd:one time pressures,intimidation of team,unwillingness to allow (reasonable)CAATS.etc
2. Consider if un- fraud- like misstatements could be intentional ,esp. if their effect on fin. Stats. Is very
significant.
TO BE COMMUNICATED TO MNGMNT
1) IF found: To appropriate level mangmnt to deal with it
2) Governance : if separate from mngmnt :
a) Tell them if Real or suspected
b) Any other matters relating to fraud pertinent
3) Matters for auditor to consider when identifies misstatement resulting from fraud:
a) Confidentiality- it is inappropriate to simply inform all and sundry about it, ie SARS,creditor,trade union.
b) Management fraud : should always be reported 1 level higher,(+to section chief eg: to fin or other manager if needed) than
suspect eg paymaster to financial manager, financial manager to audit comitee/chairman (those charged with governance)If this
is not successful it may be necessary to report to IRBA as reportable irregularity.
c) Absolute evidence of fraud is not needed but at least sufficient appropriate evidence befor e wild accusations.
d) Entire matter should be documented
e) As per Auditing Professionact: to be a “reportable irregularity” the auditor only needs “reason to believe”, not absolute evidence.
4) Parties to whom auditor must communicate fraud
a) Mangement : +1 level above suspect.
b) Those charged with governance: Audit committees + {BoD is the ultimate level charged with governance}. + And Audit
committees (law says public companies must have one) Folowing matters MUST be reported to these ?2?:
i) INTERNAL CONTROL MATERIAL WEAKNESS (mngmnt is not doing their job)
ii) Questions regarding mngmnt integrity
iii) Mngmnt fraud
iv) Other fraud resulting in material misstatement of fin. Stats.
c) Regulatory and enforcement authorities:
i) Confidentiality stops auditor from reporting to 3rd party exept:
(1) To IRBA as per Act(law)
(2) Court or statute requires certain disclosure
(3) Client gives permission
d) Proposed successor auditor:
i) If permission not granted by client to discuss with proposed new auditor then old may not discuss with new auditor ,but he
must say permission has not been granted.
TO BE COMMUNICATED TO AUTHORITIES
1) As per local laws ( see code of coduct SA part FOR IRBA RULES)
2) Reportable irregularites above 100 000 : The law says you must report any fraud over 100 000 must be
reported, not dealt with in-house,or else you are seen as being part of the fraud.
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FROM APPENDIX : CHARACTERISTICS (DO LEARN)THERE
MANY FRAUD RISK FACTOR
ARE ALSO ‘INDICATORS OF FRAUD’ IN APPENDIX 2, THAT IS NOT WRITTEN HERE IN OWN
NOTES- NOTE ….IT IS A DIFFERENT THING REALLY. (SEE APPENDIX OF IAS240
FOR WHOLE LIST)
NB
INTRO:
1. ISA240 says fraud risk factors can be divided into 2 categories. And each of theses two categories can be
further divided into 3 categories. They are :
2)OPPORTUNITIES
1. NATURE OF INDUSTRY/OPERATIONS:
3)ATTITUDES/RATIONALISATIONS:
1. Enforcement of Ethics :Ineffective enforcement of firms values and ethical standards.
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2. Non-fin Mngmnt Accounting policies + Estimates : non- financial managements excessive participation.
In determining
3. History of law/fraud allegations: any regulations or fraud eg insider trading
4. Share price/earnings trend :Excessive interest by mangmnt in increasing /maintaining entitys share
price/earnings trend
5. Tax :Interest by mngmnt in unappropriate means to minimize reported earnings for tax : eg understating sales.
6. Personal/business transactions : No interest in differentiating eg: takes holidays & charges company.
OPPORTUNITIES
1. NATURE:
1.1. Cash : large amounts on hand
1.2. Inventory characteristics : eg small size high value –jewelry
1.3. Assets :Easily convertible : eg bearer bonds /diamonds
1.4. Assets: Characteristics : small, marketable,lacks ID ,eg power tools
2. INTERNAL CONTROL:
2.1. Inadequate segregation of duties
2.2. Lack of management supervision : eg goods into /out stores with no supervision.
2.3. Poor personell practices : screening for sensitive jobs (incl. storeman)
2.4. Recons: inadequate record keeping for the coming recon of assets, or asset recon itself inadequate.
2.5. Lack proper purchases authorization.
2.6. Physical safeguards : poor over assets
2.7. Timely and appropriate documentation for transactions: lack of eg: let customers take goods but
do paperwork later.
2.8. Mandatory vacations employees in key control positions: they normally do not want to take a holiday
because they cannot cover up in that time.
2.9. Senior management expenditures: inadequate authorization,review and control eg: travel claims.
2.10. IT personel ‘do what they want’ : esp. if Mngmnt has inadequate understanding of IT: IT
personell might change debtors balances in masterfile.
ATTITUDES/RATIONALISATIONS
1. Factors which indicate employees have a relaxed attitude to control, or to misappropriation of assets.
1.1. Control Environment :poor : eg Ignore theft incedents, Overriding controls.
1.2. Lifestyle changes: Mngmnt suddenly takes expensive holidays.
1.3. Dissatisfaction Behavior: by employees indicating displeasure at treatment or at entity itself.
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COMPUTER ENVIRONMENTS:
1) *Definition : Computer Environment is any particular and unique combnination of 1-hardware,s2-oftware,3-operating systems
& and 4-personnel.(larger clients may have 2 or more of these computer environments)
2) Small firms will not be able to implement all the internal controls needed eg full segregation of duties, like the larger firms, but
mngmnt is still responsible to ensure proper internal control.
3) *KEY OBJECTIVE OF CONTROLS IN A COMPUTER ENVIRONMENT: VAC : Valid Accurate Complete : although computer
environments are different ,”auditing objective” is still to establish if accounting system and related controls is VAC.
4) EDP= Electronic Data Processing (Old Term Used In Past)
5) DP= Data Processing(Old Term Used In Past)
6) IT= Information Technology (Current Term)
7) IS= Information Systems(Current)
NETWORKED SYSTEMS
(a) Definition: number of pc s linked together by data cable, each has own powerful processing – input/output/process/-
capabilities, but can share networked computers data and processing power.
(b) Characteristics:
(i) Combined processing power and storage: of each together is considerable.
(ii) Security is Demanding : far more demanding since each computer has access to all other’s data etc.eg
employee can alter his wage record.
(iii) Computer knowledge : Sophisticated software needed so a high level of knowledge is needed to run it.
SUMMARY
(1) An Entity may have a mixture of all these systems , lans,wans, networks, central, and use a service bureau for wages to
enhance confidentiality and security , etc etc .controls must be designed to fit the user, a large organization will use all the
controls, a small one far less.
COMPUTER AUDITING
DEFINITION OF A GENERAL CONTROL:
1) All controls in a computerized centre are classified as either 1-General or 2-Application controls.
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2) Definition: General Controls: Span across all applications. Establish an overall framework of control for computer activities.
Must be in place before any processing of transactions takes place.
3) Definition: Application Controls :relevant to a specific application/task within the accounting system eg wage cycle, purchases
cycle,
CONTROL ENVIRONMENT
1) For Hardware +Software ONLY:A Policy ,not Procedures, must be developed, must be DOCUMENTED. Characteristics
should be :
a) Least Priveledge: clerk cannot access things he does not need to.
b) Fail Safe : if one control fails, another takes its place : eg log in software fails, system shuts down.
c) Defense in depth : combination of controls ,not just one, eg ATM , no more than balance total give out, in case it spews
out thousands.-sommer add a control.
d) Logging: NOT an EFFECTVE measure unless regular and frequent review/AND follow up action .All access,all changes etc.
ORGANISATIONAL STRUCTURE
2) Sound ORGANISATIONAL STRUCTURE for an EDP/IT Dept :
3) The following chart illustrates following important segregations of duty: note main principles used below for chart.
a) 1- SEGREGATE I.T. AND USER DEPTS.,
i) Authorise :No transactions to be authorized by IT dept eg: wage increase rate, purchase order (to put on
system, or otherwise)
ii) Access :No IT staff have access/or custody of PHYSICAL ASSETS eg stock, or UNCONTROLLED ACCESS TO NON-
PHYSICAL ASSETS eg debtors masterfile.
iii) Resposible : ONLY responsible for correcting errors in processing+operating problems, for other corrections
(eg in books) ONLY assistance if by request from user departments.
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4)
BoD
Board of Directors
Steering Commitee
IT Manager
Application
Technical Help Desk
Development and Security
Administrators /Operations
Programming
PERSONNEL PRACTICES:
(1) Very important to have good personnel practices in IT .( nerve centre)
(a) Background check,competence checks
(b) Password,access exclusion if dismissed.
(c) Compulsory leave : crookery discovered when they are missing to cover up
(d) Training and development
(e) Terms of reference: written personnel policies and practices.
(f) Rotation of duties: boredom, learn other tasks, catch out. Do not compromise segregation of duties though.
APPLICATION CONTROLS:
INTRO:
(1) GENERAL CONTROLS & APPLICATION CONTROLS
(a) General = for all applications and the sytem eg hardware, other software etc etc
(b) APPLICATION CONTROLS: only for the software : programs & procedures to satisfy users for 1 task eg: payroll
(2) Suggested framework for application controls: = 10 KEYWORDS:
(a) Masterfile Amendments
(b) Input , Processing ,Output
(c) VAC: Validity Accuracy, Completeness.
(d) Prevention, Detection, Correction.
(3) When input/output/ processing is more real time than segregated(tech), we
(a) More access+programmed controls , less manual controls
(b) More Preventative , less than detective+corrective.
i. Eg: get details of a airline booking correct before its processed(for both above)
DEFINITIONS:
NB
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(4) An APPLICATION : a set of procedures and programs , ,designed to satisfy users for a specific task eg payroll
cycle(cycle link)
(5) APPLICATION CONTROLS : over input,processing output of fin info , relating to a specific application ,to ensure VAC
:Valid Accurate Complete.
(6) TRANSACTION FILES: files to STORE DETAILS of individual transactions
(7) MASTER FILES: files only to store 1-standing information + 2- latest balances : need tight control
(8) MASTERFILE AMENDMENTS : changes to
(9) VAC: VALID , ACCURATE, COMPLETE (objective of controls in computerized environment is VAC)
(a) VALID: transactions&data : not 1-fraudulent/fictitious 2-in Accordance activities actually authorized by
mngmnt.
(b) ACCURATE; transactions&data: are correctly 1-captured,processed,allocated to 2-minimize errors
(c) COMPLETE: transactions&data: not omitted or incomplete
(10) PREVENTION, DETECTION ,CORRECTION : (just the stage at which controls are implemented to achieve objectives of
VAC))
(a) PREVENTION : controls to get errors BEFORE input/process/output (check before input)
(b) DETECT :controls to detect errors ALREADY IN SYSTEM + RESOLVE.
