Audi 201 and 202 and 301 and 302 Auditing Notes

1 1 | P a g e Auditing Notes AUDI 101

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.!

TEXTBOOK USED ETC: 11

OWN QUESTIONS AND ANSWERS 12EFT : Electronic funds transfer 12

Aud 301 – 13CH 2 – CODE FOR PROF. ACC 13Ch 3 companies act 13

Sec 48 company or subsidiary aquiring companies shares 13SEC 64 Meeting quorum and Adjournment 13SE 65 Shareholders Meetings 13

Going concern : 13

new 2011 questions: 13

TERMS: 15

INTRODUCTION 16

CHAPTER 1 :INTRODUCTION TO AUDITING 17

Definitions: 17

WHAT is an AUDITOR?: 17

#### 3) WHY IS THERE A NEED FOR AUDITORS ?: 181-Split between Mngmnt & Ownership: 182-Confidence in Financial Information. 183-Accountability:(directors to company / companies for treatment of environment ) 18

ASSURANCE AND NON-ASSURANCE ENGAGEMENTS. 18#### 5) ASSURANCE ENGAGEMENTS: 18#### also 5) NON-ASSURANCE ENGAGEMENT (do not meet definition of an – or do not contain the Elements) 18

Reasonable Assurance. 18

Limited Assurance Engagements: 19

####7) Statutory and Non-Statutory Engagements. 19

####8) Auditing postulates. 8 of by mautz & sharaf in philosophy of auditing 1961 19

The accounting profession : 20

Accounting bodies in sa 20

pronouncements which regulate the profession. 20

The financial statement audit engagement. 20Introduction. 20A MODEL OF INDEPENDANT AUDIT OF FIN STATS ARISING OUT OF COMPANIES ACT (STATUTORY AUDIT) 20

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2 2 | P a g e Auditing Notes AUDI 101The roles of the various parties 21

Role of companies act. 21#### 9) assertions: 21Duties and responsibilities of an auditor: 21SUMMARY: 22

CHAPTER 2: PROFESSIONAL CONDUCT 23

definitions 23

INTRODUCTION 23the ifac code of ethics 23General guidance: Ethics and Professional Conduct 23The Public Interest 24Pronouncements relating to ethics and professional conduct in South Africa 24

THE IFAC (SAICA) CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS 241) PART A - GENERAL APPLICATION OF THE CODE 24

METHOD OF IDENTIFYING THREATS AND DEALING WITH THEM: 25

PART B PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE 26#### 3) SECTION 210 PROFESSIONAL APPOINTMENT 26SECTION 220 CONFLICTS OF INTEREST 2/13 26SECTION 230 SECOND OPINIONS 2/14 26#### 4) section 240 FEES AND OTHER TYPES OF REMUNERATION 27SECTION 250 MARKETING PROFESSIONAL SERVICES 2/16 27#### 5) SECTION 260 GIFTS AND HOSPITALITY 2/16 27#### 6) SECTION 270 CUSTODY OF CLIENT ASSETS 2/17 27SECTION 280 OBJECTIVITY — ALL SERVICES 2/17 27#### 7) SECTION 290 INDEPENDENCE - ASSURANCE ENGAGEMENTS 2/17 27

PART C - PROFESSIONAL ACCOUNTANTS IN BUSINESS 28

PART d - PROFESSIONAL ACCOUNTANTS IN SOUTH AFRICA 29Definitions: 29

THE CODE OF PROFESSIONAL CONDUCT of the IRBA 2/46 30

CH 3 STATUTORY MATTERS 31

Companies Act 2008: 31SEC 1 Definitions: 31SEC 2 related & interrelated persons and control 31SEC 3 subsidiary relationships 31Sec 4 Solvency and liquidity test 31SEC 8 CATEGORIES OF COMPANIES: 31CHAPTER 2 of 2008 Companies ACT.: 31Sec 11 : Criteria for names of companies : 31SEC 13 : rights to incorporate a company : 31SEC 14 registration of a company 31SEC 15 MOI 32SEC 16 AMENDING the MOI: 32sec 19 legal status of companies : 32SEC 21 pre- incorporation contracts 32sec 22 :Reckless Trading prohibited. 32SEC 23 registered office : 33sec24 form and standards of company records. 33SEC 26 Access to company records: 33SEC27 Financial year of company 33Sec 28 accounting records: 33

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3 3 | P a g e Auditing Notes AUDI 101SEC 29 financial statementS 33SEC 30 : Annual Financial Statements 33Sec 32 USE of company name & registration 34SEC 33 Annual return 34SEC 34 Additional accountability requirements for certain companies 34sec 35 LEGAL NATURE OF COMPANY SHARES & REQUIREMENT TO HAVE SHAREHOLDERS 34SEC 36 authorisation for shares 35SEC 37 preferences , rights, limitations and other share items. 35Sec 38 issuing shares 35Sec 39 subscription of shares: 36Sec 40 consideration for shares: 36SEC 41 shareholders approval f0r issuing shares in certain cases : 36SEc 43 Securities other than shares 36SEC 44 financial assistence for subscription of securities. 36SEC 45 loans or other financial assistance to directors 36SEC 46 DISRIBUTIONS MUST BE AUTHORISED BY BOARD 37SEC 47 capitalization shares 37Sec 48 company or subsidiary aquiring companies shares 37Sec 49 securities to be evidenced by certificates or uncertificated 37Sec 50 Securities register and numbering 37Sec 51/52/53 registration and transfer of certificated and uncertificated securities. 37Sec 55 liability relating to uncertificated securites 37SEC 57 INTERPRETATION AND RESTRICTED ApPLICATION OF THIS PART: 37sec 58 shareholders right to be present by proxy: 37sec 59 record day for determining shareholders rights : 37Sec 60 shareholders acting other than at meetings 37SEC 61: Shareholders Meetings 38SEC 62 NOTICE OF MEETING : 38Sec 63 conduct of meetings 38SEC 64 Meeting quorum and Adjournment 38SEC 65 Shareholders Resolutions 38SEC 66 BoD, Directors and Prescribed Officers. 39Sec 67 First Director or Directors 39Sec 76 : Standards of Directors Conduct : 39

cc act 40

auditors act 40

CHAPTER 5 : GENERAL PRINCIPLES OF AUDITING.(CH 5 IN BOOK) 46

internal control 46Introduction 46Definition of Internal control. 46

definition (per SAICA booklet :'guidance for directors:reporting on internal controls') 46four ASPECTS of internal control from above definition. 46(ISA 315). 5 components of internal control (in ch 7) 46

internal control objectives. 46limitations of internal control. 46the accounting system 46who is interested in what? 46The characteristics of good internal control. 47

audit evidence. 48Sufficient appropriate evidence. 48

1) sufficient evidence: 48appropriate evidence. 48Influenceing factors in determining whether sufficient appropriate evidence has been obtained. 48

Financial Statement Assertions: 48DIAGRAM OF ASSERTIONS: 49

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4 4 | P a g e Auditing Notes AUDI 101EXAMPLES OF ASSERTION CLASSIFICATION IN PRACICE: 49

The Auditors toolbox: 50TESTS OF CONTROLS 50substantive procedures. 50

audit sampling 51Definitions: 51Intro. 51steps in the sampling exercise. 51

CHAPTER 6 : AN OVERVIEW OF THE AUDIT PROCESS. 53

After completion of this tutorial letter you should be able to: 53

Stages of the audit process: (know whole chapter per lecturer ) 53Stage 1 : Preliminary engagement activities: 53stage 2 : Planning: 53Stage 3 : putting audit -Plan and strategy - into action. 53Stage 4 : Evaluate & conclude. 53

How the stages are linked: 53

role of ISA's : International standards on auditing 54

DETAILS OF EACH STAGE OF THE AUDIT PROCESS: 54Stage 1 : Preliminary engagement activities: 54(ii) stage 2 : Planning: 56III ) Stage 3 : putting audit -Plan and strategy - into action. 58Stage 4 : Evaluate & conclude. 58

CHAPTER 7: IMPORTANT ELEMENTS OF THE AUDIT PROCESS. 60DEFINITIONS: as per isa 315 60RISK ASSESSMENT PROCEDURES 60

The 4 important elements dealt with in this chapter, each one gone through by unisa, : 60

Important Element 1 of 4 : AUDIT RISK. 60the risk Based approach to auditing 60DEFINITIONS of AUDIT RISK: (see glossary in saica book) 60The components of audit risk: 61

1 -Inherent Risk : (IR) 612- Control Risk : (CR) 613- Detection Risk (DR) 61

Risk at financial statement level and at assertion level: 61Risk and materiality 61Assessment of audit risk by the auditor 62levels of risk 62

Important Element 2 of 4 : THE CONCEPT OF MATERIALITY. see IAS 320 64INTRO: 64the nature of materiality 64planning materiality and final materiality 64planning materiality 65

Each audit firm uses its own type of materiality planning: either one of the following: 65Setting Planning Materiality levels : 65the 4 Factors to be considered when quantifying planning materiality 65

Final materiality 65The Auditor must do the following to make a final materiality decision:. 65Factors to be considered in evaluating unresolved audit differences (in book , not TUT or IAS) 65

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5 5 | P a g e Auditing Notes AUDI 101CONCLUSION 66

Important Element 3 of 4 : UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT: 66THE ENTITY AND ITS ENVIRONMENT. see ias 315 : it gives all this in detail! bit by bit, also in the ‘a1 etc ’ appendix part of ias 315 66Internal Control of Entity .( when understanding entity & environment) 67

component 1 : the control environment 67COMPONENT 2 : ENTITYS RISK ASSESSMENT PROCESS : 67Component 3: Control Activities: (internal controls) 67Component 4: Monitoring of Controls: 67COMPONENT 5: THE INFORMATION SYSTEM: 67

Significant risks : .( when understanding entity & environment ) 68Communicating with ‘governance’ and management .( when understanding entity & environment) 68DOCUMENTATION : ( when understanding entity & environment) 68

Important Element 4 of 4 : THE AUDITORS RESPONSIBILITY TO CONSIDER FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS. 68INTRO: 68DEFINITIONS (LECTURER SAYS KNOW THESE WELL) 69THERE ARE ONLY 2 KINDS OF FRAUD TO BE CONSIDERED IN AUDITS : 69respoNsibility of management and those charged with governance: (exactly in IAS 240) 69respoNsibility of the auditor (exactly in IAS 240) 69OBJECTIVE OF THE AUDITOR: (exactly in IAS 240 69DURING ENGAGEMENT TEAM DISCUSSION AS PER IAS 315: 70risk assesment procedures to do by auditor exactly put in ias 240 .16-24 70responses to the risk of material misstatement due to fraud (DO LEARN THIS as per lecturer) 70

At Financial Statement level: (in IAS240 EXACTLY vertabim!!!) 70At Assertion level: (in IAS240 EXACTLY vertabim!!!) 70Management Override: (in IAS240 EXACTLY vertabim!!!) 70

Evaluation of Evidence: 70Management Representations to be gotten in writing : (in IAS240 EXACTLY vertabim!!!) 71feel UNABLE TO CONTINUE ENGAGEMENT 71TO BE COMMUNICATED TO MNGMNT 71TO BE COMMUNICATED TO AUTHORITIES 71

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) 71

intro: 71fraudulent financial reporting: 72fraud risk factors relating to misstatements resulting from misappropriation of assets: 72

CHAPTER 8: COMPUTER AUDIT THE BASICS. 74

COMPUTER AUDITING 74iNTRO: 74COMPUTER ENVIRONMENTS: 74A BRIEF DESCRIPTION OF DIFFERENT COMPUTER ENVIRONMENTS: 74INTERNAL CONTROL IN COMPUTERISED ACCOUNTING SYSTEMS 75FACTORS PECULIAR TO COMPUTERISED SYSTEMS WHICH THE AUDITOR SHOULD BE AWARE OF. 75

COMPUTER AUDITING 75DEFINITION OF A GENERAL CONTROL: 75CATEGORIES OF GENERAL CONTROLS 75CONTROL ENVIRONMENT AND SECURITY POLICY: 76ORGANISATIONAL STRUCTURE AND PERSONNEL PRACTICES 76STANDARDS AND STANDARD OPERATING PROCEDURES 77SYSTEMS DEVELOPMENT CONTROLS (NB know very well) 77program change controls 77p 78

APPLICATION CONTROLS: 78iNTRO: 78Definitions: 78

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6 6 | P a g e Auditing Notes AUDI 101input, processing, output: 78PROCESSING METHODS: 79APPLICATION CONTROL FRAMEWORK : MASTERFILE AMENDMENTS 79NB 79APPLICATION CONTROL FRAMEWORK : INPUT 79APPLICATION CONTROL FRAMEWORK : PROCESSING 80APPLICATION CONTROL FRAMEWORK : OUTPUT 80MENU AND DESCRIPTION OF CONTROLS above: 80summary 82

CAATS : COMPUTER ASSISTED AUDITING TECHNIQUES (SUMMARY –NOT NB) 82HOW DO CAATS FIT IN AUDIT PROCESS 82SYSTEM ORIENTATED CAATS 82DATA ORIENTATED CAATS 82FACTORS WHICH WILL INFLUENCE DECISION TO USE CAATS 82AUDIT FUNCTIONS WHICH CAN BE PERFORMED USING DATA ORIENTATED CAATS 82APPENDIX 1: ILLUSTRATION OF WHAT A DATA ORIENTED caat CAN DO: 83

THE USE OF MOBILE INFORMATION &COMMUNICATION TECHNOLOGY ON AUDITS. 83WHAT THIS TECHNOLOGY CAN DO 83SECURITY IMPLICATIONS OF USING MOBILE INFORMATION AND COMMUNICATIONS TECHNOLOGY ON AUDITS. 83Security of clients files: 83

CHAPTER 9 : NETWORKING.(CH9 IN BOOK) 84

INTRODUCTION: 84

Trends in IT 84

Networks 84

Definitions: 84

Audit Implications of Networks: 84

databases 85Definitions 85

audit and control implications: 85

Electronic Messaging systems 85Audit and control implications of EDI: 85EFT : Electronic funds transfer 86

THE INTERNET 86Risks and controls:trading on the internet: 86

Computer bureaux 87Audit implications: 87

VIRUS 87CATEGORIES of VIRUS: 87Kinds of 87AUdit and control implications: 88

CHAPTER 10 : REVENUE AND RECEIPTS CYCLE 89

ACCOUNTING SYSTEM AND INTERNAL CONTROLS: 89INTRODUCTION: 89Account balances: 89

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7 7 | P a g e Auditing Notes AUDI 101DOCUMENTS USED IN THE (Revenue+receipts)CYCLE 89UNDERSTANDING THE CONTROL ENVIRONMENT: 89Business risks 89CHARATERISTICS OF GOOD INTERNAL CONTROL 89FLOW CHARTS AND DESCRIPTION OF THE CYCLE 90Auditing the CYCLE: 91financial statement assertions -in this cycle-(Isa 500) 92Important accounting aspects : specially for this cycle 92Fraud in the cycle 92TEsts of controls and substantive procedures 93tests of controls 93substantive procedures 93

DIAGRAM OF ASSERTIONS: 94substantive procedures for the audit of debtors: 94

Use of audit software (substantive procedures) for debtors 95substantive procedures for auditing bank/cash 95

CHAPTER 11 : ACQUISITIONS AND PAYMENTS CYCLE: 97

The accounting system and internal controls: 97documents in the cycle: 97characteristics of good internal control: 97flowchart and description of cycle 97

auditing the cycle: 98Intro. 98Financial statement assertions and this cycle 98FRAUD in the cycle 99tests : 99TESTS OF CONTROLS: 99Substantive Procedures: 99dual purpose tests 100creditors balance (trade) performing substantive procedures on : 100Use of audit software (substantive procedures) for creditors balances 101

CHAPTER 12 INVENTORY AND PRODUCTION CYCLE 102

ACCOUNTING SYSTEM AND INTERNAL CONTROLS: 102INTRODUCTION: 102Characteristics of the cycle 102Documents in the cycle 1023 Objectives of the cycle 102Risks of the cycle 102Auditing the cycle: 105

Financial Statement Assertions 105Important accounting aspects –ias2 –inventories 105

fraud in the cycle: 106tests of controls and substantive procedures: 106

Tests of controls 106substantive procedures 106POST INVENTORY COUNT PROCEDURES: (bit nb sort of) 107the use of audit soft ware (substantive testing) 108

CHAPTER 13 PAYROLL AND PERSONEL CYCLE 109

accounting system and internal controls 109Introduction: 109Documents used in the cycle: 109characteristics of good internal control: 109

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8 8 | P a g e Auditing Notes AUDI 101flowchart & description of cycle : 109

Auditing the cycle 111introduction 111Assertions: 111fraud in the cycle 111

audit procedures: salaries & related accounts 111audit procedures :Wages & related Accounts: 112

the use of audit soft ware (substantive procedures) 113HOW TO DO A RECONCILLIATION FOR SALARIES AND WAGES AS PER IAS ACC. STANDARDS IN THE NOTES TO THE FIN. STATS. 114

FINANCE AND INVESTMENT CYCLE CH14 115DIAGRAM OF ASSERTIONS: 115

INTRO: 115

CHARACTERISTICS OF THE CYCLE 115

COMPENSATING CONTROLS 115

FRAUD IN THE CYCLE: 116

THE AUDIT PLAN FOR THE CYCLE 116

AUDITING FAIR VALUE: 116

AUDIT PROCEDURES – FINANCE CYCLE 117KNOWLEDGE OF THE BUSINESS: 117SIGNIFICANT BALANCES 117Documents AND RECORDS 117risks 117FINANCING ACTIVITIES : ASSERTIONS 118SHARE CAPITAL: 118RESERVES: 118DEBENTURE 119LONG TERM LOANS 119FINANCE LEASES 119PROVISIONS CONTINGENT LIABILITIES & CONTINGENT ASSETS: 120

AUDIT PROCEDURES: INVESTMENT CYCLE 121Knowledge of business here 121IAS’S INVOLVED 121SIGNIFICANT BALANCES 121Documents AND RECORDS 122risks 122Main activities 122ppe 122INVESTMENT IN SHARES 124INVESTMENT IN GRANTING LONG TERM LOANS 125INTANGIBLE ASSETS 126

CH 15 GOING CONCERN & FACTUAL SOLVENCY: 127

AUDITORS INTEREST IN GOING CONCERN : 127

:AUDIT PLAN: 127:OBTAINING INFO ON GOING CONCERN:*********** 127MITGATING FACTORS evaluating 128audit report: 128

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9 9 | P a g e Auditing Notes AUDI 101factual vs commercial insolvency 128

reliance onother parties 130

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TEXTBOOK USED ETC:TEXTBOOK USED ETC:AUDITING NOTES FOR SOUTH AFRICAN STUDENTS : JACKSON AND STENT : LEXIS NEXIS PUBLISHERS 2000 6TH EDITIONGRADED QUESTIONS ON AUDTING GOWAR & JACKSONPOOPEDI

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OWN QUESTIONS AND ANSWERSOWN QUESTIONS AND ANSWERS1) A SUBJECT MATTER: Eg: Financial Position or Results of operations 2) WHAT IS STATEMENT of changes in equity and Cash Flow Statement? : fin position or fin performance ?3) Assertions: account balances,pg 5/13 eg valuations &allocation ;does this heading include for lower down allocation eg in journal level , so is it too much in repairs ,or too much

in vehicles and not machines,BEFORE it all gets to Inc.Stat heading of TOTAL repairs + maintenance.4) Are creditors (from Account Balances) Rights or Obligations or Both? How?(no rights – only obligations!)pg 5/135) Do assertions form the 'BASIS' of the fin stats.6) Ask where : duty of fin acc. to ensure best capital structure : find best interest rates of all banks, each month,esp. special rates for large sums / personal atttention. 7) (2)how do you find the current usury rates for b2b and b2c. (are they different? Where and how?)8) Can you segregate backwards ; ie: 2= executing-sales clerk takes order 1= credit controler authorise 3= custody= store clerk picks order and sends out. (or what is execute =

delivery note made up + or delivery man checks order+or security guard check +or not storeman does stock count– which number do these fit into)9) Assertions :Account balances +classes of transactions&events ;?difference is it –Bal Sheet + Income Stat. ONLY or ?10) Presentation& disclosure pg5/12 –what is this . Also the example :'contingent liabilities'is this a 'note' or just Creditors/ –ONLY in NOTES or also general format of balance

sheet,methods used in journals+ledgers etc?11) What about pg 5/13 assertions –disclosure and presentation- occourance and rights and obligations- shouldnt these 2 be separated and what is rights and obligations here?12) Pg 5/13 3.3.4 accuracy and valuation : should this be broken up into accuracy and valuation and allocation? Why does this (former) heading not appear in table below this??13) It seems assertions not very exactly classified- why pg 5/16 4.3 transactions= presentation&disclosure and not classification&understandability. Is measurement = accuracy. Is

classifiction & UNDERSTAND only for presentation/disclose not for transactionas/14) Is pg 5/19 -18 sampling risk mixed up where two types give explanation- visa versa for 1 st test of controls thing maybe ??15) Is Gov. Audit Statutory or Not : Answer : YES16) What is ISA stand for eg ISA 506 Answer : international standards on auditing :17) ACCESS CUSTODY CONTROLS:

(a) Information =ASSET :eg destroy debtors masterfile,make electronic payments, etc.(b) info can be regarded as an asset which must be controlled/guarded in same way(c) Computers can enhance : this by features eg:??? regular mini – stock counts (cycle counts)? ???to recon theoretical to actual. How does this work

between ????18) When an auditor comes to check your stuff: how should fin accountant treat the following issues:

a) How do you ask if the software used was thoughtroughly tested by a computer audit specialist?wont corrupt your files.can you ask to phone some of his other clients to ask if no problems?i) Are any CAATS notorious / or any specific procedures/ notorious for causing a problem.

b) How do you grant only read accessc) What should one watch out for /some pointers on how to treat an audit –

i) with a computer audit(eg: corruption of files )ii) with other type of audits.

SEMESTER II

Q1- what is yellow highlight below:ie: ”client held”

EFT : ELECTRONIC FUNDS TRANSFER1) 2 Important points to remember with EFT:

a) It is Transfer of CASH : in a flash – so bad controls =gone.b) 1 function in a CYCLE: eg wage cycle – all controls contribute to VAC of payment.

2) Whatever the system : EFT payments should be in 4 steps:(eg for a wage payment system)a) MASTERFILE AMENDMENTS:

i) Any amendments to it must be VAC – V=not ficticious employee A=no errors on account details of employee C-…..b) PREPARE THE EFT PAYMENT ( before the payment):

i) Payments to be made must be VAC : (1) V= fin.Accountant must authorize it –AFTER CHECK supporting DOCS etc.(2) A=fin.Acc should TEST COMPUTATIONS on payroll before authorizing.(3) C=fin Acc. Should CONFIRM NO. OF TRANSFERS = No. of employees.(4) NOTE: just examples- the full range of controls to be effected befor payment is in the ‘Cycle’ chapters.

c) EFFECT THE PAYMENT: d) AFTER THE PAYMENT: Controls to ensure that transfers actually made WERE VAC.

i) System MUST supply an AUDIT TRAIL of all EFT’s made to date.(Hardcopy or Onscreen)ii) Audit TRAIL TO BE REVIEWED BY SENIOR personnel and tied back to “client held” documentation.

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 Receipts

1-bank deposit slip2-CRJ3-DL4-GL(?remittance list/receipts issued/customer remittance advice)?

1-deposits not recorded/or timeously2-recorded deposits may (a)inaccurate (b)overstated(fictitious) (c)cr to wrong debtor

1-CRJ daily by date & number from receipts (if rec. issued)2-Queries from debtors : by person independent of 1’debtors’ & 2’banking&recording of cash functions.’3-recon1 bank statement TO cash book mnthly + independentof banking&recording employee + reviewed by senior official.4-recon2 CRJ supervisor (a)CRJ vs gaps 1dates 2sequential (b) test CRJ to DL5-recon3 DL to GL control acc. Independent employee 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?12

13 13 | P a g e Auditing Notes AUDI 1012. 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 ACTSEC 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 OR2.2. 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?

NEW 2011 QUESTIONS: 1) 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 IESBAa) IAASB- international auditing and assurance standards board formulate the: ISQC’s etc.b) IAESB: international accounting education standards board – formulate all education for accounting stuffc) 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 boarde) Where does IFRS etc come into this???

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 engagementsb) ISAE- Assurance angagementsc) 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.

(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.

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(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: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 ,correct5) Cycles of company.( in duty segregation)6) Function s 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 consideration15) 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 procedure21) 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 ledger24) Accumulate : costs eg direct labour and materials, to each specific account by journalizing it for job costing or std.costing

25) A nalogous /əˈnaləgəs/Adjective1. 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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INTRODUCTIONINTRODUCTION1. 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 sections3. 2/3 tests +3/4 assignments4. 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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CHAPTER 1 :INTRODUCTION TO AUDITINGCHAPTER 1 :INTRODUCTION TO AUDITING

-------------------------------------------------------------------------------------------------------------------------------------Balance Sheet

Cash Flow Statement

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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 users1.1.1.5. 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 includes2.1. - a questioning mind,2.2. 2 being 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 accountant2 expresses a conclusion 3 designed to enhance the degree of confidence 4 of the intended users5 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 what2- Enhance whos confidence 3-What do they do 4 anything else might want to add

a. EXTERNAL AUDITORSi. 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. AUDITORSi. 1-Independent of gov. dept. audited – 2 enhance senior Gov. confidence in lower -

d. FORENSIC AUDITORSi. 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

6. COMMON ESSENTIAL CHARACTERISTIC THREAD RUNNING THROUGH : 1. Characteristic of INDEPENDENCE. …….if not independent=NOT A VALID AUDIT.

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Income Statement

Statement of Equity

18 18 | P a g e Auditing Notes AUDI 1017. OTHER ESSENTIAL CHARACTERISTICS: IFAC code ethics for Prof. Accountants.

1 INTEGRITY :STRAIGHTFORWARD , HONEST , moral2 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 &REGULATIONS , AVOID BEHAVIOR which discredits the profession.

#### 3) WHY IS THERE A NEED FOR AUDITORS ?: There are 3 reasons:

1-SPLIT BETWEEN MNGMNT & OWNERSHIP: 1) Owners -Management split –need Auditor to verify : truth,correct,fair presentation for owner.(owner not time/expertise to do it)as business evolved …

2-CONFIDENCE IN FINANCIAL INFORMATION. 1. Investors in businesses that fin info is reliable2. Gov. can trust Fin Info to set the tax rate equitable basis, run economy3. Investors direct toward needs which?-risk/return4. Develop economy as a whole- ensure funds go to sound mngmnt,strong productivity,sound FinPos5. Inspire confidence in how gov. handles its finances

3-ACCOUNTABILITY:(DIRECTORS TO COMPANY / COMPANIES FOR TREATMENT OF ENVIRONMENT )1. Directors to company etc –Gov. to taxpayers – Companies for treatment of Environment etc + SOUND CORPORATE GOVERNANCE.

ASSURANCE AND NON-ASSURANCE ENGAGEMENTS. 1.1. #### 4) OBJECTIVE OF AN AUDIT OF FINANCIAL STATEMENTS : (IAS 200.02)- “ is to enable the auditor to express 1-an opinion

on whether the 2-financial statements are prepared ,in all 3-material aspects,in accordance with an 4-identified financial reporting framework. Per lecturer.

1.2. ISA 200 warns :It is not an assurance of the future viability of the entity1.3. 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 stats1.3.1.1.2. Does not guarantee future viability of the entity1.3.1.1.3. 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 degree1.3.1.3.1. Use of testing1.3.1.3.2. Inherent limitations of Accounting & internal controls1.3.1.3.3. Persuasive rather than conclusive1.3.1.3.4. Subjectivity of AUDITORS work

1.3.1.3.4.1.Obtaining audit evidence – planning audit in different way1.3.1.3.4.2.Conclusions he then made (each makes own conclusion)

#### 5) ASSURANCE ENGAGEMENTS: 1) As per International Framework for Assurance Engagements :An assurance engagement is one in which”

“ the professional accountant expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party ,about the outcome of the evaluation or measurement of a subject matter against the criteria “ + it must contain all the elements of an assurance engagement.

2) Elements of an Assurance Engagement.: (1) THREE PARTY RELATIONSHIP :1-Prof. accountant 2-Responsible Party 3-Intended User

(a) Eg: 1-registered auditor 2-directors responsible for AFS 3-shareholders(2) A SUBJECT MATTER: Eg: Financial Position or Results of operations (3) SUITABLE CRITERIA : Eg: International Fin. Reporting Standards (IFRS)(4) SUFFICIENT APPRORIATE EVIDENCE : Eg: evidence needed to conclude Fin Stats free of material misstatements(5) WRITTEN ASSURANCE REPORT : Eg: The Audit Report on Fair Presentation.

3) Examples :Assurance Engagements : a) Audit of Fin Stats : The Registered auditor gathers sufficient appropriate evidence to be in a position to pass an opinion on whether the directors ,who are responsible for

the AFS , have applied the IFRS standards appropriately in presenting fairly, the fin pos fin perf. and cash flow info.b) Other types: 1-effectiveness of internal control system ( there are criteria/standards) 2-COMPLIANCE WITH SARBANNES-OXLEY ACT.

#### ALSO 5) NON-ASSURANCE ENGAGEMENT (DO NOT MEET DEFINITION OF AN – OR DO NOT CONTAIN THE ELEMENTS)

a) Where it does not meet the definition of or does not contain the elements of an assurance engagement, then it is automatically called a non-assurance engagementb) So generally ,where does not :enhance credibility, and pass an opinion , but rather perform a task eg:c) Eg: no 3rd party involved , or client does not require assurance, or no suitable criteria/benchmarks.d) Eg: Tax Return , or compile(collect+classify+summarise) certain info. Etc,efficiency,correct sales strategy,

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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 2004) #6) THE INHERENT LIMITATIONS OF AN AUDIT : ISA 200

a) Per lecturer answer: i) Use of testingii) Accounting & Internal controls limitationsiii) Auditors Subjective judgement

(1) interpretation of the results could differ(2) different ways of obtaining audit evidence/planning audit

iv) Evidence persuasive not conclusivev) (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)

vii) THE NATURE OF AUDIT PROCEDURES:(1) Auditor cannot be certain MNGMNT DID PROVIDE ALL INFO needed to prepare the fin stats.(2) The use of testing :ONLY % OF ALL transactions checked-called 'test checking'- expensive /time constraints.(3) Audit problem: Inherent limitations of account & INTERNAL CONTROL SYSTEMS: -must place reliance on clients safety features inherent limitations-no system is

100% foolproof.(4) Audit evidence is usually (Docs etc.) PERSUASIVE not CONCLUSIVE. – eg: documents only persuade that a transaction took place –not prove it(must rely on

documenty!(5) Audit procedures are NOT DESIGNED SPECIFICALLY TO DETECT FRAUD- by collusion & other means of circumventing controls fraudulent transactions may go

unheeded.(6) Auditors choice & timing of tests varies one to the next auditor.

viii) TIMELINESS OF FINANCIAL REPORTING AND BALANCE BETWEEN BENEFIT AND COSTix) 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)

x) OTHER MATTERS THAT AFFECT THE INHERENT LIMITATIONS OF AN AUDIT: (1) Some things are very difficult to gather evidence on eg : did company comply with every single law and regulation AND has auditor been Told of all going

concern issues?

LIMITED ASSURANCE ENGAGEMENTS: International framework for assurance engagements further classifies assurance engagements into Limited Assurance Engagements and Reasonable Assurance Engagements –further done in ch 19.

####7) STATUTORY AND NON-STATUTORY ENGAGEMENTS. 1) Statutory Engagements : required by Act of Parliment. eg: 1-company annual audit.(companies Act) 2-Fin.Institutions Act=bank annual audit2) Non-Statutory Engagements :NOT required by law. Eg: audited Fin. Stats. For a loan or if a partnership/C.C. builds into partnership/ association agreement or if a Regulatory

Body requires assurance with Corporate Governance requirements, or a non-compusory environmental audit

####8) AUDITING POSTULATES. 8 OF BY MAUTZ & SHARAF IN PHILOSOPHY OF AUDITING 1961 -Definition: Postulate. Thing claimed as a basis for reasoning, and, Provides a starting point/fundamental condition as a basis for thinking about things & arriving at solutions.The very foundation on which the discipline is built.

1) No neccessary conflict of interests exist between the auditor and 1-Management OR 2-Employees of the enterprise. a) Both client and auditor want Fin Stats to achieve fair presentation , so basicly it assumes management does not want to/ is not trying to cheat.b) It becomes impossible to do a conventional (normal) audit if mngmnt are trying to cheat.- economicly & operationally feasablec) In current times relevance of this old postulate becoming questionable due to rising fraud etc of mngmnt.d) For todays times and latest auditing standards newly developed : AUDITOR CANNOT ACCEPT THIS POSTULATE AS BEING TRUE, HE MUST EVALUATE MNGMNT INTEGRITY

WITH {'PROFESSIONAL SCEPTICISM' –ONE OF PRINCIPLES OF Generally Accepted Auditing Standards }–NOT BE LED AROUND BY THE NOSE- e) Similar to (5) – very expensive or impossible audit if Mngmnt Unreliable.

2) An Auditor must Act 1-Exclusively As An Auditor in order to be able to Offer an 1-Independant and 2-Objective Opinion on the 3-Fair Presentation of Fin. Info. ( ie :INDEPENDANCEa) Free of bias,independant ,cannot do other work for client eg: accounting.b) Currently under fire eg: enron+anderson accounting downfall etc.

3) The Professional Status of the independant auditor Imposes commensurate Professional Obligations.a) Concepts of 1-Due Care , 2-Service before personal interest , 3-Efficiency ,4-Competence.

4) Financial data is Verifiable.a) It is possible to verify clients data.- there will be sufficient evidence to support transactions.b) Audit Objective of forming an opinion on fair presentation of fin info/ fin stats. Needs verification or cannot.c) Eg e-commerce ...must develop new ways of verification.d) Poor internal controls make fin. Info. NOT verifiable.

5) Internal Controls reduce the Risk of Errors & Irregularities.a) Makes errors possible not plausible ,eg sequential numbering makes duplication/omission of source docs. Reduced.b) The more controls, the less detailed investigation/less samples. Zero controls =cannot do audit /or very expensive.

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20 20 | P a g e Auditing Notes AUDI 1016) Application of IFRS results in fair presentation .(international financial reporting standards)

a) If you adhere to GAAP FRAMEWORK –it results in fair presentation.( not his own personal preference ,but GAAP)7) That which Held True in the Past will Hold True in the Future, in the absence of any Contrary Evidence.

a) Factual historical evidence more powerful than speculation, eg: measure Prov. Bad Debts. By history of debtors.-But eg: directors integrity may decline. 8) The Fin. Stats. submitted to auditor for verification are free of Collusive and other unusual Irregularities.

a) Unless contrary evidence, it can be taken for granted that management took steps to prevent collusion, and they were not involved in any. b) These Made in1961 –current cynisism- current focus on Corporate Governance – Introduction of Professional Sceptisism as important prereqiusite for auditors lately –The

objective of auditors is: fair presentation – NOT an all out search for fraud.

THE ACCOUNTING PROFESSION : 1) Professional Status is achieved by the PUBLIC recognising a BODY OF PRACTITIONERS.2) SAICA says a profession is distinguished by:

a) MASTERY SKILLS :Professional offers : mastery specialised skills ( by study,practical training)b) STANDARDS :Render services to a High standard of conduct +performance .(Regulatory mechanism/ regulatory body -laws restricting admittance,freedom from

uninhibited competition, voluntary advancement of profession,ethical code)c) DUTY SOCIETY :Accept duties to society as a whole + to client+employer. d) ETHICAL ABOVE MONEY : Objective outlook. Members of profession show ethical commitment above monetary gain.(peer evaluation not 'most moneye) INDEPENDENCE :OF PARTICULAR IMPORTANCE IS PRINCIPLE OF OBJECTIVITY. f) Integrity + Prof Skills&due care +Objectivity +Confidentiality.

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 accountants12) 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 timea) 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 IESBAa) IAASB- international auditing and assurance standards board formulate the: ISQC’s etc.b) IAESB: international accounting education standards board – formulate all education for accounting stuffc) 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 boarde) 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 auditingb) 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 engagementsd) ISAE- Assurance angagementse) ISRS- related services f) IFAE :International Framework for Assurance Engagements

PRONOUNCEMENTS WHICH REGULATE THE PROFESSION. 1) In order to ensure high standards of ethics conduct & skill,

a) ISA 200 states ; objectives & general principles governing an audit of Fin Stats. :i) Comply with IFAC code of ethics for professional accountantsii) Conduct audit accordance International standards on auditing.

b) Legislation to ensure : ( some examples of 8 or more)i) Companies Act 2008ii) SAICA constitution and by-laws.iii) Auditing profession act 2005iv) IRBA rules& codev) IFAC code of ethics for professional accountantsvi) International auditing practice statements(IAPS)vii) South African auditing practice statements(SAAPS)viii) International standards on

(1) Auditing(ISA)(2) Review engagements(ISRE)(3) Assurance engagements(ISAE)(4) Related services(ISRS)

THE FINANCIAL STATEMENT AUDIT ENGAGEMENT. INTRODUCTION.

1) An EXTERNAL Audit Engagement is called an ASSURANCE engagement + must be conducted by a registered auditor.

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A MODEL OF INDEPENDANT AUDIT OF FIN STATS ARISING OUT OF COMPANIES ACT (STATUTORY AUDIT)1) Statutory laws arose from need to protect investors + economic system as a whole. 2) Most common audit engagement is the audit of private & public companies Fin.Stats. by registered auditors in public practice.

THE ROLES OF THE VARIOUS PARTIES

1) SHAREHOLDERS a) Provide finance for businessb) Appoint directorsc) Appoint auditors (to opinion assertions of directors to shareholders fair)d) Receive Annual Fin. Stats.

2) DIRECTORS a) Running companyb) Reporting results OF THEIR STEWARDSHIP to shareholders.

3) AUDITOR a) Independant opinion Fin info. fairly presents fin. Pos + fin Res.b) Report to shareholdersl

ROLE OF COMPANIES ACT.From old companies act, not new one:1) States all companies must be audited2) Duty on shareholders to appoint auditor.3) Duty on shareholders appoint directors.4) Regulates who may be appointed as director + auditor and how/when may resign or be dismissed.5) Form & Content of report from directors to shareholders – Annual Fin. Ststs. + 4th schedule.6) Legal backing for Financial Reporting Standards.7) Requires Audit Commitees to enhance audit function be appointed.8) Right of auditor to access company records.9) Requirements fulfilled by auditor (eg accounting records in agreement with fin stat) before can report to shareholders.10) Duty on auditor to report to shareholders.11) CLEARLY stipulates : auditors report must contain OPINION –if Fin Stat. = fairly presents FIN Pos + Res.

#### 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

(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

DUTIES AND RESPONSIBILITIES OF AN AUDITOR:1. Comply legislation : to be aware of and comply with legislations & regulations applicable to the audit engagement

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SHAREHOLDERS

DIRECTORS

AUDITORS

22 22 | P a g e Auditing Notes AUDI 1012. Comply Auditing Professions Act: 3. Comply ISA while conducting audits. (international standards on auditing)4. Comply IFAC Code Ethics for Prof.Accountants.5. Report opinion : to report his opinion6. Due Professional Care & Competence 7. Confidentiality/ independence/ professional behavior/integrity. 8. Independent : maintain independent attitude9. Report Reportable Irregularities10. Detect & Report material Error & Fraud 11. Detect contraventions laws : and regulations by the audited entity

SUMMARY: Scan in pg1/16 bottom

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CHAPTER 2: PROFESSIONAL CONDUCTCHAPTER 2: PROFESSIONAL CONDUCTDEFINITIONS 1. DEFINITIONS:

1.1. Financial interest: 1.1.1. An interest in an 1equity or 2other security,3debenture, 4loan, 5other debt instrument of an entity,including 1-rights and 2-obligations to aquire such an interest

1.2. Direct financial interest: 1.2.1. A fin interest owned directly by or under control of an individual or entity1.2.2. Fin interest beneficially owned through an investment vehicle (eg unit trust fund,trust, estate etc) which is controlled by the individual or entity.

1.3. Indirect financial interest: 1.3.1. Fin interest beneficially owned through a collective investment vehicle (eg unit trust fund,mutual fund) over which entity/person has no control

1.4. Immediate family : spouse or dependant1.5. Close family : parent, child or sibling who is not an immediate family member1.6. Listed Entity: who’s shares or DEBT is listed on a recognized stock exchange.1.7. Network Firm. : an entity under common control, management or ownership with the firm, or that a reasonable 3rd party would say is part of the firm nationally or

internationally.1.8. independence : has 3 parts to it

1.8.1. independence of mind : a state of mind - influences not affect judgement , auditor is able to act with objectivity & independence & professional skepticism eg own shares in company etc.

1.8.2. independence in appearance: as per a 3rd parties opinion- even if he IS being independent the 3rd party might not perceive this to be so( eg: acc. has shares)1.8.3. “state of mind” & “in appearance” : eg: even if you can get by the 1st one , both must be true – so if a 3rd party would say not look like it , then it is not , even if you

made a plan somehow.1.9. Assurance: 1-ADDING CREDIBILITY 2- TO INFORMATION 3- PROVIDED BY ANOTHER.1.10. Assurance Team : all 1-members of the team for the engagement, 2- incl experts contracted , 3-also all others in firm who could influence the outcome eg technical

support 1.11. Assurance Engagements (independance is more critical for assurance engagements) :

1-the professional accountant 2-expresses a conclusion designed to 3-enhance the degree of confidence 4- of the intended users other than the responsible party ,about the outcome of the 5-evaluation or measurement of a 6-subject matter against the 7-criteria “ 8-and which has all the elements of an assurance engagement ie:3 main ones:suitable criteria a subject matterthree party relationship other 2 written assurance reportsufficient approriate evidence

1.12. Non-assurance engagements: Is short 1 or more of the elements of an assurance engagement or does not coincide with definition of assurance engagement.1.13. Assertion based audit engagements : is split into 2 types

1.13.1. Fin stat audit engagements : a reasonable assurance engagement in which the prof. acc in public practice, expresses an 1-opinion on whether the2- fin stats are prepared in l3- material aspects in accordance with an 4-identified financial reporting framework eg GAAP for companies act statutory audit

1.13.2. Other assertion based audit engagements ( anything as long as criteria are available ) 2. Advertising: communication to the1- PUBLIC of info as to 2-service or skills provided by a 3-member with a view to procuring 4-

professional business3. Publicity: communication to 1-public of info on a 2-prof acc or 3-his firm or 4-bringing his/her name to the notice of the public4. Solicitation: the direct or indirect approach to a potential client with the purpose of offering to perform professional work ie direct

mailing or cold calling. direct mailing incl. sending a brochure to a client who did not request it. cold calling incl. direct or indirect approach by telephone.

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.

GENERAL GUIDANCE: ETHICS AND PROFESSIONAL CONDUCT1) As per SAICA: The pre-eminent attribute of Auditors is = 1- skills & 2-integrity2) Ethics: dictionary = a set pf principles, or morals, rules of conduct3) Morals: dictionary= concerned with the distinction between right and wrong,virtuous in general conduct,4) Sources for ethical guidance:

a) corporate code of conductb) older leaders/colleguesc) parents, religion, role models.

5) questions to ask for an ethical question:a) Greatest good for greatest no. of peopleb) Would I be comfortable explaining my decision to a person I respected for their moralsc) Is decision honest & truthfuld) If my action to others Is it how I want others to act toward me

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24 24 | P a g e Auditing Notes AUDI 1016) Issues affecting accountants: eg:

a) Did I act independentlyb) Should I use confidential info from a client for my own advantagec) Should I report a client who evades tax to the authorities

THE PUBLIC INTEREST 1) Eg to enhance confidence of public/users the following professionals will each do different things: auditor=fin stats to be accurate, internal auditor=sound

internal control systems , tax experts=confidence in tax system, mngmnt consultants=promote sound mngmnt decision making.

PRONOUNCEMENTS RELATING TO ETHICS AND PROFESSIONAL CONDUCT IN SOUTH AFRICA 1) The IFAC code of Ethics for Professional Accountants(adopted by SAICA

a) Applies to professional accountants ini) PUBLIC PRACTICE: professional accounting firm for tax,accounting or auditingii) BUSINESS : employed by a company/government etc as accountant.iii) TRAINEES.

2) Code of Conduct of the independent regulatory board for auditors (IRBA) 3) The disciplinary rules of IRBA 4) IRBA and IFAC codes are identical in all material respects. –IFAC- IF Accountants is international body but IRBA -IndependantRBAauditors is SA body.

THE IFAC (SAICA) CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

1) Structure of the Code 2/5a) Part A 100-150 General application of the codeb) Part B 200-190 Professional Accountant in Public Practicec) Part C 300-350 Prof. Acc. In Businessd) Part D 400-495 Prof. Acc. In South Africa.

1) PART A - GENERAL APPLICATION OF THE CODE

(A) BASIS OF THE CODE - THE CONCEPTUAL FRAMEWORK 2/5

1. THE conceptual framework means it is broken down into :

1. fundamental principles : integrity /independence&objectivity/confidentiality/professional behavior/prof competence&due care.

2. The types of threats (use :1- professional judgement , 2- public interest , 3- reasonably informed 3rd pary)2.1. Self interest2.2. Self review2.3. Advocacy2.4. Famililiarity2.5. intimidation

3. Safeguards (2 categories 1-regulation&legislation by profession/law 2-work environment )3.1. Sound leadership3.2. Procedures Policy documented3.3. Employees grievance structures3.4. Client structures3.5. Disciplinary mechanism

#### 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 truthful2. OBJECTIVITY /INDEPENDENCE Bias, conflict of interest, or undue influence of others3. CONFIDENTIALITY

disclose confidential information acquired as a result of a professional

4. PROFESSIONAL BEHAVIOR comply with relevant laws and regulations5. PROFESSIONAL COMPETENCE AND DUE CARE (skills) * professional knowledge and skills

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25 25 | P a g e Auditing Notes AUDI 101(B) FUNDAMENTAL PRINCIPLES

NB 1. INTEGRITY sect 110 of IFAC code of ethics for professional accountants (SAICA code)

a. Straightforward honest fair truthful in professional and business relationshipsb. Should not be associated with info. they believe is false, misleading(omission or inclusion) or recklessly provided.

2. OBJECTIVITY (INDEPENDENCE) sect 120a. Should not compromise their professional or business judgement because of Bias, conflict of interest, or undue influence of others. Be fair,

maintain professional scepticism.3. CONFIDENTIALITY sect 130

a. professional accountants should noti. * 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 bodyv. • to protect the professional interests of a professional accountant in legal proceedings orvi. • to comply with technical standards or ethics requirements

f. 4.6 In deciding whether to disclose confidential information a professional accountant shouldi. consider whether the interests of all parties could be unnecessarily or unjustly harmed by the disclosuresii. * 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.

4. PROFESSIONAL BEHAVIOR sect 140a. 5.1 This fundamental principle requires that professional accountants

comply with relevant laws and regulationsb. * 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

5. 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 employersb. (in the case of professional accountants in business) receive competent professional in service c. * act diligently in accordance with applicable technical and professional standards whend. 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 THREATSNow 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.

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.

25

26 26 | P a g e Auditing Notes AUDI 101(ii) As per Conceptual framework approach-It then provides the approach they should adopt for threats & safeguards.

METHOD OF IDENTIFYING THREATS AND DEALING WITH THEM: METHOD :

i) Identify threats to the compliance with fundamental principlesii) Threat :See where threat is insignificant BY following 3 ways :

professional judgement as per definition of matter –firstly it will be a matter of his own professional judgement public interest -must take into account the public interest — if the public interest is threatened , it is most likely to be significant. reasonable and informed third party – what would he say?- is it insignificant

iii) Safeguards: See where it is clearly not insignificant and then put safeguards in place there to make sure that the threat is contained.

SAFEGUARDS

NB SAFEGUARDSUnless 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 decision1. professional judgement as per definition of matter –firstly it will be a matter of his own professional judgement2. 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.

PART B PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE 1. SECT 200 : is Introduction to the Code.:

1.1. This section applies to all :1.1.1. Assurance engagements : threats to fundamental principles esp. significant is threats to objectivity (INDEPENDENCE)1.1.2. Non-Assurance engagements : less threats than above in most cases.

1.2. SAFEGUARDS: with regards to all safeguards , following points are important in all cases –work from here:1.2.1. The following fall in 2 categories :

1.2.1.1. profession/law/regulation 1.2.1.2. work environment

1.2.1.2.1. SOUND LEADERSHIP : in firm + Engagement team are essential.1.2.1.2.2. DOCUMENTED : POLICIES AND PROCEDURES must be documented +conveyed to employees regularly.1.2.1.2.3. DISCIPLINARY MECHANISM :must be effective.1.2.1.2.4. EMPLOYEES PROCEDURES : Firms employees procedures should have a procedure for and feel safe in raising ethical issues with senior

personnel.eg: staff partner.1.2.1.2.5. CLIENTS STRUCTURES :eg: audit committees, corporate governance policies, should be embraced whenever possible.

ONLY THE PARTS WHICH ARE MARKED NB ARE DONE HERE : THE REST IS LEFT OUT TO END OF CHAPTER ON PROFESSIONAL ETHICS.

#### 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 principles1.1.2. 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 it1.2.2. 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.

SECTION 220 CONFLICTS OF INTEREST 2/13

1.4. RESPONSIBILITY : Prof. acc. Must ID situation where interests of firm may be in conflict with interests of client. Eg competes with client selling software

26

27 27 | P a g e Auditing Notes AUDI 1011.5. THREATS: Objectivity, Confidentiality, Prof. Behaviour. If he competes with client OR confidentiality & objectivity if he has 2 competing clients.1.6. SAFEGUARDS: 1-inform client of situation 2- separate teams for separate clients/ not use employees doing competing 3-policy guidelines on confidentiality in these

situations 4-confidentiality agreements signed by members of team & partners.

SECTION 230 SECOND OPINIONS 2/14

1.7. RESPONSIBILITY : he has a responsibility to himself & other accountant – if asked to give a second opinion.1.8. THREATS: 1- prof.competence & due care : tries to make a decision with half the facts (he is the second in line accountant) 2- prof.behaviour –critisises other

accountant. 3- or maybe client wants to sue first acc.- then integrity&Prof.behaviour are threats1.9. SAFEGUARDS:1-client –written explanation of why opinion is needed. 2-permission to contact other acc. If not given must be sound reason! 3-handled by senior personell

4 all communications to be in writing & reviewed by second person

#### 4) SECTION 240 FEES AND OTHER TYPES OF REMUNERATION

1.10. NORMAL FEES : 1.10.1. RESPONSIBILITY: entitled to FAIR remuneration, but not OVER or UNDER charge.1.10.2. THREATS: professional competence & due care + objectivity- low fees,quick work ; eg fixed fee for variable hours ; integrity –not an honest practice 1.10.3. SAFEGUARDS: 1-basis of charges not fixed quote ,alert in writing to variability of hours eg problems,issues ;2-discuss terms with client 3- assign appropriate time

& experience of staff1.11. CONTINGENT FEES :( calc.per outcome of engagement or per transactions arising from work)

1.11.1. RESPONSIBILITY: certain types are permitted, some not eg audit fees NOT1.11.2. THREATS: self interest threats to objectivity +integrity+professional behavior 1.11.3. SAFEGUARDS: 1-advance written agreement of basis of charges with client ,2-committee authorize all contingent fees. 3- disclose to 3rd party users contingent

nature 4-review by pro. 3rd party of your work to counter claims of fee maximization.1.12. REFERRAL FEES / COMISSIONS

1.12.1. RESPONSIBILITY: pro. Accountanrt may RECEIVE or PAY a fair referral fee or commission to get work , BUT must make sure not threaten fundamental principles.1.12.2. THREATS: to objectivity, pro. Competence & due care , integrity. 1.12.3. SAFEGUARDS: 1-disclose to client that you advised that you got commission for referrals + EXACTLY HOW MUCH 2-same rules for a referral to you fee 3-

committee in firm to authorize any such fees/commissions

SECTION 250 MARKETING PROFESSIONAL SERVICES 2/16

1.13. RESPONSIBILITY : He may advertise his services but NOT in bad taste eg make extravagant claims or advertise in bad taste 1.14. THREATS: Prof.Behaviour & Integrity –ads could be dishonest,exaggerated,critical of other firms,obnoxious or not in good taste (eg saying you have the best audit

approach&best staff)1.15. SAFEGUARDS:1- Quality control procedure inhouse to review all ads placed. 2- procedures written for employees as to what is acceptable or what is not.

#### 5) SECTION 260 GIFTS AND HOSPITALITY 2/16

1.16. RESPONSIBILITY May accept clearly insignificant gifts: as judged by a 3rd party, but not large gifts1.17. THREATS : intimidation(disclosure) and familiarity1.18. SAFEGUARDS : quality ethics committee: approval ; notice to employees & clients of policy of not accept gifts.

#### 6) SECTION 270 CUSTODY OF CLIENT ASSETS 2/17

1.19. RESPONSIBILITY: must: ensure: 1-separately identifiable, 2-not from illegal sources, 3-not used for purposes other than intended (by accountant).1.20. THREATS integrity,professional behavior, objectivity. (accused of misuse, money laundering,integrity)1.21. SAFEGUARDS: 1-separate bank accounts, 2-purposes it may be use for in writing, 3-records of anything earned/done with it etc+ 4-record available always for

inspection, 5-FICA compliant bank acc.etc 6- immediately deposit money in client account, not wait 7- long then put in interest bearing account and discuss with client 8- interest to same account

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 .\

#### 7) SECTION 290 INDEPENDENCE - ASSURANCE ENGAGEMENTS 2/17

Independence is treated by IFAC as the single most important part of the rules. It has a lot of space devoted to it – more than anything else.It is important because most of the work of auditors in statutory and requires a lot of independence- if he is not independent confidence will not be achieved.. See textbook pg 2/17 for long lists of examples etc for Sect. 290.

THE CONCEPTUAL APPROACH TO INDEPENDENCE :

Independance has been broken down by IFAC into a conceptual approach to make it easy to understand. This approach is outlined again below :

THE conceptual framework means it is broken down into :1. fundamental principles (5 of ) : integrity /independence/ etc 2. The types of threats 3. Safeguards

METHOD :i) Identify threats to the compliance with fundamental principlesii) See where threat is insignificant

professional judgement as per definition of matter –firstly it will be a matter of his own professional judgement public interest -must take into account the public interest — if the public interest is threatened , it is most likely to be significant. reasonable and informed third party – what would he say?- is it insignificant

iii) See where it is clearly not insignificant and then put safeguards in place there to make sure that the threat is contained.

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28 28 | P a g e Auditing Notes AUDI 101 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 PARTSSee 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. h3.1.1.2.

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 BUT3.1.2.1. 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 DISPOSE3.1.3.1. Firm has material indirect interest in fin stat audit client ; MUST DISPOSE till immaterial amount left3.1.3.2. Firm has material fin interest in entity which has a controlling interest in a fin stat audit client: MUST DISPOSE till immaterial amount left3.1.3.3. 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 party3.1.3.4. 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 3.1.4.1. Firm has Indirect Interest: MUST DISPOSE till immaterial amount left3.1.4.2. Firm has Material interest in entity with a controlling interest in client : MUST DISPOSE till immaterial amount left

5. LOANS & GUARANTEES 3.1.5.0. By bank or similar (their normal business is loans) Under normal lending procedures & terms & requirements – to Auditing Firm : NO THREAT (if loan is

material to either an external review of work is needed)3.1.5.1. By bank or similar (their normal business is loans) Under normal lending procedures & terms & requirements – to Team Member : NO THREAT ( if loan is

under abnormal procedure it must be investigated by bank and team member removed)3.1.5.2. As above but it is not a bank- not their normal business (loan to or from from team&firm) – CANCEL LOAN/ RESIGN AUDIT/ RESIGN MEMBER

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 o3.1.6.1. 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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PART C - PROFESSIONAL ACCOUNTANTS IN BUSINESS 1. METHOD again shown here

1.1. IDENTIFY THREATS TO THE COMPLIANCE WITH 5 FUNDAMENTAL PRINCIPLES : Identify threats to independence, 1.1.1. THREATS: 1-self interest / 2-self-review /3-familiarity/ 4-intimidation / 5-advocacy

1.2. 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.

1.3. SAFEGUARDS: 1-policy 2-leadership 3- disciplinary 4-employee complaint/question avenue - 5-use clients structures in place eg audit committee

1) Section 300 Introduction 2/36a) The majority of prof. accountants work in business.b) They have an obligation to encourage ethical behavior in their organization.c) They must uphold the 5 fundamental principles

2) SECTION 310 POTENTIAL CONFLICTS 2/36 a) RESPONSIBILITY: The firm may not COMPLY WITH FUNDAMENTAL PRINCIPLES , because of some conflict with the interests of company b) THREATS: intimidation or all other principles

i) Laws: don’t pay PAYE.ii) Professional standards : awarding tenders because intimidation by GMiii) Unethical/ or illegal earnings strategies- eg illegal productsiv) Lie/intentionally mislead (incl. remain silent) 1-auditors eg fictitious sales2- regulators eg customsv) Issue or be otherwise associated with a financial or non financial report that materially misrepresents the facts : eg for good ratios

c) SAFEGUARDS: 1-access to those charged with corporate governance eg audit committee/independent director 2-SAICA etc .advice 3-formal dispute resolution process in the company ELSE resign

3) SECTION 320 PREPARATION AND REPORTING OF INFORMATION 2/37 a) RESPONSIBILITY : To present info. fairly,honestly & in accordance with relevant standards b) THREATS : Intimidation or Self-Interest Threats to objectivity,integrity , and professional competence by:

internal or external parties or for personal gain eg manipulating profitsc) SAFEGUARDS :use the standard safeguards from sedction 310, and Prof. Acc. Can only be free from self-interest threats if they put measures in place

so they cannot be accused of it.

4) SECTION 330 ACTING WITH SUFFICIENT EXPERTISE 2/37 a) RESPONSIBILITY : may only do tasks for which he has the necessary expertise, or he must get trainingb) THREATS : professional Competence & due carec) SAFEGUARDS : use safeguards listed under ???sect. 310.??? & obtain advice what to do or get training.

5) #### 8) SECTION 340 FINANCIAL INTERESTS 2/38a) RESPONSIBILITY : If accountant or family has a financial interest in company they must ensure they comply with fundamental principles. b) THREATS : Self Interest treats to objectivity or confidentiality . : So where value can be influenced by the

accountant/profit bonus/share options/insider trading.c) SAFEGUARDS : policy : -POLICY of to disclose any fin interest in company also by relatives./remuneration committee/internal&external audit

/POLICY of communicate insider trading laws REGULARLY to employees.

6) SECTION 350 INDUCEMENTS Bribes a) Receiving Offers:

i) RESPONSIBILITY : Gift/bonus to Acc or family to reveal info. or act in illegal manner. Must comply with fundamental principles.ii) THREATS : Self –interest / Intimidation ( to objectivity ,confidentiality etc ).The provider of the

inducement may threaten to make inducement public.iii) SAFEGUARDS :1- EMPOLYEE REPORT AVENUE :on receiving ANY inducement inform governance structures &supervisor 2- DISCIPLINARY

ACTION inform 3rd parties eg employer of offeror of inducement- BUT NOT BEFORE TAKING LEGAL ADVICE. 3- POLICY OF : inform employer of inducement possibilities :eg family member works at competitor& for their advantage you let slip info.

b) Making Offers: i) RESPONSIBILITY : not offer inducement to influence 3rd party eg overseas holiday for a business deal.ii) THREATS : self interest, professional behavior , threat to all 5 of fundamental principles iii) SAFEGUARDS : 1-company policy prohibiting employee from offering inducements(bribes) 2- grievance structure to support prof acc so he can

report it if pressure is put on him to induce /bribe people.

a) RESPONSIBILITY: b) THREATS: c) SAFEGUARDS:

PART D - PROFESSIONAL ACCOUNTANTS IN SOUTH AFRICA DEFINITIONS:

1. Advertising: communication to the1- PUBLIC of info as to 2-service or skills provided by a 2-prof acc or 3-his firm with a view to procuring 4-professional business.

2. Publicity: communication to 1-public of info on a 2-prof acc or 3-his firm or 4-bringing his/her name to the notice of the public.3. Solicitation: the direct or indirect approach to a potential client with the purpose of offering to perform professional work ie direct

mailing or cold calling. direct mailing incl. sending a brochure to a client who did not request it. cold calling incl. direct or indirect approach by telephone.

1) #### 9) Section 400 Joint and vicarious liability 2/39a)

2) Section 410 Tax practice 2/40a) RESPONSIBILITY: Not be associated with a return that is :

i) False, misleading info. 29

30 30 | P a g e Auditing Notes AUDI 101ii) Reckless furnished (not sure if true/false)iii) Omits & obscures materially

b) THREATS: objectivity, integrity, professional behavior.c) SAFEGUARDS:

i) Law & fundamental principles :Put forward best position of client as long as :(1) With professional competence & due care , integrity , objectivity/independence(2) In the bounds of law

ii) Client understand :Make sure client understands:(1) SARS can dispute returns based on opinion & not fact, and often do(2) Client is responsible for content of return, even if accountant prepared it.(3) (+plus that you must dissociate yourself AT SARS from returns if next year you find out they were ‘false’ , your livelihood,future,rest on it

so you will definitiely do that!)iii) In Writing : Advice/opinions given to employer/client in writing only, so he cannot say excuse he acted on “advice” he did not get.iv) Rely on info Furnished : You may rely on info furnished by client/employer ONLY IF :

(1) It appears REASONABLE(2) You should use his PREVIOUS YEARS returns where feasible (??to compare?? or what )(3) You do make REASONABLE ENQUIRIES for apparent incomplete/incorrect info(4) Prof Acc. Are ENCOURAGED not REQUIRED to:

(a) Request the supply of supporting data(b) Make reference to relevant books and records of the business

v) When discover Material errors or omissions in prior years tax returns(1) Notify client of it(2) Advise him to make full disclosure(3) Advise him of powers of SARS to seize books & impose penalties.(4) Dissosiate yourself from return : If client does not co-operate after this ,YOU MUST notify SARS that you are DISSOSIATING YOURSELF

FROM THE RETURNS, vi) When is : Prof. Acc associated with a return?

(1) His name is on it (2) OR his name is not on it but he assisted in preparing it .

vii) Leave client :General Rule is Prof. Acc. may not continue an association with a dishonest client.- & SARS can report him to SAICA.