(c) CORRECT :controls to RESOLVE ERRORS&PROBLEMS already identified by detection controls
PROCESSING METHODS:
NB
(1) 3 types of controls
(a) BATCH ENTRY ,batch processing/update
(i) First on Source Docs
(ii) In batches of eg 25 : entered on computer to store at efficient/convenient time, to update masterfile immediately
(b) ONLINE ENTRY, batch processing/update
(i) First on directly on PC
(ii) Stored on transaction file, later batches of these files are updated to masterfile.
(c) ONLINE ENTRY, real time processing/update
(i) First direct on PC
(ii) Stored and also Masterfile updated in Real Time eg airline seats available
(2) Todays esp. SME ,Commercial packages incorrectly configured to not do programmed controls are a risk.
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2-Logs And Reports
(5)
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3. Limit checks – min OR max
4. Limit test after processing – not on entry
5. Check digit – extra digit on end of field, formula checks if field generates it,no db
6. Size checks – field too many characters
7. Missing data checks – detect blanks
8. Reasonable checks – eg not more than 50 Hrs per week
9. Reasonableness test after processing : eg wage of 100000000
10. Sequence checks –duplications/gaps in numbers
11. Verification checks – masterfile lookup if correct account number
12. Data approval checks –credit limit for all sales
13. Internal label check – if computer file name correct
14. Generation number check – correct file generation loaded ( old/ new etc)
15. Retention date checks –if file expired
16. Arithmetic accuracy check – eg reverse multiplication for 3*5= 15 : do 15/5=?
17. Cross casts – acc
18. Run to run totals: closing balance 10th compared to opening balance 11th ,and also to total debits minus
credits etc. and more at same time same time etc etc.
19. Reconciliation of related subsystem balances – debtors legder to debtors control acc.
(h) Logs and reports
(i) Audit trails: eg intrest or PAYE rates used/ or summaries + list transactions
(ii) Run to run balancing reports – see above
(iii) Override reports- abuse of privaledges
(iv) Exception rports- outside parameters set for control purposes eg wages > 40 hrs
(v) Before and after images- database images before/after updates in case error
(vi) Activity reports-usage times etc per user on pc, using resource
(vii) Computer generated transaction listing- all automaticly generated re-orders/purchases by computer
(viii) Access & access violation reports – sensitive eg – payroll + EFT
(i) Output handling controls
(i) clear report identification :name, time+production number , period covered/date,numbered pages
(ii) distribution checklist : who is to receive them
(iii) register sign: must sign for receipt
(iv) printing restricted to specific printers: confidential info eg salary slips – HR managers office printer only.
(v) stationary design: eg sealed envelope salary slips
(vi) shredding/ destroy: eg carbon paper or printer ribbons etc.
(j) Reconciliation and review
(i) Control clerk:activity reports : output and processing
(ii) Control clerk:control totals from input : eg batch controls
(iii) Control clerk:sequence checks numbering on docs
(iv) Control clerk:document count : eg must be 200 cheques for 200 payments
(v) User dept :recon : with processing dept : eg foreman calc. 5000 wage hrs, payment should be for
5000 wage hrs.
(vi) User dept : recon :reports : to 1-source docs 2- physical assets
(vii) User dept :reasonableness: review output for:
SUMMARY
Computers do not change the FUNCTIONS which mus occour in a cycle: eg in a wage system:
Personnel records
Time keeping
Payroll prep and record
Pay
Pay deductions over
Unclaimed wages accounted for.
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DATA ORIENTATED CAATS
(1) More : auditing with computer
(2) Mainly substantive testing
(3) Can cause : Corruption of client files
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INTRODUCTION:
1) In large companies access to computer resources must be controlled:
a) For 1-tapping the Telephone line
b) 2-points of access plugs
c) Maintaining the
i) 1-integrity and
ii) 2- security of data actually transmitted
2) Auditor is not a expert BUT must call on experts if need be! For technical stuff.
TRENDS IN IT
1. Move from mainframes to personal computers-move to end user computing-processing power +storage-division of
duties&data integrity and confidentialtity under threat if correct controls not put in place (due to everybody has access now,not just 1
central mainframe)
a. Auditor benefits – uses laptop computers
2. Client-server architecture : simplest is a LAN, applications+databases scattered throughout organization,same implications
for auditor as in introduction above.
3. Open sytems: many applications all use same standards, so communicate/exchange data easy.eg word+wordplus+others. Has
implications for auditor.
4. Image processing: scan backups for audit trails
5. CD,USB,DVD : opportunity&threat= + easy to store stuff for auditor.& stealing info
6. Smartcards: contains microprocessor, not magnetic stripe.= better controls-(storage+processing)
7. Communications technology: EFT,EDI,wireless etc.
8. Web enabled: access application via the internet.
NETWORKS
1) Why we have them: Comes from people wanting to share printers,so to buy less printers, now expanded to any resource incl.
processors/database etc etc.
DEFINITIONS:
1) LAN: local area network : is a Data Communications System, links independent resources, normally by cable,in a small geographical
area/building.For 1-share resources+ 2-communicating.
2) WAN: wide area network : same as LAN, exept :
a) Wider geographical area – Eg: to Branches/trading partners(use EDI)/service providers(banks).
b) Extra resources eg: routers,gateways,bridges.
c) Additional considerations: - see cost/security/access control to use either
i) Use leased line OR
ii) Switched line OR
iii) Lines in analogue(needs modems to convert to computer digital) or digital(uses diginet connections).
3) VAN: value added networks: Business entities which provide a message transmission service: they connect you to 3rd parties/ or trading
partners for a fee so you don’t have to buy expensive equipment.
4) VPN: virtual private network: uses encryption to provide a secure ‘tunnel’ using the internet to connect companies to remote
offices/users.Cheaper than leased/owned lines.
5) Internetworks: signify linking of LANS,WANS, to many other LANS,WANS, also to mainframes,PCs etc. Risks remain same.
6) Server : Powerful microcomputer which controls the usage and makes available to the network : a particular resource eg; printer/ files/e-
mail etc. and makes it available.
7) Distributed Processing: where 1-processing + 2-storage is distributed amoungst a number of different computers and processors and
could take place on various remote sites, not just on 1 easily controlled site.1-Security of link + 2-Access control is very important.
DATABASES
DEFINITIONS
1) DATABASE : pool of interrelated data stored/structured/managed in such a way that:
a) Duplication is minimized
b) Contains all: information needed for use by sharing in common programs&users
c) Quickly accessable : by all authorized users
d) Simultaneous : accessability by many users with the same view in spite of updates which are in progress.
e) Provides sharing : by many users eg Microsoft SQL
THE INTERNET
1) Started as ARPANEt- many LANS,WANS etc.
2) Virus,confidentiality,corruption of data+PROGRAMS,
3) Certain protocols for different types of service, some are more safe than others.Different services are:
a) WWW : uses http/ https (secure) ,hypertext transfer protocol. to market products/sell 24/7 /source of info./download
products=music/articles etc.
b) E-Mail : uses smtp=simple mail transfer protocol
c) File Transfer : uses FTP/ SFTP ,file transfer protocol.
d) Remote terminal access+command execution: as if you were on that terminal.
COMPUTER BUREAUX
1) Is a business which processes other entities data for a fee.Provides hardware,software,skills. You don’t have to pay for staff& equipment.
2) Options:
a) Facilities Mngmnt : -your equip., they look after it at their premises.
b) ASP: application service providers- entire service for an application is provided by them
c) Full Outsourcing: All IT services are provided by the bureau.
3) Used by some to enhance confidentiality eg: salaries processed offsite.
AUDIT IMPLICATIONS:
1) Adds another dimension to accounting system to be controlled.
2) Auditor must evaluate bureau
3) Data must still be INPUT ,PROCESSED ,OUTPUT – with all same controls by client or bureau- one of the two!
4) Auditor MUST do the following:
a) Assess bureauxs suitability.-
i) it is relying on an expert, so their 1-competence 2-independence 3-stability 4-range of services 5-reputation for confidentiality 6-
security arrangements of bureau 7-deadlines efficiency&responsibility 8-up to date and reliability+check any independent
evaluations done on them,read correspondence emails with them,professional bodies etc.
b) Evaluate bureauxs agreement/contract.(learn-very large thing in book-could ask just this)
i) Reference in dispute: must cover: 1-liason2- describe input/process/output 3-deadlines&consequences 4-clients + also 5 bureaus
responsibilities 6 back-up processing arrangements. 7-auditors access to 8-training 9-fidelity&10 other insurance 11-basis of fee etc
c) Evaluate controls of client over functions which are the clients responsibility.
i) IE: by observation,enquiry,inspection,reperformance.
VIRUS
1) DEFINITION: it is a program SPREADS from 1 computer to another, EVENTUALLY performing the ILLICIT function for which it was
intended. Each virus works INDEPENDENT of original. Common to SPREAD BY e-mails.
2) Viruses extra likely in high network environment eg internet.
CATEGORIES OF VIRUS:
a) DESTRUCTIVE:
i) Massive destr. : unrecoverable data damage
ii) Partial destr: erase portions of storage
iii) Selective destr: erase specific files
iv) Random havoc: change random data/keystrokes/input or output data.
v) Network Saturation: overload crash
b) NON-DESTRUCTIVE:
i) Annoyance : display messages/change screen colour/change keystrokes(eg ALT/SHIFT combination)/delete chars. etc.
KINDS OF
a) Trapdoor = code causes extra illicit password/entry door
b) Worm = code spread through a network
c) Trojan Horse = code copies eg passwords as typed in
d) Logic/Time bomb – sets off at date/event does some illicit thing
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AUDIT AND CONTROL IMPLICATIONS:
1) Security system which includes following controls must be instituted.
a) Regular backups
b) Anti-virus updated all PCs
c) Scan in/out e-mail
d) Reputable software suppliers
e) Examine carefully all new purchased software/ first load on separate PC.
f) Users informed of data security
g) Users: instructions not open e-mail from unknown/suspicious sites
h) Access restricted to authorized personell- also accountable for their PC’s
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ACCOUNT BALANCES:
1. SCI : sales, discount in/out, bad debts , sales returns, cost of sales
2. SFP : receivables, bank, provision for bad debt, inventory, “output” Vat.
BUSINESS RISKS
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5) Access/Custody control:
i) Cashier protected
ii) Cheques crossed after receipt ( if stolen cannot..)
iii) Debtors ledger (destroy/altered)
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reference to ISO & Delivery note.
6-second employee(supervisor) check & sign invoice:
discount,vat,prices,customer details,extentions,casts.
6-Recording of 1-Invoice 1-invoices are omitted 1-invoices entered in sales journal in numerical sequence
Sales 2-Sales journal from sales journal only
Record Sales 3-Debtors Ledger 2-inv. Duplicated in sales a)sequence continued from period to period
and Raise 4-General Ledger journal b)cancelled invoices to be recorded in SJ -as “cancelled”-
Debtors. 3-inv.inaccurately no missing a number
entered in eg 45 as 450 2-batch control sys- total “invoices” before entry/ then
4-inv.entered against after entry total the “sales journal” to check entries.
incorrect debtor 3-independant employee to: recon1
a)sequence check SJ entries+follow up missing
b)compare SJ customer name+amount to invoice
c)check SJ to “GL & DL”
4-other independent employee recon 2 DL to GL regular
7-Receipts 1-Remitance register 1-payments received not 1-Post opened by 2 people
Mail room/ 2-Customer banked due – 2-Post payments into remittance register by “openers”
Cashier remittance advice (a)carelessness or 3-Prenumbered receipts for all pay received(or at least
Receiving and 3-Receipts (b)theft for cash)
Recording 4-Bank deposit slip 4-bank receipts daily
Payment from 5-Bank deposit slip by CASHIER- NOT employees opening
debtors. post.
6-cashier recon 1 remit.register vs cash&cheques & sign it.
7-independent employee remittance register& receipts
issued recon 2 to bank deposits.
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AUDITING THE CYCLE:
1) SPECIAL INTERESTING CHARACTERISTICS OF THE REVENUE AND RECEIPTS CYCLE:
After assessing the risk at FinStat AND at assertion(eg complete/exist/occour ..ance) level, auditor gets idea which of following is more likely
to occour.
a) Debtors Amount: this cycle produced what is frequently a very significant figure on the balance sheet. (fraud/errors etc)
b) Sales: it produces the figure from which Profits & Losses originate.
c) The Overall Risk in this cycle can be looked at in 2 ways:
i) Understate SALES: mngmnt tempted to understate for
(1) TAX & REDUCED PROFITS particularly with large cash sales.
(2) ‘hold back’ by moving to next year , to get off to a good start for next year ( if large slaes this year)
ii) Overstate SALES: mngmnt overstate to : by ficticious paper sales OR pre-invoicing (year-end more)
(1) Meet sales targets
(2) ‘Ratios’ by manipulate ‘debtors’
2) RECEIPTS: (transactions)
a) Completeless
b) Occourance
c) Accuracy
d) Cut-Off
e) Classification (proper accounts)
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ii) Hide by substitute cash stolen with debtors cheque payments-take cash put debtors cheque payment as a cash sale-then post
another debtors payment at mnth end as 1st one taken/or multiple.(Becomes very complex Web)You can say 2nd was too close to
mnth end thus not reflecting yet. (reconcile physical cash with cash receipts)
b) He needs: to succeed he wants you must NOT use bank deposit slips as source docs for cash book(bank teller compares cheque
name to deposit slip, so he cannot substitute),he handles all queries from debtors, or he write up source doc receipt Or cash book.
c) Fix by:
i) Feed back
ii) Credit notes
iii) Bad debts
iv) Destroy records
d) Risk in:
i) Poor control environment
ii) Poor segregation duties pay write receipts / debtors queries/ recording
iii) Cash&credit sales
iv) Small/medium size business
TESTS OF CONTROLS
1) You identify each control, then perform 1 of the above 4 procedures on it to test if it works .
2) Each is Limited in value: ‘inspect’ signature only says it was signed, not actually checked, ‘observe’ only says control worked While you
watched, not always.
3) Note: tests must also be done on NON-SPECIFIC (GENERAL) CONTROLS: eg ‘custody’ of blank delivery notes,invoices.
4) Eg:
a) Enquire:
i) of order clerk if 1- ALL orders go to him,
ii) 2- if he makes out an ISO for all orders, not only phone orders.
b) Inspect :
i) 1-filed copies of ISO for ‘evidence’ credit approval was obtained.
ii) 2- correspondence from ‘credit bureau’ to confirm approval was actually obtained.
c) Observe:
i) opening of mail & writing of receipts
ii) despatch clerk counting and checking goods on transfer from warehouse to dispatch.
d) Reperform
i) A bank recon
SUBSTANTIVE PROCEDURES
1) In some other textbook says it is divided in 3 Types: 1- Transactions 2-Balances 3-Analytical Procedures.(we say these 3 plus extra +
Presentat.and Disclos.)
2) MAIN focus for this cycle: BANK/CASH + DEBTORS balances, which also gives evidence for sales.
3) MOST IMPORTANT part : non-cash transactions which reductions debtor balances : do tests as in ‘eg’ no 4 below , PARTICLARLY
AUTHORITY given for each to be done.
a) Credit notes
b) Bad debts write off
c) Special discounts
4) Eg: auditor just selects a sample of Sales Invoices and Does DUAL PURPOSE TESTs on them :”VOUCHING OF TRANSACTIONS ‘ ARE referred
to as ‘dual purpose’ tests: because…..
a) DUAL PURPOSE TESTS:
i) Inspect: Match to details on supporting docs –sales order,delivery note
ii) Inspect: trace to entry in sales journal
iii) Inspect : docs for signatures showing control procedures have been carried out.
iv) Reperform :pricing from price list and Enquiry&Confirmation :validity of discounts.
v) Reperform/recalculate: casts, extensions,discounts, vat.
vi) Reperform: posting to debtors ledger.
5) CATEGORIES OF ASSERTIONS: ISA 500R Categorises the Assertions as follows.:
Classes of Transactions and Events (for period) eg:sales, purchases, interest received: Rem‘allowance for doubtful debts ‘
AS WELL AS ‘Revenue’ are ‘transactions’
a)
b) Account Balances carried forward to next year(at year end) eg:property plant &equipment ,accounts receivable.
c) Presentations and Disclosure : eg:notes to bal.sheet , contingent liabilities
DIAGRAM OF ASSERTIONS:
Remember: ‘allowance for doubtful debts ‘ AS WELL AS ‘Revenue’ are ‘transactions’ assertions
TRANSACTION PRESENTATION
ASSERTION ACCOUNT BALANCES
EVENTS DISCLOSURE
1 OCCURRENCE (ALSO ?
# #
VALIDITY)
2 COMPLETENESS # # #
3 ACCURACY # #
4 CUT OFF #
5 CLASSIFICATION (and for
Pres.& Disclosure : # #
UNDERSTANDABILITY)
6 EXISTENCE #
7 RIGHTS and
OBLIGATIONS # #
8 VALUATION and
ALLOCATION # #
5) PRESENTATION & DISCLOSURE ASSERTIONS: (not ‘balances’ but next one :ie) as it applies to debtors: as per ISA500
a) COMPLETENESS : IN TERMS OF ias INTERNATIONAL ACCOUNTING STANDARDS, 4TH SCHEDULE. Eg: debtors balance with current
assets, + disclosed encumbrances on debtors. + all dother DISLOSURES are there
b) :Occourance: Evidence :consistent with evidence gathered on audit.
c) Accurate: Amounts , facts ,details, 1-accurate 2- and=evidence
d) Classification&: Appropriate classification of information.
e) Understandablity: Wording is clear and understandable. Eg: accounting policy & explanation of encumbrances.
f) Rights&Obligations: per evidence gathered
g) Valuation&Allocation: per evidence gathered
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(a) New accounts ( to check eg credit applications)(existence)
(b) Major fluctuations in individual account balances(valuation)
(c) Not Listed :anymore Debtors (existence)
(7) Bad debt allowance : recalculate based on aging eg 3% 30 days + 5% 60 days etc.
(8) Casts/cross cast : (valuation)
6) Kiting: where company controls many bank accounts and uses this to inflate ceratin balances using the time taken by a bank to clear
payment n a cheque. You transfer from a bank account at another bank, by cheque to another bank account-then while one is waiting to clear
so it gets reduced (has not cleared yet so not yet reduced at 1 bank) , then other is immediately credited on deposit and youseem to have
more than you actually have ie; 50 +10+ deposit of 10 = 70., but deposit only clears after bal.sheet date so then it is 2 weeks before 40-
payment of 10 + 10+deposit of 10=60
7)
8) Transfers:
a) Eft TRANSFERS scrutinize : carefully esp. payee account VALIDITY
b) YEAR END : any large transfers at year end, to subsidiary or related party or own bank accounts,CONFIRM(for KITING) (also with
reference to other auditors at related parties if needed).
i) Supporting docs
ii) In same year period : recorded in both enities books in same period
iii) Any outstanding : are included in any bank recons.
9) Cash counts:
a) Simultaneous: counting of all floats prevents cover ups
b) In Presence of cashier responsible for:
c) Alone : auditor NEVER alone with cash, or accused of stealing it
d) Cashier+auditor sign : results on workpaper together
e) Recon as follows: cash float + cash received - cash payments=cash on hand.
f) Supporting docs : all Payments& receipts should be supported by
g) Supporting docs: 1-Valid+2-Authority all to be scrutinized for both of these things.
h) Postings: cash transactions to the ledger
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1-ORDERING Initiate orders, 1-REQUISITION 1- 1-order clerk not order no authorized requisition
OF GOODS always 2-ORDER FORM Incorrect/Unnecessary (a)cross-ref requisition to order
AND SERVICES available,place =liquidity+wastage (b)confirmation by stores/production (esp. preset levels)
orders,after check 2-unauthorised=losses 2-before place order senior buyer/supervisor check
suitable deliver/ by fraud (a)accuracy&authority
/qlty /qnty /price 3-order forms misused (b)supplier suitability, price&qty reasonable, nature
eg private orders goods reasonable ie used by company
4-requisition not acted 3-approved supplier list
on OR orders not (a) confirm available+delivery dates
timeous (b)or get quotes if no supplier list
5-inferior quality (c)seniors evaluate suitability of before approve
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6- unnecessarily high a supplier
prices 4-order dept file requisitions sequentially by dept +
7-orders not OR not frequent review requistions not cross-ref to an order.
timeously filled (unordered)
. 5-copy of order filed sequentially + review sequence
check +cross-ref to GRN to make sure they were
received.OR check pending file of orders in receiving bay.
6-blank order forms sound stationary controls (custody)
2-Receiving of Accept, 1-supplier delivery 1-acceptance of 1-pysically secured access controlled Goods rec. section
goods&service acknowledge, note(DN) Short deliveries as full 2-offload by goods rec. clerk who must:
s valid, record(GRN) 2-GRN Damaged/broken (a)match supplier delivery note to Purchase Order
+ check qty, qlty, Itms not ordered (b)check qty+descry. Vs both docs above
descr. Wrong type/qty (c)check goods- broken/wet etc (superficially)
2-GRN incomplete/ (d)reject incorrect + note on both docs
Inaccurate (e)note short delivered on both(+ actual QTY!)
3-no GRN made out (f)include only those accepted on GRN(??????)