3) Section 420 Insolvency practice 2/414) Section 430 Discrimination 2/425) Section 440 Cross border activities 2/426) #### 10) Section 450 Publicity, advertising and solicitation 2/43

a) ADS & PUBLICITYi) : Good taste ;

(1) Racist(2) Shock/sensationalise(3) Offend religious(4) Trivialize important issues(5) Relies on particular personality (sports stars)(6) Deride public figure(7) Mock(disparages) educational attainment(8) Odious(hateful , obnoxious)(9) Strident (loud) extravagant(10) Belittles others / claim superiority

b) ADS :i) No hourly rates/ pricesii) Basis of fees calc. can be showniii) NO testamonials/endorsements

c) SOLICITATION :i) Direct mailing yes, unless asked to refrainii) No cold call if in ‘public practice’, but yes for if in ‘business’

7) Section 460 Responsibilities to colleagues 2/448) Section 470 Recruiting 2/449) Section 480 Signing of reports or certificates 2/4510) Section 490 Stationery and letterheads 2/4511) Section 495 Inclusion of the name of a professional accountant in public practice in a document issued by a client 2/45

THE CODE OF PROFESSIONAL CONDUCT OF THE IRBA 2/46

12) THE DISCIPLINARY RULES (IRBA) 2/477) # 11) Acts which will be improper conduct:

a) Contravention of Auditing Act/relevant other actb) Dishonestyc) Failure reasonable care&skill or not work doing at alld) Evading/assisting to evade tax-duties-levies-ratese) Divulging confidential info.f) Contingent feesg) Accept 3rd party commission unless client knew of it.h) Vouch accuracy forecastsi) Trainee accountants contraventions

impose restraints on after finished time except taking your clients 1 year not permittedRequire compensation for cancelling training contract

30

31 31 | P a g e Auditing Notes AUDI 101j) Fail responsibilities iRBA – pay fees + respond communications k) Contraventions in respect of relinquishing engagementsl) Fail to resign if client requests itm) Abandon practice without notice to clientsn) Soliciting/advertising/canvassing for work in manner not permitted by codeo) Contraventions other provisions of IRBA codep) Improper/unprofessional/dishonourable/or brings profession into disrepute

31


CH 3 STATUTORY MATTERSCH 3 STATUTORY MATTERSCOMPANIES 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 person2.1. 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 other2.2.2. 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 OR1.2. 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 public1.2.1.2. 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 SOC1.2.1.4. At least 1 directors

1.3. PERSONAL LIABILITY COMPANY: Abbr : Inc. or Incorporated1.3.1. MOI must

1.3.1.1. Meet criteria of private company1.3.1.2. 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 Limited1.4.1. 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 persons1.2. Non-Profit : three or more

2. Procedure : complete & sign the MOI (or proxy) , FILE a Notice of INCORPORATION , PAY THE FEE.3.

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.32

33 33 | P a g e Auditing Notes AUDI 1012. 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 void2. MOI deals with :

2.1. Details eg : date& type of company2.2. Alteration of moi2.3. Authorized shares number & class2.4. Authority to issue debt instruments (of board to)2.5. Shareholders meetings eg notice, quorum, resolutions,locations2.6. Directors : composition of board, meetings,committees, compensation2.7. 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 VOID3.2. 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 itself3.3.2. 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 & shareholder4.2. Among shareholders4.3. 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; or1.1.2. (bb) shareholders entitled to exercise at least 10% of the voting rights that may be exercised on such a

resolution; and2. (ii) is adopted at a shareholders meeting, or in accordance with section 60, subject to subsection

(3).3. Notice of amendment + prescribed fee4. If Court order to amend – no resolution needed –board just effects

Q16. (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 rightsthat 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).

SEC 19 LEGAL STATUS OF COMPANIES :

1. Policy to make sure & sign any supplier knows the MOI about may and may not buy / + list of all buys over 100000 + to give chance to sue to stop the action + a committee to approve these buys over 100 000 + exception requires full board approval or chairman & financial mngr etc etc

2. MOI may have things added to it to curtail juristic powers of any company- if they want3. THE OLD RULE WHERE IF THE ‘MAIN’ AND ‘ANCILLIARY ‘ OBJECTS OF COMPOANY WERE NOT IN LINE WITH A TRANSACTION, IT COUND BE

CANCELLED BECAUSE IT IS ASSUMED THERE IS ‘CONSTRUCTIVE NOTICE’ DIUET TO THE FACT THAT ANYBODY MAY ASK TO SEE THE REGISTRATION DOCS AT THE REGISTRAR, DOES NOT APPLY ANYMORE. ALSO , IF THE MAIN OBJECTS OF THE COMPANY ARE ONE THING , IT IS ALLOWED (NOT ENTIRELY DISALLOWED) THAT THE COMPANY MAY ENTER INTPO ANOTHER TYPE OF BUSINESS.

4. As per Sec 20.1 : “ No action of the company is void by reason that the action was prohibited by rhe MOI, or as a consequence of the limitation that the directors had no authority to authorize the transaction.4.1. But, if the “supplier” knew, or reasonabley ought to have known, that the company had failed to comply with such a requirement, then

the transaction is voidable.5. One or more directors or shareholders MAY however take legal action to restrain a company -from continuing with a certain transaction – if it is

against the MOI or Rules.6. Each shareholder has a claim for damges aginst any person who fundamentally OR due to gross neglect causes the company to do anything

inconsistent with the Act or MOI or RULES

SEC 21 PRE- INCORPORATION CONTRACTS

1. A company may completely,partially, or conditionally ratify any pre-incorporation contract entered into in its name. If it does not reject/ratify within 3 mnths from incorporation then it is deemed to have ratified it.Also the person who entered into this pre-incorporation contract at first is jointly & severally liable for all liabilities created with this .

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.

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34 34 | P a g e Auditing Notes AUDI 1012. 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 + RULES2.2. Record of directors :

2.2.1. Name & former names2.2.2. ID no. or Date of birth.2.2.3. Passport no & nationality if not a south African.2.2.4. Occupation2.2.5. 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 AGM4. AFS5. 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 falsified4.3. Keep other than in the prescribed manner & form

SEC 29 FINANCIAL STATEMENTS

1. If a company provides Financial statements , incl. AFS. , to any person , “FOR ANY REASON” , : those statements must:1.1. Satisfy the financial reporting standards (IFRS presumably) as to form and content.1.2. Present Farly, state of affairs & business of company, and explain the transactions & financial “position” of the company.1.3. Show the ASSETS, LIABILITY, EQUITY as well as the INCOME & EXPENSES 1.4. 1-Date of preparsation & 2-accounting period 1.5. Prominently indicate on 1st page of statements whether :

1.5.1. Statements were audited OR 1.5.2. OR independently reviewed OR1.5.3. OR have not been audited or independently reviewed.1.5.4. Name & professional designation (if any) of person who prepared OR supervised the preparation of the statements.

2. Fin Stats may not be false, misleading or incomplete3. ANY PERSON who is PARTY(eg fin. director) to the preparation,approval,dissemination or publication which do not comply with the above or are

materially false or misleading ,will be guilty of an offense.4. This section gives the misister power to prescribe “financial reporting standards” – but these must be consistent with IFRS5. A SUMMARY of FIN STATS is aloowed provided 1st page PROMINENTLY STATES :

5.1. That the doc. Is a summary, and which docs were summarized5.2. Steps to obtain a copy of the original full fin stats which were summarised5.3. Statements were audited OR 5.4. OR independently reviewed OR5.5. OR have not been audited or independently reviewed.5.6. Name & professional designation (if any) of person who prepared OR supervised the preparation of the statements

SEC 30 : ANNUAL FINANCIAL STATEMENTS

1. A company must prepare AFS within 6 mnths of Fin Yr end or such shorter period as may be appropriate to provide the required notice of an annual general meeting in terms of section 61(7).

2. AFS must INCLUDE :2.1. Auditors report (if required)2.2. Directors report : 1-state of affairs 2- the business & profit & loss 3- any prescribed information 4- ANY info material to shareholders to

appreciate state of affairs of. 5 – if company is part of a group then the directors report must be of the group, not the individual company(?? Also incl. report on individual company or not??)

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35 35 | P a g e Auditing Notes AUDI 1013. Be approved by board4. Signed by authorized director (usually mnging director or CEO)5. Be presented to first shareholders meeting after time being approved by board.6. Any person who holds a beneficial interest in any security of a company is entitles to receive : 1- notice of publication & steps to get a copy 2-

on demand receive a copy without charge7. AUDIT - PUBLIC Company :

7.1. Must be audited 8. AUDIT - ANY OTHER COMPANY TYPE :

8.1. Fin Stats must be EITHER Audited OR Independantly reviewed8.2. The INDEPENDENT REVIEW requirements will be formulated by the minister8.3. EXCEPTION S :

8.3.1. The minister may make a regulation that certain ones must be audited – depending on turnover/workforce size/nature&extent of activities

8.3.2. MOI may stipulate / or holding company/ or financier that it must be audited (voluntary type) 8.3.3. PRIVATE COMPANY will be exempted from ‘independent review’(?and audit?) if:

8.3.3.1. One person holds all the shares OR8.3.3.2. Every person who is a security holder (? Incl debt security & shareholder?) is also a director.-or : see Sec 69.12

9. Directors Remuneration : any company required to be audited (?voluntary due to MOI yes/no?) must incl. the following particulars :

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.

SEC 32 USE OF COMPANY NAME & REGISTRATION

1. Must provide both to anybody who requests ,+ may not misstate in manner likely to mislead or deceive

SEC 33 ANNUAL RETURN

1. Must submit in prescribed form/fee/time period after Fin Year End specified

35

36 36 | P a g e Auditing Notes AUDI 101SEC 34 ADDITIONAL ACCOUNTABILITY REQUIREMENTS FOR CERTAIN COMPANIES

1. Public & SOC must comply Ch 3 of ACT1.1. Auditor + audit committee + company secretary

2. Private +personal liability+ non-profit need not comply with extended requirements in Ch3 of act unless MOI requires itPART D of CH2 – CAPITALISATION OF COMPANIESSEC 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 itself4. 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 issue1.2. A distinguishing designation (name ) for each type of share1.3. -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 OR3.2. 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)—

36

37 37 | P a g e Auditing Notes AUDI 101(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.

SEC 38 ISSUING SHARES

1. The BOD may issue shares at any time.- if authorized in MOI2. If shares are issued that sare not suthoirised , then it may be ratified later , but if not ratified then the persons responsible are liable personally

for company losses therefrom, and company must repay the shareholders with interest.

SEC 39 SUBSCRIPTION OF SHARES:

1. If PRIVATE COMPANY issues EXTRA shares, shareholders HAVE A RIGHT BEFORE OTHERS TO PURCHASE equal % to their current shareholding.But the MOI may restrict /conditional/ or stop this right.

SEC 40 CONSIDERATION FOR SHARES:

1. BOD may issue shares ONLY for either:1.1. Capitalization issue as a capitalisation share as contemplated in section 47.1.2. In terms of existing conversion rights of existing securities held 1.3. For adequate consideration as determined by the board.(adequate means ONLY: 1-good faith , 2-best interests of company 3- diligence &

skill reasonable expect of director )2. Shares are only “issued “ when all money is received – then it is to be entered in share register.

SEC 41 SHAREHOLDERS APPROVAL F0R ISSUING SHARES IN CERTAIN CASES :

1. If a share or option or security convertible into a share is to be issued to a : Director /future director / prescribed officer or a person related/interrelated to them or to a nominee of these persons OR to a person related or interrelated to the company(ie: subsidiary/holding company) or a nominee of same, then a Special Resolution of the shareholders is needed.1.1. A future director who becomes a director more than 6 mnths after the issue – is not considered a director.

2. EXCEPTION : special resolution is not required where the issue is:2.1. The issue is under an agreement underwriting the shares (etc) ???????2.2. The issue is in proportion to existing holdings % on same terms & conditions offered to all other shareholders (or all other holders of

same class of shares)2.3. The fulfillment of an existing pre-emptive right.2.4. Is pursuant to an employee share scheme2.5. An offer to the public

SEC 43 SECURITIES OTHER THAN SHARES

1. The board may authorize the issue of debentures (either to be secured or unsecured and board must CHOOSE 1) – unless MOI prohibits it. 2. Unless MOI prohibits it , these may grant special rights to the holders eg:

2.1. Vote & attend general meetings2.2. Vote on appointment of directors2.3. Redemption of instrument or conversion to shares.

3. (4) Every security document must clearly indicate, on its first page, whether the relevant debt instrument is secured or unsecured.4. (5) A company may appoint any person, including a juristic person, as trustee for the holders of the company’s debt instruments, if—(a) the person—

(i) is not a director or prescribed officer of the company, or a person relatedor inter-related to the company, a director or a prescribed officer; and(ii) does not have any interest in, or relationship with, the company thatmight conflict with the duties of a trustee; and

(b) the board is satisfied that the person has the requisite knowledge andexperience to carry out the duties of a trustee.(6) Any new trustee appointed for the purpose of this section must—

(a) satisfy the requirements of subsection (5)(a); and (b) be approved by the holders of at least 75% by value of debt instruments present at a meeting called for that purpose.

SEC 44 FINANCIAL ASSISTENCE FOR SUBSCRIPTION OF SECURITIES.

1. Company may provide fin. Assistance(either loan/guarantee/provision of security) for purchase of any security (??debenture/pref shares??) of itself or related company eg holding company provided :1.1. Any conditions in MOI adhered to1.2. Board is satisfied :

1.2.1. Liquidity / solvency test1.2.2. Terms are fair & reasonable

1.3. Special resolution is needed.- within at least the last 2 years – can be for a class or single transaction)2. If contravenes MOI it is void & fin directors may be liable3. EXEMPTION :

3.1. DOES not apply to entity whose primary business is lending money(if given on same terms as usual presumably)3.2. If for EMPloyee Share Scheme- -Special Resolution not needed, but other conditions must still..

SEC 45 LOANS OR OTHER FINANCIAL ASSISTANCE TO DIRECTORS

1. May provide direct or indirect financial assistance(loan/guarantee/provision of security) for ANY purpose to1.1. Director of company or related company eg holding company

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38 38 | P a g e Auditing Notes AUDI 1011.2. Any prescribed officer s1.3. A related company itself1.4. member of a related company1.5. Or any person related to such company , prescribed officer , director , member

2. PROVIDED that:2.1. MOI conditions adhered to2.2. Board satisfied ;

2.2.1. Liquidity&solvency test2.2.2. Terms fair & reasonable to company

2.3. Special resolution is needed.- within at least the last 2 years – can be for a class or single transaction)3. If fin assis. Given in contravention of MOI or this section, it is VOID & directors may be liable4. WRITTEN NOTICE : of any resolution to do this to : all shareholders(unless every one is a director) & ‘trade unions’ within 30 days of adoption

4.1. If total assistance within that fin year over 0.1% of net worth of entity – notice must be in 10 days maximum.5. EXCEPTIONS :

5.1. Company whose primary business is lending money5.2. for EMPloyee Share Scheme- -Special Resolution not needed, but other conditions must still..5.3.5.4. Advance for

5.4.1. legal expenses concerning company5.4.2. Anticipated expenses on behalf of company5.4.3. Defray expenses for removal (??from office??)

SEC 46 DISRIBUTIONS MUST BE AUTHORISED BY BOARD

1. Definition of Distribution: per Act : transfer of money or property, to or for the benefit of one or more shareholders on any of the shares of the company or any of the companies within the group.eg:1.1. Dividends1.2. Share ‘buy backs’1.3. Payments in lieu of capitalization shares1.4. Incurring a debt for the benefit of a shareholder1.5. Cancelling a debt owed by a shareholder (forgiveness)

2. No distribution may be made unless:2.1. Pursuant to an existing legal obligation or court order2.2. The board has passed a resolution authorizing the distribution + liquidity&solvency test + resolution ‘States’ board applied liquidity &

solv. test and concluded reasonably satisfied.2.3. Done Within 120 after this resolution& test or resolution & test must be done again.

3. If director present at meeting OR participated in decision , and failed to vote against knowing it was contrary to this section 46 , he may be liable for any damage or cost .

SEC 47 CAPITALIZATION SHARES

1. Board may authorize the distribution of any authorized shares as capitalization shares on a pro – rata basis to existing shareholders.2. When resolving to award cspitalisation shares, board may choose to allow payment of cash instead of shares at a value determined by board ,

but since that is a distribution sec 46 must be applied – ie: resolution+statement+ liquidity&solv. test.

SEC 48 COMPANY OR SUBSIDIARY AQUIRING COMPANIES SHARES

4. 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)

5. WHERE a buy – back has taken place,the following MUST happen :5.1. ‘stated capital ‘ must be reduced by formula : [no. of shares acquired] * [stated capital/no. of issued shares]5.2. The share certificates get cancelled and they revert to “authorised shares”

6. Subsidiairy may buy shares in holding company , but 10% is max that all subsidiaries taken together are allowed to own in company per any 1 particular class.6.1. Voting rights of these shares may not be exercised.

SEC 49 SECURITIES TO BE EVIDENCED BY CERTIFICATES OR UNCERTI FICA TED

1. Any security must be certificated or uncertificated(details held in a central securities depository) . whichever does not affect the rights & obligations attaching to the security.

SEC 50 SECURITIES REGISTER AND NUMBERING

1. Every company must establish register of issued securities – to contain holder/details/transfers details.Uncertifiated record is usually in a ‘central securities depository’

2. Unless all shares rank equally, each should be distinguished by an appropriate numbering system.

SEC 51/52/53 REGISTRATION AND TRANSFER OF CERTIFICATED AND UNCERTIFICATED SECURITIES.

1. All share certificates must have details : name of holder / issuing company /restrictions on transfer if any / number,class,designation of share.2. If in unregistered securities register : any holder may request a list of all holders of uncertificated securities within 5 days, also company itself

may request this.3. Any transfer affected by a central securities depository may only be done due to a : 1-authenticated instruction 2 court order

SEC 55 LIABILITY RELATING TO UNCERTIFICATED SECURITES

1. Any person who does any of the foLlowing to securities register or to uncerificated secuties ledger ,is liable to any person who has suffered loss from that action:\1.1. Description of, namesof holders, or numbers of securities is unlawfully ommmited/increased/altered/reduced etc.

CHAPTER 2 PART F GOVERNANCE OF COMPANIES :SEC 57 INTERPRETATION AND RESTRICTED APPLICATION OF THIS PART:

1. A shareholder is defined as ; anyone allowed a voting right from a security- not matter what type of security it is ie debts or otherwise.2. SPECIAL RULES FOR special ownership/directorship arrangements

2.1. If profit entity – with 1 director= sole shareholder : he may exercise any voting rights at any time , anywhere, without internal formalities unless MOI prohibits it.

2.2. If profit entity – with 1 director : he may exercise any functions of the board at any time anywhere without internal fornalities.

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39 39 | P a g e Auditing Notes AUDI 1012.3. 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 anytime2.3. 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 shareholders1.2. Same voting & quorum & effect as if it was done at a meeting1.3. 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 decision2.2. To fill a vacancy on the board2.3. If MOI requires it at any time2.4. For AGM2.5. 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 REPORT4.2.2. AUDITED FIN STATS.4.2.3. AUDIT COMMITTEE REPORT4.2.4. ELECTION OF DIRECTORS TO EXTENT REQUIRED BY MOI OR ACT4.2.5. APPOINTMENT ODAYS F : AUDITOR & AUDIT COMMITTEE4.2.6. 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 proxy6.2. A proxy need not be a shareholder6.3. It is a requirement of the act that personal identification by shareholders/proxys ids required6.4. 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 identification2.2. Person presiding must reasonably satisfied verified

3. Unless MOI prohibits3.1. Shareholders meeting electronic communication3.2. Only 1 or 2 shareholders by electronic, the rest not, provided method enables all persons(using&not 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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40 40 | P a g e Auditing Notes AUDI 1012.3. 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 OR5.2. 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 shareholders6.1.2. The next shareholders meeting6.1.3. 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 MOI9.2.2. 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. Mergers9.2.3.2. Amalgamations or mergers9.2.3.3. 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 director3.2. Public Company : at least 3 directors3.3. 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 company4.3. The appointment of alternate directors

5. Person ineligible /disqualified may not be director- must be nullified6. 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.

SEC 76 : STANDARDS OF DIRECTORS CONDUCT :

1.1. See page 3/35

1.2. THE ACTUAL RULES IN COMPANIES ACT : 1.2.1. Not use 1-Position or 2-Info to

1.2.1.1. GAIN ADVANTAGE for self or other person – exept company & subsidiary1.2.1.2. Cause harm to entity / subsidiary

1.2.2. Communicate to board at earliest practical opportunity pertinent info UNLESS 1.2.2.1. Immaterial1.2.2.2. Generally available to public / or known to directors1.2.2.3. Bound by confidentialty – ethical or legal

1.2.3. Exercise 1-powers + 2-functions of director in 1.2.3.1. Good faith1.2.3.2. Best interests of company1.2.3.3. Degree 1- care 2- diligence 3 – skill reasonable expected of functions of director1.2.3.4. ??also –per lecturer- knowledge+skill +experience of director???)

1.3. Notes on these rules :1.3.1. Be informed : You must take reasonable & diligent steps to be informed about any matter to be dealt with (to be coming before

board)1.3.2. Rational basis : Have a rational basis for making a decision & believing it was in best interests of the company1.3.3. Rely on people : You are ENTITLED to rely on PERFORMANCE of and REPORTS +RECOMMENDATIONS + OPINIONS + INFO. by the

following parties :1.3.3.1. Professionals , legal council, accountants retained by company1.3.3.2. Employees you consider diligent & responsible

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41 41 | P a g e Auditing Notes AUDI 1011.3.3.3. Anyone REASONABLY delegated authority by board to PERFORM A BOARD FUNCTION.

1.3.4. Eg : if any person related to you has a personal interest in any matter to be brought before board ,or about which you think board should know anyway , you should notify the board of nature of interest.g

1.4. Directors incl. : 1.4.1. Prescribed officer 1.4.2. alternate director1.4.3. member of a committee of board , eg + audit committee 1.4.4. the above all is irrespective if person is an actual member of the company board or not.

1.5.2. QUICK NOTES :

2.1. 15 days public company meeting notice, 10 days other companies2.2. Quorum special resolution = 75% of voting righs that were exercised on the occasion min 10% difference between ordinary& special if

moi state different2.3. Special resolution needed for : amalgamations&mergers,+ moi change + disposal greater part assets + voluntary winding up2.4. Min 50% directors be elected by shareholders in profit company +++voted on separately+indefinite term or per MOI +elected persons

voting rights to elect directors+ 1vote per right + majority needed.2.5. Director removed by ordinary vote at shareholders meeting by majority allowed to vote rights in an election of a director. +++he gets

notice same time as for a shareholders meeting 15 days or 10 other olonger per moi + he can make representation at meeting2.6. Ineligible – juristic person, unemployed minor or other legal disability , convicted of cretsain offences , per companies act not allowed ,

unrehabilitated insolvent , prohibited by a court from being , declared delinquent by court ,remover public office trust for dishonesty2.7. Board meetings : quorum – majority of directors must be present to be asble to vote. 1 vote each , majority wins , chair cast if not vote,

else vote fails3. n If a director must leave a meeting because they are voting on a matter in which he has a financial interest , then he is still part of – counts

toward-the quorum,but his vote is not counted as being part of the number of which 50% is a majority- so he is counted as absent for the vote, but present for the quorum2.8.

CC ACT

AUDITORS ACT

1. OBJECTIVES OF “A.P.ACT”

1.1. APA OBJECTIVES

1.2. The APA has the following objectives:

1.2.1. • To protect the public interest.

1.2.2. • To provide for the establishment of IRBA (The Independent Regulatory Board for Auditors).

1.2.3. • To improve the development and maintenance of internationally comparable ethical andauditing standards.

1.2.4. • To set out measures to advance the implementation of appropriate standards of competence and good ethics.

1.2.5. • To ensure disciplinary action.

2. SEC 45 : REPORTABLE IRREGULARITY

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.

2.5. Five questions to ask to see if it is:2.5.1. Committed by person responsible for Management ?2.5.2. Is it an Unlawful Act or Omission ?2.5.3. Does it result in Material Financial Loss ? ( if answer is no see Q4)2.5.4. Is it fraud or theft ? ( if answer is no see Q5)2.5.5. Is it a Material Breach of Fiduciary Duty ?

2.6. If BOTH question 1 and 2 , plus any one of 3-4-5 are yes , then IT MUST BE REPORTED TO THE IRBA2.7. REPORTING TO IRBA:

2.7.1. When : 1st report is to be done “without delay”2.7.2. Next : Report to Mngmnt within 3 days , then do a second report within 30 days to the IRBA again stating EITHER:

2.7.2.1. No reportable irregularity is taking place OR2.7.2.2. It was stopped AND measure were taken to prevent & recover loss OR2.7.2.3. The reportable irregularity is continuing

2.8. Some examples of potential reportable irregularities include:2.8.1. Non-payment of amounts withheld with the sanction of person responsible for management of the entity (for example PAYE, Pension or Medical Aid contributions).2.8.2. Payment of bribes with the sanction of a person responsible for management of the entity.2.8.3. Trading whilst factually insolvent.2.8.4. Income tax and other tax submissions not made or fraudulent.2.8.5. Books and records not maintained.2.8.6. Unauthorised directors loans and expenses.2.8.7. Theft or fraud committed by any person responsible for management of the entity.

41


Fairness AccountabilityResponsibilityTransparencyCOMPANIES ACT: May not be auditor:1) Director.officer,employee of company2) Director.officer,employee of company or of any company offering secretarial work to the company.3) Partner, employee,employer of any director of the company4) 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 companyii) Shareholders agree writingiii) In audutiors reportiv) No shares owned by public companyv) 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 meetingsii) Receive all notices regarding such meetingsiii) 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 AGMb) Ensure proper acc. Records and returns received from branches not visited.c) Minute books and attendance registers of meetings kept as requires by actd) Register of directors interests in contracts have been kept.and entries agree with minutes of meetings.e) Existence of securitiesf) All info + explanations auditor deems necessary.g) AFS in accordance acc. Records& returnsh) Gafs comply with acti) Tests to Gafs &Afs fairly presentj) Directors report – conflict fair presentation / distort meaning of fin statsk) Not carrying on business+ no intention= report to registrarl) Comply any other duty imposed by act on himm) Comply auditing profession act

6) ####ASSSOSIATION AGREEMENT :a) To regulate the internal affairs of corporationsb) Voluntaryc) Binding on all new & present membersd) No constructive noticee) Amendments & dissolutions in Writing & signed by membersf) May be amended & ddissolved

CC Act1) Founding statement: basic document bring cc into being = memorandum of company but simpler

i) Name ii) principle businessiii) postal + physical addressiv) full name + ID of each memberv) % of each members interestvi) Contributionvii) Accounting officers name& addressviii) 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 memberiii) 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 mindb) Guilty of conduct prejudicial : eg reckless/negligencec) Impractical to other members: eg such member never presentd) Other circumstances render just & equitable to cease to be eg acts in own interests detriment cc.

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43 43 | P a g e Auditing Notes AUDI 101All For ‘not pull their weight’ , and also court decides on payment

PER EXAM SCOPE :JULY ONLY1. Difference Between External & Internal Auditor : see the Q 5 on class answers to class quiz2. Reportable irregularities :

2.1. Reportable irregularity2.1.1. Five questions to ask to see if it is:

2.1.1.1. Committed by person responsible for Management ?2.1.1.2. Is it an Unlawful Act or Omission ?2.1.1.3. Does it result in Material Financial Loss ? ( if answer is no see Q4)2.1.1.4. Is it fraud or theft ? ( if answer is no see Q5)2.1.1.5. Is it a Material Breach of Fiduciary Duty ?

2.1.2. If BOTH question 1 and 2 , plus any one of 3-4-5 are yes , then IT MUST BE REPORTED TO THE IRBA2.1.3. REPORTING TO IRBA:

2.1.3.1. When : 1st report is to be done “without delay” to IRBA 2.1.3.2. Next : Report to Mngmnt within 3 days , then do a second report within 30 days to the IRBA again stating EITHER:

2.1.3.2.1. No reportable irregularity is taking place OR2.1.3.2.2. It was stopped AND measure were taken to prevent & recover loss OR2.1.3.2.3. The reportable irregularity is continuing

3. Founding document : 3.1. Founding statement: basic document bring cc into being = memorandum of company but simpler

3.1.1. Name 3.1.2. principle business3.1.3. postal + physical address3.1.4. full name + ID of each member3.1.5. % of each members interest3.1.6. Contribution3.1.7. Accounting officers name& address3.1.8. Fin year end date.

4. ASSURANCE/NON-ASSURANCE DIFFERENCE: engagements a) Elements of an Assurance Engagement.:

(1) THREE PARTY RELATIONSHIP :1-Prof. accountant 2-Responsible Party 3-Intended User(a) Eg: 1-registered auditor 2-directors responsible for AFS 3-shareholders

(2) A SUBJECT MATTER: Eg: Financial Position or Results of operations (3) SUITABLE CRITERIA : Eg: International Fin. Reporting Standards (IFRS)(4) SUFFICIENT APPRORIATE EVIDENCE : Eg: evidence needed to conclude Fin Stats free of material misstatements(5) WRITTEN ASSURANCE REPORT : Eg: The Audit Report on Fair Presentation.

b) Where it does not meet the definition of or does not contain the elements of an assurance engagement, then it is automatically called a non-assurance engagementSo generally ,where does not :enhance credibility, and pass an opinion , but rather perform a task eg:

5. Postulates: 5.1. That held true past hold true future5.2. Conflict of interest5.3. Collusive & other irregularities5.4. Professional status – professional obligations5.5. Internal controls reduce risk of errors & irregularities 5.6. GAAP application results in fair statement fin stats 5.7. Fin data is verifiable5.8. Auditor act exclusively as auditor –in order to independent&objective opinion

6. Assertions of the fin stats Fundamental principles of saica:6.1.1. – see fundamental principles –

.7. Auditors responsibilities :

7.1. Auditors duties :7.1.1.1. 1st appoint a partner in charge/responsible7.1.1.2. Then audit must be –to express opinion if fairly presented

7.1.1.2.1. Free of restriction7.1.1.2.2. Satify existence liabilities & assets7.1.1.2.3. Proper accounting records at least 1 of official languages7.1.1.2.4. All vouchers/docs /records in opinion auditor needed have been obtained7.1.1.2.5. No reportable irregularities7.1.1.2.6. Comply auditing pronouncements/ standards isa’s7.1.1.2.7. Auditor complied all laws relevant to audit7.1.1.2.8. Satifsfied audit of fairness of fin stats.