4-fraud/theft +collusion (g)suppliers personel sign +sign amendment eg short
outside (h)sign supplier delivery note
3-on transfer to stores next clerk sign GRN + count +
report discrepencies to supervisor
4-Collusion in this cycle is a major problem to many
companies, so isolate responsibilities+independent physical
controls eg: tracing device on vehicles+security cameras to
be used by all in supply chain
3-RECORDING 1-purchase invoice(PI) 1-record incorrect 1-purchase invoice must be:
OF 2-credit note(CN) amounts from incorrect (a)match to1- GRN 2-delivery note+3-purchase order for:
ACQUISITIONS 3-Creditors purchase invoices Qty, descr,prices, discounts(from order or supplier
statements (a)QTY/QTY/TYPE notas price lists)
4-Purchases journal ordered or received (b)review if posted to correct account eg: stationary.
5-Purchases Returns (b)price not as quoted 2- account to be posted must be got from official list by
+allowances journal (c)calc errorsegcast/vat requisition maker outer and written on there-or clerk will not
6-Creditors ledger 2-fictitious know for which account it is.!
7-General ledger purchases /creditors 3-reperform casts,extentions,calc,s on invoice.
from invoices never 4-Specific emplyee must responsible GRN +invoice dates
receiv. or ordered check and only then timeously posted to journal+ledger.
3-delays, misallocation,
posting errors = recon
problems+ loose early
pay discounts.
4-Payment 1-remittance advice 1-pay fictitious creditors 1-creditors statement recon to support docs.+clerk
preparation (RA) 2-pay incorrect amounts check invoice accuracy controls done before recorded
(requisitioning 2-cheque requisition 3-unauthorised payments 2- creditors statements recon creditors ledger
) 4-discounts lost individual
3-creditors clerk make sure pay early discount 1-pay
early2-actually is deducted
4-cheque requisitions 1-preprinted+ 2-sequenced + 3-
custody controls over blanks
5-cheque requisitions: 4-to incl. details of 5- authorized
by preparer sign 6- maybe even authorized second person
6-cheque requisition+support docs ALL go to cheque
signatories.(+ batch controls if numerous enough)
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AUDITING THE CYCLE:
INTRO.
1) Important cycle –must be comprehensively audited.
2) Product= purchases&creditors also bank
3) If auditor thinks cash&creditors is fair, then purchase&payments should be fair
TESTS :
1) Tests of controls:
a) Observation
b) Inspection
c) Reperformance
d) Enquiry
2) Substantive procedures:
a) Inspection
b) Enquiry & Confirmation
c) Recalculation
d) Reperformance
e) Analytical procedures
TESTS OF CONTROLS:
1) Assess the risk that misstatement will not be identified by the system/risk of misstatement of the fin stats/not fairly presented.
2) Eg:
a) Inspect
i) a sample of purchase orders for supplier is on approved supplier list
ii) Requisitions for authorizing signature
iii) Supporting docs is it stamped so it cannot be used again
b) Enquire: procedures carried out of goods receiving clerk – to reveal missing procedures
c) Observe: procedures carried out of goods receiving
d) Reperform: creditors reconciliation(creditors STATEMENTS to creditors ledger)
3) Test should also be conducted on GENERAL(NON-SPECIFIC) CONTROLS eg: custody of blank order forms
4) Remember limitations of these tests: observing someone performing it only means he did it then, not every time etc.
SUBSTANTIVE PROCEDURES:
1) Main= creditors balance, main=completeness, main
2) Generally seen as :liabilities understated, not overstated
3) In addition to creditors balances auditor may select sample of transactions eg: payments and purchases to perform subst.tests on, to seek
EVIDENCE on assertions :Eg on a purchase transaction:
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a) Occourance:
i) Inspect supporting docs (GRN, PURCHASE ORDER, DELIVERY NOTE, INVOICE)to see if
(1) External docs are made out to Why(Pty)ltd
(2) All doc are signed by the authority eg chief buyer.
b) Accuracy: (amount)
i) Recalc name extentions invoice
ii) Confirm prices&discouts: check order or purchase contract
iii) Recalc vat , check discounts come before vat.
c) Cut-off:
i) Date on docs to date in purchase journal +fin year
d) Classification:
i) Should be on purchase order by buyer , check if in right one
ii) Check descr. To be sure correct: eg fixed asset not written off as expense.
iii) Vat correct on invoice+journal
iv) Creditors ledger posting from ..
e) Completeness
i) All that should have been recorded are recorded.
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(3) Check list of GRN unmatched to Invoices year end-which is compiled when doing cut-off at year end 1-was it specially
raised in journals at year end since no invoice was received yet ??Y/N 1-recalc amount 2-check price
(a) Check if Pile of Unmatched GRN,s contains 1 with number lower than cut-off number -and check if that one was put in
journal (creditor raised)-the later in year you do this the less likely there will be 1.
(ALL THE YELLOW ONES BELOW WERE NOT FINISHED_NO TIME)book- page11/28
(4) AFTER year end: 1-GRN purchases journal no. > cutoff . 2-DATES after year end
(5) Check if cheque payments made prior to year end are paid in reasonable time(window dressing creditors)
(6) Check recon-eg premature write off disputed amount
(7) Physical MORE THAN recorded inventory.
(8) GL accounts ACCRUALS correct
5) ASSERTION: Presentation & Disclosure of trade creditors.(ISA500)
NOT FINISHED-NO TIME BOOK pg 11/29 (very short)
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receivin
gRISKS OF THE CYCLE
1-RISKS
1) Inventory is Lost or Stolen due to.
(1) Physical Controls – inadequate
(2) Transfer Controls -of inventory, inadequate ,unathorised issues
(3) Isolation of Responsiblility – inadequate establish who is accountable for at any stage
(4) Division of Duties- inadequate- eg storeman custody+recording=conceal theft
2) Inventory Deteriorates due to
a) Inadequate Physical controls (eg: gets wet)
b) Its Nature (foodstuffs, chemicals, fresh produce)
3) Delays & Inefficiencies in Production due to:
a) Incorrect raw materials supplied to production
b) Non-availability of raw material
c) Poor Quality of raw materials
4) Unauthorised Production : eg private jobs
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5) Inadequate recording of Costs of Production. : WIP etc wrong costs carried forward.
6)
2-CONTROL PROCEDURES
1-TRANSFERS N.B. 1) Recorded: no movement without recording eg signed requisition / or barcode scanning.
2) Deliverer + Receiver Sign : both should acknowledge after check qty,descr. Eg material issue
3) Filed Numericly : transfer documents (for finding gaps/false copies/missing/)
4) Regular Review Signature : all docs. Should regular review for authorizing signature.
5) Regular review sequence check: docs regular find missing/false extra etc. +Investigate if
2-DAMAGE/LOSS/THEFT 1) Physical controls : Stores + All Production Area
N.B. a) Limited entry/exit : minimum doors possible
b) Controlled entry/exit: swipe cards / keypads /turnstiles /x-ray /security guards/gate cntrl.
c) Restricted entry/only: eg buying clerks not unaccompanied, only production employees.
d) Secure buildings: solid structure, minimum windows, locks etc
e) Environmental: pest free, temp. controlled, dry, neat , clean.
f) Surveillance: cameras over production line+receiving+despatch.(it’s often easy to steal from
production line)
2) Frequent Comparison & Reconciliation:
a) Inventory theory vs Actual: in all its forms, theoretical vs actual
b) Production schedule VS Actual :where’s the extra raw materials from lower actual gone to?
c) Budget VS Actual : why did it cost more? Dofness on duty?or why?
3) Investigate Reconciliation : material variances.
4) Regular Surprise Checks: by mngmnt+supervisory to see unauthorized production by: machine
hours/usage compare to actual production+production schedule to actual being made comparison
5) Division of Duties : Note: ONLY THIS ONE : custody + recording inventory not by same person.
3-Info. FOR PRODUCTION 1-FOR JOB ORDERS
COSTS 1) Preprinted Job Cards for ALL JOBS TO BE RECORDED ON
a) Sequenced and dated
b) List of materials to be used
c) Cross-ref : to customer order/quote
d) Cross-ref : to materials requisition
e) Cross ref : daily production schedule
f) AUTHORISED by PRODUCTION MANAGER.
2) Job cards Pending File : that are still In production go in a …and updated for labour hours as they
are incurred.(could be computerized)
3) Job cards Finished: should be removed from pending file and costed-labour hours&material prices
accumulated and overheads allocated. (see objectives above)
4)
5) Job Card Calculations Checked : all above calc. should be checked by a second clerk
6) Job Card Numericaly filed : after
7) Job Card Completed file Sequence test & Check for: Frequent & Regular for
a) Cross-ref to “transfer to finished goods note” and to a “sales invoice” ( not skelm private job)
b) Missing job Cards are still in the production stage.
8) Job Card Mngmnt Compare : to QUOTES and BUDGETS & investigate variances.
9) “transfer to finished goods form” : On Completion : make out a
a) Accompany goods to finished goods store
b) Cross-ref to job card
c) Be used to write up perpetual inventory of finished goods (one record-the other is job card
accumulation, so you have 2 to stop skelm change 1,as well as other reasons)
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10. No dispatch on date of count(or use system of : all issue forms on those days must record if
before end of year or after end of year removal per item and exact time and date of picking–before add
to count if already counted , after subtract from count if not yet already counted – the counters must
note time & date of each item counted to see which .(note : if box was already counted, then before
leave same , and after also leave same.And if busy counting the box while picking stock then figure out
a method to balance it all out-with people at door to double check what goes out etc. etc.very complex-
must research and work this out)
11. Receipts from deliverys : store separate in receiving bay-don’t add to stock until after
count.These late deliveries MUST then be counted and added to inventory count after count is
complete.
12. Counters to:
i) Draw Lines through Blank spaces on sheets
ii) Sign each sheet and every alteration.
13. Inventory Controller to:
i) Check above 2 procedures done
ii) Sequence test sheets to make sure all are accounted for.
14. Count Teams Formally Dismissed : only when count is complete AND all queries have been
attended to.
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ii) Variances as a result of incorrect standard setting must be dr/cr to inventory & cost of sales to approximate actual cost as per
IAS2)
iii) So if it was a temporary price rise due to shortages but the price went down again , it must be added to inventory cost for any of
that specific purchase that is still in stock ,for the fin stats, due to condition: only allowed to be used in fin.stats. if it approximates
actual costs though-as a second requirement), but if it is a price rise and half the inventory was sold, the variance for the part that
was sold must be “???written off???how?? “, but only for part still in stock it must be added to the cost of inventories, and if same
inventories were used for manufacture then it must be ‘written off”???what if the manufactured goods are still in stock?.
e) Retail Method (allowed to be used in fin.stats. if it approximates actual costs though-as a second requirement)
7) Pricing of Imported inventory:
a) Rate at TRANSACTION date, not PAYMENT date.
b) Even if rate is different at year end, no change is made to inventory.
2) Misappropriation of assets
a) How to get the goods and how to hide the theft
b) How to get the goods will depend on:
i) Nature of goods: small valuable vs large immovable
ii) Physical control ; limited exits, cameras,etc
iii) Division of duties: custody & recording by same person
iv) Frequency of physical & theoretical reconciliations.the more often the more difficult to steal
v) Controls in other cycles: eg receiving goods(aquisition cycle) , despatching goods(revenue cycle)
vi) How to hide the theft will depend on :
(1) Division of duties-custody & record keeping – presents the BEST opportunity.
(2) Control environment weak.
SUBSTANTIVE PROCEDURES
1) Many of the tests of controls are dual purpose tests
2) Auditors Objective: (all done by substantive procedures)
a) Quantities correct
b) Cost formula correct
c) Reasonableness of write-downs
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d) Cut-off procedures(physical vs records)
e) List of GRN no.s not matched to suppliers invoices by year end drawn up for later use.
3) Year-End procedures:
a) Attendance at inventory count (existence ,completeness,valuation)
b) Post – count procedures :subsequent audit of carrying value (valuation, rights, presentation & disclosure)
4) Inventory Count Attendance: (generally)
a) it is both a test of controls & substantive test.
b) Test of controls: of actual controls for the count itself
c) Substantive tests:
i) Existence : of qty by sheet to shelf tests.
ii) Valuation : condition-damaged/obsolete/slow moving.
iii) Completeness: by shelf to sheet
d) Cut-off procedures(physical vs records)
e) List of GRN no.s not matched to suppliers invoices by year end drawn up for later use.
5) INVENTORY COUNT ATTENDANCE: (METHOD) NB
a) PRIOR:
i) dates & times Liase with client about of count
ii) locations: confirm by enquiry, prior audit papers,visit
iii) admin.planning eg organize staff to attend
iv) written instructions: get a copy of clients instructions to his teams
v) not to be counted: get list of eg: consignment,invoiced but not delivered/collected.(&ask how it is identified physically)
vi) brief audit staff: as to their responsibilities.
b) DURING:
i) Written instructions: observe to check clients instruction are adhered to.
ii) Obsolete/damaged/dusty old packets record item no,details etc to check if it was noted on count sheets as it should have.
iii) Sheet to shelf: make sure all categories all sections & categories are tested.
iv) Shelf to sheet: make sure all categories all sections & categories are tested.
v) Resolve discrepencies & amendment: before end, to be sure amendments entered on sheet after recounted with staff.
vi) Numerical Sequence test: check before & after count to be sure all sheets are accounted for
vii) Exclusions: confirm by enquiry (of counters) &inspection (of sheets) whether consignment/undelivered/uncollected/etc have
not been included.
viii) Pronounce ‘sixtiey’ etc not sixtie for 60, same for 70, 80, etc. to avoid confusion.
c) CONCLUSION:
i) Inspect Inventory Sheets To Confirm That:
(a) Lines drawn through blank spaces. (so items cannot be added)
(b) Alterations/corrections have been signed.
(c) Sheets signed by counters responsible.
(2) Audit Records (create some by)
(a) Copies: of all inventory sheets.(hardcopy or digital)
(b) Observations: as to clients count procedures.
(c) Test Counts Results :of Test Counts by Audit team
(d) Recording damaged/slow-moving/obsolete : inventory.
(3) Record cut-off numbers: for all docs used in inventory & production cycle.
(4) Record GRN unmatched to Supplier Invoices. List of.
4) EXISTENCE:
a) Cut-off proves all that was purchased was included and all that was sold, was excluded.
b) Attend inventory count
c) Analytical review
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1-PERSONNEL Obtain max 1-Payroll Amendment 1- Unnecessary or 1-Requests: for new retain or old dismiss must be from
(Human efficiency from Form.(PAF) unsatisfactory 1-DEPT making request, IN WRITING
Resources) workforce by 2-Employees File. :recruit/retain such 2-Signed by section head , countersigned
control: employees. by sect.
1-Dismissals 2- Dismissal : Incorrect manager,after reference to the budget.
2-Recruitments procedures. 2-Pay Rate / promotions /other service conditions :
3-Wage 3-Unauthorised 1- Decided by Wage Committee/ or Personnel
negotiations amendments to Dept. after
4-Labour employee records. 2-Consultation with interested parties eg
disputes -fictitious add UNION
5 Keep Records - wage rate change representative
for 3-Consider Laws & Regulation : eg min. pay
employees(Accu rate/overtime etc.
rate Complete) 4-Documented + Authorised by body
produce authorizing eg: Wage
clockcards from Committee/ Personell
these. 3-Payroll Amendment Form(PAF) : all above to here +
1-Cross Ref to supporting docs +
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2-Signed by senior Personnell Dept.
3-Regular Review Gaps in file of PAFS :
sequence&validity.
4-Competent trustworthy Personel :
1-use sound Personell Practices
(interview/background
checks.)
5-File Of Each Employee : to be kept incl :
1-copies of relevant PAF’s
2-employment contract
3-performance appraisals & disciplinary
warnings
4-personal details including qualifications
,background info.
2- 1-KEEP VAC record 1-Clock cards 1-invalid Hrs recorded.by 1-Entry & Exit points of Work area:
TIMEKEEPING of valid hrs 2-Batch control sheet eg: 1-limited (preferably just 1)
worked 3-batch register. Fictitious employee 2-protect by turnstile mechanism(counts in/out)
2-Clockmachine Clock for absent friend 3-supervised during clocking periods(watch that no
commonly used Clock in + leave double clock etc.)
3-daily hrs added premises. 2-Clockcard : prepare by Personell Dept only,strictly per
for week & sent to 2-hrs incorrectly added “authorized
payroll for normal / overtime employee list.”
preparation. 3-At end of WEEK : (usual Wednesday Afternoon)
1-agree no. of cards VS list of employees in
section.
2- calculate ordinary time
3- calc. overtime
4- divide into workable batches(25)
5- Do batch control sheet:
a-ID section&week
b-control totals(tot.hrs,no.of cards etc)
c-signature
4-Batches: a- Before batch transferred to payroll section
head must:
1-check calculations
2-authorise overtime( need for overtime to be
confirmed
before it is worked)
3- check & sign batch control sheet\
b- Batch Register : details of batch to register
& then securely
transferred to Payroll Preparation
3-PAYROLL Calc. 1-Clock cards 1-Include fictitious 1-Wage clerk check details of batch & sign register on
PREPARATION: wages&deductions 2-Deduction tables employee receipt from timekeeping.
. From hrs. and 3-Updated List of 2-Use Incorrect/ 2-Wage clerk prepare:
record on payroll. employees Unauthorized pay 1-payroll
(wages journal) 4-Payroll (Journal) rates/hrs/deduction 2-coinage schedule
tables. 3-Recon : this week VS last week
3-Cast & Calculation (no.employees+amounts net)
errors. 4-A RECORD: control totals for overtime & hrs worked
etc.
3-Supervisor or 2nd wage clerk :
1-verify hrs&rates used VS clockcards & employee
lists.
2-verify deductions VS relevant table
3-Reperform calculations & wage recon.
4-Sign
4-Head of Payroll Prep : SIGN 1-payroll 2-recon (week to
week one) after careful review.
5-Cheque for wages: give with 1-payroll 2- recon to 2
cheque signatories who :
1-review for unusual eg large amounts , excessive
overtime.
2-check signatures :for control signatures
3-sign payroll & recon
4- PAYMENT 1-Prepare Pay- 1-Payroll 1-Errors or theft of 1- 2 people to make up wage packets (where there is
PREPARATION packets 2-Payslips & cash during cash allways 2+) (and also “physical” security over cash
&PAYOUT 2-Distribute 3-Paypackets 1-drawing of cash handling tight)
VERY NB: Wages 4-Unclaimed wages 2-making up 2- Delivery of Wages to payout: section head must
3-Unclaimed register paypackets 1- agree no. paypackets to payroll.
wages recording. 3-payment of 2-agree control totals : batch register ot.hrs , no.
employees cards.
2-Theft of Unclaimed 3-sign payroll to show receipt & control procedure
Wages done.
3- Lock away paypackets till payout
4- 2 people min. do payout :independant paymaster &
foreman
5- Employees must:
1-show ID
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2-sign payroll (to show receipt)
3-count & report discrepencies immediately. (tick sheet
on
employment date to say read this- tick each & sign.
6- collect for another person : MAY NOT collect the
paypacket.
7- AFTER payout: foreman & independent paymaster
must :
1-agree all unclaimed paypackets to payroll
2-identify on payroll all employees with unclaimed
paypacket.
3-Unclaimed wage register : fill it in
4-Sign Payroll :to acknowledge this control
procedure.
8- Lock away by paymaster : unclaimed paypackets AND
payroll
9- Collect Unclaimed Wages : show ID + Sign unclaimed
wage
register(not payroll) (it could be a fictitious employee!)
10-After 2 weeks: unclaimed to be a-Banked + b-Copy
deposit slip
attached to register + c-Cross-Ref to entries
11- Reconciliation : unclaimed wage packets to unclaimed
wage
register +CHECK FOR UNUSUAL OCCOURANCES eg
more
unclaimed in one section than another.
POINTS BY LECTURER:
-physical security : high windows + no disturbance allowed
during
the paypacket filling with cash.
-people who will count out cash must declare how much
cash they
have when they walk into the room- if short wages they
must be
searched. & use other people eg creditors or debtors clerk,
not
same ones who prepared the wages. Also someone must
observe
them to make sure they put nothing in their pockets.
-unclaimed: recon to blank spaces on register
5- 1-To record 1-General Ledger 1-penalties due to non- 1-One Single Person to raise & pay deductions :isolate
DEDUCTIONS: liabilities in 2-Payroll (wage payment or late payment responsibility
PAYMENT & respect of journal) or underpayment. so no confusions develop
RECORDING. deductions 3-Cash Payment 2-criminal/civil 2-a strict monthly schedule for :
& settle them in Journal charges due to non- 1-post entries to raise liabilities for deductions
time 4-Return form payment (this is theft) 2-make payments timeously
3-Overpayments : 3-supervisory checks on above activities
losses due to 3- Signing cheques: Payroll Journal & Return forms should
be presented for scrutiny before signing .
4- independent monthly scrutiny of general ledger accounts
for deductions (liability/ creditor account) by the financial
accountant , to be sure they are being cleared
ASSERTIONS:
1) OCCOURANCE : most important one because The Highest risk = overstatement of expense by incl. fictitious payments
2) ACCURACY:
3) CUT- OFF:
4) CLASSIFICATION: in the proper accounts
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5) COMPLETENESS : not normally a risk exept make sure no illegal immigrants and not record wages/ or illegally low wages to those who
need a job.= reportable irregularity + contingent liabilities (fines/penalties/ illegal)
6) DEDUCTIONS: the Liabilities part does not form part of this and is done when “creditors” are audited , not here.
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HOW TO DO A RECONCILLIATION FOR SALARIES AND WAGES AS PER IAS ACC.
STANDARDS IN THE NOTES TO THE FIN. STATS.