7.1.2. report on all such matters said by act or any other acts.7.1.3. Examine afs and gafs to be laid before AGM7.1.4. Ensure proper acc. Records and returns received from branches not visited.7.1.5. Minute books and attendance registers of meetings kept as requires by act7.1.6. Register of directors interests in contracts have been kept.and entries agree with minutes of meetings.7.1.7. Existence of securities7.1.8. All info + explanations auditor deems necessary.7.1.9. AFS in accordance acc. Records& returns7.1.10. Gafs comply with act7.1.11. Tests to Gafs &Afs fairly present7.1.12. Directors report – conflict fair presentation / distort meaning of fin stats7.1.13. Not carrying on business+ no intention= report to registrar7.1.14. Comply any other duty imposed by act on him

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44 44 | P a g e Auditing Notes AUDI 1017.1.15. Comply auditing profession act

8. Procedures to obtain evidence – inspection /observation/recalculation/reperformance/enquiry .9. Contingency fees - may be charged for certain non-assurance engagements

9.1. N ot allowed to be charged for assurance engagements9.2. Not allowed to preparre a tax return for a contingent fee.

10. Financial interests 2/37 11. Tax practice 2/39+/- 12. Incorporating an audit company:

12.1. Personal liability company & private co.12.1.1. With a share capital

12.2. MOI says personal liability co12.3. MOI says directors& past directors personally liable for debts of company12.4. All members :

12.4.1. NATURAL PERSONS(no juristic)12.4.2. Punlic accountants & registered with IRBA12.4.3. Directors12.4.4. All directors ALSO members (both ways)

12.5. Or: partners all are OR sole proprietor = IRBA auditor& public acc13. MOI : all -see computer notes 14. Removal or directors & auditors :

14.1. Directors : 2.8.1. Director removed by ordinary vote at shareholders meeting by majority allowed to vote rights in an election of a director. +++he

gets notice same time as for a shareholders meeting 15 days public co. or 10 other or longer per moi + he can make representation at meeting

14.1.1. MOi may state - Chairman or other persons who may remove certain specified directors , but not over 50% of directors allowed to be removed like this14.2. Auditors :

14.2.1. 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.,

14.2.1.1. BUT auditor normally appointed may not be removed exept at AGM by ¾ majority of those present15. BOARD COMMITTEES:

15.1. Bod may appoint any no.of committees(unless MOI staes otherwise)15.2. May dlegate any authority of board to committee

15.2.1. May appoint directors or non directors, buty non-directors MAY NOT vote & must not be ineligible to be a director.15.3. 1-Audit & 2-Remuneration committee are compulsory for public companies ,

16. LOAN TO DIRECTORS : 16.1. PROVIDED that:

16.1.1. MOI conditions adhered to16.1.2. Board satisfied ;

16.1.2.1. Liquidity&solvency test16.1.2.2. Terms fair & reasonable to company

16.1.3. Special resolution is needed.- within at least the last 2 years – can be for a class or single transaction)16.2. If fin assis. Given in contravention of MOI or this section, it is VOID & directors may be liable16.3.WRITTEN NOTICE : of any resolution to do this to : all shareholders(unless every one is a director) & ‘trade unions’ within 30 days of

adoption16.3.1. If total assistance within that fin year over 0.1% of net worth of entity – notice must be in 10 days maximum.

17. Rotation of auditors: 5 yrs , or if >2 yrs, then stop , then must wait further 5(or isit 2?) years.18. Business Rescues :

18.1. 5 inform about resoluton+5 appoint a bus resc. prac=2 name to the commission 18.2. Debts as fall due in next 6 mnths18.3. Will go Insolvent in next 6 mnths

19. Audit Comittees : pubic co os SOC or any voluntary 19.1. At every AGM, must elect new one, at least 3 members

19.1.1. UNLESS : it is subsidiary of a company that has one AND19.1.2. It will perform the functions of it for the subsidiary

19.2. Any vacancy to be filled in 40 bus.days19.3. Each member MUST BE ;

19.3.1. Director19.3.2. Satisfy minimum qualification minister may prescribe as to requirements so audit committee as a whole comprises enough experience/knowledge

19.4. MUST NOT BE : 19.4.1. Involved in day to day mngmnt of company business or in last fin year19.4.2. Prescribed u officer OR full time executive employee Or related or inter-related company or -held that position last 3 fin years.19.4.3. Material supplier or customer reasonable 3rd party conclude integrity/impartiality/objectivity 19.4.4. Not related person to above ‘not alloweds’

20. DUTIES :&responsinbilities of AUDITOR : 20.1.1. Report his opinion in written report 20.1.2. Comply ISA’s20.1.3. Comply SAICA20.1.4. Comply ACT & laws & name all acts20.1.5. Due care & professional sceptcism 20.1.6. Independent attitude20.1.7. Report reportable irregularities20.1.8. Detect&report material fraud & error 20.1.9. Detect 7 report contraventions of laws & regulations 20.1.10. Obtain sufficint appropriayte evidence to support.. 20.1.11. Professional jusgement in planning audit 20.1.12. Professional skepticism that fin stats mistated

21. Values of governance :

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45 45 | P a g e Auditing Notes AUDI 10121.1. Resposibility : assets& action of company & corrective action21.2. Fairness : interests of all stakeholders 21.3. Accountability: justify decisions its to stakeholders21.4. Transparency : sharehplders easy analysis

22. Remuneration for services as director 22.1.Company may pay remuneration to directors for services as directors unless MOI states otherwise.22.2.may only be paid in accordance with a special resolution passed in last 2 years.22.3.Must state in fin stats the directors remuneration in certain detail.

23. INTERNAL CONTROL OBJECTIVES 24. CHARACTERISTICS OF GOOD INTERNAL CONTROL 25. Analytic procedures : see own notes26. Preliminary engagement activites 27. Business risks ch 5 28. Definitions :

28.1. corporate governance : it is the system or process whereby companies are controlled or directed. It is about companies being good corporate citizens and all that it entails.

28.2. fraud 28.3. errors

29. ways in which fraudulent financial reporting takes place. 30. Audit risk/significant risk/control risk 31. Application controls 8/35 32. Program checks 33. Materiality quantitative matters

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CHAPTER 5 : GENERAL PRINCIPLES OF AUDITING.(CH 5 IN BOOK)CHAPTER 5 : GENERAL PRINCIPLES OF AUDITING.(CH 5 IN BOOK)

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.

DEFINITION OF INTERNAL CONTROL.DEFINITION (PER SAICA BOOKLET :'GUIDANCE FOR DIRECTORS:REPORTING ON INTERNAL CONTROLS')Internal Control is a PROCESS effected by the 1- COMPANIES BOARD OF DIRECTORS ,2-MANAGEMENT AND 3-OTHER PERSONNEL.Designed to provide REASONABLE ASSURANCE regarding the achievement of OBJECTIVES in the following 3 categories:

i) 1-ECONOMY 2- EFFICIENCY 3-EFFECTIVENESS.ii) INTERNAL FINANCIAL CONTROL iii) COMPLIANCE with applicable LAWS & REGULATIONS.

FOUR ASPECTS OF INTERNAL CONTROL FROM ABOVE DEFINITION.1. Internal control is a PROCESS , a means to an end, not an end in itself.2. AFFECTED BY PEOPLE ,not just procedures/policies.3. Only REASONABLE ,NOT ABSOLUTE ASSURANCE.4. To achieve objectives in 3 CATEGORIES , which are INTERLINKED. (3 in definit.)

(ISA 315). 5 COMPONENTS OF INTERNAL CONTROL (IN CH 7)1. CONTROL ENVIRONMENT (all) : +attitudes,awareness,actions, of those responsible for governance,mngmnt2. ENTITIES RISK ASSESMENT PROCESS: 3. INFORMATION SYSTEM : transactions 4. CONTROL ACTIVITIES : actual sys.5. MONITORING OF CONTROLS : eg internal audit dept.

INTERNAL CONTROL OBJECTIVES.1) Policies & Procedures (internal controls) to ensure orderly & efficient conduct of business.incl. controls to :

a) ADHERE TO MNGMNT POLICIES (INCL. APPLICABLE LAWS & REGULATIONS!) b) SAFEGUARD ASSETS c) PREVENT& DETECTION OF FRAUD & ERROR d) ACCURACY & COMPLETENESS OF ACC RECORDS e) TIMELY PREPARATION OF RELIABLE FIN. & OTHER INFO NECESSARY TO RUN BUSINESS.

LIMITATIONS OF INTERNAL CONTROL.1) Cost exceed benefit –limits capacity of int.controls.2) Directed at routine transactions. –miss non-routine eg sell copier.3) Human error. – eg: calc. discount after vat.4) Collusion- eg fraudulent paypacket- collude wage clerk,foreman,personell mngr.5) Abuse of responsibility over internal control.- eg mngr overrides stop on purchases for overdue acc.6) Changes in CONDITIONS causes INADEQUATE controls.- sales clerk not check credit record/overdue acc. due to volume

THE ACCOUNTING SYSTEM1) Category of int. controls = 'INTERNAL FINANCIAL CONTROLS'.2) Collection of TASKS & RECORDS to process transactions to create fin.records 3) Maj. elements = 1-PAPER 2-PROCEDURES 3-PEOPLE 4-COMPUT4) BUT , to ensure =” VACT” = VALID ,ACCURATE,COMPLETE +TIMEOUS ADD: control procedures to Acc.Sys. (not calc.price,write invoice,enter in sales journal, BUT check

customer not overdue before sale, check calculations, mnthly check if entered in sales journal afterwards.

WHO IS INTERESTED IN WHAT?

1) MANAGEMENT:all 3 categories , but eg fin director-int.fin. controls, production dir- operations controls(efficiency,effecti...) etc2) INTERNAL AUDITORS : all 3 categories –eg audit delivery procedures,or compliancewith laws, or stock audit etc.3) EXTERNAL AUDITORS : last 2 Internal Financial Control :accounting sys. + related controls.,related laws & reh=gulations(but not on eg environmental laws,that is production

mngr etc.,unless fin implications eg a fine is involved.Then he is interested,(now financial))

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THE CHARACTERISTICS OF GOOD INTERNAL CONTROL.

INTERNAL CONTROL is only ever: POLICIES & 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 goods2. 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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INTERNAL CONTROL FOR THE BUSINESS

AS A WHOLE

OPERATIONS:ECONOMYEFFICIENCYEFFECTIVENESS

INTERNAL FINANCIAL CONTROL

COMPLIANCE WITH LAWS AND

REGULATIONS

ACCOUNTING SYSTEM

CONTROL PROCEDURES

50 50 | P a g e Auditing Notes AUDI 101(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 APPROPRIATE EVIDENCE.Overall measure of whether enough sufficient appropriate evidence is gathered cannot be 100% exactly determined :BUT

1) SUFFICIENT EVIDENCE: 1) SUFFICIEN T means if QUANTIT Y 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)

r2) 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 attorneyc) 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 Effectivee) 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.

INFLUENCEING FACTORS IN DETERMINING WHETHER SUFFICIENT APPROPRIATE EVIDENCE HAS BEEN OBTAINED.

Factors which MUST influence auditors decision.:

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.

6) CATEGORIES OF ASSERTIONS: ISA 500R Categorises the Assertions as follows.:a) Classes of Transactions and Events (for period) eg:sales, purchases, interest receivedb) 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

1. Classes of TRANSACTIONS AND EVENTS: Assertions about (during period)1.1. OCCURENCE :recorded trans.& events DID occour and DO PERTAIN to THIS entity.1.2. COMPLETENESS :all that should have been recorded, were recorded ,none missing.1.3. ACCURACY :1-Amounts & 2-Data were recorded appropriately.1.4. CUT-OFF : in right accounting period.1.5. CLASSIFICATION (and UNDERSTANDABILITY) : recorded in correct account names.

2. ACCOUNT BALANCES :Assertions about (end period). 2.1. EXISTENCE : assets, liabilities, equitys DO actually exist.2.2. RIGHTS AND OBLIGATIONS : entity holds rights to assets , liabitities are obligations of this entity , named shareholders . : do hold the rights

to the equity.+2-ALL ENCUMBERENCES on ownership must be . .. . :Disclosed2.3. COMPLETENESS : all that should have been recorded,were recorded,none missing.2.4. VALUATION AND ALLOCATION. : assets ,liabilities , equity recorded at appropriate valuation amounts and any resulting : valuation adjustments or allocation adjustments

are appropriately recorded .ALSO , :DEPRECIATION and OBSOLECENCE ALSO allocated to correct accounts in ledger3. PRESENTATION AND DISCLOSURE :Assertions about.

3.1. OCCURENCE 3.2. AND RIGHTS AND OBLIGATIONS. :disclosed events ,transactions& other matters DID occour and Do pertain to this entity. 3.3. COMPLETENESS : All matters that should be disclosed in FIN STATS. , were disclosed, none missing.3.4. CLASSIFICATION AND UNDERSTANDABILITY. :financial info./disclosures are appropriately/ properly PRESENTED and DESCRIBED, and EXPRESED CLEARLY., and classified

correctly in ledger3.5. ACCURACY amounts disclosed in eg notes are not junk3.6. VALUATION & ALLOCATION. : 1-FINANCIAL and 2-OTHER INFORMATION( eg notes on union problems) are disclosed FAIRLY and at APPROPRIATE AMOUNTS. (at correct

valuation amounts and in a correct and proper – 'FAIRLY presented' - manner.)

DIAGRAM OF ASSERTIONS:

ASSERTION TRANSACTION EVENTS ACCOUNT BALANCES PRESENTATION 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# #

9 Ias 315 has ACCURACY & Valuation instead of number 8 above for presentation( 8 is correct for acc.balances though)

#

10 Ias 315 has rights& obligations&OCCOURANCE for presentation ( 8 is correct for acc.balances though)

#

EXAMPLES OF ASSERTION CLASSIFICATION IN PRACICE: 1. SALES TRANSACTIONS :

1.1. FIRSTLY : all Sales figures PLUS all disclosures pertaining to sales should be checked for :(leave out Occourance for disclosures though)1.1.1. Occourence : all sales included DID actually occour.(not fictitious)

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52 52 | P a g e Auditing Notes AUDI 1011.1.2. Completeness : all sales made were included in sales total, none left out.1.1.3. Accuracy : all sales recorded appropriately , meaning prices discount & vat rates are correct & correctly calculated. 1.1.4. Cut- off : All sales recorded occoured in accounting period being audited.1.1.5. Classsification : All sales posted to proper account incl. Contra accounts –VAT, DISCOUNT ,CREDITORS.

TRANSACT&EVENTS Occourence Completeness Accuracy Cut-Off Classify&Undrstd

ACCOUNT BALNCES Existence Completeness Rights&Obligat. Valuat.&Allocat.

Plant &Equipment All in bal.sheet existed at time of bal. sheet

All owned is included,none left out.

Holds rights to ownership+2-Encumberences on ownership disclosed.

reflected at appropriate amount incl allocat.1Obsolete+ 2-Depreciation

Note: when "presentation and disclosure ' is done for Sales transactions and above,it is far more complex for plant & equip(deprec)

PRESEN. & DISCLO. Occourence Completeness Accuracy Cut-off Classify&Undrstd Rights&Obligat

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.

THE AUDITORS TOOLBOX: 1. Auditor has ONLY 2 things in his TOOLBOX

a. TESTS OF CONTROLS =to test if control procedures complied withb. SUBSTANTIVE PROCEDURES. =to test if verify / substantiate 1-TRANSACTIONS 2-BALANCES

TESTS OF CONTROLS1) 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

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;

52

53 53 | P a g e Auditing Notes AUDI 101a) 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 entityv) 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 onlya) Collection of balances - bal sheetb) 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 definitions2) 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.

STEPS IN THE SAMPLING EXERCISE.1) Determine objectives of procedure2) Determine procedure3) Confirm population is appropriate & complete4) Define units5) Get sample size6) Select sample7) Perform audit procedure8) Analyse nature & cause of errors53

54 54 | P a g e Auditing Notes AUDI 1019) Project results over population10) Evaluate11)

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CHAPTER 6 : AN OVERVIEW OF THE AUDIT PROCESS.CHAPTER 6 : AN OVERVIEW OF THE AUDIT PROCESS.

AFTER COMPLETION OF THIS TUTORIAL LETTER YOU SHOULD BE ABLE TO: 4.1. discuss the preliminary engagement activities you would perform before accepting aprospective client;4.2. identify and assess the risks of material misstatements through understanding the entity andits environment;4.3. discuss/describe the audit risk/risk of material misstatement;4.4. implement procedures to address the identified audit risk by using the risk indicator;4.5. know the difference between risk at overall financial statement level and the assertion level;4.6. know the difference between audit plan and audit strategy and discuss the details dealt within the audit plan and audit strategy;4.7. calculate materiality in planning and performing an audit and apply planning materialitycalculated to a given scenario;4.8. distinguish the difference between fraud and error;4.9. identify and explain the fraud risk factors and circumstances that might indicate the possibilityof fraud;4.10. identify, discuss and apply the principles contained in the IFAC Code of Ethics (SAICA) in agiven scenario; and4.11. identify, discuss and apply the requirements of the Auditing Profession Act (IRBA) to a givenscenario.

KNOW/LEARN WHOLE CHAPTER PER LECTURER :

STAGES OF THE AUDIT PROCESS: (KNOW WHOLE CHAPTER PER LECTURER ) STAGE 1 : PRELIMINARY ENGAGEMENT ACTIVITIES:

(1) Decide whether to ESTABLISH/CONTINUE : Performing Procedures to decide whether to Establish/Continue a Relationship.1. Step 1 - CLIENT INVESTIGATION : :Evaluate if -(1)- Firm can comply with ethical requirements if he were to accept the job , NAMELY THE 5

FUNDAMENTAL PRINCIPLES + EXTRA 1 IS INDEPENDENCE. : Eg: illegal operations, management is dishonest, refusing to implement correct acc. policies , cannot pay, etc.

2. Step 2 - CAPACITY :Establish if auditor has the Capacity / Resources / if Client can be appropriately serviced or not.

(2) TERMS OF ENGAGEMENT :Formulate the terms of engagement.

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.

STAGE 3 : PUTTING AUDIT -PLAN AND STRATEGY - INTO ACTION.1) RESPOND RISK FIN.STAT. LEVEL ('overall response') :Respond to assesed risk at financial statement level, eg: assign more experienced staff.2) RESPOND RISK ASSERTION. LEVEL :By carrying out Tests Of Controls +Substantive Tests (to gather sufficient evidence to reduce risk to an acceptable level.)3) RESPOND TO SIGNIFICANT RISKS : By carrying out Tests Of Controls +Substantive Tests + Investigation eg laws regulations etc.

STAGE 4 : EVALUATE & CONCLUDE.1) EVALUATE AND CONCLUDE :Evaluate and Conclude on Audit Evidence gathered.2) AUDIT REPORT :Formulate Audit Report.

HOW THE STAGES ARE LINKED: The preliminary stage is not really linked to the other stages , except for the fact that the info gathered here will be used in the rest of the audit in eg: evaluating the client The rest of the stages are closely linked

1- The planning stage is linked to Putting into action stage because the Nature/Timing /Extent of tests done in executing stage are determined in planning stage2- The executing linked to reporting because : all info gathered here is used in reporting + evaluate stage.

ALSO :(Note: The stages are NOT standalone units and the activities within each stage do not fit neatly into the order presented.Planning :is not standalone because \1-as they execute current audit, next years audit is being planned.2- if problems develop in audit then new planning must again be done to implement additional procedures / audit strategy if needed. –so if you are in stage 3 , you must go and do some stage 2 things again, but you are already in stage 3.)

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ROLE OF ISA'S : INTERNATIONAL STANDARDS ON AUDITING 1) SA has adopted the IFAC (international federation of accountants) auditing standards : (ISA's).2) Stipulate a standard& give explanatory comment how (does Not give a list of procedures)3) Eg: STAGE 1 = ISQC 210 -terms of engagement + ISA 220R Quality control for audits of historical fin. Info. STAGE 2 = ISA 300 etc.

DETAILS OF EACH STAGE OF THE AUDIT PROCESS: STAGE 1 : PRELIMINARY ENGAGEMENT ACTIVITIES:

This is only a stage to see if the client is trustworthy, and if you are big enoufh to take on the job It does NOT entail studying the manufacturing process or making big audit plans.

The auditor needs to assess whether or not to act as an auditor for a new client or to continue acting as an auditor for an existing client. The auditor should take into consideration the risks of legal liability or reputational damage, whether a quality audit can be conducted in terms of ISAs well as regulatory and ethical requirements.

ISA ‘ S ETC : (i) ISA200 ( A14-A17) for “ethical requirements for an audit of the fin.stats” in this ISA on ‘overall requirements for general audits’ , just talks about the 5

fundamental principles + independence , not much else.(ii) ‘IESBA’ Code of Professional Conduct. : in the section on ‘new clients acceptance/continue’ about just 1-independence 2- fundamental principles 3- ask

old accountant and permission stories 4-multiple “threats & safeguards” to be put in place before you accept ,mentioned.(iii) ISQC1 par A7 - in this standard of quality control in general, it is just a few words about compliance with ethics , only states the ‘fundamental principles’

to be followed really .(iv) ISA 220 para 12-14 & A8 –A12 in this ISA on ”quality control in an audit of fin stats” (v) SAAPS 1 : used to apply but it has been withdrawn by SAIPA lately so it is gone.

WHAT TO DO IN THE PRELIMINARY ENGAGEMENT ACTIVITIES: (vi) Decide whether to ESTABLISH/CONTINUE : Performing Procedures to decide whether to Establish/Continue a Relationship.

1. Step 1 - CLIENT INVESTIGATION : :Evaluate if -(1)- Firm can comply with ethical requirements if he were to accept the job , NAMELY THE 5 FUNDAMENTAL PRINCIPLES + EXTRA 1 IS INDEPENDENCE. : Eg: illegal operations, management is dishonest, refusing to implement correct acc. policies , cannot pay, etc.

2. Step 2 - CAPACITY :Establish if auditor has the Capacity / Resources / if Client can be appropriately serviced or not.

(vii) TERMS OF ENGAGEMENT :Formulate the terms of engagement.

(1) DECIDE WHETHER TO CONTINUE/ESTABLISH : ISA 220R +ISQCI +ISA200 + IESBA CODE OF CONDUCT : STIPULATE:

(a) CLIENT INVESTIGATION : FIRST OF ONLY 2 THINGS TO CHECK (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 THREATS2) 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 clientINTEGRITY; 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

(iii) ETHICS & CLIENT INTEGRITY : other stuff trated separately by UNISA: ABILITY OF CLIENT TO PAY

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(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) CAPACITY :ESTABLISH IF AUDITOR HAS THE CAPACITY / RESOURCES / IF CLIENT CAN BE APPROPRIATELY SERVICED OR NOT. :ISA220 PARA A8-A11

(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. Experience: enough experienced managers etc.

3. Technical Skills (own guys) -competence in firm or access to other auditors or experts who do have the skills.

4. Resources : - Enough Team Staff in relation to size of client.

5. Resources : computers etc.

6. Time. – Manage to finish by Audit deadline Necessary to complete within deadline.

7. Quality control as per ISQC1

a. Per unisa: When you are required to discuss factors that you will consider prior to accepting the engagement, in addressing quality control, we recommend that you write the following sentence in addressing compliance with quality control: “ The audit firm would have to consider whether it could comply with ISQC1 and SAAP1( withdrawn) in ensuring quality of the audit.”

SAFEGUARDS EXAMPLES FOR BOTH OF THE ABOVE :

(ii) Understand Aquire understanding of: enterprise

(iii) Understand relevant industry

(iv) Understand Relevant reporting & regulatory requirements

(v) Use experts where necessary

(vi) Assign enough staff

(vii) Comply with quality control policies ie: ISQC 1 etc.

(viii) Agree realistic time frame

PROCEDURES TO GATHER PRELIMINARY ENGAGEMENT INFO.

(ix) Relationships to team/auditors : enquiry if any family etc.relationships exist(regular written from staff)

(x) Inside Inquiry / : Discussion ; directors,senior financial personnel,audit committee(2 heads better than 1, + experienced). (Analytical Procedures are for planning stage(risk assessment) , not here

(xi) Outside Inquiry/ : of firms bankers,legal council,etc (permission must be sought first)

(xii) Observation & Inspection :of operations etc. and also of :

(xiii) Observation & Inspection: of Public Documents or made available : by client eg: group reports.

(xiv) Other Audit Procedures :Database searches : eg. internet

(xv)Other Audit Procedures :Previous Auditor : communicate with , in compliance with code of Professional Conduct.

REASONS WHY AUDIT FIRM MAY NOT WISH TO START RELATIONSHIP.

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. (note: there is however nothing in any of the ISA’s which says this is a reason to not accept , if the client does not allow inspection at the preliminary stage., but if it is documents needed to do the audit then it is not acceptable at all. Reasons: 1- could restrict info to a senior auditor to be confidential 2- regard it as suspicious so treat with professional skepticism. 2- nothing in ISA’s but is an indicator of a major problem here!

6. Risk Sue Auditor : Client history of poor relationships with auditor.7. Capacity :not competence+ resources, not able to do it (eg too big)8. Ethical: see standards below ,eg: client director is family of auditor.

REASONS WHY AUDIT FIRM MAY NOT WISH TO CONTINUE WITH EXISTING CIENT. (xvi) Same as above exactly.

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.

(II) STAGE 2 : PLANNING:

The following standards are applicable to this section:ISA 200 Overall objective of the independent auditor and the conduct of an audit in accordance with International Standards on Auditing.ISA 300 Planning an audit of financial statements.ISA 315 Identifying and assessing the risks of material misstatement through understanding the entity and its environment.ISA 320 Materiality in planning and performing an audit.ISA 330 The auditor’s responses to assessed risks.

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59 59 | P a g e Auditing Notes AUDI 101ISA 600 Audits of group financial statements (including the work of component auditors) par 15-31; par A22-A55) Appendix 2 and Appendix 3.

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) A UDIT STRATEGY : Risk of Misstatement at FINANCIAL STATEMENT level : CORRECTED BY : A UDIT STRATEGY : (words= SCOPE + TIMING + DIRECTION)

ii) A UDIT PLAN : Risk of Misstatement at ASSERTION level : CORRECTED BY : A UDIT PLAN : (words= Nature + Timing + Extent)

c) Documentation: all Audit Plan + Audit Strategy must be documented for:

i) REFERENCE for team

ii) PROOF of proper planning by team

iii) RECORD OF KEY DECISION made

d) IMPORTANCE OF PLANNING: i) Attention -: Plan to give enough to important areas of audit.ii) Potential Problems : Identify & resolved.iii) Audit team : Properly assemblediv) Supervision +Review : and proper review of their work ,of audit team , facilitatedv) On time : completion of work planned

1) AUDIT STRATEGY :ESTABLISH AN OVERALL AUDIT STRATEGY.

1) REM “Materiality “ is basicly officially done in THIS PHASE of the audit... strategy2) 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 toii) 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.

3) OVERALL RESPONSES TO ADDRESS A HIGH RISK OF MATERIAL MISSTATEMENT AT THE FINANCIAL STATEMENT LEVEL : one includes the following in the AUDIT STRATEGY (not in audit plan) (ISA 330, par A1-A3). • larger samples :Extend sample sizes.• more experience staff.Engage more experience staff.•Follow a more ‘only’ substantive tests : approach or to do a more ‘combined’ approach (if there are deficiencies in the control environment – ie tests of controls OR substantive testing ?Which one more? ).• less analytical procedures : Perform more tests of detail and less analytical procedures.• arrive unexpectedly Incorporate an element of unpredictability in testing-.• professional sceptism Exercise professional sceptism.• use an expert : Consider the use of an expert.• doubt mngmnt representations :Put less reliance on management representations.

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60 60 | P a g e Auditing Notes AUDI 101• Perform procedures closer to year-end.• Lower materiality.

1) AUDIT PLAN :

a) OBJECTIVE OF AUDIT PLAN: The objective is to formulate an audit strategy and audit plan which ensures that the audit will be conducted in an effective manner.

b) The audit plan is far more detailed than audit strategy

(1) PLANNING STAGE CAN BE BROKEN DOWN INTO FOLLOWING 5 STAGES :

(A) UNDERSTAND: :OF ENTITY AND ENVIRONMENT INCL. INTERNAL CONTROL. eg check if there is a risk of directors overstating stock, one cannot do planning without first study Entity.

(B) UNDERSTAND: INTERNAL CONTROLS : understanding of internal controls to determine no. of samples to take

(C) UNDERSTAND : MATERIAL MISTATEMENT : assess risk of in the financial statements.(d) UNDERSTAND: MATERIALITY : decide what is material, and what is not .

(E) FORMULATE AUDIT STRATEGY & AUDIT PLAN:

C) AUDIT PLAN MUST CONTAIN:

I) RISK ASSESMENT : Planned Procedures :OF :

(1) NATUR E of Procedures : make sure its sorted out ie :sufficient to asses risks of material misstatement

(2) TIMING of Procedures : make sure its sorted out ie :sufficient to asses risks of material misstatement

(3) EXTENT of Procedures : make sure its sorted out ie :sufficient to asses risks of material misstatement.

II) AT ASSERTION LEVEL : Planned Further Procedures : to respond to the risk identified above.(i) NATURE of Procedures : for each MATERIAL CLASS of Account Balance, &Transactions, &Disclosure. Refers to the type of audit approach and further

audit procedures.The auditor can decide to follow either of the following approaches:1. A combined audit approach which entails tests of controls and substantive procedures. This is normally when the auditor intend to rely on the

operating effectiveness of controls or substantive procedures alone cannot provide sufficient appropriate audit evidence at the assertion level (ISA 330, par 8).

2. OR Substantive procedures which entail both test of detail and analytical procedures. Irrespective of the assessed risks of material misstatement, the auditor shall design and perform substantive procedures to each material class of transactions, account balance and disclosure (ISA 330, par 18)

(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 PROCEDURES 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

III ) STAGE 3 : PUTTING AUDIT -PLAN AND STRATEGY - INTO ACTION.1-OBJECTIVE of putting PLAN INTO ACTION: TO GATHER SUFFICIENT APPROPRIATE EVIDENCE to reduce risk of material misstatement remaining undetected to an acceptable level :in the account balances,classes of transactions and disclosure. (from PLANNING Item 2 –now carried out here)2-there are many ISA’s refered to for each stage eg: ISA540 =audit of estimates ,ISA520=how to conduct analytical procedures.

1) ISA 330: SAYS : in order to reduce risk to an acceptably low level , auditor should determine overall responses to assesed risk at financial statement level,and should design and perform further audit procedures to respond to assesed risk relating to the assertions.(at account balance/ transaction level) .

a) RESPOND RISK FIN.STAT. LEVEL ( 'overall response')

(1) ‘overall responses‘ at Fin.Stat. Level- overall responses means actions to deal with risk at fin.stat. level : eg assigned strong willed staff/experts/more supervision/surprise visits/do abnormal,unexpected types of tests , not expected : if there is risk of directors manipulating results.

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 salesii) 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

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2) QUICKLY READ PG 6/10 , FROM NO. 3, TO 6.12 BOTTOM. VERY FAST- SOME QUICK FACTS.J

STAGE 4 : EVALUATE & CONCLUDE.3) EVALUATE AND CONCLUDE :

The Evaluation, Done By senior/manager/partner, checks if:

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)

ii) AUDIT DIFFERENCES : show a material misstatement in Fin.Stats. or Not.(1) 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.(2) There must be sufficient evidence to support each ‘audit difference”(3) “Known errors” : auditor can be cocky + request fin ststs. Adjustment, and badly qualify fin.stats.(4) “Likely Errors” : auditor NOT EASILY Allowed to : can be cocky + request fin ststs. Adjustment, and badly qualify fin.stats.( eg: estimation of stock

obsolescence)(5) “Materiality”: auditor will not badly qualify fin stats if not MATERIAL to affect users decisions using fin stats. , but auditor must just inform client so

he can make some changes if he feels like it.

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

IV) AFTER BALANCE SHEET DATE TILL AUDIT REPORT. (1) If any (NEW) relevant /material events must be disclosed.

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 forii) Adverseiii) Disclaimeriv) Other additions eg inclusion of an ‘emphasis of matter paragraph.’(DONE IN CHAPTER ON REPORTING LATER)

1. WORKING PAPERS of the Audit MUST INCLUDE :1. Evidence of :

1.1. Planning process & changes of audit1.2. Auditors understanding of accounting system & controls1.3. Internal audit : assessment of work of1.4. Inherent & control risk assessments & revisions thereof1.5. 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 transactions1.10. Analysis of significant trends & ratios1.11.