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TRANSACTION PRESENTATION
ASSERTION ACCOUNT BALANCES
EVENTS DISCLOSURE
1 COMPLETENESS (ALSO ?
# # #
VALIDITY)
2 OCCURRENCE # #
3 EXISTENCE #
4 ACCURACY # #
5 CUT OFF #
6 CLASSIFICATION (and for
Pres.& Disclosure : # #
UNDERSTANDABILITY)
7 RIGHTS and
# #
OBLIGATIONS
8 VALUATION and
ALLOCATION # #
INTRO:
1. Consists of 3 parts :
a. Raising finance & repayment of principle : eg debentures / equity shares issued/ loans etc.
b. Obligations therefrom : Interest & dividends abligations
c. Usage of these funds : application thereof.
2. Finance Cycle : = audit of capital emplyed section of SFP (equity&liability section).
3. Investment Cycle: = audit of Non-Current Assets in Asset section of SFP.
COMPENSATING CONTROLS
1. PLANNING :
i. Planned by senior, experienced mngmnt.
ii. By Fixed committees eg investment committee -(eg best rates, + decide on investment of surpus funds- not a skelm,
progress report
iii. Use Budgets & cash flows
iv. Exhaustive Consider alternatives – eg best method of raising finance., not hit and run – high interest rate.
v. Actual to Budget compare regularly
2. AUTHORISING :
a. At Highest level ONLY (very few transactions!) – eg BOD or steering committee.
3. IMPLEMENTING “
a. Qualified competent staff only:
b. Large installation eg production line: Treat as a Project & use Project Controls –see ch 8-
c. Share issue: use merchant bankers & lawyers etc.
4. REVIEW & APPROVAL:
a. All transactions MUST BE subject to:
i. Progress Reporting
ii. Compare Actual to Budget / Plan (like recon.)
iii. Internal audit must check it out – for legal/laws/rules etc.
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FRAUD IN THE CYCLE:
1. There are 2 main headings here , as usual it is either :
a. FRAUDULENT FINANCIAL REPORTING:
i. Presents directors with numerous account headings which can be manipulated. Ie : many opportunities to improve fin
stats by working fraudulently.
ii. ALLOWANCES, PROVISIONS , IMPAIRMENTS and FAIR VALUES are of particular concern.
iii. PPE : Equity Reserves VS Add Assets : VALUATION : eg : inflated land property valuation from estate agent.
iv. PPE : EXISTENCE & RIGHTS : fictitious assets
v. PPE : VALUATION : understate depreciation & impairment.
vi. INVESTMENTS IN SHARES : VALUATION : fail to write down where value has dropped , saying no market valuation
is available.
vii. Long term Liabilities : omit them : COMPLETENESS : eg ; record a loan as income , or not capitalizing finance leases.
viii. Long Term liabilities : undervalue : VALUATION : fail to amortise debentures redeemable at a premium.
ix. PROVISIONS /ALLOWANCES : COMPLETENESS : eg environmental damage must be fixed – not providing
x. CONTINGENT LIABILITIES : COMPLETENESS : same, fail to recognize eg pending lawsuit per lawyers estimate of
outcome
xi. SCI : ALL : manipulating SCI remember will cause SFP to be affected.
b. FRAUDULENT MISAPPROPRIATION OF ASSETS:
i. Not much opportunity here except :
1. MAKING UNAUTHORISED USE OF COMPANY ASSETS : EG: COMPUTERS TO RUN PRIVATE ACCOUNTING
JOBS, use assets as security for private loans, directors making unauthorized loans to directors.
2. CASH : fraudulent payments by employees to themselves , made for fictitious stuff by this cycle. – eg
dividends, interest, or assets buy.
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v. See ISA 620 if you engaged an expert
vi. Where ‘meaurement’ incl. forecasts/assumptions (eg private company valuation) then:
1. Assumptions reasonable
2. Appropriate valuation model used
3. Underlying data relevant & reliable
vii. Check data used to do fair value “measure & disclose” is VAC -perform audit procedures to check VAC on this data-
viii. Consider effect of “Subsequent events “on fair values
ix. Written mngmnt representations as to fair values used eg: reasonableness of significant assumptions
x. If needed discuss fair values with those charged with governance ( eg if significant use is made of fair values – lots of)
SIGNIFICANT BALANCES
RISKS
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FINANCING ACTIVITIES : ASSERTIONS
SHARE CAPITAL:
1. Read regulations new companies act 2008 -35-44
2. Statutory&JSE listing requirements for public companies & JSE are onerous and not covered by this syllabus/textbook
3. PRIVATE COMPANIES ISSUE: (not JSE /Public) YOU ARE CHECKING “TRANSACTIONS” HERE – not “ACCOUNT BAL.”!!!!!!
a. OPENING BALANCE: inspect if :prior yrs closing bal= this yrs opening bal.
b. COMPLETENESS:
i. No other share issues not know ; INQUIRE directors if any other shares were issued in the year.
c. OCCOURENCE:
i. Inspect : MOI for : conditions must comply with 2- enough unissued authorized share capital
ii. Special resolution directors issue needed for issue to directors/related/ or nominee UNLESS : 1-pre-emptive right 2-rights
issue-same proportion/terms to all shareholders
iii. Pre-emptive rights ; if all requirements were satisfied –1-inquire directors 2 minutes shareholders meeting 3shareholder
communication.
iv. Minutes BOD: 1-resolution approved 2-price appropriate (S40) 3-quorum+special/ordinary resolutions done right per act
v. Register of shareholders VS GL VS SFP VS minutes
vi. Registrar : lodged with registrar in 1 mnth ?, + fee paid – inspect Notification from minister
vii. Was Payment received ? : check cash book VS bank statement OR other assets recieved for
d. ACCURACY,
i. RECALC : if authorized Issue price = consideration received.
ii. CAST : capital account in GL
e. CUT-OFF :
i. INSPECT documentation correct dates
f. CLASSIFICATION: check ord/pref
g. CLOSING BALANCE: fin stats StChEq amount = stated capital account close. bal.
h. PRESENTATION & DISCLOSURE:
i. INSPECT AFS for
1. : COMPLETENESS Correctly done :
a. Show No. shares issued & authorized
b. Show rights& preferences& restrictions per class
c. Directors issued to
2. OCCOURANCE :Consistent with evidence gained on audit
3. ACCURACY :Amounts,facts,dates,accurate
4. CLASSIFICATION & UNDERSTANDABILITY : correct + wording is clear & understandable
RESERVES:
1. MOSTLY JUST BOOK ENTRIES- SO mostly just : 1- authority obtained? 2-regulations complied?
2. 1 type is very important: PPE –fair value adj. –using revaluation model- direct to equity, not through SCI -!!!
3. Skim:
a. O/B : last yr closing = this yr O/B (check work papers & fin stats)
b. COMPLETENESS
i. MOI INSPECT: rules adhered to eg: N-D reserve for all revaluations etc.
ii. Minutes: authority yes/no for transfers between reserves?
iii. IAS ‘s : accounting treatment of ‘direct to equity ‘ transactions like reval. are appropriate (allowed? – for occourance?)
c. OCCOURANCE:
d. ACCURACY
i. Reasonable : valuations seem reasonable to YOU – estate agents + industry journals
ii. Valuer: qualifications + independence + suitability
iii. Same asset : is it the same one as referred to in valuation
iv. Sale of fixed Property : if reserve comes from here, inpect documents & terms & authorizing signatures & price etc.
v. RECALCULATE : all amounts to ensure amounts transferred to reserve are correct .
vi. SCI to SFP : confirm correct figures moved to SFP from profit – ie not choeked both ways as profit+reval reserve at
same time.
e. CUT OFF : ? skim up
f. CLASSIFICATION : ? skim up
g. PRESENTATION & DISCLOSURE
i. inspect AFS for
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1. COMPLETENESS: per GAAP all movements in reserves disclosed etc.
2. OCCOURANCE: consistent with evidence obtained on audit
3. ACCURACY: amnts , facts details accurate ,per evidence gathered
4. CLASSIFACTION & UNDERSTANDABILITY: appropriate wording & understandable
5. VAL. & ALLOC.: skim
6. RIGHTS & OBLIGATIONS: skim
h. C/B closing balance: trace it from General ledger all reserves to fin stats(in StCHEq for reserves)
DEBENTURE
1. Only for private entities below, for listed entities it is almost like a share issue, requires a prospectus etc etc. all below similar to share
issues.
2. Debenture must be shaown at amortised cost. Thus For a redeemeable at premium one, it works by you say the potion of premium for
this year is part of interest for the year- and also the capital principle amnt increases every year per amortization of premium , so every
year it is worth more!!!(or you owe more !!!). don’t know how this method works see IAS 39
a. O/B : last yr closing = this yr O/B (check work papers & fin stats)
b. COMPLETENESS: inquire directors no other debenture issues that year? y/n
c. OCCOURANCE:
a. MOI :
i. Allowed : Entity Authorised to issue debentures per MOI?
ii. Authority person : Contravened borrowing powers ?y/N – for authority requirements
b. Minutes of BoD : check terms, to whom, number, amount, interest rate – make sure it happened like said by BoD, not
different.
c. Register of debentures: check it is all written in ‘occourance’ as authorized
d. Payment: check deposit slips etc for receipt of correct amount (legally must be paid before an issue can be recorded)
d. ACCURACY:
a. Reperform calcs : make sure payment received is correct
b. SUBSEQUENT MEASUREMENT :
i. Check Interest Calc. : ‘effective interest rate’ is right , used correctly each year to incr. premium part.
ii. Check journals for interest & principle incr. are right
e. CUT OFF: dates : confirm recorded in correct period
f. CLASSIFICATION : debenture liability account :confirm cash posted to only this one
g. PRESENTATION & DISCLOSURE:
i. inspect AFS for
1. COMPLETENESS: per GAAP complete eg : disclose security granted , redemption/conversion conditions.
2. OCCOURANCE: consistent with evidence gathered on audit
3. ACCURACY: amounts facts etc
4. CLASSIFACTION & UNDERSTANDABILITY: appropriate & clear + understandable wording.
5. VAL. & ALLOC.:
6. RIGHTS & OBLIGATIONS:
h. C/B closing balance: trace it from General ledger all reserves to fin stats(in StCHEq for reserves)
i. EXTRA: 3rd party confirmation from debenture holders: interest rate /premium/amount etc. relates to all assertions
FINANCE LEASES
1. These have a asset and liability part to them, as well as interest. So audit aspects for assets + liabilites + transactions all apply here,
overlapping each other.