2. Legal & organizational structure3. Info on economic & legislative & industry ENVIRONMENT4. Copies of important minutes, agreements & legal documents5. Copies of financial statements6. Copies of auditors report7. Copies of all communications with experts, 3rd parties , other auditors8. Copies of letters , notes to Entity incl. terms of engagement discussions, weaknesses in internal control etc.9. Letters of representation – from the entity10. Conclusions reached by auditor on : significant aspects of audit , esp exceptions & unusual matters were resolved & treated

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CHAPTER 7: IMPORTANT ELEMENTS OF THE AUDIT PROCESS.CHAPTER 7: IMPORTANT ELEMENTS OF THE AUDIT PROCESS.DEFINITIONS: AS PER ISA 315

NB 1) ISA 315 :”Understanding The Entity And Its Environment and Assessing The Risks Of Material Misstatement” : …is to obtain an understanding of the entity ,its

internal control and its environment, sufficient to identify and assess the risks of material misstatement of the financial statements ,whether due to fraud or error , and sufficient to design and perform further audit procedures….

2) BUSINESS RISK : A Risk resulting from significant 1Conditions, 2Events, 3Circumstances, 4Actions Or 5 Inactions that could adversely affect an entitys ability to achieve its objectives and execute its strategies, or from the setting of inappropriate objectives and strategies.

3) Significant risk : A risk of Material Misstatement that in the auditors judgement , is one that requires Special Audit Consideration4) Audit risk – risk that an auditor gives an inappropriate conclusion when there is a material misstatement IN FIN STATS (or elsewhere) , so if he says there is no

material miststement when there actually is one.5) RISK ASSESSMENT PROCEDURES (5) :The Audit Procedures designed to obtain an understanding od the 1-Entity, incl. Its 2-Internal Control, and its 3Environment, to

identify and assess the Risks of Material Misstatement , whether due to 1Fraud or 2Error, at the 1Financial Statement And 2Assertion Levels.6) INTERNAL CONTROL : The Process designed and effected by those charged with governance ,management and other personell to provide REASONABLE ASSURANCE

about the achievement of an entitys objectives with regard to 1Reliability Of Financial Reporting ,2Effectiveness,And 3Efficiency of operations and 4Compliance with applicable laws and regulations.

7) MATERIAL WEAKNESS: A weakness In Internal Control that could have a Material Effect on the Financial Statements.

RISK ASSESSMENT PROCEDURESNB

1) RISK ASSESSMENT PROCEDURES :The Audit Procedures designed to obtain an understanding od the 1Entity, incl. Its 2Internal Control, and its 3Environment, to identify and assess the Risks of Material Misstatement , whether due to 1Fraud or 2Error, at the 1Financial Statement And 2Assertion Levels. THEY ARE PRIMARILY THE FOLLOWING (book very specifically states these)

a) INQUIRY : legal personel (fraud,contracts interpretation),sales personnel(sales),production , marketing , key management .b) INSPECTION & OBSERVATION : check records /assets etc /watch internal controls/ mnftring operationc) ANALYTICAL PROCEDURES : ratio & trend,unusual, prior years etcd) Recalculatione) Reperformancef) OTHER AUDIT PROCEDURES : trade journals,internet,lawyers,bankers.g) Discussion amoungst team members : 2 heads better than 1

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 conceptc) Understanding entity & environmentd) Auditors responsibility with fraud

IMPORTANT ELEMENT 1 OF 4 : AUDIT RISK. For unisa they want :”Risk identification and assessment in obtaining an understanding of the entity and its environment including an evaluation of the entity’s internal control.”

THE RISK BASED APPROACH TO AUDITINGThe auditor identifies the fin stat assertions at risk of misstatement and plans the audit in such a way that it reduces this risk to an acceptable level

DEFINITIONS OF AUDIT RISK: (SEE GLOSSARY IN SAICA BOOK)1) AUDIT RISK : definition:

a) As per International Framework for Assurance Engagements : Definition: (AUDIT) RISK is “ the risk that the practitioner expresses an INAPPROPRIATE CONCLUSION when the SUBJECT MATTER INFO. is MATERIALLY MISSTATED ”.

b) As per ISA200 : Definition: Audit risk: – The risk that the auditor expresses an inappropriate audit opinion when the FINANCIAL STATEMENT are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk (AR = IR x CR x DR).

c) So it is just the risk the auditor gives an UNQUALIFIED OPINION if he should have given a QUALIFIED OPINION.2) Significant risk : A risk of Material Misstatement that in the auditors judgement , is one that requires Special Audit Consideration (Also refer to tutorial letter 103.)3) RISK OF MATERIAL MISSTATEMENT – The risk that the financial statements are materially misstated prior to audit. This consists of two components, namely,

inherent risk and control risk. 4) BUSINESS RISK : A Risk resulting from significant 1Conditions, 2Events, 3Circumstances, 4Actions Or 5Inactions that could adversely affect an entitys ability to

achieve its objectives and execute its strategies, or from the setting of inappropriate objectives and strategies. (ISA 315, par 4(b)).

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THE COMPONENTS OF AUDIT RISK:1) Per ISA 200 audit risk has 3 components

1 -INHERENT RISK : (IR)1) Is NOT controllable by auditor2) The susceptibility of an assertion about a : 1-class of transaction, 2- acc. bal., or 3- disclosure3) Built in risk eg: complex transaction calc’s MORE than simple transaction calc’s, or jewelry value more than cricket bat value. 4) The risk “before” consideration of any controls.

2- CONTROL RISK : (CR)1) Is NOT controllable by auditor1) If Internal controls do not do their job properly. Due to LIMITATIONS OF INTERNAL CONTROLS :

(1) COST VS BENEFITS(2) NON ROUTINE TRANSACTIONS(3) HUMAN ERROR (4) COLLUSION(5) ABUSE =MNGMNT OVERRIDE (6) CHANGE (UPSWING IN SALES)

2) Overcome by put control activites in place: eg segregation duties, access control, control environment.

3- DETECTION RISK (DR)2) Is controllable by auditor – if inherent + control risk is high , he must increase experience staff,or no. of samples, etc, to reduce detection risk.3) May arise because 3 reasons: auditor

a) Selects :an Inappropriate audit Procedureb) Misapplies :an Appropriate procedurec) Misinterprets :results of a test

RISK AT FINANCIAL STATEMENT LEVEL AND AT ASSERTION LEVEL:NB

ISA200 says: must be assessed at 2 levels: a) Financial Statement level:b) Assertion level:

1) FINANCIAL STATEMENT LEVEL 1) Possible reasons:

a) Management Crooked b) Management Inexperienced/Unknowledgeable c) Management Pressure to perform : no capital,etc.d) Business nature : technology/fashion (obsolescence) ,complexity of capital structure,no.of locations.e) Industry nature :economic conditions(recession) , competition, consumer demand, accounting practices.

2) Possible solutions: (etc)a) Experienced staffb) Supervision More c) Professional skepticism Emphasise team d) Surprise visits : add more unpredictability elements –e) Change Audit : make plan different to in past

2) ASSERTION LEVEL: 1) Possible reasons:

a) Account Type : eg involve high degree of estimation: stock count fresh vegetables,or provision bad debtsb) Complex Transactions : eg sale &leaseback , contract accountingc) Estimation /Judgement Involved : bad debts provisiond) 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 assetsg) 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.

RISK AND MATERIALITY 1. (AUDIT) RISK : Is “ the risk that the practitioner expresses an INAPPROPRIATE CONCLUSION when the subject matter info. is MATERIALLY MISSTATED in the

FINANCIAL STATEMENTS ”. 2. IMMATERIAL RISKS : if auditor identifies a risk as immaterial, BUT finds a major internal control problem there ALSO, he must :

i. CAN ignore iot for purposes of fin stat reportingii. MUST report it to management iii. SHOULD carefully re-consider if it was actually correctly classified (as a immaterial risk).

3. MATERIALITY : When making a decision based on Fin. Stats. : the judgement of a reasonable person would be effected a. Reasonable person/user =

i. Reasonable knowledge of Business and Economic Activities and Accounting.ii. Willingness to study information with Reasonable Diligence

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ASSESSMENT OF AUDIT RISK BY THE AUDITOR1) Each account heading can have a different audit risk , if there is a higher misstatement risk then there is a higher AUDIT RISK. Eg [complex

transactions VS simple transactions] or [leased VS purchased assets.]2) Eg : For a leased asset VS purchased asset : is there a difference in the audit risk? Answer = YES

Leased attracts more risk of misstatement than a bought item because:(1) Assertion : VALUATION

(a) LEASED = complex ie may not be clear on the contract – finance charges etc! need to check market values etc.(b) PURCHASED = simple ….where is the purchase invoice ?

(2) Assertion : RIGHTS (a) LEASE : is it a finance lease or operational lease, was it correctly capitalized?(b) PURCHASED = simple receipt/licence

(3) Assertion : EXISTENCE(a) (easy IN BOTH CASES = physical inspection

LEVELS OF RISK1) TYPES OF LEVELS:

a) ISA’s only give ‘significant’ Definition; ISA315 :risks that require : Special audit considerationb) Some audit firms have : high,medium,lowc) Some have :pervasived) 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/unbundling4. Related : parties , significant transactions with –to do with risk- eg: inter-company transactions5. 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

2) Auditors Response to: 1. Experienced staff2. Supervision More 3. Professional skepticism Emphasise team 4. Surprise visits : add more unpredictability elements –5. Change Audit : make plan different to in past

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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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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IMPORTANT ELEMENT 2 OF 4 : THE CONCEPT OF MATERIALITY. SEE IAS 320

INTRO:

1) It is generally understood and accepted by users of fin.stats that NOT 100% and may contain margin of error or uncertianity.HOWEVER margin of error must be acceptable to users otherwise are of little value.-ie : Materiality.

2) DEFINITION : MATERIALITY : ( also in IAS 320 , one in begin of chaoter hodden , other for ‘performance materiality’ is under ‘definition’ headinga) If omission or misstatement could affect users decisionsb) Size of item judged from particular circumstances.c) Threshold or cut-off point rather than a qualitative characteristic - to be useful.

THE NATURE OF MATERIALITY

1) SUBJECTIVE : Materiality is very :1 auditor will get a different answer to another auditor, but many similarities. 2) RELATIVE, NOT ABSOLUTE : Materiality is very : material to small firm is maybe not material to large firm.

a) Eg :+/- Net profit before tax 5%, current assets 5% ,current liabilities 3% ,Total Assets 3 % Turnover 1%.b) Net profit before tax is mostly used alone, none of others , so cross-mix ups do not occour.(most important one)

3) QUANTITATIVE AND QUALITATIVE : Materiality is very :Quali= non-figure eg a ‘law’ or disclosure / Quanti= figures. WHEN ANSWERING QUESTIONS RELATING TO CALCULATING MATERIALITY IN PLANNING AN AUDIT : , follow the following steps:

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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67 67 | P a g e Auditing Notes AUDI 101PLANNING 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 rules2. KEY DISCLOSURES : eg key disclosures- eg R&D costs for pharmaceutical3. 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 formulasb) 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 auditedd) 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 specifiedii) 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

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

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68 68 | P a g e Auditing Notes AUDI 101iii) 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.

IMPORTANT ELEMENT 3 OF 4 : UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT: THE ENTITY AND ITS ENVIRONMENT. SEE IAS 315 : IT GIVES ALL THIS IN DETAIL! BIT BY BIT, ALSO IN THE ‘A1 ETC ’ APPENDIX PART OF IAS 315

1) KNOW THIS ONE ONLY ,JUST READ THE REST :As per ISA 315 , the auditor should obtain an understanding of (pg6/8)a) INDUSTRY Relevant INDUSTRY , REGULATORY, and other EXTERNAL FACTORS. (of whole industry)b) ENTITY :NATURE of the Entity. (of just entity itself)c) ACCOUNTING POLICIES. The Entitys selection of d) OBJECTIVES &STRATEGIES of entity and the related business RISK ,of Entitye) FINANCIAL PERFORMANCE. of Entity

2) As per ISA 315 , the auditor should obtain an understanding of (IN DETAIL,SAME AS ABOVE): a) of whole industry -INDUSTRY , REGULATORY, and other EXTERNAL FACTORS, that are Relevant

i) INDUSTRY:(1) cyclical/seasonal(2) Risk Profile : high eg fashion /technology –OBSOLETE etc, labour volatility, boom/recession, competativeness.(3) Gov.Mometary Policy. : incentives,restrictions,foreign exchange

ii) REGULATORY:(1) Tax,health, environmental(2) Accounting policies.

b) of just entity itself - NATURE of the Entity.i) PRODUCTS , MARKETS, SUPPLIERS, OPERATIONS:

(1) Products & Markets: key customers/suppliers , export/import , market share , pricing policies and margins (2) Retailer/wholesaler/service(3) Internet trading(4) Key Suppliers(5) Location addresses(6) Labour : unions, pension commitments,regulated eg: minimum wages etc.(7) R&D(8) Franchisees,licences,patents(9) Stock :Quantity,types,location

ii) OWNERSHIP & GOVERNANCE:(1) Structures : corporate,organizational,capital(2) BEE(3) BoD : governance adherence ,risk management, reputations, committees, meetings(4) Management Operational : pressures to perform/deadlines , performance based remuneration , capabilities etc(5) Internal Audit dept.

iii) INVESTMENTS AND FINANCING ACTIVITIES :(1) Acquisitions/mergers(2) Investments : other entities(joint ventures,partnerships) , plant & Equipment, technology(3) Sources of Finance(4) Group Structure ;(5) Debt Structure:

(a) Covenants(b) Restrictions(c) Off balance Sheet(d) Leasing(e) Related Parties(f) Derivatives

iv) FINANCIAL REPORTING:(1) The Reporting Environment : deadlines, profit share/remuneration based on financials, 3rd party reliance(bank lend etc), shareholders expectations,

pressure to perform from holding company/overseas affiliates.(2) Specifically Relevant Accounting Practices : revenue recognition ,accounting for fair values ,foreign currency assets.

c) ACCOUNTING POLICIES , the Entitys selection of i) If appropriate or notii) If consistent with that Type Industry standard.iii) OF SPECIFIC INTEREST TO AUDITOR:

(1) Unusual Transactions: Accounting for unusual transactions(2) No Accounting Policies Available New’ Matters : Accounting Policies adopted for controversial or ‘/issues, for which there is no standard(3) Change Accounting Policies :Reasons and appropriateness of changes client has made to accounting policies(4) Change Accounting Policies :If New Standards Adopted :How client adopts & implements new standards in accounting.

d) OBJECTIVES & STRATEGIES ‘RISKS’ of Entity . : eg Risk=Sales on credit to customers who will not pay. Potential Misstatement: bad debts /////or //// Risk=import regulation contraventions,,overestimate demand, product liability Potential Misstatement: overstate inventory(cannot legally sell products) , Underprovision for legal claims.

e) FINANCIAL PERFORMANCE, (Income Statement) of Entity.i) After considering the following things in Evaluation of Performance, a unusual result may indicate mngmnt manipulation from pressure from holding

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69 69 | P a g e Auditing Notes AUDI 101(1) Ratios/trends ,(2) comparable info mnth-mnth / division-division / industry- industry.(3) Budgets/forecasts(4) Employee Incentive/performance schemes. Or. Holding company pressures to perform.

INTERNAL CONTROL OF ENTITY .( WHEN UNDERSTANDING ENTITY & ENVIRONMENT)ISA 315 gives a more formal approach to internal control than chapter 5, and requires the auditor to have understanding of following 5 components of internal control:

COMPONENT 1 : THE CONTROL ENVIRONMENT Sets the tone of organization and influences control consciousness of staff, positive audit risk factor if good, fraud less

Control Environment : Attitude and awareness of managers & directors to internal controls and their importance to entity.(a) 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.(b) ISA 315 : says good control environment characterised by:

(i) Mngmnt Commitment/implements/employ : Integrity and Ethical values and Sound Performance. (ii) Mngmnt Commitment/implements/employ : Competent staff (iii) Mngmnt Acts/displays : Leadership , Sound judgement , (+Ethical behaviour).(iv) Mngmnt Inluence Positive: Acts/displays : Integrity & Ethical.(v) Organisation Structure/policies promotes this : Authority + Responsibility + Reporting : relationships (vi) Organisation Structure/policies promotes this : Planning + Execution +Control + Review (vii) Good HR policies : Training & development , Compensation fair & benefits ,get competent ethical staff.

COMPONENT 2 : ENTITYS RISK ASSESSMENT PROCESS : (1) THE PROCESS OF THE ENTITY IN PLACE TO:

(i) Identify Business Risks:(ii) Estimate significance of each Risk:(iii) Assess likelihood of its occourance(iv) Respond to risk.

(2) In larger organizations : (i) Committees hold regular meetings.(ii) Appoint chief Risk Officer and/or Compliance Officer

(3) Smaller organizations & generally: managers job(4) Audit by Inspecting:

(a) Documentation eg;(i) Minutes of special committee meetings.(ii) Inter-office memos on rectifying problems/ rectifying risks.

COMPONENT 3: CONTROL ACTIVITIES: (INTERNAL CONTROLS)1) Info. Is Gathered on this by auditor in same way as for I.T. above (iv)2) Ensure mngmnts objectives carried out- policies & procedures which3) Auditor ONLY concerned with those ones where MATERIAL MISSTATEMENT likely. EG:

a) Authorisation of transactionsb) Segregation of dutiesc) Physical control over assetsd) Comparison + reconciliatione) Access controlsf) Custody controls over eg: blank chequesg) Good document design etc etc etc

COMPONENT 4: MONITORING OF CONTROLS:1) How internal controls are monitored, to ensure they are actually done.2) If no monitoring, not be long before employees order goods for themselves,write off friends debt,steal stock etc)

a) Eg:\i) Regular employee performance reviewsii) Weekly IT manager srutinises logs+exeption reportsiii) Telesales manager replays recordings check procedure

3) Info. Is Gathered on this bya) Inspection :Documents on ‘monitoring activities’ /’performance reviews’.b) Discussion :Internal auditors discuss with

COMPONENT 5: THE INFORMATION SYSTEM:1) Auditor wants info on RELEVANT info ie: fin stat , not nonsense, he wants info on:

a) FINANCIAL REPORTING and COMMUNICATION.i) “Classes of transactions” that are relevant to Fin.Stats.ii) Procedures : Manual + IT for A-Z ‘initiate transaction to fin stat’‘ process.iii) Capturing of NON-FINANCIAL info: eg contingent liabilities.iv) Accounting Estimates + Disclosuresv) Controls over Unusual transaction Journal Entries vi) Manner fin. Info. Is conveyed to board, audit committee, JSE etc.

b) COMPUTERISED INFORMATION SYSTEM.i) Aspects of IT sys to Consider for Auditor:

(1) Computerised applications(a) Which? Eg payroll / acquisitions & payments.(b) Environment : bureau,micro/network/centralized

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70 70 | P a g e Auditing Notes AUDI 101(c) Application software : purchased or inhouse ,input sources,important masterfiles etc.,new/old

(2) Hardware (a) Makes +types (establish compatability with auditors own system)(b) Location - factory,branches etc

(3) Software(a) O.s,utilities,DBms,access control software etc.

(4) Organisation + Control(a) Internal controls+ personnel structure

(5) Complexities of the System(a) Complex databases,internet,EFT,LANS,WANS,EDI(electronic data interchange),

(6) Level of Dependence (on system by client) : eg wages , if broken - disruptionii) Risks to Internal Control :

(1) Programming Errors : eg calc.vat incorrectly.(2) Unauthorized Access to data : could delete/contaminate entire masterfile etc!(3) Unauthorised Changes to data: (4) IT personell fiddling data eg salaries.(5) Instantaneous Fraud Processing: eg eg funds transfer.(6) Data non-access from system failure.

iii) Risks to IT System (1) New employees(2) Rapid growth(3) New technology(4) Introducing new business models(5) Corporate restructuring

iv) How auditor gathers Info on system: (1) Observation.(2) Inquiry (+questionaires)(3) Discussion (past auditor, mngmnt,outsiders,software providers)(4) Discussion (Internal Auditor + review their workpapers)(5) Trace info through system.(6) Flowcharts inspection

SIGNIFICANT RISKS : .( WHEN UNDERSTANDING ENTITY & ENVIRONMENT )NB

1) Definition; ISA315 :risks that require : Special audit consideration2) Classed as: low medium high , or specific or pervasive , increased or decreased3) Must have some or all of Following Characteristics:

1. Fraud : Risk–to do with risk-2. Events :Recent + 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/unbundling4. Related : parties , significant transactions with –to do with risk- eg: inter-company transactions5. 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

2) Auditors Response to: 1. Experienced staff2. Supervision More 3. Professional skepticism Emphasise team 4. Surprise visits : add more unpredictability elements –5. Change Audit : make plan different to in past

COMMUNICATING WITH ‘GOVERNANCE’ AND MANAGEMENT .( WHEN UNDERSTANDING ENTITY & ENVIRONMENT) 1) Auditor MUST : ASAP inform management or governance personell of material weaknesses in Internal controls and Risk assessment process.

DOCUMENTATION : ( WHEN UNDERSTANDING ENTITY & ENVIRONMENT)Auditor MUST document his all work .see ias315 for details needed

IMPORTANT ELEMENT 4 OF 4 : THE AUDITORS RESPONSIBILITY TO CONSIDER FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS.

INTRO:1) Due to increase in fraud worldwide eg: enron.parmalat,leisurenet ,auditing profession responded by amending ISA.’s In past objective of audit NOT to discover

fraud(see postulates of auditing) but to express opinion on fin stats to increase confidence.The primary objective is still not to discover fraud, but more emphasis has been placed on this.

2) Recent developments in Auditing to respond :a) ISA 200 : ‘Emphasise Professional Scepticism’b) Isa315 ‘assesses the risk of fraud’c) Isa330 ‘respond to assessed risk ‘d) THE MAIN ONE:

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

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71 71 | P a g e Auditing Notes AUDI 101(3) To respond appropriately to fraud or suspected fraud in the audit

DEFINITIONS (LECTURER SAYS KNOW THESE WELL)1) ERROR: an unintentional act which results in misstatements in the fin. Stats. 3 (eg calc. interest wrongly,mistake in journal entry,not by auditor but by client ,

not on purpose) 2) FRAUD : an intentional act involving deception to obtain an illegal advantage 33) FRAUD RISK FACTORS : Events or Conditions that show an Incentive, or Pressure or provide Opportunity to commit fraud. 2/54) MANAGEMENT FRAUD : fraud involving one or more members of management OR those charged with governance.5) EMPLOYEE FRAUD : fraud involving employees, NOT management or those charged with governance.

THERE ARE ONLY 2 KINDS OF FRAUD TO BE CONSIDERED IN AUDITS :1) FRAUDULENT FINANCIAL REPORTING : Fraudulent Financial Reporting invoves intentional misstatements ,including omissions,in financial

statements,to deceive users of the financial statements.It is normally perpetrated by those charged with governance or management (they have the most control over fin stats/prepare them)

a) It may be accomplished by the following: i) SUPPORTING DOCUMENTS :Underlying the financial statements. Manipulate ,Falsify , Alter .

(1) Change balance on a debtors account to reflect a higher value(2) Inflate cost price of inventories(3) Include fictitious sales

ii) FINANCIAL STATEMENTS :Misrepresent OR Omit from events,transactions, or significant information. (1) NOTES , OMIT in NOTES a significant contingent liability from the NOTES.(2) UNDERPROVIDE /or do not :for all known future losses.(3) SALE Failing to reflect the SALE of material assets.

iii) ACCOUNTING PRINCIPLES :Intentional misapplication to amounts,classification,manner of presentation or disclosure. (1) failing to CAPITALIZE FINANCIAL LEASES.(2) INAPPROPRIATE POLICY to inflate profits

KNOW ALL OF (iv) below per lectureriv) MANAGEMENT OVERRIDE (particularly where controls appear to be operating effectively)

(1) FICTITIOUS JOURNAL ENTRIES –eg fictitious sales in journal(2) JUDGEMENTS/ESTIMATES - eg understate asset impairments(3) YEAR END DATE : Omit /Advance /Delay recognition of transactions at balance sheet date. Eg Premature recognize profits on long term

contract, or include sales from following year in current fin year to inflate ‘sales’ (STOP THIS BY GOING ON YEAR END DATE AND WRITING END ON LAST SALES DOCUMENTS SO YOU CAN CHECK NUMBERING AFTERWARDS)

(4) DISCLOSURE of FACTS : Hide disclosable facts ; eg a claim for damages against company(5) COMPLEX TRANSACTIONS : structured to MISREPRESENT financial PERFORMANCE /POSITION of company. Eg manipulate inter-company balances

in a group to ‘reallocate profits’.(6) ALTERING RECORDS /or TERMS relating to significant or unusual transactions.

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.

2) MISAPPROPRIATION OF ASSETS : theft of companies assets , by employees or mngmnt,harder to detect with mngmnt they can conceal it easier.includes:a) Embezzlement:

i) Stealing cash sales ii) Stealing cash received from debtors, and then writing debtor off as bad.

b) Physical assets or intellectual property: Theft of or c) Pay for goods and services not received: Causing entity to ficticious employees- keep the money,or pay a ficticious company set up by management for

goods never received.buy things for own use through companyd) Using companies assets for personal use : hire out equip on weekends, keep cash.

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.

RESPONSIBILITY OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE: (EXACTLY IN IAS 240)

NB1) Responsibility for the 1- Prevention 2-Detection of fraud lies with those charged with 1-governance 2- management

(a) Strong control environment – responsibility also rests with those charged with 1-governance 2- management .(b) Management responsible for Concious assessment of of risk of fin stats materially misstated.

RESPONSIBILITY OF THE AUDITOR (EXACTLY IN IAS 240 ) NB

Where does that leave the auditor?1) The auditor’s responsibility is to conduct the audit in accordance with ISAs and obtain reasonable assurance that financial statements taken as a whole are free

from material misstatements, whether caused by fraud or errors.2) He achieves this responsibility by doing 3 things only :

(a) Professional Scepticism {even mngmnt with integrity can be tempted to fiddle fin stats to meet group performance targets}(b) Consider mngmnt override(c) Recognize fact internal controls for detecting errors not enough to detect fraud

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OBJECTIVE OF THE AUDITOR: (EXACTLY IN IAS 240 1) ID & assess risks of material misstatement2) Obtain sufficient appropriate evidence to respond to these risks3) To respond appropriately to any detected/suspected fraud

DURING ENGAGEMENT TEAM DISCUSSION AS PER IAS 315:1) Audit Team { auditor must make team aware of duty to watch out for fraud}

RISK ASSESMENT PROCEDURES TO DO BY AUDITOR EXACTLY PUT IN IAS 240 .16-241) SPECIFICLY ASK MANAGEMENT :

i) Their Assessment :THEIR ASSESSMENT OF RISK that FIN STATS may be MISSTATEMENT DUE TO FRAUD. ii) Processes Identifying :THEIR PROCESSES FOR IDENTIFYING FRAUD ,INCL. ANY LIKELY OR ALREADY IDENTIFIED iii) Processes Responding :PROCESSES FOR RESPONDING TO FRAUD ; eg one supplier alleges buyer takes kickbacks from other supplier. iv) Communicate Stance :HOW MNGMNT COMMUNICATED ITS STANCE ON ETHICAL BEHAVIOR TO EMPLOYEES. v) ALSO :

(1) Ask other employees & management if they have any knowledge /suspect of any fraud(2) Ask Internal audit if they have any knowledge /suspect any fraud

2) GOVERNANCE : obtain an understanding of how those charged with governance , unless they are also management ,exercise their responsibility by: i) Oversightii) Any actual knowledge / suspect of

3) ANALYTICAL PROCEDURES : unusual or unexpected relationships eg unusual fluctuations in gross profit percentage.4) OTHER SOURCES: eg: from previous audit engagement at client5) FRAUD RISK FACTORS : if any are present from assessing Entity and Environment.

6) These can all be done at Financial statement & Assertion level : Identify and Assess Risk of Material Misstatement due to FRAUD at level of

RESPONSES TO THE RISK OF MATERIAL MISSTATEMENT DUE TO FRAUD (DO LEARN THIS AS PER LECTURER)

NB(IN IAS240 EXACTLY VERTABIM!!!)AT FINANCIAL STATEMENT LEVEL: (IN IAS240 EXACTLY VERTABIM!!!)

1. Assign appropriate staff:1.1. Strongly Independent /Strong Willed1.2. Competent1.3. Experienced1.4. That adopt Professional Scepticism

2. Accounting Policies :Consider those adopted by mngmnt :Appropriate & Properly applied OR indicative of possible fraudulent earnings manipulate/influence users etc

3. Element of Unpredictability: nature ,timing,extent : surprise vistis etc.

AT ASSERTION LEVEL: (IN IAS240 EXACTLY VERTABIM!!!)

1. Nature ,timing ,extent :consider of tests to minimize risk of misstatement in assertions2. Nature ,timing ,extent ;

2.1. Remember difficult to detect concealed things2.2. Strong evidence : must get strong, not weak, evidence for any serious allegations.

3. CORROBORATIVE Multiple tests : experts+observation+inspection+analytical review +element of Unpredictability. +CAATS(find duplicate bank acc. No. for fake employee payroll scam)

MANAGEMENT OVERRIDE: (IN IAS240 EXACTLY VERTABIM!!!)

1. CHARACTERISTICS OF FRAUDULENT JOURNAL ENTRIES:

1.1. Unusual Accounts :entries made to unusual,unrelated,or seldom used acc’s1.1.1. Nature+Compexity : eg not reconciled regularly ,or acc .with no specific purpose eg slush funds.1.1.2. Normal course of business : ie non- recurring ,not subject to standard internal controls.

1.2. Other People :passed (entered/done)by people who normally do not do journal entries.1.3. Narrations: Not supported by adequate reasons,explanations or descriptions1.4. Ledger :Not posted to ledger, but direct to fin stats(loss of audit trail.)1.5. Round Amounts : Or Consistent Ending Numbers only.

2. JOURNAL INTERNAL CONTROL : Entries authorisation : concentrate on entries where controls are weaker 3. END YEAR ADJUSTMENTS: procedures to check journal entries & adjustments.4. FRAUD RISK FACTORS : consider these, eg if there is already an assessed risk debtors payment embezzeled & written off as bad debt.5. WEAK INTERNAL CONTROLS UNUSUAL TRANSACTIONS :Significant transactions outside normal course of business eg:

purchase firm which makes different products.

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,72

73 73 | P a g e Auditing Notes AUDI 1011.4. 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.etc2. Consider if un- fraud- like misstatements could be intentional ,esp. if their effect on fin. Stats. Is very significant.

MANAGEMENT REPRESENTATIONS TO BE GOTTEN IN WRITING : (IN IAS240 EXACTLY VERTABIM!!!)

1. Auditor must get written confirmation from management that:1.1. Fraud Internal controls: Mngmnt responisible for design+implement Internal controls to prevent & detect fraud1.2. Disclosed assessment :Mngmnt has disclosed to auditor their assessment that misstatement due fraud in current fin stats.1.3. Prior fraud : mngmnt has disclosed to auditor prior fraud by 1-employees 2-mngmnt1.4. Suspected fraud : mngmnt has disclosed to auditor SUSPECTED fraud , esp communicated by others eg: employees,analysts,regulators.

FEEL UNABLE TO CONTINUE ENGAGEMENT1) May question if should withdeaw, 2) Must consider report this to to client and authorities 3) IF YOU DO DECIDE TO WITHDRAW :

a) Discuss with mngmntb) Report to client + authorities as per law/regulations

TO BE COMMUNICATED TO MNGMNT1) IF found: To appropriate level mangmnt to deal with it2) Governance : if separate from mngmnt :

a) Tell them if Real or suspectedb) 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 documentede) 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 frauda) 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 integrityiii) Mngmnt fraudiv) 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 AUTHORITIES1) 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.

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)

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 :

1. Fraudulent Financial Reporting: 2. Fraud Risk Factors Relating To Misstatements Resulting From Misappropriation Of Assets:

73

74 74 | P a g e Auditing Notes AUDI 101And:

1. Incentives/Pressures : are there pressures eg: performance bonus’s2. Opportunities :are there any opportunities3. Attitudes / Rationalisations: does the attitude of employees&mngmnt suggest an environment conducive to fraud.

FRAUDULENT FINANCIAL REPORTING:

1) INCENTIVES/PRESSURES 1. PROFITABITLTY /FINANCIAL STABILITY : threatened by economic,industry operating conditions

1.1. Competition so declining margins1.2. High Vulnerability to Change :rapid change eg interest rates, technology,eg electronics companies.1.3. Operating losses : threaten going concern1.4. New statutory/accountin/regulatory requirements : deliberate contravention.eg environmental

2. PERFORMANCE PRESSURE : Excessive pressure for mngmnt to meet the expectations of 3rd parties due to following:2.1. Debt or equity financing: eg need a loan, want to show good results to influence2.2. Expectations :profitability or trend level, of investment analysts,significant creditors,institutional investors.2.3. Debt repayment requirements: eg to maintain ratios specified in a loan agreement.2.4. Pending transactions : significant,need specific performance. eg: merger or construction contract(cant show bad losses)

3. PERSONAL FINANCIAL POSITION : info indicates personal fin position of mngmnt is threatened by entities fin performance arising from following:3.1. Mmngmnt Performance bonuses : eg 25% of net profit after tax.3.2. Mngmnt Shares: :hold significant shares in firm3.3. Personal debt guarantees: :by directors of firm.

4. EXCESSIVE PRESSURE FOR FINANCIAL TARGETS OR ALSO FOR INCENTIVE GOALS: set by those charged with governanace,incl sales,profitability incentive goals.

2)OPPORTUNITIES1. NATURE OF INDUSTRY/OPERATIONS:

1.1. Non-Same auditor Related Party transactions :significant transactions inter-group1.2. Firm Dominates industry sector :allowing firm to dictate conditions to suppliers resulting in inappropriate transactions.1.3. Estimates: where difficult to corroborate estimates could be used to manipulate results (assets, liabilities, revenue, expenses)1.4. No clear business justification: all business methods with –eg import through a neighbouring country.

2. INEFFECTIVE MONITORING OF MANAGEMENT

2.1. Domination : of mngmnt by small group/ or person without compensating controls.2.2. Ineffective oversight :by those charged with governance over the financial reporting process&internal control.

3. COMPLEX ,or UNSTABLE ORGANISATIONAL STRUCTURE :3.1. Controlling interest :Difficult to determine who has controlling interest in company3.2. Unusual legal entities &managerial lines of authority in Overly complex organizational structure.3.3. High pro staff turnover: senior mngmnt and legal council and those charged with governace.

4. INTERNAL CONTROL DEFICIENT:4.1. Inadequate monitoring of internal controls.4.2. High -Turnover /Ineffective : either of for Accounting ,Internal Audit, or IT staff.4.3. Ineffective accounting and information systems.

3)ATTITUDES/RATIONALISATIONS:1. Enforcement of Ethics :Ineffective enforcement of firms values and ethical standards.2. Non-fin Mngmnt Accounting policies + Estimates : non- financial managements excessive participation. In determining3. History of law/fraud allegations: any regulations or fraud eg insider trading4. Share price/earnings trend :Excessive interest by mangmnt in increasing /maintaining entitys share price/earnings trend5. 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.

FRAUD RISK FACTORS RELATING TO MISSTATEMENTS RESULTING FROM MISAPPROPRIATION OF ASSETS:

1. INCENTIVES/PRESSURES 1. Personal financial problems Mngmnt.2. Adverse relationships: with firm eg compensation /other dissatisfaction , anticipated retrenchments.

2. OPPORTUNITIES 1. NATURE:

1.1. Cash : large amounts on hand1.2. Inventory characteristics : eg small size high value –jewelry1.3. Assets :Easily convertible : eg bearer bonds /diamonds1.4. Assets: Characteristics : small, marketable,lacks ID ,eg power tools

2. INTERNAL CONTROL:2.1. Inadequate segregation of duties

74

75 75 | P a g e Auditing Notes AUDI 1012.2. 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 assets2.7. 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.

3. 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.

75


CHAPTER 8: COMPUTER AUDIT THE BASICS.CHAPTER 8: COMPUTER AUDIT THE BASICS.COMPUTER AUDITING

INTRO:1) Companies can use different types of ERP (enterprise resource planning) software , which doe severything from accounting to warehouse , mail, online etc etc in the

business.Different types include: J.D.Edwards, BAAN, SAP, Oracle , PeopleSoft etc.2) Auditor is a called a simple ‘line auditor’.A computer Audit Specialist might have to be called in if there are difficulty with technicalities ,or a tax specialist if there are

tax troubles.Auditors are not necessarily highly specialized in these fields.3) VACT = valid,accurate,complete,timeous(in old days shortcut) ,SCRAMM=separation of duties,c,r,access

control,m,m ,CEAVOP=completeness,e,accuracy,validation,o,p,4) First years of auditing=verification approach only ie check bal sheet.1960 etc ,then 2 –systems approach, now today 3-cycle approach.

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)

A BRIEF DESCRIPTION OF DIFFERENT COMPUTER ENVIRONMENTS:

(1) FULLY CENTRALISED SYSTEMS (a) In old days all hardware was centralized and users need bring all documents to dept. to be processed. Some companies still use this system for certain

aspects eg: clock cards to head office for processing, using batch controls.(b) Characteristics of fully centralized system.:

(i) IT Skills :Employees in user depts. Need have no IT skills.(ii) Security Easy: maintenance & safekeeping of electronic DATA and computer facilities is Easy since only 1 dept to control access etc. to.(iii) (REQUIRES A SYSTEM TO CONTROL PHYSICAL MOVEMENT OF DATA ) Batch Control System: system of controlling physical movement of data (eg

invoices,wage cards,printouts output) to and from user Depts.

(2) CENTRALISED IT DEPT. BUT LINKED TO USER DEPTS. BY PERSONAL COMPUTER (a) Next development was the central IT depts. Linked to user depts. By a terminal in dept where info. could be typed in.Hardcopy (printed material first had

to be delivered(batch controls) but in later years could be printed out in user dept.(b) Characteristics of this type of system;

(i) Type in data in terminal transfer to central dept(ii) Output distributed from Central It(iii) Widening Risk to incl. Users : Employees in user depts. Needed some computer skills, so corresponding widening of risk to include them, not just

‘boffins’ in computer dept.(iv) Security Complications : Facilities and data risk spread : hardware + data access by many more depts. widened this risk too.

(3) USE OF MICROCOMPUTERS/PERSONAL COMPUTERS (a) Next stage : explosion of small businesses using self contained computers to do accounting etc.(b) Segregation of duties: far less since 1 person could do all easily.Very Risky if alternative controls not put in place eg: accountant deletes debtors and keeps

payments.”Physical Audit Trail” missing now.(c) Possiblity Override Controls : higher possibility of this(d) Prevalent in Small Businesses :

(4) 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.

(5) USE OF OUTSIDE SERVICE PROVIDERS (a) “computer bureau” - Similar to a centralized IT dept. but run by another firm.Very common example is a ‘computer bureau”(b) Magnetic tapes / e-link : Information can be delivered /collected in hardcopy or magnetic tape or electronicly linked .(c) Implications of using this type –characteristics:

(i) Natural Segregation of Duties(ii) Security is dependant on bureau – makes business vulnerable here.(iii) : Transfer of Information. Controls : these controls must now be very strong –back and forth of magnetic tapes etc..

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(6) 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.

INTERNAL CONTROL IN COMPUTERISED ACCOUNTING SYSTEMS1) The 7 (+1 = controls monitoring,review,development) characteristics of good internal control as applying to computer environment:

i) THE CONTROL ENVIRONMENT : (1) Mngmnts attitude influencing employees attitude(2) increases the need :Introduction of computers increases the need for good control environment.

ii) COMPETENT TRUSTWORTHY STAFF : (1) Trustworthy: needed because of potential of destruction/manipulation of data.(2) Competent :important because of skill needed , for common users as well as specialized I.T. staff.

iii) SEGREGATION OF DUTIES ; (1) Danger : makes it possible for 1 person to do all the duties at once,lessens segregation.(2) Capabilities of computers that can enhance segregation of duties:

(a) PC Restricted access: can be set to restrict access to certain files and programs to certain PC’s only.(b) User Restricted Access: can set to restrict access to data&programs to certain users.(c) Level of access : read only / write only / (d) Log/Audit Trail : record of who accessed what +when.+ log any entries = leaves an audit trail.

iv) ISOLATION OF RESPONSIBILITIES :(1) Unique User Id’s :Can computer can isolate who did what and when.: by this allow 5 people to use 1 pc for different purposes,and the above types,

v) ACCESS CUSTODY CONTROLS: (1) Information =ASSET :eg destroy debtors masterfile,make electronic payments, etc.(2) Restrict access to masterfiles etc : info can be regarded as an asset which must be controlled/guarded in same way(3) Computers can enhance : this by features eg: regular mini – stock counts (cycle counts) to recon theoretical to actual.

vi) SOURCE DOCUMENT DESIGN: (1) Equally important in computers, processes what is fed, good doc design minimizes errors at source already.(2) Note: no signatures,no coloured paperwork copies carbon, etc.(3) Effective pre-numbering: when on-screen , each doc should be pre-numbered!(4) For hardcopy distribution : (printing) requirements for multipart stationary should be satisfied.(5) ‘On Screen’ good design Achieved by :

(a) Mandatory fields ; before can continue(b) Alpha numeric checks : wrong letter(c) Screen dialogue : eg have you Confimed order details.(d) As little as possible : to be keyed in by capturer, rest auto by system(less mistakes)(e) Select & click : only the desired options for data entry are allowed.

vii) COMPARISON AND RECONCILIATION :(1) A strong computerized acc system should promote frequent reconciliation and comparison.eg:

(a) Input-output(b) Theoretical-actual eg stocktake(c) Progammed computer to do auto -own recons as well.

(2) Timely and comprehensive accounting info makes frequent &regular recons +comparisons possible . viii) CHECK ON INTERNAL CONTROLS WORKING/NEED MORE

FACTORS PECULIAR TO COMPUTERISED SYSTEMS WHICH THE AUDITOR SHOULD BE AWARE OF. Watch for exam question:contrast a manual and computer system

(1) Lack of audit trail : could be only in machine readable form,or only exists short period in some.(2) Lack of segregation of duties : (3) Potential for errors and irregularities

(a) needs more skill : Development + Operation + Maintenance needs more skill and detail so potential for human error (b) Visible evidence: one can gain access and alter data without visible(c) Decreased human involvement : means less chance of spotting errors(d) Software Design errors: remain undetected for long, or exploited by those in the know.

(4) Initiation or execution of transactions may be automatic : eg interest rate increases on a savings account once a certain balance is reached.(5) Potential for increased mngmnt supervision: appropriate software – eg sales reports,analyses, expense fluctuations,stock movement reports.(6) DISADVANTAGES OF COMPUTER ENVIRONMENT:

(a) Dependence of other controls on computer processing : eg: when account balance debtor check before sale is made, if masterfile tampered with, it could lead to extra bad debts.

(b) Uniform processing of transactions : if error in program, all transactions will be wrong eg: extra vat calculated etc.

COMPUTER AUDITING DEFINITION OF A GENERAL CONTROL:

1) All controls in a computerized centre are classified as either 1-General or 2-Application controls.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,

CATEGORIES OF GENERAL CONTROLS1) Control environment and security policy2) Organizational structure and personnel practices3) Standards and standard operating procedures4) System development controls

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78 78 | P a g e Auditing Notes AUDI 1015) Program change controls6) Continuity of operations7) Access controls8) Documentation.

CONTROL ENVIRONMENT AND SECURITY POLICY:

I) CONTROL ENVIRONMENT 1) As per normal for control environments , especially the following for I.T.

a) BoD IT representation: “IT Committee” preferably ,all new IT matters referred to them.b) Internal Control System : incl. an Internal Audit Dept. if possible + embrace characteristics of good internal controlc) Mngmnt style : that promotes good controls.d) Organizational structure : that promotes to good controls.

II) 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 AND PERSONNEL PRACTICES1) Should achieve 2 major objectives :

a) Clear Reporting Lines / Levels of Authorityb) Lay foundation for segregation of duties,so no staff perform incompatable functions. :1- segregate IT and user depts., 2- segregate users within dept.

I) 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.

b) 2- SEGREGATE USERS WITHIN DEPT. i) Technical administrators have a high level of knowledge and should be separated from programmers/business analysts else if they also knew the

program they could easily make unauthorized changes.ii) Security : separate from other – because a operator should never be asked to follow up on logged access violations.iii) System analysts iv) Operators v) Programmers vi)

4)

5) APPLICATION DEVELOPMENT AND PROGRAMMING. : a) Business system analysts b) programmers

78

BoDBoard of Directors

Steering Commitee

IT Manager

Application Development and

Programming

Technical Administrators

Help Desk /Operations Security

79 79 | P a g e Auditing Notes AUDI 1016) TECHNICAL /ADMINISTRATION

a) Db admin b) OS admin ( and hardware)c) Network admin

7) HELP DESK/OPERATIONS 1st tier questions ,backups, refer 2nd tier questions8) SECURITY access,logs follow up,passwords issue.

II) 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.

STANDARDS AND STANDARD OPERATING PROCEDURES

I) STANDARDS: (1) Eg ISO 9000 , and ISO17799 : standards for security ertc. In IT depts..(2) Makes sure

(a) Compatability with other systems /companies(b) Communicate requirement for good consistent practices with IT mngmnt .

II) STANDARD OPERATING PROCEDURES: (1) Prodedures over everyday Operations: compliance with standards and current standards should be frequently reviewed to ensure up to date,in

touch,protected.(a) Scheduling of jobs : eg wages on thurs for payout fri.(b) Equipment operation and maintenance. : eg log out, not switch off at plug.(c) Machine serviceing: eg printer every 1000 copies etc.(d) Job run procedures: not left to own devices but instructions(e) Activity logs: as before(f) Personnel habits and tidiness: eating ,drinking ,smoking etc- protect equip- neatness standards: less loss eg flash disk.(g) Library(physical) : tapes etc. : label,access,issue,inspection,duty segregation.

SYSTEMS DEVELOPMENT CONTROLS (NB KNOW VERY WELL)

DOUBLE NB3) For a new system eg payroll or internet shop, new hardware,software,OS,procedures etc must be got4) RISKS :

i) Costs get out of controlii) Sytem design end up does NOT suit user at end.iii) Errors,bugsiv) Business analyst incorrectly implements accounting procedures etcv) Not enough controls implemented- users access too easy etc.vi) No-one knows how to use itvii) Transfer info old to new system causes errors.

5) To avoid these risks , following controls must be implemented: know well as per lecturer:i) STANDARDS : eg ISO 9000 , + check compliance ii) PROJECT APPROVAL: steering committee must approve, feasibility study in-house or off-shelf +cost vs benefits.iii) PROJECT MANAGEMENT : KNOW well lecturer : 1-project team 2-stages/milestones/deadlines 3-progress monitoring + 4-prog. monit. reports to

steering commiteeiv) USER REQUIREMENTS : business analyst + auditors consult(int +ext) + mngmnt of depts. sign off approvalv) SYSTEMS SPECIFICATIONS AND PROGRAMMING : specifications documented + programming by international standards –flow chart etc.vi) TESTING : debugging, test data run, integration other programs, if users happyvii) FINAL APPROVAL : test results approved by all involved, + final all users-mngmnt-IT-internal audit approvalviii) TRAINING : schedule for training with times for all users, manuals updated.ix) CONVERSION: following controls to ensure DATA is VALID,ACCURATE,COMPLETE

(i) CONVERSION PROJECT: seen as a project in its own right(ii) DATA CLEANUP: thoughrouly checked before conversion eg stock count(iii) CONVERSION METHOD:

1. parallel OR 2. phases OR3. shut down old start new

(iv) PREPARATION AND ENTRY: 1. File comparison – old to new data +resolve discrepencies2. Reconcile old/new using:1- Record counts & 2-Control totals.3. Use programmed Limit checks etc. to identify problems and follow up 4. user approval per dept if correctly done, 5. confirm all balances with customers/suppliers etc.

(v) POST IMPLEMEMENTATION REVIEW: : users+auditors+ IT for several months : documentation/sys dev. success or not/bugs/

PROGRAM CHANGE CONTROLS(1) You want valid + accurate + complete information. (2) When changes are made to computer programs/ + sytems :Use following controls to ensure above. For “program maintenance”

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80 80 | P a g e Auditing Notes AUDI 101(a) Similar standards as f or system development controls (above)(b) Documented , Preprinted ,Prenumbered : change control forms.(c) Change requests: approval by 1- IT manager 2 user dept.(d) Done by programmers, NOT operators.(separation of duties)(e) Make it a Mini project (f) Change a development (test) program first, not the real one.(g) Test by programmer+ senior use debugging tequniques(h) Changes : users + internal audit must sign change form control.(i) Documentation updated(j) 1-Logging: of changes dine to it by computer + 2-independent tech operator puts program on(separation of duties)(k) Review of log by it manager to check no extra changes were made skelm in the process.

P

do pg 8/17 to 8/24 left out no time (incl. passwords controls!)

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: o nly 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 (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

INPUT, PROCESSING, OUTPUT:

NB(11) Application Controls : are Various controls , designed to ensure info on comp.acc sys. Is VAC , which means controls at stages of input/processing/output stages(12) Diagram: masterfiles - programmes - processing – output : see pg 8/26 (13) INPUT: data inputed to computer by:

(a) Manual source docs(b) PC/keystroke entry(c) Barcode scanning

(14) PROCESSING: info to masterfile, Application programmes use this to processing, controls to 1-program error 2-hardware/software malfunctions

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81 81 | P a g e Auditing Notes AUDI 101(a) HARDWARE MUST FUNCTION PROPERLY : regular servicing,treatment,ie auditer worry(b) INPUT: TRANSACTIONS MUST BE VAC : computer processes whats fed to it: so need General Controls (eg good source docs)+ Application

controls(foreman authorize clockcard) (c) MASTERFILES: very important eg alter salary.(d) PROGRAMMES : gives what fed, so general controls eg sytems development/implementation contrls

(15) OUTPUT: eg hardcopy/e-mail/store : Controls to: (a) Integrity : Preserve data integrity(b) Effective Use :Ensure of reports(c) Confidentiality :Ensure

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.

APPLICATION CONTROL FRAMEWORK : MASTERFILE AMENDMENTS

NB VAC OBJECTIVE CONTROL

(3) VALIDITY: 1- Program Checks

2-Assess To Source Docs

3-Access Controls

4- Authorisation

5- Independent Checks

6-Logs And Reports

(4) ACCURACY 1- Program Checks

2-Screen Aids

3- Source Doc Design

4-Independent Checks

(3) . COMPLETENESS 1-Independent Checks

2-Logs And Reports

(5)

APPLICATION CONTROL FRAMEWORK : INPUT

DOUBLE NB(1) BATCH IMPUT METHOD

(a) Step 1 :PREPARE SOURCE DOCS. /DATA (i) VALIDITY:

1. Access to source docs2. Authorization of transactions

(ii) ACCURACY : 1. Source doc design2. Independent checks3. Batch

(iii) COMPLETENESS: 1. Independent checks2. Batch

(b) Step 2:ENTER SOURCE Data Via Keyboard (i) VALIDITY:

1. Access to application specific Program module2. Batch

(ii) ACCURACY : 1. Screen Aids

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82 82 | P a g e Auditing Notes AUDI 1012. Batch 3. Program checks

(iii) COMPLETENESS: 1. Screen Aids2. Batch 3. Program checks (all same as above one!)

(2) ON-LINE INPUT (i) VALIDITY:

1. Access to application specific program module2. Program Checks

(ii) ACCURACY: 1. Screen aids2. Program checks

(iii) COMPLETENESS: 1. Screen aids2. Program checks 3. Post Entry Batch control

APPLICATION CONTROL FRAMEWORK : PROCESSING

DOUBLE NB(1) Four major components as indicated earlier:

(a) Hardware : eg: parity check(odd/even bit), valid operation code,echo check,equipment check.(b) Transactions(c) Masterfiles(d) Programs

(2) Controls techniques to achieve objective:(a) VALIDITY

(i) Program Controls(processing)(ii) Logs and Reports

(b) ACCURACY (i) Program Controls(ii) Logs and Reports(iii) Reconcilliation and Review

(c) COMPLETENESS (i) Program Controls(ii) Logs and Reports(iii) Reconcilliation and Review

APPLICATION CONTROL FRAMEWORK : OUTPUT

DOUBLE NB(1) Can be hardcopy, data file, e-mail etc. so different control techniques(2) Eg : destroy printer ribbon & carbon from stationary : data can be read from it.(3) Controls:

(a) CORRECT & CONFIDENTIAL DISTRIBUTION (validity receiver) (i) Output handling controls (eg printout/ e-mail etc.)(ii) Access controls (electronic output)

(b) ACCURACY (i) Logs And Reports(ii) Recon. And Review

(c) COMPLETENESS (i) Logs And Reports(ii) Reconciliation And Review

MENU AND DESCRIPTION OF CONTROLS ABOVE:

NB(1) AUTHORISATION

(i) Signature of supervisor on source doc and batch forms(ii) input module program application restricted to authorized person(iii) programmed checks: against parameters : eg loan allowed if income+expenditure right/enough(iv) overrides to above: min. supervisor +logs and recon by mngmnt

(2) ACCESS (i) Unused source docs under lock and key, independent person(ii) Register of issue/receipts + numerical sequenceing

(3) SOURCE DOC DESIGN (i) Pre-printed, multicopy in differ colours(ii) Tick , from list rather than write.(iii) Clear Title(iv) Instructions written below how to fill in(v) Field size boxes: eg date= 6 boxes(vi) Order of keying in : in right order not here and there

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83 83 | P a g e Auditing Notes AUDI 101(vii) Pre-numbered

(4) INDEPENDENT CHECKS (i) Independent check others work person eg : foreman checks clerks ‘hours worked’ calculation (ii) Check numbering sequence correct. Preferably With exeption reports.(iii) Review : Override Logs, Exception Reports, Audit Trails By Senior/supervisor.

(5) BATCH CONTROLS: (a) Controls:

(i) Source Docs Grouped Eg 50 : compute following controls MANUALLY.1. Financial Totals: totals of any fields holding monetary amounts2. Hash Totals : totals of any numeric field eg: invoice number3. Record Counts: total records per batch

(ii) Batch Control Sheet :attached to each batch.Should contain on it:1. Unique batch number : eg batch 3 of 6, week ending 31/07/20082. Control totals for batch : see (i) above3. Transaction Type : eg invoices4. Signature spaces : prepared by + checked by + reviewed by.

(iii) Batch Register : 1. Recipitent : signs the register after checkingwhat is signed for

(b)Batch Control System Works As Follows: 2. Details(description & control totals) keyed into computer to create “batch header label”3. Actual Records entered : already then subjected to programmed validsation checks eg valid account number, limit checks.4. Finsh entering records: computer computes&check all contol totals5. If totals agree +no other error: batch accepted , else rejected & sent back for re-processing.6. The contol totals can follow the bach in its life : eg 10 clock cards keyed in, 10 processed,10 output created etc.

(c)Batching assists with the following: 7. Data transcription error identify eg wrong valued entered into computer by accident.8. Incorrect field : detect data entered in incorrect field.(computates like trial balance)9. Invalid or omitted or duplicate entry into computer checked for.

(d) Batch control in online entry systems: 1. Pre –entry batch Controls impossible, so use Post-entry batch Controls.

a. Set 1 : Computer generates logical batch totals : eg per user/ application /PC b. Set 2 : User manually computes same logical batch totals totals on entry.

(e) ACCESS CONTROLS (i) Only certain PC’s can Access certain applications : eg payroll(ii) Physical access to PC’s : lock door, key safe.(iii) User Id/password restrict to (least privaledge)

1. System level (to PC)2. Application level (to Program)3. Read only/ write access4. Time of day5. Sensitive fields hidden

(iv) PC Shutdown for violation/timeout.(v) Logs :User ID + application

(f) Screen Aids: (i) Minimum key in Info.(ii) Order of type in same as form order(iii) Screen formatted like form : ie sound source doc design controls.(iv) Screen dialogue + prompts(v) Mandatory fields : cannot continue till typed in(vi) Verbal confirmation of data : eg with customer (vii) Drop down lists .

(g) PROGRAM CHECKS: VERY VERY NB(i) CONTROLS BUILT INTO the software, this list is not exhaustive :

1. Alpha –numeric – if letter or number2. Range checks –min AND max3. Limit checks – min OR max4. Limit test after processing – not on entry5. Check digit – extra digit on end of field, formula checks if field generates it,no db6. Size checks – field too many characters7. Missing data checks – detect blanks8. Reasonable checks – eg not more than 50 Hrs per week9. Reasonableness test after processing : eg wage of 10000000010. Sequence checks –duplications/gaps in numbers11. Verification checks – masterfile lookup if correct account number12. Data approval checks –credit limit for all sales13. Internal label check – if computer file name correct14. Generation number check – correct file generation loaded ( old/ new etc)15. Retention date checks –if file expired16. Arithmetic accuracy check – eg reverse multiplication for 3*5= 15 : do 15/5=?17. Cross casts – acc18. 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

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84 84 | P a g e Auditing Notes AUDI 101(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:

SUMMARYComputers do not change the FUNCTIONS which mus occour in a cycle: eg in a wage system:Personnel recordsTime keepingPayroll prep and recordPayPay deductions overUnclaimed wages accounted for.

CAATS : COMPUTER ASSISTED AUDITING TECHNIQUES (SUMMARY –NOT NB) Common large client sytems: SAP ,Peoplesoft CAAT programs : 1-GAS (generalized audity software)eg: ACL and 2- CAS (customisesd audit software)

HOW DO CAATS FIT IN AUDIT PROCESS(1) TO AUDIT AROUND COMPUTER

(a) Only check source3 docs-input – and output for VAC, if right then computer is also ok.Only for simple computer systems(2) TO AUDIT THROUGH COMPUTER

(a) Testing the computer system and controls built into it(3) TO AUDIT WITH COMPUTER

(a) Using computer to assist in audit procedures- mainly substantive testing(b) And using it to do reports, fin stats, workpapers etc.

SYSTEM ORIENTATED CAATS(1) More : auditing through computer (2) Mainly for tests of controls, but some substantntive evidence may be produced(3) Send test data through stystem, wrong acc. No.s and overlarge amounts eg 50 hrs wages week etc(make a dummy company/cost centre X, to prevent corruption

of clients files.watch out for manipulation of by fraud –of this dummy cost centre(4) Any of :Test data,IntegretedTestCentre,Parallel,Embedded audit facility

DATA ORIENTATED CAATS(1) More : auditing with computer (2) Mainly substantive testing(3) Can cause : Corruption of client files

FACTORS WHICH WILL INFLUENCE DECISION TO USE CAATS(1) Complexity(2) Volume(3) Data elec(4) Skills(5) Independence: loss -assistence(6) Attitude professional tequniques –must use caats(7) Compatable hardware(8) Utilites available(9) Cost of data 3rd parties

AUDIT FUNCTIONS WHICH CAN BE PERFORMED USING DATA ORIENTATED CAATS

(1) Sorting and file organization (2) Summarization,stratification and frequency analysis (3) Extracting samples (4) Exception reporting

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85 85 | P a g e Auditing Notes AUDI 101(5) File comparison eg current masterfile to prior years masterfile (6) Analytical review eg extraction of ratios (7) Casting and recalculation (8) Examinining records for inconsistencies ,inaccuracies and missing data- and creating a report thereon

APPENDIX 1: ILLUSTRATION OF WHAT A DATA ORIENTED CAAT CAN DO:See above list XV)

NB NB DOUBLE NB KNOW VERY WELL.(1) Scan the file : and produce a report on missing fields ,duplicated item numbers , eg item no.missing/dup(2) Sort the file : by category : and total fields to determine if any has major portion : determine where to aim audit (3) Sort the file : by location: add values and quantity fields to assist in planning stockcount attendance(4) Extract a list : items with negative quantity, or values, or unit costs : ( NB : - X - =+)(5) Extract a list : items quantity field is zero but date of last purchase is after the date of last sale(6) Extract a list : items where date of last sale is say > 9 mnths ago , but date of last purchase is < 3 mnths ago : enquiry why ordereod? – is it because goods in

stock were damaged(7) Extract a list : where date last order > 9 mnths , and date last purchase > 9 mnths : to assist in identifying non saleable stock –which should be written down.(8) Extract a list : where date last sale or purchase after stock masterfile date : weird(9) Extract a list : random sample of items to be counted at stockcount (10) Cast : value field for total value : to be compared to trial balance(11) Compare : unit price EXCEEDS selling price (12) Reperform : Qty X Value : see where clients file has a different answer

THE USE OF MOBILE INFORMATION &COMMUNICATION TECHNOLOGY ON AUDITS. WHAT THIS TECHNOLOGY CAN DO

(1) Planning and administration (2) Review Internal control & accounting systems (3) Document & obtain evidence (4) Preparation and review of fin stats (5) Application of generalized audit software(GAS)

SECURITY IMPLICATIONS OF USING MOBILE INFORMATION AND COMMUNICATIONS TECHNOLOGY ON AUDITS.(1) Security over workpapers: controls restrict access to audits computers& storage devices (2) Security of clients files:

SECURITY OF CLIENTS FILES:(1) Client make Backup to time of access by auditor.(2) Only audit software thouroughly tested by a computer audit specialist should be used.(ask to phone other clients he lately used it on)(3) Full procedure should be done in presence of clints IT personell(4) The files should be “read – only” if/where possible(5) Access granted only to those files necessary for audit purposes.(eg debtors)(6) Clients staff should not have access to audit software(7) Own: have updated computer anti-virus same day.(both auditor and client)

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CHAPTER 9 : NETWORKING.(CH9 IN BOOK)CHAPTER 9 : NETWORKING.(CH9 IN BOOK)

INTRODUCTION: 1) In large companies access to computer resources must be controlled:

a) For 1-tapping the Telephone lineb) 2-points of access plugsc) 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 trails5. CD,USB,DVD : opportunity&threat= + easy to store stuff for auditor.& stealing info6. 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 ORii) Switched line ORiii) 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.

AUDIT IMPLICATIONS OF NETWORKS: Auditor is interested in the VAC of the data produced by the system. Following points he is interested in:

1) Access control : (Validity) : a) each new user in a system increases chance of data being /invalid. And integrity of programs or data.Distributed processing+networking increases problem. Via laptop in

socket or bona fide pc. in socket.b) ACCESS CONTROLLS used :NB…………(note- majority of fraud is from internal statisticly)….

i) Sound General Controls: eg: control environment,policies& guidelines, trustworthy personnel,ii) +Physical Access controls: eg payroll clerk locks office when out, plus strong office security.iii) +Logical Access Control: : at 1-system+2-application level by.

(1) Identification of users+(2) Authentication of 1Users + 2Computer Resources(3) Authorisation : define level of access granted to 1user or 2computer.(4) Encryption (5) Logging

2) Security and accuracy/completeness of the data in the communication channels: a) Long lines in network gives lots of place for hackers to get access.b) CONTROLLS used :NB

i) Physical & Logical access controls to Telephone Lines.ii) “Call Back” facility : Once connected , then the bank cuts connection and redials users stored number- so hackers will be left out.iii) Lockout after 3 unsuccessful login attemptsiv) Use Industry standards – to ensure network is developed in right way.