2. Accounting aspects: the condition for a lease to be recognized eg take ownership/at low price at end/ only lessee can use it specialized
– as well as requiremtns after it is recognized : eg interest /principle , lower of fair value or intertest rates implicit value etc must all be
very carefully studied and taken into account. Probably 1 by 1 ie substantive.
a. O/B : last yr closing = this yr O/B (check work papers & fin stats)
b. COMPLETENESS :
i. mngmnt written representations : that all have been included.
ii. Inspect evidence Unrecorded: minutes, records,steering committee minutes – evidence of unrecorded leases/
wrong classify
iii. Schedule leased assets: enquiry inspect: confirm that operating VS finance types are correctly recorded.
iv. Source of funding assets: enquire where money came from
v. Lease payments : INSPECT : that leases relating to each lease payment has been recorded.
vi. Analytical reiew: current balances VS last yr & lease paid etc.
c. OCCOURANCE:(transactions) + OBLIGATION(acc bal) + EXISTENCE(acc bal) :
a. Finance lease IAS definition: check if it is really a finance lease per IAS
b. INSPECT : contract for details eg, interest ,penalties, terms etc
c. Minutes ; BoD authorize lease
d. MOI : allowed per MOI
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e. OLD finance conditions NEW : ask mngmnt if any old lease conditions exist for leases where ‘new finance’ not allowed
/any more leases until old one paid.-
d. ACCURACY:
a. Initial Recognition : 3 rd party confirmation : that fair value correct recorded
b. Lease payments : RECALC: interest rates, apportionment of principle/interest , current portion of outstanding.
c. Depreciation , leased asset : check correct choice made of lower of usefull life or terms of lease period + residual
value + if component depreciation is applicable or not.+ depreciation method + if impairment may be needed etc.
d. General : cast liability account +
e. CUT OFF: docs : check leases paymenst & interest relate to current period.
f. CLASSIFICATION : any lease costs capitalized confirm correct classify
g. PRESENTATION & DISCLOSURE :
i. inspect AFS for
1. COMPLETENESS: per GAAP complete eg : disclose terms, accounting policies, terms, encumbrances,
reconciliations.
2. OCCOURANCE: consistent with evidence gathered on audit
3. ACCURACY: amounts facts etc
4. CLASSIFACTION & UNDERSTANDABILITY: appropriate & clear + understandable wording.
5. VAL. & ALLOC.:
6. RIGHTS & OBLIGATIONS
i. EXTRA : disclosures for n-c assets are very extensive, and special procedures to check them will probably also be necessary.
h. C/B : closing balance: trace it from General ledger all reserves to fin stats(in StCHEq for reserves)
a. THE PROCEDURES FOR PROVISIONS AND CONTINGENTS ARE VERY SIMILAR , SO THEY ARE THE SAME FOR THE BELOW, although
they are in different categories : ie 1-Contin.=Presentation & Disclosure AND 2-Prov.=Account Balances
b. COMPLETENESS: it is less likely that overstatement will happen than understatement , and it is more difficult to prove
overstatement than understatement. Any of the 2 by directors are fraudulent financial reporting. To check for these;
a. PROCESSES & PROCEDURES for IDENTIFYING :EVALUATE the processes & procedures used by entity to ID these things
b. Provisions: Compare lat YR to This Yr: find any major reductions /changes and confirm
c. Contingent liabilities: Compare lat YR to This Yr:
d. Ask Lawyers about disputes: enquire of them if there are any and the possible outcomes(maybe they missed a provision
here)
e. Minutes : of I meetings etc : eg warranty claims/refund policies/guarantees/closure of divisions etc.
f. SARS Tax correspondence: inspect this to see if there are any here to SARS
g. Bank Guarantee certificate: obtain one for guarantees for loans or discounted bills etc.
h. Written representation: of mngmnt that there are no more.
i. Cash paid from last yrs: see if any big payments this year were made that should have been included last year in these
provisions.(bad record of correct treatment)
c. OCCOURANCE: / EXISTENCE : normally company does not want to misstate this, but could to inflate these account balances
for something (ratios or something)
i. Procedures: evaluate procedures used to identify these by the company concerned
ii. Documents: INSPECT : supporting docs for EACH provision
1. Check if it is a legal/contructive obligation or not (as per definition)
2. Evaluate probability that outflow of resources will be required or NOT or MAYBE
3. Evaluate basis of reliable estimate to see if it is a reliable estimate.
iii. Documents: same as above for each contingent liability ( “possible” obligation)
iv. Process of Authorising Provision/Cont.Liab. : it could count as a good internal control eg BoD must
approve etc.
v. Discuss with directors; any uncertainties they might have about any so far
vi. Legal council or expert advice ; seek if needed eg: industry expert etc.
d. ACCURACY : skim it uit
e. CUT OFF: skim
f. OBLIGATIONS : enquire mngmnt & inspect docs, that the provisions ETC are of the entity and not someone else like
directors/owners etc
g. VALUATIONS: since these are estimates , the accountant should use “ISA540: accounting estimates”.
a. ISA540 requires:
i. ID risk of material misstatement
1. Check GAAP
2. Mngmnt ID’ing of transactions etc that give rise to Acc Estimates.
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3. Mngmnt method of estimation
ii. Review Prior yr acc. Estimates outcomes.
iii. Test & review mngmnt procedures
iv. Test the data used
v. Assess reasonableness – VS last years’ results OR similar estimates elsewhere
vi. Compare to industry standards for these estimates
vii. Get an expert if needed
IAS’S INVOLVED
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SIGNIFICANT BALANCES
RISKS
MAIN ACTIVITIES
PPE
1. Use “assets register” + Schedule of “asset accounts. and Acc. Depr. “ to do your audit.
2. There is the 1- cost model ( carried at cost less Acc depr & Acc. Impair in separate accounts) and 2- reval model (carried at reval
amount) the reval must be done regularly and must be applied to entire class.
3. Depreciation has severe problems too, like each part depreciated separate or not, determine residual value, useful life etc., redetermine
useful life 7 residual every fin year end at least.
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4. USE OF AUDIT SOFTWARE FOR PPE :
a. If computereised fixed assets register:
i. Sample select – by stratification/location/price etc.
ii. Disposals/additions list - list them and compare to clients list he gave you
iii. Scan for Error - conditions:
1. Missing
2. Duplicated
3. Blank fields
4. Negative book value
5. Anomalies: eg Depr. Exceeds Acc depr
iv. Recalc - all casts & extensions
v. Sorted & summarized for comparisons -by class/location/year etc for comparisons
vi. The more info on register- the more to work with.
5. AUDIT PROCEDURES:
a. These are PPE : SFP ACCOUNT BALANCE TYPE ASSERTIONS:
i. EXISTENCE:
1. Extract a Sample of fixed assets register, incl. some additions this year.
2. Physically inspect assets , matching them
3. Corroborating evidence : if very far- drivers wages/documents,licence numbers
4. Conduct a search of unrecorded disposals (mainly PPE)
a. Cash receipts for disposals – make sure they are on the list of disposals
b. Equipment Removed : fixed items obviously removed (leave a gap on floor),make sure they were not
disposed of quietly
c. Enquire New equip replace Old: if so check if old was disposed or not
d. Insurance company : enquire for items removed from list of insured items : check if they were
disposed /
e. Evidence PPE Expenses Reduced: eg licence /other expenses fees not paid anymore etc. – check if
disposed
5. Reconcile: capital budget VS disposals list.
ii. COMPLETENESS
1. Repair s & maintenance accounts : check asset aquisitions not put by error in here , should be caoitalisatruon
etc
2. Physically verify : when checking for EXISTENCE , also do assets VS assets register check all item serial
numbers, decr. Etc are COMPLETE.
3. Cash payments & creditors : check any payments for assets ,they are all recorded as assets , not
otherwise.
4. Inspect lease agreements & enquire of mngmnt : all leases have been recorded as leases & capitalised
iii. RIGHTS:
1. O/B assets change: for assets on O/B check no change has happened 1-enquire mngmnt & 2-BoD
minutes.
2. Additions: check DOC’S that they are in entity’s own name, not another persons.
a. Vehicles : licence & registration docs.
b. Land : title deed & mortgage bonds /sale agreements etc
c. Other assets: sales agreements & invoices.
3. Jeoperdising rights: check not behind with payments ; statements & payment records & supplier contact
4. Leases : inspect lease agreements to be sure capitalized leases are supposed to be capitalized – ie risks and
rewards of ownership have been effectively passed on to your company.
5. Encumbrances : evidence of asset as security : from banks/ minutes/old working papers/loan
agreements/3rd party confirmations.
iv. VALUATION:
1. O/B : open bal. : agree Fin Stat O/B to prior year work schedules/General ledger
2. REPERFORM : casts & extensions in : fixed asset register, summary lists, disposals & acquisitions list
3. REPERFORM : reperform recon of fixed asset register VS General Ledger Deprec. & Acc. Depr. & Assets
accounts
4. C/B : agree Fin Stat to prior year work papers, general ledger
5. Why Nothing said about revaluations / deprec. Methods / etc???
6. DEPRECIATION VALUATION:
a. Policy consistent : written representation from directors – done regularly per IFRS
b. Component method: written representation from directors – done regularly per IFRS
c. Residual values/useful life re-asses: written representation from directors – done regularly per IFRS
d. Res.val & use.lif. re-asses correct: check any reval. Was reasonable
e. Damage write down: when doing physical inspection, check no not in use/damaged assets, should be
written down.
f. Special Circumstances : check if not double shifts all the time- other reasons deprec. may have to be
increased.
g. Physical condition. VS depreciation : check to see if it looks right , sample, eg 4 yrs old
h. Disposals: check if deprec. Method /Useful life/ etc is reasonable
i. Reperform : deprec.: Calc. to be sure accurate, compliance with policy etc.
j. Discuss Procedures with Directors: does fin director review policies etc, reasonableness etc
k. Perform Analytical review: to prior yrs, by grouping, per disposals/additions etc.
7. IMPAIRMENT VALUATION:
a. Should be done each reporting date, all assets, if not revoverable by use or sale – then lower. Reliant
on directors estimate.
b. Evaluate process/method used: by company to do this
c. Supporting docs: check any docs which support estimates for: 1-assumptions made 2- bases/methods
used 3- % rates used.
d. Discuss mngmnt:
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i. Declined too much : any assets which declined faster than normal for some reason – why?
ii. Significant Events affecting eg tech : sudden tech advancement in marketplace could
devalue their assets
iii. Performance bad: if “economic value from use” is very impaired -
iv. Discontinue operations: if “economic value from use” is very impaired
v. Lying idle etc; if “economic value from use” is very impaired
8. REVALUATIONS VALUATION:
a. Calc. of deprec. at reval date, all calc.s and changes here to be checked for correctness (complex)
b. Checkall assets in same class revalued together – per IAS rule
c. Check if cost model/reval model correct policy used – revalue one revalue all
d. Check if done regularly – yearly.
e. INSPECT :
i. Methods /bases used for reval
ii. Qualifactions of valuer
iii. Reasonableness of reval.
iv. Own check – industry journals / estate agent etc / numerous sources for certain classes eg
front end loaders/cars etc value books
b. PRESENTATION & DISCLOSURE : (this one has its own set of ASSERTIONS remember)
i. inspect AFS for
1. COMPLETENESS: per GAAP complete eg : disclose terms, accounting policies, terms, encumbrances,
reconciliations.