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87 87 | P a g e Auditing Notes AUDI 101v) Use Sophistcated User Authentication techniques designed for network/distributed processing environment.vi) Encryption methods: eg public key or private key.vii) Network monitoring devices : cuts off vulnerable devices/logs anauthorised access.viii) Firewalls: to secure a protected environment.

c) ACCURACY & COMPLETENESS of DATA. NB i) Communication Protocols: international standard developed to facilitate communicationii) Auditor is less concerned with this and more with VAC of input/processing and output.

DATABASES DEFINITIONS

1) DATABASE : pool of interrelated data stored/structured/managed in such a way that:a) Duplication is minimizedb) Contains all: information needed for use by sharing in common programs&usersc) Quickly accessable : by all authorized usersd) 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

2) DBA : database administrator : he manages the database.Duties include:a) Define access priviledges of database usersb) Design, definition,maintenance of database.c) Backup and recovery ; define and control

3) Data Ownership: NOT the DBA , BUT the person he gives some ownership to: ie: the database DBA grants ownership of certain data to certain users eg credit controller-creditors.Then they are allowed to tell administrator who may access that data and who may not.Promotes integrity of the database.

4) Database structure: either Hierarchical or Network or Relational.5) Data Sharing: ability of different users on different applications to use same data for different purposes: eg qty on hand used by stock controller+buyer each for own thing.6) Data Independence: it is independent of a specific application- can be shared by many applications7) Datawarehouse : a very large database with many records,from many different applications , also used for management reports.

AUDIT AND CONTROL IMPLICATIONS: 1) General Controls must be assessed (control environment,policies+guidelines,trustworthy personel)2) DBA ‘s function must be assessed:

a) Data ownershipb) Access controlsc) Effectiveness+reliability of DB in 1-access+2-updates assessed by

i) Use SQL language &utilities to check upii) Attempt anauthorised access( both by computer audit specialists)

d) Standards : asses adherence to standards of program 1-development& 2-changes adherence)(used by many-no stuff ups)e) Segregation of duties of : 1-design 2-implement 3-operate 4-use database for integrity+VAC of DB.eg programmers do not update data on database. Assess by 1-inspect

organisational charts 2- observation & enquiry

ELECTRONIC MESSAGING SYSTEMS 1) Definition: involves communicating, transacting or recording Electronicly instead of paper based.Two common forms:

a) EFT: electronic funds transfer: transfer money from one account to another by electronic instructionb) EDI : electronic data interchange :TRANSACT or TRADE electronicly via links between their computer- By 1Van, 2Direct Link or 3Internet.

2) Benefits: from Characterristics/ a) Characteristics are: Speed , Minimal Paper use , less Repetition of Data. So benefits are:b) Benefits are :lower costs, quicker response times, fewer errors.

3) Risks: a) System failure =loose customer confidence,fail supply deadlines etc.b) Loose confidentiality = of “interchanged’ datac) No Stopping Payments = No Manual controls to stop eg cheque- EFT is gone.d) Reliance =on Networks+ Data Communications.e) No audit trail = no paperf) Legal liability Issues =: eg loss of supplier data : responsible VAN,company A , or B, or Communications provider?

4) How Electronic M.. S.. works: a) Either you do it manually or you place orders and send invoice, statement, payment etc etc electronicly.Can use a VAN to store these messages and re-transmit them or

direct link/internet etc.

AUDIT AND CONTROL IMPLICATIONS OF EDI:1) Basic requirements of internal control do not change: all transactions must be VAC .2) Approach to use here: identify risks/objectives and then determine control procedures most appropriate.

a) NB: Risk/Objective = Continuity : i) Control = Normal General Controls incl.

(1) Physical protection(2) Backups and Redundancy(3) Disaster recovery plan

b) NB: Risk/Objective = Fraud /Error : i) Control =

(1) Segregation of Duties by physical & logical access controls.(2) Trustworthy & Reliable Staff.(3) Supervisory Control: supervisor must add his code as a signature to authorize each transaction.

c) NB: Risk/Objective = New EDI sytem implementation.

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88 88 | P a g e Auditing Notes AUDI 101i) Control = normal systems controls apply

(1) Standards (apply, not not)(2) EDI CHAMPION (appoint one)

d) NB: Risk/Objective = Confidentiality/Unauthorised accessi) Control = Normal access control principles apply

(1) Apply Network specific control principles( as earlier in this chapter)(2) Particulary important is encryption.

e) NB: Risk/Objective = Loss of manual controlsi) Control = add corresponding program controls eg:

(1) Check digit in Acc. No’s.(2) Reasonableness check(3) Missing data checks, etc.

f) NB: Risk/Objective = lack of Audit Traili) Control =

(1) Logs(2) Reports on transactions timely+adequate to ID + treat problems.

g) NB: Risk/Objective = Legal Liabilityi) Control = Use standard EDI trading contracts for defining resposibilities & penalties.

h) NB: Risk/Objective = Use of a VANi) Control = Must insist on:

(1) VAN contract for defining duties& liability/penalties of VAN(eg security/message format etc).(2) Independent verification from time to time of VAN.(eg access to your messages,logs etc)

EFT : ELECTRONIC FUNDS TRANSFER3) 2 Important points to remember with EFT:

a) It is Transfer of CASH : in a flash – so bad controls =gone.b) 1 function in a CYCLE: eg wage cycle – all controls contribute to VAC of payment.

4) Whatever the system : EFT payments should be in 4 steps:(eg for a wage payment system)a) MASTERFILE AMENDMENTS:

i) Any amendments to it must be VAC – V=not ficticious employee A=no errors on account details of employee C-…..b) PREPARE THE EFT PAYMENT ( before the payment):

i) Payments to be made must be VAC : (1) V= fin.Accountant must authorize it –AFTER CHECK supporting DOCS etc.(2) A=fin.Acc should TEST COMPUTATIONS on payroll before authorizing.(3) C=fin Acc. Should CONFIRM NO. OF TRANSFERS = No. of employees.(4) NOTE: just examples- the full range of controls to be effected befor payment is in the ‘Cycle’ chapters.

c) EFFECT THE PAYMENT: following controls to be effected: i) NO. OF PC’S FROM WHICH TRANSFER can be effected to be restricted.(try 1 only?)ii) 2 PASSWORDS FROM 2 DIFFERENT senior personnel required to effect a transfer.iii) Bank to identify terminal PC first eg: ‘CALL BACK’iv) Auto ACCOUNT LOCKOUT AFTER 3 unsuccessful attempts.v) LOGS + FOLLOW UPS of security violationsvi) Full range of PASSWORD+IDENTIFICATION controls.vii) LEAST PRIVILEGE principle. Eg: wage clerks cannot do internet transfers.viii) ONLY POSSIBLE TRANSFER FROM MAIN TO CLEARING (1 for wages, 1 for purchases etc) accounts at same bank- from MAIN never /not to any other accounts at all

exept ‘clearing’ one.(even up to point that - main account is NOT internet enabled – only debit orders allowed here and then also only to clearing accounts-or similar -or you must go into bank itself etc etc .)

ix) All payments eg: wages to be made ONLY FROM “CLEARING” acc.x) TRANSFERS LIMITED EG: ONLY ON 23 RD allowed to clearing account, or only Fridays for Wages etc.xi) BANK ACKNOWLEDGE+RETRANSMIT info (eg to fin.acc + also another accountant/manager etc) for final confirmation before transfer to employees bank account.xii) ENCRYPTION.

d) AFTER THE PAYMENT: Controls to ensure that transfers actually made WERE VAC. i) System MUST supply an AUDIT TRAIL of all EFT’s made to date.(Hardcopy or Onscreen)ii) Audit TRAIL TO BE REVIEWED BY SENIOR personnel and tied back to “client held” documentation.iii) BANK RECON by NON -EFT function person.

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 protocolc) File Transfer : uses FTP/ SFTP ,file transfer protocol.d) Remote terminal access+command execution: as if you were on that terminal.

RISKS AND CONTROLS:TRADING ON THE INTERNET:Apart from usual controls, the following is just a part of the whole cycle as usual in sales etc: so use the usual controls + these:RISKS CONTROLS1 Electronic communications and Transactions act.(ECTA)

Employees/consultants to monitor AND implement compliance.

2 Link-allows unathorised access Virus,data/program corruption,loss confidential:CONTROLS=1. Configure system to restrict access granted to outsiders by link2. Store +Process sensitive stuff on separate non-connected system3. Firewalls to restrict route.4. Use eg: Web marshall/Mail Marshal = internet+e-mail monitoring software to

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89 89 | P a g e Auditing Notes AUDI 1011-Log all web sites accessed 2-block web sites 3-control address/lenghth/content of e-mails. 3-virus scan all incoming 4-encrypt 5-control delivery to specific PC’s.

3 Non -Payment Before dispatch : verify customer strong possibility will pay.-ID+auth. BY:1-get ID no/credit card no. and give customer a log in password. 2-challenge-response question(security question)3-e-mail address to alert customer of transactions on his account or verify and foil fraud use of anothers e-mail. 4-restrict payment to credit card only(supposedly bank has his details etc-but seems a bit dof ) 5-For credit sales all normal creditworthiness controls must be done+ ID&auth.

4 Info could be missing=cannot fill order-unhappy customer

Adequate input& reasonableness checks eg:1-well designed web pages with spaces for all info. +EASY TO FOLLOW.2-minimum input eg click description of product- NOT type it in! brings up item no. etc.3-program check eg alphanumeric/mandatory fields etc.

5 Unauthorized disclosure of customer info. or data integrity loss on transmission

Use transport layer security techniques.eg 1SSL etc. 2- info is re-sent to customer to confirm it after input(confirmation page)3-logs checked to see if all transmissions sent were received.

6 Customers chased by suspicion of malicious code/or non-legitimacy of business.

1-Verify company using Thawte/Verisign/ 2-display privacy policy3-secure web applications by specialists: ID+auth. ,input validation, reasonableness check

7 Lack of availability of 24/7/365 Lost /unhappy customers prevented by reputable service provider

1-inhouse specialists –user friendly,up to date,attractive.2-Redundancy&disaster recovery

8 Incorrect Pricing Reputable staff + info. systems who can :1-Must calculate all costs of webstore carefully, also not compete with own retail stores.2-Set prices correctly

9 Risks of international trade, unless country blocked to SA only:

Reputable staff to ensure: 1-reliable delivery 2-policies +procedures to avoid contravening customs/financial export/etc

10 Inadequate Audit Trail prevents adequate defense against claims

1-digital signatures2-time stamping3-software which logs all transactions.

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 themc) 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 bureau3) 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 etcc) 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 damageii) Partial destr: erase portions of storageiii) Selective destr: erase specific filesiv) 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 doorb) Worm = code spread through a network

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90 90 | P a g e Auditing Notes AUDI 101c) Trojan Horse = code copies eg passwords as typed ind) Logic/Time bomb – sets off at date/event does some illicit thing

AUDIT AND CONTROL IMPLICATIONS:1) Security system which includes following controls must be instituted.

a) Regular backupsb) Anti-virus updated all PCsc) Scan in/out e-maild) 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 sitesh) Access restricted to authorized personell- also accountable for their PC’s

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CHAPTER 10 : REVENUE AND RECEIPTS CYCLECHAPTER 10 : REVENUE AND RECEIPTS CYCLEACCOUNTING SYSTEM AND INTERNAL CONTROLS:

INTRODUCTION:1) The Revenue and Receipts cycle is sometimes also referred to as the : SALES and COLLECTION cycle.2) This cycle deals with ACCOUNTING system and related controls pertaining to it.3) There are 3 top level functions :

i) :Sales : Taking Orders & Distribution of goodsii) Get Paid Receipt of payment from customersiii) Sales Adjustments :

4) The MAJOR Activities of a (credit) REVENUE AND RECEIPTS CYCLE are:i) Receiving Customer Orders –phone/internet/written/counter etc.ii) Authorising the Sale -creditworthy/and in stockiii) Processing the Order -manual pickingiv) Despatch -releasing+collect/courierv) Invoicing - vi) Record Sales and Raise Debtors.- vii) Receiving and Recording Payment from debtors.-

5) The MINOR Activities are:i) Goods returned Controlii) Credit Notes passingiii) Discounts granting on paymentsiv) Bad debts – writing off and considering.

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.

DOCUMENTS USED IN THE (REVENUE+RECEIPTS) CYCLE 1) Customer order: customers instruction2) Internal sales order : sales clerk for picking+records3) Picking slip : 4) Invoice :sent(say all details in exam)5) Delivery note: signed by customer,details to delivery list to schedule6) LIST :Statement: month end(say all details in exam,Ob+Cbalance+ageing+pay received+credit notes)7) Credit application form : trade references,income+expenditure,bankers,details,credit bureaux8) Receipts9) Remittance advice: from customer, advises which Precisely accounts being paid10) LIST :Remittance register: lists all payments received by company11) Credit note: acknowledge customers account reduced(we cr your dr) for all exept pay received12) Deposit slip: bank document deposit …13) LIST :Price lists: …referred to by sales clerk14) Back-order note: a slip/doc,ONLY goods in orders which could not be supplied… filed+regular review to check if ordered.15) Goods returned voucher : made by company, records returns.16) ALSO: Sales,Cash Receipts,”Sales returns+allowances”,JOURNALS + debtors ledger.

UNDERSTANDING THE CONTROL ENVIRONMENT:1. Understanding the clients business helps auditor to understand the:

a. Materiality & reasonableness of significant balances & classes of transactions in FSb. Performance relative to external & inter factors affecting itc. Potential risk of material misstatement that mngmnt has not managed effectivelyd. Anticipate total revenues /. Different GP margins / total debtse. Detect potential missaplictaions of GAAPf. Audit strategy determine.

BUSINESS RISKS

CHARATERISTICS OF GOOD INTERNAL CONTROLAll normal good internal control characteristics –here applied to Sales&rec.cycle like this:1) Control environment:

i) Over receipts particularly strong +ii) protection of debtors(eg crook deleted etc)

2) Competent trustworthy Personnel:i) Emphasis – those access to cash+cheques

3) Segregation of Duties:i) Basic= points 1-7 in basic activities of r&r cycleii) 1Receive payments /from/2Banking cash /from/ 3Recording writing up / from 4Reconcilliation

4) Isolation of Responsibilities:i) All docs in cycle signed to indicate a control procedure has taken place.

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92 92 | P a g e Auditing Notes AUDI 101ii) + Important: As goods move: check/count them +sign for receiptiii) +Important : As Payment/cash move …..mailroom to cashier …sameiv) Creditworthiness check-per order-before process -controler signature.

5) Access/Custody control:i) Cashier protectedii) Cheques crossed after receipt ( if stolen cannot..)iii) Debtors ledger (destroy/altered)

6) Source document design:all docs in cycle7) Comparison and Reconcilliation :Frequent & timeous of

i) Orders placed TO orders Processed/invoicedii) Invoices TO Payments receivediii) Debtors ledger TO General ledgeriv) Bank statement TO Cash records

8) ????

FLOW CHARTS AND DESCRIPTION OF THE CYCLENOTE: For every single controls column below , ADD: employees must sign docs to acknowledge control procedures they have conducted.( as per book vertabim)

FUNCTION Descr. DOCUMENTS RISKS CONTROL PROCEDURES

1-Receive Customer Orders (order dept)1) Receiving

Customer Orders

No account=refer to credit manager for application

Customer orderInternal sales orderPrice Lists

1-non-account holder2-no timeous fulfil/atall3-inaccurate/no details

1-only account holders2-sequential numbering3-attach customer order to internal sales order-cross check details if practical4-phoneorders: get 1-acc.no; 2-customer ref.no. ;3-confirm details by ‘read back’ 5-regular sequence check ISO’s (C=complete) + + + + matched to delivery notes find those not acted upon.7- order clerk check vAc right customers ‘items’ details 8-order clerk sign ISO,s indicate cntrl procedures done

2-Sales Authorisation (order dept)Authorising the Sale

Old=not exeed limitNew=creditworthy

Credit applicationDebtors ledger

Not creditworthy-will not pay Old Customer:1-credit controler check (a) fictitious details (b)credit status fine from balance&terms on file2-ISO’s(picking slip) Credit Cntrlr authorize by sign first.New Customer:1-must fill in bank details,trade references,+inc&exp details2-credit cntrlr follow up credit bureau, trade references,assess liquidity.3-Limit set by credit contrlr. And approved by fin.manager.

3-WarehouseProcessing the Order

Ensure only authorized orders are acted on

Picking SlipDelivery NoteBack Order Note

1-picking slip not picked2-pick for fictitious / unauthorised sales3-pick incorrect item/qty 4-delivery note inaccurate/incomplete5-‘out of stock’ items not shown on picking slip.6-customer not notifed of “out of stock” items-

1-picker initial each picked item, and tick items unpickable out of stock2-warehouse foreman-check all items picked supported by signed (PRE-NUMBERED) picking slips.3-stores clerk to: i)check goods picked to picking slip ii)prepare delivery note from picking slip+cross reference iii)prepare back order slip + cross reference iv)back order copy to order clerk to notify customer v)back order copy to buying dept.4-order clerk follow up back order, confirm if send again when it arrives5-delivery notes &picking slips filed numericly – follow up unmatched to check for picked/sent

4-DespatchDespatch

Delivery noteList of Deliveries

1-theft from uncontrolled dispatch2-Dispatch errors qty/item/customer3-customers deny receiving4-released from warehouse but never despatched.

1-on receipt by dispatch clerk (a)check qty/item against 1picking slip 2delivery note (b)sign picking slip&delivery note show receipt (c)keep 2 copies of delivery note,return picking slip to warehouse2-double check against picking slip when packing,also check address3-clerk prepare 2 part delivery list, match goods+Delivery Note eg: Delivery Note a447… 5 boxes.4-delivery staff sign delivery list show receipt (after check) of goods+delivery notes, give to dispatch clerk,+keep 1 copy5-gate control data stamp both copies of delivery note after check goods vs 1delivery notes+2delivery list(no gate control then dispatch controls must be very tight)6-customer sign both copies of delivery note, keep 1 ,1back

5-invoicingInvoicing

Return of delivery note match to ISO and produce invoice.

1-Sales invoice2-Price lists

1-Goods not invoiced2-Inaccurate invoice

1-copy of ISO temporary in numerical order in invoicing dept.2-as signed delivery notes received filed sequentially & match to ISO(is it then removed to where from file)3-ISO’s remaining in temporary file investigate frequently.4- matched delivery notes file sequence tested, gaps check5-invoice clerk:

i) check details ISO vs INVOICEii) check prices vs price&discount listsiii) make sequenced invoice cross-reference to ISO &

Delivery note.6-second employee(supervisor) check & sign invoice: discount,vat,prices,customer details,extentions,casts.

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93 93 | P a g e Auditing Notes AUDI 1016-Recording of SalesRecord Sales and Raise Debtors.

1-Invoice2-Sales journal3-Debtors Ledger4-General Ledger

1-invoices are omitted from sales journal2-inv. Duplicated in sales journal3-inv.inaccurately entered in eg 45 as 4504-inv.entered against incorrect debtor

1-invoices entered in sales journal in numerical sequence only a)sequence continued from period to period b)cancelled invoices to be recorded in SJ -as “cancelled”-no missing a number2-batch control sys- total “invoices” before entry/ then after entry total the “sales journal” to check entries.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 Mail room/ CashierReceiving and Recording Payment from debtors.

1-Remitance register2-Customer remittance advice3-Receipts4-Bank deposit slip

1-payments received not banked due – (a)carelessness or (b)theft

1-Post opened by 2 people2-Post payments into remittance register by “openers”3-Prenumbered receipts for all pay received(or at least for cash)4-bank receipts daily5-Bank deposit slip by CASHIER- NOT employees opening post.6-cashier recon 1 remit.register vs cash&cheques & sign it.7-independent employee remittance register& receipts issued recon 2 to bank deposits.

7.5-cash sales receipts

1-count of cash AT TILL ON STANDARD CASH COUNT FORMS2-signed by cashier & cash controller3-list totals of cash couynt forms on daily cash summary4-compare to cash register total5-investigate overs and unders6-cash controller to prepare bank deposit slip

8-Recording of ReceiptsReceiving and Recording Payment from debtors.

Record debtors in CRJ & credit debtors accounts promptly Total received for period then posted to GL control acc.

1-bank deposit slip2-CRJ3-DL4-GL(?remittance list/receipts issued/customer remittance advice)?

1-deposits not recorded/or timeously2-recorded deposits may (a)inaccurate (b)overstated(fictitious) (c)cr to wrong debtor

1-CRJ daily by date & number from receipts (if rec. issued)2-Queries from debtors : by person independent of debtors’ & banking&recording of cash functions.’3-recon1 bank statement TO cash book mnthly + independent of banking&recording employee + reviewed by senior official.4-recon2 CRJ supervisor (a)CRJ vs gaps 1dates 2sequential (b) test CRJ to DL5-recon3 DL to GL control acc. Independent employee regular

9-Goods Returned by Customersee 4 minor activities in the cycle for this one

1-Goods returned voucher2-credit note3-Returns&allowance journal4-debtors ledger5-general ledger

1-desc. & qty of the actual goods returned incorrect- causes an incorrect credit note be passed2-credit note passed for goods not returned3-credit note recorded inaccurately/or to wrong debtor

1-all ONLY received by “Goods receiving Dept.”2-goods receiving clerk must: (a)check qty+descr. +damage (b)make goods retuned voucher+ cross reference it to customer documentation (c)sign customer docs. +keep copy+attach to GRVoucher3-transfer receiving TO warehouse: clerk (a)check qty+desc to GRVoucher (b)sign4-Credit notes to be: (a)ONLY made by Accounting dept (b)cross-reference to original invoice (c)supervisor check GRV+credit note+signed customer docs –check policies(eg: in 30 days only) +valid (d)5-sequential in Returns&Allowances Journal and normal control procedures over recording put in place eg check gap s in sequential6-senior fin. Manager regular check Journal +follow up suspicious(eg large amounts, regular same customer, etc)7-Not to mix up damaged with other stock

10-Credit Managementsee 4 minor activities in the cycle for this one

All record in cycle are relevant+monthly statements+age analysis+credit bureau information

1-debtors do not pay/pay late2-debtors prematurely or inappropriately written off3-debtors written off without authority.

1-credit application controls same as in ‘sales authorisation’2-monthly statements to be sent promptly to all debtors3-monthly age analysis+ follow up by phone/letter if exceed4-if not successful- credit manager contact to re-negotiate terms or threaten hand over debtor.5-hand over before too long period elapsed(prescription..)6-write off recommend credit manager , authorize independent senior financial employee.7-recon 1 : credit manager recons write offs TO supporting docs, after entered in journal.8-REPORT: senior fin manager: regular: age analysis,write offs,how overdue’s are being handled,bank,debtors balance,list of debtors.

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.

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94 94 | P a g e Auditing Notes AUDI 101(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’

FINANCIAL STATEMENT ASSERTIONS -IN THIS CYCLE-(ISA 500)The directors of company are ‘ASSERTING’ 1) SALES: (transactions)

a) Completelessb) Occourancec) Accuracyd) Cut-Offe) Classification (proper accounts)

2) RECEIPTS: (transactions)a) Completelessb) Occourancec) Accuracyd) Cut-Offe) Classification (proper accounts)

3) 1-DEBTORS 2-BANK/CASH (balances)a) Existence (like ‘occourance‘ but goes for events)b) Rights: (entity had the rights, and they were not encumbered in any way – OR it should have been disclosed)c) Completeness (at bal. sheet date)d) Valuation : 1-Prov.BadDebts 2-Bank/Cash balances

4) PRESENTATION and DISCLOSURE:a) Completeness (in terms of the 4th schedule and the financial reporting standards)b) Accuracy (of presentation)c) Classification-d) Understandability-

IMPORTANT ACCOUNTING ASPECTS : SPECIALLY FOR THIS CYCLEAs per ISA18 revenue : following conditons must be met before it can be recognized.

1) SALES of GOODS a) Revenue Measurement Reliable : can be measured reliably – simple if amount is on invoiceb) Flow Economic Benefits Probable : not that it is not probable it will flow to entity– eg a fictitious sale. c) Effective control or managerial involvement - eg Consignment : seller does not retain effective control or managerial involvement over goods eg: consignment or other

type.d) Evidence : that risks&rewards of ownership have passed from seller to buyer. Eg: signed contract/delivery note

2) RENDERING of SERVICES a) Revenue Measurement Reliable : can be measured reliably – simple if amount is on invoice/or rates&payments terms on contractb) Flow Economic Benefits Probable : not that it is not probable it will flow to entity– eg a fictitious sale. c) STAGE of completion at Bal.Sheet.Date. :-of transaction can be measured reliably eg by %costs used vs total costs.

3) ALLOWANCE FOR DOUBTFUL DEBTS: a) As per isa18, if it seems if a revenue cannot be collected, an expense should be created instead of reducing revenue (PROV. BAD DEBTS)

FRAUD IN THE CYCLE

1) FRAUDULENT FINANCIAL REPORTING a) Fictitious/Overstating Sales( occourance) & fictitious /Overstating Debtors( existence) : incr. profits & current assets –so ratios.b) Understating Sales & same Debtor : tax or ‘cheap mngmnt buyout’c) Understating Bad Debt Allowance( valuation) : normally part of trend to manipulate allowances/provisions , improve assets/profits/ratiosd) Recognition of revenue from sales (occourance): eg pre-invoicing OR recording appro. / lay-by OR understating

2) MISAPPROPRIATION OF ASSETS. a) Stealing cash sales(Completeness sales+bank)b) Stealing debtors payments(Completeness debtors+bank)c) Unauthorised reduced sales charge -bribe/friend(Completeness debtors+bank & Accuracy sales)d) Debtors accounts (Completeness debtors ) bribe/friend –not accurate but completeness.e) Picking/dispatch theft (Existence stock) – 15 instead of 10 collusion ouside)f) VAT not pay (Completeness liabilities) – recorded OR unrecorded sales.

3) LAPPING/ ROLLING a) Stealing cash from : Cash sales or Debtors payments by:

i) Hide by manipulate posting from debtors to debtors ledgerii) 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 backii) Credit notesiii) Bad debtsiv) Destroy records

d) Risk in:

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95 95 | P a g e Auditing Notes AUDI 101i) Poor control environmentii) Poor segregation duties pay write receipts / debtors queries/ recordingiii) Cash&credit salesiv) Small/medium size business

TESTS OF CONTROLS AND SUBSTANTIVE PROCEDURES1) Types of controls:

a) PREVENTATIVE: stop things happen at input or processing stage , rejects then before it happensb) DETECTION: finds out after it has happened after accounting & all other processes finished. Eg reconcillliations / or supervisor check work of dept. later.

2) TESTS OF CONTROLS: used to determine if Control Procedures & Information System is working correctlya) Observation b) Enquiry c) Inspectiond) Re-performance

3) SUBSTANTIVE PROCEDURES : if Balances and Totals are fairly presented.a) Enquiry & Confirmationb) Inspectionc) Reperformanced) Recalculatione) Analytical Procedures : eg: if Gross profit 30%, you immediately know whether sales & purchases is correct.

TESTS OF CONTROLS1) 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 receiptsii) despatch clerk counting and checking goods on transfer from warehouse to dispatch.

d) Reperformi) A bank recon

SUBSTANTIVE PROCEDURES1) 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 notesb) Bad debts write offc) 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 noteii) Inspect: trace to entry in sales journaliii) 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

4. Classes of TRANSACTIONS AND EVENTS: Assertions about (during period)4.1. OCCURENCE :recorded trans.& events DID occour and DO PERTAIN to THIS entity.4.2. COMPLETENESS :all that should have been recorded, were recorded ,none missing.4.3. ACCURACY :1-Amounts & 2-Data were recorded appropriately.4.4. CUT-OFF : in right accounting period.4.5. CLASSIFICATION (and UNDERSTANDABILITY) : recorded in correct account names.

5. ACCOUNT BALANCES :Assertions about (end period). 5.1. EXISTENCE : assets, liabilities, equitys DO actually exist.5.2. RIGHTS –(AND OBLIGATIONS) : entity holds rights to assets , liabitities are obligations of this entity , named shareholders . : do hold the

rights to the equity.+2-ALL ENCUMBERENCES on ownership must be . .. . :Disclosed5.3. COMPLETENESS : all that should have been recorded,were recorded,none missing.5.4. VALUATION –(AND ALLOCATION). : assets ,liabilities , equity recorded at appropriate valuation amounts and any resulting . . . : valuation

adjustments or allocation adjustments are appropriately recorded .ALSO , . . :DEPRECIATION and OBSOLECENCE 6. PRESENTATION AND DISCLOSURE :Assertions about.

6.1. OCCURENCE AND RIGHTS AND OBLIGATIONS. :disclosed events ,transactions& other matters DID occour and Do pertain to this entity.

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96 96 | P a g e Auditing Notes AUDI 1016.2. COMPLETENESS : All matters that should be disclosed in FIN STATS. , were disclosed, none missing.6.3. CLASSIFICATION AND UNDERSTANDABILITY. :financial info./disclosures are appropriately/ properly PRESENTED and DESCRIBED, and EXPRESED CLEARLY.6.4. ACCURACY AND VALUATION. : 1-FINANCIAL and 2-OTHER INFORMATION( eg notes on union problems) are disclosed FAIRLY and at APPROPRIATE AMOUNTS. (at correct

valuation amounts and in a correct and proper – 'FAIRLY presented' - manner.)

DIAGRAM OF ASSERTIONS:Remember: ‘allowance for doubtful debts ‘ AS WELL AS ‘Revenue’ are ‘transactions’ assertions


1 OCCURRENCE (ALSO ? VALIDITY) # #

2 COMPLETENESS # # #3 ACCURACY # #

4 CUT OFF #


6 EXISTENCE #

7 RIGHTS and OBLIGATIONS# #


SUBSTANTIVE PROCEDURES FOR THE AUDIT OF DEBTORS:

1) ASSERTION: RIGHTS & OBLIGATIONS:a) Determine if any accounts received have been factored, ceded or encumbered in any way. By:

i) Inspection:(1) Loan agreements(2) Bank confirmations(3) Prior year workpapers(4) Minutes of directors meetings

ii) Enquiry: of management2) EXISTENCE:

a) The 2 MAJOR procedures for existence are:i) Enquiry: Debtors circularization: must have permission from management(if no you qualify report), ii) Inspection: Subsequent receipts testing : matching amounts owed at year end to payments received after year end.(unless paid for new year bill) IE it was “Existing “

at year end, not it was not there but should be-if they moved this years sales to next year-(oocourance) .b) How to do a debtors circularization:

i) Auditor takes control of all debtors statements after they have been printed at month end(1) Test to debtors ledger & other way(2) Select sample for circularization

ii) 2 types of confirmation can be used.(1) Positive : requests confirm if correct OR not

iii) Negative: only confirm if not correct: weak since could be 1-fictitious debtor 2-incorrect in favour of debtor iv) Enclose in letter

(1) Sticker/letter requesting confirmation directly with auditor(2) Self-addressed envelope(‘positive confirmations’ only)

v) Auditor supervise all mailings by:(1) Direct all ‘addressee unknown’ to return to auditor only(2) Check all P.O. boxes telephonicly or by looking in the directory.

vi) Auditor collects evidence for Existence & Valuation now by :monitors replies, follows up on:(1) Disagreements: refer to 1-source docs, 2-client, 3-clients attorneys.(2) ‘No-replies’, ‘addressee unknowns’ : refer to : 1-recircularise after correct address,&2-telephone/fax &3-post year end receipts.

c) How to ‘subsequent receipts testing’:i) Select sampleii) Check CRJ to identify receipts, 1-trace to customers remittance to see for which invoice it was, 2-trace to date, 3-trace to invoice & delivery note& 4-trace if recorded

at year end in sales journal & debtors ledger.iii) Make sure a cut-off test is performed where last 20 invoices+delivery notes customer signed inspected to make sure they are from year end /OR : at year end(auditor

marks the last invoice/del. Note number as ‘end of year’ & note number)3) ASSERTION : VALUATION (& ALLOCATION): for debtors consists of 2 parts , gross amount and bad debts

i) Gross Amounts: & follow up(1) Unusual entries: eg year end dr’s(2) List of debtors : trace to general ledger debtors control account&trial balance, and debtors ledger individual accounts.(3) Reconciling items from ii) must be

(a) Casts(b) Reconciliation logic(c) Follow up reconciliation items.