2. OCCOURANCE: consistent with evidence gathered on audit
3. ACCURACY: amounts facts etc
4. CLASSIFACTION & UNDERSTANDABILITY: appropriate & clear + understandable wording.
5. VAL. & ALLOC.:
6. RIGHTS & OBLIGATIONS
c. PPE ADDITIONS : “transactions” ASSERTIONS ONLY (very short , “accuracy ,cut off,classification” in just 1
paragraph)
i. OCCOURANCE :
1. Sample authority : check authority for buying in mintes, capital budget, purchase requisitions.
2. Inspect Asset serial no: and description etc , cross-ref / trace to purchase requisition – to see if it is the same
asset
3. To entity/ signed / right asset: check purchase docs : invoice & contract – confirm made out to YOU , is SIGNED
, RIGHT ASSET.
4. Payment made or not : check payment records to see if payment was made or not-( did transaction
occour/valid not cancellable etc)
ii. ACCURACY:
1. Purchase Docs : INSPECT to check correct : price +shipping charges,insurance,import duties
+installation,commissioning cost
2. Imported Assets: REPERFORMANCE: should be raised at spot rate transaction date + shipping/import etc costs
coverted at same spot rate
3. Installation Costs: ucheck capitalized costs are correct: eg not repairs incl. by accident, and correct wages,
reasonableness discuss with fin. director. etc.
4. VAT : check not incl. in cost price unless NOT a vat vendor.
5.
iii. CUT-OFF: INSPECT DATES on all docs for correct period
iv. CLASSIFICATION:
1. “Significant Parts deprec.” Where asset is divded in parts for depreciation etc, check this is correct –
directors/supplier docs
2. Trace source docs to GL : confirm correct posting done classified in correct accounts.
3. Impairment loss VS loss on sale : check that it was not recorded wrong – if impaired it should be impairment
loss, else loss on sale.
d. PPE DISPOSALS “ transactions ASSERTIONS ONLY (very short , “accuracy ,cut off,classification” in just 1
paragraph)
i. OCCOURANCE :
1. Sample authority : check authority for selling in mintes, capital budget, supporting docs
2. Inspect Asset serial no: and description etc , cross-ref / trace to purchase requisition – to see if it is the same
asset
3. Signed /authorized : check selling docs : is SIGNED and authorised
4. Payment made or not : check payment records to see if receipt of payment was or not-( did transaction
occour/valid not cancellable etc)
ii. ACCURACY
1. Fixed asset register calcs. : check these figures for : deprec. Reval , profit/loss on sale ,
2. Accurately transferred : check if correct figures from all Acc DEpr.accounts & other account removed /
amended on disposal
iii. CUT-OFF: check dates in correct periods
iv. CLASSIFICATION: check disposal correctly classified when recorded /(removed) in acc.dep., depr, asset accounts, etc.
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INVESTMENT IN SHARES
1) Investments in bonds, debentures,derivatives - auditing these can almost be regarded as specialist audit knowledge – beyond scope of this
text.
2) The audit takes place in 2 sections: “account balances” – O/B and C/B and their assertions (4 of) and any transactions for the year, and their
assertions(5 of)
3) MAJOR RISK : overstatement by incl. fictitious amounts or overstating
4) .As With Ppe Client Should Supply A List Of investments with info on details of decr,name,numbercost,fair value etc.
5) AUDIT PROCEDURES : ACCOUNT BALANCE : these assertions only
a) COMPLETENESS
i) Compare C/B vs C/B : for any changes from last years C/B there must be a movement for year on the list provided
ii) Written representation mngmnt : that list is complete
iii) Dividends match: match to investments, to make sure all investments recorded
iv) Brokers: get a listing of years dealings from brokers to check inpect no investments are missing.
b) EXISTENCE: goes with “RIGHTS & OBLIGATIONS ” below – same stuff ,put this as one of the headings for it., just separate
here to see.
c) RIGHTS AND OBLIGATIONS :
i) Share certificates:
(1) Count & inspect in presence of client official :1-nominee signed blank transfer docs 2- descr,name,amount,number 3-appear
authentic
(2) OR if electronicly held not paper- permission obtain confirmation from clients brokers
(3) OR if held by BANK or 3rd party- get confirmation letter with details of each share held. + if whether “pledged as security”
ii) Private company DOUbt exists: get confirm with CIPRO or phone company.
iii) Discuss Intention : if mngmnt wants to speculate: classify as trading asset, else as investment.
5. AUDIT PROCEDURES :
a. O/B : opening balance : by inspection prior yrs working papers, agree open balance with last yrs closing balance
b. ACCOUNT BALANCES : (only use acc.bal. assertions )
i. COMPLETENESS:
1. payment records/ minutes/correspondence for misclassified loans , esp. staff&directors
2. directors written request in writing – all loans received by them or related to them person / company , in past
year,even if repaid.
3. Written mngmnt representation – on all completeness of loans advanced
ii. EXISTENCE: nothing said in book -
iii. RIGHTS: nothing said in book
iv. VALUATION : see closing balance below for this one.
c. TRANSACTIONS:
i. NEW ADVANCES:
1. COMPLETENESS:
a.
2. OCCOURANCE:
a. MINUTES INSPECT :: authority to make loans made
b. MOI : powers to make loans made (inlc to directors)
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c. directors loans: solvency/liquity test, special resolution. – sec 45 Comp.Act , see minutes,contract,
correspondence.
d. related party loans: fair & arms length transaction? y/n
e. Payment : INSPECT payment records / bank statement, that loan was actually made.
f.
3. ACCURACY:
a. INSPECT : loan agreement : descr, name, amount, terms etc are same as per GL and records.
b. INSPECT : amount correct raised in ledger
4. CUT-OFF: dates on bank payment records etc, to see in correct period.
5. CLASSIFICATION: skim it uit
ii. REPAYMENTS:
1. COMPLETENESS:
a.
2. OCCOURANCE:
a. Receipt records for eveidence it was recived
b.
3. ACCURACY: REPERFORM : allocation of repayments into interest / principle accounts
4. CUT-OFF: dates on receipt- correct acc period?
5. CLASSIFICATION: REPERFORM posting to confirm correct allocation.
INTANGIBLE ASSETS
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:AUDIT PLAN:
1. Nature:
a. 1-enquiry mngmnt/personnel 2-analytical review 3-confirmation of mngmnt evidence provided .auditor should still enquire if
anything beyond next 12 mnths that could affect, though next 12 mnths is generally the timeframe to consider
b. Auditor can consider certain conditions that indicate a problem as name dbelow AND ALSO vs for each condition any
mitigating factors at the same time. Botyh types are listed below
i. FINANCIAL:
1. Key financial ratios
2. net liability or Net current liability
3. cannot pay loans due soon
4. suppliers&creditors withdraw financial support
5. dividends arreas /discontinuance
6. cannot pay creditors
7. change to cash from credit at suppliers
8. more in textbook
ii. OPERATING:
1. Mngmnt intend to cease / liquidate etc
2. loss key mngmnt without replacement
3. Tech obsolescence of products
4. Emrgence higjly successful competition
5. Cheap imports threat
6. Shortage supplies raw materials
7. Loss major market/franchise/patent etc
iii. OTHER:
1. Non-comliance capital/other statutory requirements
2. Pending Legal proceedings with possible too large penalties
3. Change in tax concessions/banning of product /other legislative etc
4. BEE problems too bad
5. More in textbook
iv. MITIGATING FACTORS
1. Plans eg planned sale of redundant assets/ positive cash flow budget of some sort
2. Support form holding comapnay etc
3. Record of mngmnt resolving similar crisies effectively
4. Subordination / backranking agreements –(credtor refinancing deals)
2. Extent:
a. Depends on risk- if large safe company – very lttle , if small problematic company – much more.
3. Timing:
a. More around fin yr end time – ie conditions then.
AUDIT REPORT:
1. AUDIT CONCLUSIONS:
a. Decide if Material uncertainty exists of going concern overall
b. If it exists it must be Disclose in fin stats
c. Proper disclosure:
i. ADEQUATELY DESCRIBES situation in notes.
1. State clealy there is GOING CONCERN PROBLEM
2. State clearly MNGMNT PLANS TO RESOLVE
2. AUDIT REPORT:
i. STANDARD AUDIT REPORT : UNMODIFIED
1. NO PROBLEM WITH going concern
ii. UNQUALIFIED AUDIT REPORT : UNMODIFED -WITH EMPHASIS OF MATTER-
1. Going concern assumption IS appropriate but
2. Material uncertainty exists
3. It is properly disclosed
4. EMPHASIS OF MATTER : 1-must highlight existence of material uncertainly AND 2-raw attention to it in the
notes.
iii. QUALIFIED AUDIT REPORT
1. Going concern basis IS appropriate
2. Material uncertainly exists
3. HAS NOT been properly disclosed in notes
4. OPINION : here an opinion is given , not an emphasis of matter
a. “EXCEPT FOR “ opinion : this is given if the material uncertainly is not so pervasive that it requires an
OPINION to state what exactly is not considered cool by the auditor.
b. “ADVERSE OPINION ” where material uncertainlty is too pervasive, then this opinion is given – if then
fin stats will be utterly misleading , you must give this opinion (there are 2 situations for this one
either this or if they may NOT be prepared on going concern basis but have been , see 2 below)
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1. Has he the financial substance to do this- what if he goes insolvent – what then? His creditors can claim the
debt
2. Was value given by the debtor to creditor yet? Or not yet? It could be worthless
iv. Reversing the subordination agreement: is there a possibility it can be reversed by the creditor for some reason
(integrity of creditor in what he says and does)
v. Disclosure : this must be disclosed in fin stats , that there is a backranking agreement and this is why it is still a going
concern, not bankrupt
vi. Size : is the amount of the agreement large enough to help the company continue and to recover
vii. Documents : a copy of contract to be kept by auditor, original to be kept by ‘debtor to creditor’ – ie the troubled entity
must keep original in his hands!
viii. Pledged as security already : the creditor may already have pledged the owed amount as security to some other
company – check up.u
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8. IINTERNAL AUDIT:
a. Communication – 1-free 2- regular 3-access to his docs etc
b. Due prof care : 1- manuals, docs, programs, policies etc 2- planned , supervised,reviewed,documented
c. Technical competence : 1- supervisor 2- others skills etc
d. Objectivity : 1- report to ceo or just a accountant 2- status- objective & seriously taken 3- not do normal accounting work 4-how
musch mngmnt acts on their work - listens
Expert:
1-needed to use one y/n
2-qualifcations & body
3-undersatnding of field by auditor – learn
4-Written agreement 1- work to be done 2- communication needs to audiotor 3- whao does what/ team involved or not etc 4-need to
observe confidentiality requiremnts
5-Evaluate adequacy : 1- reasonable 2-data used 3- consistent orher audit eveidence 4- relevance of methods & assumptions used by
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