(4) re-CAST : Debtors list & control account re-CAST.(5) Find CR balances in debtors ledger+reverse if needed(6) Circularization : Refer to circularization & follow up (7) Foreign currency :

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97 97 | P a g e Auditing Notes AUDI 101(a) Rates Bank(b) Old transaction rates calc vs end year rates(c) Must be at end of year rate in books, or it is wrong!

b) Bad Debts: (this is very close to debtors cause it reduces debtors etc)(1) Method &procedures enquire (eg if to students hostel room no. then provision must be more)(2) Authorization procedure :(better if more independent of ‘credit control/er’ itself)(3) Change in circumstances : have they change so prior year’s method is wrong eg new credit policy.(4) ENQUIRE MNGMNT: change in circumstances : eg new credit policy/ changed trading conditions major customer.(5) Reperform ALL calc’s.(6) Reperform Ageing : on small sample, to check if correct periods, refer to invoice/delivery note.(7) Long outstanding & material outstanding :discuss ALL with credit controller(8) Legal &debtors correspondence : check to identify debtors handed over and those with disputes.(9) Prior year vs Actual compare to check the companies ability to estimate correctly.(10) MONTHLY REPRTS TO MNGMNT: should be reviewed eg: write offs & debtor liquidity problems.(11) Analytical Review:

(a) % to prior year (b) write-offs to prior year.(c) Age analysis to prior year : is debt getting older?(d) Ratios year on year : eg Days Outstanding Debtors.

(12) Potentially Uncollectable : debtors should be considered on a 1 by 1 basis, not as a %.Consider all aspects eg large chain store will pay, but just overdue.4) ASSERTION : COMPLETENESS : do following to make sure of this

a) Cut-Off Testing:i) AFTER: first 20 (material) after year end cut off number –trace correct to delivery notes/records ii) BEFORE: 10 before check as above.

b) Credit Sales: to see whats NOT been recorded is more difficult to check/trace than what has been recorded.i) Missing dispatch notes (not in debtors)ii) Dispatch notes NOT MATCHED to an invoice (not invoiced= not in debtors- TAX etc)iii) Purchases+ inventory left MATCH to Sales (eg sold but not in debtors/or revenue)iv) Specific Representation from Management as to Completeness of Sales v) Analytic procedures:

(1) gross profit % fluctuations(2) prior periods : sales&debtors to (3) prior periods : sales by characteristic to branch/region/month/customer(4) sales ratio: eg: commission vs sales (if commission is up, sales should be up)

5) PRESENTATION & DISCLOSURE ASSERTIONS: (not ‘balances’ but next one :ie) as it applies to debtors: as per ISA500a) COMPLETENESS : IN TERMS OF ias INTERNATIONAL ACCOUNTING STANDARDS, 4TH SCHEDULE. Eg: debtors balance with current assets, + disclosed encumbrances on

debtors. + all dother DISLOSURES are thereb) :Occourance: Evidence :consistent with evidence gathered on audit.c) Accurate: Amounts , facts ,details, 1-accurate 2- and=evidenced) Classification&: Appropriate classification of information.e) Understandablity: Wording is clear and understandable. Eg: accounting policy & explanation of encumbrances.f) Rights&Obligations: per evidence gatheredg) Valuation&Allocation: per evidence gathered

6) ASSERTIONS: all /Generala) Analytical procedure of debtors : should be performed

(1) Analytical Review: (a) Debtors to prior year (b) Debtors vs credit Sales to prior year.(c) No. & Amount of Debtors by Branch/Division/Product.

USE OF AUDIT SOFTWARE (SUBSTANTIVE PROCEDURES) FOR DEBTORS1) Enhance auditing of debtors by (if clients debtors are computerized)

(1) Stratify as % total: by rand amount, profile,etc, (2) select samples for ageing(valuation)/circularization(existence).(3) Scan ERROR : masterfile for error conditions,duplicate ACCOUNT NUMBERS (existence),NEGATIVE balances( valuation) ,blank fields(existence)., over/abnormal/

credit limit/terms(valuation bad debts)(4) Debtors balances vs client listing, or vs ageing,(5) Unique characteristic/code 1-2-3: eg extract all handed over to lawyers(Valuation gross&bad debts, or code 2 correspondence(all assertions)(6) This Year vs Last Year for

(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)

SUBSTANTIVE PROCEDURES FOR AUDITING BANK/CASH1) EXISTENCE : BANK BALANCE

a) Bank confirmation letter(1) Standard SAICA bank confirmation letter sent to bank, first permission from client(2) Return to auditor, not client(3) Ask to SUPPLY balance details, NOT confirm bal. details.- auditor gives account numbers, or name of entity maybe better(4) ALL TYPES of accounts eg: 32 days, call , current etc.(5) Takes bank long, do timeously,-auditor give year end date.(6) Compare to clients docs(7) ENCUMBRANCES : Confirmation from bank must ALSO list any ENCUMBRANCES

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98 98 | P a g e Auditing Notes AUDI 101(8) MINUTES of directors meetings checked for balances encumbered.

2) RIGHTS & OBLIGATIONS: see Existence above , it is the same stuff to be used here3) ASSSERTION : COMPLETENESS : ALL BANK BALANCES

a) Risk Siphoning: off to other bank accounts ,then call forensic auditor assistance.- b) This year to previous year : no. and type of accounts held compare & follow up closed accountsc) ASK bank if ALL: accounts have been included in confirmation.d) Alert in other audit procedures: to check for other bank accounts, eg in minutes,cash budgets,vouching payments.e) Foreign Bank :ask mngmnt –written reply -about foreign accounts if any import/export is undertaken.

4) ASSERTION: VALUATION: at appropriate amounts in the fin.stas.a) Bank confirmation: Theory is bank could not pay up, but in reality this is low, so confirmation is good enough.b) Bank Recon:

i) REPERFORM by:(1) Check balance on recon vs bank stat. vs bank confirm.lett. vs cashbook(2) Reperform casts & test logic of recon ( eg outstanding cheques added not subtracted to cash book balance.)(3) Sample cashbook receipts & payments : check in bank statements before OR in recon itself.(recon date is year end)(4) Outstanding out cheques + deposits in recon : must be in BEFORE: date cash book AFTER: date a bank statement.(5) Cut off no. cheque on any post bank statement : must appear on recon.(6) Written out :enquire about any long standing deposits (max 2 weeks) and long outstanding cheques which SHOULD BE WRITTEN BACK.(7) UNUSUAL reconciling items : follow up by supporting docs.

5) Window Dressing : where you make a payment by cheque but do not post it until after year end: so a ratio of 2:1 will become a ratio of 3:1: eg bank 100 creditors 50=2:1 , so you pay 25 then bank=75 creditors= 25 = 3:1 but with window dressing I think they don’t record the 25 paid out,so you have a ratio of 100: 25 or 4:1 at that date.–(1-to catch check a ‘cut off statement from bank’ which means one from after the end of fin year, to see which cheques took very long to present, 2-then request to write-back this cheque for year end figures purposes)

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 VALIDITYb) 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 docsii) In same year period : recorded in both enities books in same periodiii) Any outstanding : are included in any bank recons.

9) Cash counts: a) Simultaneous: counting of all floats prevents cover upsb) In Presence of cashier responsible for:c) Alone : auditor NEVER alone with cash, or accused of stealing itd) Cashier+auditor sign : results on workpaper togethere) 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

10) PRESENTATION AND DISCLOSURE : i) Same as for Debtors, egii) Correctly presented on face of SOFP. –in liabilities if in overdraft, or in assets etciii) Disclosuresiv) Agree evidence.

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CHAPTER 11 : ACQUISITIONS AND PAYMENTS CYCLE:CHAPTER 11 : ACQUISITIONS AND PAYMENTS CYCLE:THE ACCOUNTING SYSTEM AND INTERNAL CONTROLS: 1) 2 major activities:

a) Ordering & receiving : 1-required 2- suitable quality&priceb) Payment 1-valid orders 2-authorised,accurate,timeous

2) Major balance= creditors3) Control procedures: mainly payments =risk asset=cash

DOCUMENTS IN THE CYCLE:1) Requisitions: from any dept but mainly stores, from stores mainly by: 1-re-order levels/qtys(computer or count) 2-production schedules 3- special (preferably written) request. 2) order forms: buying dept,sign chief buyer,details & price3) Suppliers delivery note: cross reference order form, sign by us, 4) Goods received note: by us, cross-ref SupplierDelnote.5) Purchase invoice:6) Credit note: FROM supplier, + returned goods accompanied by “12-returned goods voucher”7) Creditors statements: mnthly8) Cheque requisitions: by creditors section to whoever9) Remittance advice: breakdown of what is being paid10) Receipt: from supplier11) PJ,Creditors journal,GL, Purchase Returns & Allowances journal

CHARACTERISTICS OF GOOD INTERNAL CONTROL:1) Control environment: 1-NORMAL + 2-particular to authorize payments (shows poor contrl envir.…: 1-sign blank cheques, 2-not check supporting doc. Before sign cheques)2) Competent , trustworthy staff: boring &mundane& poorly paid (some tasks here)+money+if readily saleable consumer goods = special attention3) Division of duties:

a) Order goods = not Access goods (order for yourself) + {best if also “not Authorize payment”}b) 1-Receiving/custody = not amend records , 2-also Receiving=not do Goods Rec.Note.(or receiving does correct GRN but sends half back with suppliers truck then split

proceeds{so receiving signs ‘delivery note’, but warehouse does ‘GRN’ later))4) Isolation of responsibility:only: 1-moving goods isolate each move BOTH ‘count+sign’ 2-cash transferred isolate each move BOTH ‘c+s’5) Custody/asset control : 1-blank order forms (etc) 2-bank 3-goods6) Regular reconciliations & review

a) Creditors Statement vs Company Records (before pay)b) Orders vs goods received (unfulfilled)c) Company’s records vs Bank statements

7) Source doc design: 1-normal

FLOWCHART AND DESCRIPTION OF CYCLENOTE: For every single controls column below , ADD: employees must sign docs to acknowledge control procedures they have conducted.( as per book vertabim)


1-ORDERING OF GOODS AND SERVICES

Initiate orders, always available,place orders,after check suitable deliver/ /qlty /qnty /price

1-REQUISITION2-ORDER FORM

1-Incorrect/Unnecessary =liquidity+wastage2-unauthorised=losses by fraud3-order forms misused eg private orders4-requisition not acted on OR orders not timeous5-inferior quality6- unnecessarily high prices 7-orders not OR not timeously filled.

1-order clerk not order no authorized requisition (a)cross-ref requisition to order (b)confirmation by stores/production (esp. preset levels)2-before place order senior buyer/supervisor check (a)accuracy&authority (b)supplier suitability, price&qty reasonable, nature goods reasonable ie used by company3-approved supplier list (a) confirm available+delivery dates (b)or get quotes if no supplier list (c)seniors evaluate suitability of before approve a supplier4-order dept file requisitions sequentially by dept + frequent review requistions not cross-ref to an order. (unordered)

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100 | P a g e Auditing Notes AUDI 1015-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 goods&services

Accept, acknowledge, valid, record(GRN) + check qty, qlty, descr.

1-supplier delivery note(DN)2-GRN

1-acceptance of Short deliveries as full Damaged/broken Itms not ordered Wrong type/qty2-GRN incomplete/ Inaccurate3-no GRN made out4-fraud/theft +collusion outside

1-pysically secured access controlled Goods rec. section2-offload by goods rec. clerk who must: (a)match supplier delivery note to Purchase Order (b)check qty+descry. Vs both docs above (c)check goods- broken/wet etc (superficially) (d)reject incorrect + note on both docs (e)note short delivered on both(+ actual QTY!) (f)include only those accepted on GRN(??????) (g)suppliers personel sign +sign amendment eg short (h)sign supplier delivery note3-on transfer to stores next clerk sign GRN + count + report discrepencies to supervisor4-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 OF ACQUISITIONS

1-purchase invoice(PI)2-credit note(CN)3-Creditors statements4-Purchases journal5-Purchases Returns +allowances journal6-Creditors ledger7-General ledger

1-record incorrect amounts from incorrect purchase invoices (a)QTY/QTY/TYPE notas ordered or received (b)price not as quoted (c)calc errorsegcast/vat2-fictitious purchases /creditors from invoices never receiv. or ordered3-delays, misallocation, posting errors = recon problems+ loose early pay discounts.

1-purchase invoice must be: (a)match to1- GRN 2-delivery note+3-purchase order for: Qty, descr,prices, discounts(from order or supplier price lists) (b)review if posted to correct account eg: stationary. 2- account to be posted must be got from official list by requisition maker outer and written on there-or clerk will not know for which account it is.!3-reperform casts,extentions,calc,s on invoice.4-Specific emplyee must responsible GRN +invoice dates check and only then timeously posted to journal+ledger.

4-Payment preparation(requisitioning)

1-remittance advice (RA) 2-cheque requisition

1-pay fictitious creditors2-pay incorrect amounts3-unauthorised payments4-discounts lost

1-creditors statement recon to support docs.+clerk check invoice accuracy controls done before recorded2- creditors statements recon creditors ledger individual 3-creditors clerk make sure pay early discount 1-pay early2-actually is deducted4-cheque requisitions 1-preprinted+ 2-sequenced + 3-custody controls over blanks5-cheque requisitions: 4-to incl. details of 5- authorized by preparer sign 6- maybe even authorized second person6-cheque requisition+support docs ALL go to cheque signatories.(+ batch controls if numerous enough)

5-PAYMENT & RECORDING

1-cheque2-returned paid cheque 3-bank statement4-Cash payments journal (CPJ)6-Creditors ledger7-General ledger

1-cheque incorrectly made out(payee,amount)2-invalid payments(fictitious creditors)3-payments recorded inaccurately (error/fraud)

1- two cheque signatories2-they must agree support doc to date/amount/payee3-cancel (stamp/crossing) paid , used, Support Docs. ,(not use again)4-anti-tampering methods for cheque (a)permanent ink (b)no gaps (c)payees name in full (d)cross as ‘not transferrable’5-cheques+cheque books issued numerial sequence, only 1 used at a time.6-incorrect cheques: stamp cancelled +tear off signature –retain do not throw away7-signed cheques NOT returned to preparer: BUT mailed by independent employee.8-all recorded in NUMERICAL sequence in CPJ9-CPJ review by mngmnt regularly for missing sequence OR unusual pay.10-recon cash book to bank statement : staff independent of banking functions/creditors dept11-returned paid cheques: (a)filed numerically, (b) review suspicious endorsements.

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

FINANCIAL STATEMENT ASSERTIONS AND THIS CYCLE1) Purchase transactions: (TRANSACTIONS)

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101 | P a g e Auditing Notes AUDI 101a) Completeness.-all have beenb) Occourance. -normalc) Accuracy.d) Cut-off.e) Classification.-in the proper accounting records

2) Payments (TRANSACTIONS)a) Completeness.b) Occourance.- did actually occour,not fictitiousc) Accuracy.-d) Cut-off.e) Classification.

3) Creditors: (BALANCES)a) Completeness:b) Existence.-not fictitiousc) Valuation:d) Rights&obligations.-are actually obligations, not anything else.

4) Assertions pertaining to (PRESENTATION AND DISCLOSURE.)a) Completenessb) Accuratec) Classification & Presentationd) Understandable

FRAUD IN THE CYCLE1) FRAUDULENT FINANCIAL REPORTING :

a) Understate trade creditors : to improve ratios (completeness testing)i) Eg: manipulate cut-off year end = inventory count at year end but only put as a ‘purchase’ after year end.

b) Overstate Purchases : to reduce profits (tax)c) Trading with many related parties like subsidiaries = “current liabilities” manipulation becomes much easier

2) MISAPPROPRIATION OF ASSETS i) Order goods for personal use- but company pays (occourance purchase,obligation fictitious creditors)ii) Fictitious payments to creditors : own companies/friends (obligation of creditors, occourance of purchases)iii) Claim Vat not entitled to :(completeness of liabilities)iv) Bribes from suppliers to purchase/or family/friends : Sect 45 Accounting Profession Act (director has not declared his interest to company) –difficult to catch.v) Theft of goods at receiving stage: (existence of inventory)

TESTS :1) Tests of controls:

a) Observationb) Inspectionc) Reperformanced) Enquiry

2) Substantive procedures:a) Inspectionb) Enquiry & Confirmationc) Recalculationd) Reperformancee) 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) Inspecti) a sample of purchase orders for supplier is on approved supplier listii) Requisitions for authorizing signatureiii) Supporting docs is it stamped so it cannot be used again

b) Enquire: procedures carried out of goods receiving clerk – to reveal missing proceduresc) Observe: procedures carried out of goods receivingd) Reperform: creditors reconciliation(creditors STATEMENTS to creditors ledger)

3) Test should also be conducted on GENERAL(NON-SPECIFIC) CONTROLS eg: custody of blank order forms4) 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 overstated3) 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: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 contractiii) Recalc vat , check discounts come before vat.

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102

102 | P a g e Auditing Notes AUDI 101c) Cut-off:

i) Date on docs to date in purchase journal +fin yeard) Classification:

i) Should be on purchase order by buyer , check if in right oneii) Check descr. To be sure correct: eg fixed asset not written off as expense.iii) Vat correct on invoice+journaliv) Creditors ledger posting from ..

e) Completenessi) All that should have been recorded are recorded.

DUAL PURPOSE TESTSThese are combinations of testcontrols& substantive tests : to be done as follows:1) BY INSPECTION:

a) Supporting docs for:i) A Requisition from stores or production : 1- signed by foreman etc 2- goods commonly used by company ii) An Official company order form: 1-signed by the inhousecompany Buyer 2-cross-ref requisition 3-agree descr. Received goods 4-from authorised supplieriii) Copy suppliers delivery note which is:

(1) Sign(2) Descr right / agrees (3) Cross-ref : (only?)order

iv) Official GRN:(1) Sign in stamp says qty+qlty checked(2) Cross-ref :order/suppliers delivery

v) A suppliers invoice which :1-signed to show following tests done: 2-arithmatic accuracy check 3-pricing supplier list vs order price checked 4-the invoice was reconciled with supporting docs.

vi) A suppliers statement and RECONCILLIATIONwhich: 1-signed by clerk who reconciled 2-cross-ref to cheque requisition& agrees in amount to.vii) A cheque requisition which: 1-cross ref. to creditors support docs.by name,date amount 2- bears number of cheque issued 3-signed by senior creditors clerk & fin.

Accountant to authorize itb) Returned paid cheque:

i) Correct creditorii) Amountiii) Crossing&datingiv) Stamped by bankv) Signed by authorized signatories( pref.2)

c) General:i) All docs cancelledii) All docs addressed to this companyiii) All docs dates in current fin year + reasonable relation to each other

2) REPERFORMANCEa) Casts & extentions (generally)b) Prices correct (generally) test to price lists/orders etc.c) Recons correct

CREDITORS BALANCE (TRADE) PERFORMING SUBSTANTIVE PROCEDURES ON :1) Assertion : Existence :

a) Cut –off tests at year end. 1-record cut off no.& write on invoice 2 select in last 2 weeks material in purchases journal check GRN&delivery note&invoice that number&date are from last year(check for prematurely3- raised creditors so not overstated )..

2) Assertion : Obligations: : a) Check supporting docs to get evidence of

i) 1-the goods are commonly used by companyii) 2-made out in name of company

3) Assertion : Valuation (1) Individual Creditors Accounts TO Creditors Control account NB- MAIN do not forget this one(2) Sample of creditors on creditors list TO individual creditors accounts(3) Cred control+ ACCRUALS in General ledger TO- TrialBalance(4) Reperform Casts of Creditors list+ Creditors Control acc.(5) Find ANY ‘dr’ balance and discuss with credit manager if they should be taken off list- put in debtors.(6) Check Year end Recons by creditors clerk : a sample incl. major suppliers

(a) Reperform casts(b) Balances on recon- TO creditors list AND creditors statement(c) Test logic of recon.(d) Inspect supporting docs & inquiry&confirmation –all amounts/balances

(7) Foreign currency –on date of fin stats = at Spot Rate.(8) All Accruals (year end adjustments) : 1-re-cast list 2-check all sup docs+Ledger &reperform calculations3- check if total is the same as in TB,Ledger,Balance

Sheet4) Assertion : Completeness MOST AT RISK of ALL – companies are more likely to understate liabilities than overstate them (find missing ones)

(1) Current year TO last year : 1-missing this year 2-significantly smaller this year 3-find why(2) Disputes – check creditors correspondence file for evidence –adjust if needed/dispute not winnable?(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.

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103 | P a g e Auditing Notes AUDI 101(8) GL accounts ACCRUALS correct

5) ASSERTION: Presentation & Disclosure of trade creditors.(ISA500)NOT FINISHED-NO TIME BOOK pg 11/29 (very short)

USE OF AUDIT SOFTWARE (SUBSTANTIVE PROCEDURES) FOR CREDITORS BALANCES2) Enhance auditing of debtors by (if clients debtors are computerized)

(1) Stratify as % total: by rand amount, profile,etc, select samples for ageing(valuation)/ nil balance/ above some level(2) Scan ERROR : masterfile for error conditions,duplicate ACCOUNT NUMBERS (existence),NEGATIVE balances( valuation) ,blank fields(existence)., over/abnormal/

credit limit/terms(valuation bad debts)(3) Unique characteristic/code 1-2-3: eg extract all handed over to lawyers(Valuation gross&bad debts, or code 2 correspondence(all assertions)(4) This Year vs Last Year for

(a) Major fluctuations/reduced in individual account balances(valuation)(b) Not Listed :anymore creditors

(5) Casts/cross cast : (valuation) ageing + print a detailed list of creditors&balances out (6) creditors balances vs client listing, or vs ageing,

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104 | P a g e Auditing Notes AUDI 101

CHAPTER 12 INVENTORY AND PRODUCTION CYCLECHAPTER 12 INVENTORY AND PRODUCTION CYCLEACCOUNTING SYSTEM AND INTERNAL CONTROLS:

INTRODUCTION:1) Also called: “inventory & warehousing cycle” ,”conversion cycle”, etc.2) Deals with 3 things:

(1) Control Physical Transfer of inventory – /it’s movement anywhere.(2) Protect inventory : from damage,theft,loss / Custody. raw materials, work in process, finished goods.(3) Record Production Costs : Provide Information to calc. cost of manufacture/production. (accumulating all production costs and

adding to ‘cost’)

CHARACTERISTICS OF THE CYCLE1) HEART of the business : often the business is shaped around what it sells2) FIN. STATS. Effect on:usually major component in calc. of sales/cost of sales/net profit. Pervasive role in fair presentation .

of fin. Stats. Int.controls&control environment&acc.procedures must be good. (many businesses failed . .. due to this) 3) INTERNAL cycle : acquisitions cycle puts in, revenue cycle takes out, but this one depends on their controls.4) PHYSICAL asset : physical controls because it is not non-physical assets(eg debtors) 5) FRAUD - Inventory: inventory overstatement is very prominent –very ‘effective’ manipulation by overstating fin.stats.6) DIVERSITY of inventory :acc.procedures&internal controls must be able to deal with:

The auditor is affected by the diversity by eg: existence: of gas, valuation: of products of rapid tech obsolescence, rights: to inventory held in anothers possession, completeness & existence: held at multiple&obscure locations.a) Nature – 1-easy ID:fridge 2-difficult ID : chemicals,precious stones 3-growing: game,plants,chickensb) Location – 1-in transit, 2-multiple locations, 3-obscure locations, 4-in others possession-eg customs or on . .

consignment.c) Stage of development – raw/wip/finishedd) Permanence – 1-tech.obsolecence 2-expiry dates 3- fresh produce

DOCUMENTS IN THE CYCLE1) Goods received note : for transfer from receiving bay into stores- simply that stores clerk MUST SIGN the original GRN made out when the

goods arrived in the receiving bay from supplier2) Materials issue note/materials requisition – authorize the removal of items from stores.3) Manufacturing or Production schedules : to notify production what to produce, from orders/stock levels/forecasts etc.4) Job cards :tracks the stages of production of a specific job./adds each cost as it comes + an overhead allocation.5) Production report ; reports results of production/output/ wastage loss/ For specific cost centres 6) Transfer to finished goods note : records from mnftring TO stores.7) Picking slip: -normal8) Delivery notes: when/after we delivered9) Inventory sheet: for inventory count: descr,location,qty,cost,extention.10) Inventory tag: 2 (identical)small,numerically sequenced, attached to each item before count,name&descr. Of item,empty qty block.Team1

gives to ‘inventory controller’. Teams 2 as well. Discrepencies recounted.Some have a 3rd leaf which stays with the part till count is over.11) Inventory adjustment form:sequenced form used to record adjustments when actual&theoretical perpetual inventory records do not agree.

(eg lazy to count right at goods receiving, or stolen)

3 OBJECTIVES OF THE CYCLEThere are 3 objectives of the cycle:

1) Control Physical Transfer of inventory – /it’s movement anywhere.2) Protect inventory from :damage,theft,loss / Custody. raw materials, work in process, finished goods.3) Record Production Costs :Provide Information to calc. cost of manufacture/production. (accumulating all production costs and adding to

‘cost’) 4) SEE DIAGRAM PAGE 12/4 bottom – no time 5) 3 functions of the CYCLE

RISKS OF THE CYCLE1-RISKS1) 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 toa) 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 productionb) Non-availability of raw materialc) Poor Quality of raw materials

4) Unauthorised Production : eg private jobs5) Inadequate recording of Costs of Production. : WIP etc wrong costs carried forward. 6)

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105 | P a g e Auditing Notes AUDI 1012-CONTROL PROCEDURES1-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 issue3) 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 N.B.

1) Physical controls : Stores + All Production Areaa) Limited entry/exit : minimum doors possibleb) 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 etce) 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 actualb) 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 comparison5) Division of Duties : Note: ONLY THIS ONE : custody + recording inventory not by same person.

3-Info. FOR PRODUCTION COSTS

1-FOR JOB ORDERS1) Preprinted Job Cards for ALL JOBS TO BE RECORDED ON

a) Sequenced and datedb) List of materials to be usedc) Cross-ref : to customer order/quoted) Cross-ref : to materials requisitione) Cross ref : daily production schedulef) 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 clerk6) Job Card Numericaly filed : after7) 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 storeb) Cross-ref to job cardc) 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)

2-FOR PROCESS COSTING1) Production Schedules : ALL ‘process runs’ MUST go on these, which are:

a) Sequenced & Datedb) Cross-ref : to Production Plansc) Cross-ref : to Material Requisitionsd) Authorised by: production manager

2) Each Day / or eg per 1000 : “Transfer to Finished Goods Form” should be made outa) Accompany goods to finished goods storeb) Cross-ref to Production Schedulec) Used to write up the finished goods perpetual inventory

3) Performance reports : by production shift to measure performance eg wastage,qty produced,damaged items.

4) Performance reports +production schedules –sent to: ‘costing’ for the allocation of labour &material pricing &overhead costs(by ‘Standard costing usually’)

5) Mngmnt Compare: Costed Production Schedules: Date&Sequence test regularly to checka) All Production Qty was CROSS-REF to a ‘transfer to finished goods form’(means none was left out)b) Missing schedules are for finshed goods still in production(not skelm private jobs)

6) Mngmnt review :Performance reports to evaluate &follow up inefficiencies/wastage/(control environment)

7) Standard Costs :VS: Actual cOSTS: variances investigated.8) Posting to Journals: from signed , costed production schedules:

a) Dr WIP : Material cost, Direct labour, Mnftring overheads.b) Cr WIP , Dr finished goods with the total costs of goods above

9) CHECK: all casts, extentions,calc. before posting though.

4-INVENTORY COUNTS 1- CYCLE COUNTS Frequent comparison &reconciliation logic behind it is Discrepencies must be timeously indentified & corrected & preventative measures then put in place to stop more

1) Cycle counts are: used by very large qty&items inventories to compare actual to theoretical.BUT then PERPETUAL system must be used in order to make this work.(cycle counts are not restricted to large companies but a perpetual inventory IS required.)

2) Plan Timing : at begin year eg: 2 days every 3 weeks, or every 3 months(in large firms it can be an ongoing exercise.

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106 | P a g e Auditing Notes AUDI 1013) Identify items to be counted:

a) Random samples (from the records -list to shelf)b) Items susceptible to theftc) High value itemsd) Divided List in sections: do just 1 at each counte) Divided Warehouse in sections. : do 1 at the count

4) Use a Standard method & count controls5) Sequenced INVENTORY ADJUSTMENT FORM : all discrepencies entered here.6) Investigate discrepencies : by 1-internal audit 2-inventory controller.

a) Results of investigation recorded on ‘inventory adjustment form’b) Warehouse manager authorize adjustments &reviewc) Numerically filedd) Sequence checked regularly(? Why?maybe got ‘lost’in investigation)

7) Recording adjustments : by other clerk independent of 1-custody,2-receiving,3-issue.8) Review 1 : perpetual inventory records VS adjustment forms by senior warehouse ou (to see if all

adjustments DO actually come from the forms or not?)9) Review 2 : discrepencies over a period to identify trends & put preventative measures in place. 2-YEAR END INVENTORY COUNTS

Periodic sytems count & price all once per year – so mistakes =effect on fin.stats.(perpetual as well but not as bad)

1) PLANNING & PREPARATION: 1. Timeous planning & preparation2. Date & time : of count, to be decide in advance.3. Method of : choose eg Tag system, or double counts, or marking all boxes counted in 2 colours chalk

(1 colour for each count) etc.4. Staff requirements : 1-Per team : 1 person from stores, 1 from accounting 2- How many teams?5. Supervision : who will be the “Count Controller”?6. Prepare Warehouse: tidy racks, mark damaged goods,stack like goods together,pack out half empty

goods on to the racks.7. Warehouse floor plan :draft one to ID count areas for count teams.8. Locations & Categories :ID locations & categories all of inventory.

2) DESIGN OF STATIONARY:(3 types used) 1. Various docs.(3) used, all to be designed along standard design stationary principles 2. Inventory Sheets: printed, numerically sequenced ,show inventory category + item number +

location,columns for 1st count + 2nd count + discrepencies +prices + extentions(in many companies counters must insert the descriptions etc, esp. where perpetual system not used.)

3. Quantities not to be shown on sheet, as per records : so it forces counters to count(in theory, but practically not always possible)

4. Inventory tags : 5. Inventory adjustment forms :

3) WRITTEN INSTRUCTIONS: 1. Provide for all members directly&indirectly involved : info&instructions on the count to be

conducted.2. Identity of Count Teams + Responsibilities of each. 3. Method to be Used : eg Tag system, or double counts, or marking all boxes counted in 2 colours

chalk (1 colour for each count) etc.4. Identity of 1-Slow moving 2-damaged 3-consignment inventory.(say how to identify these and

record it)5. Controls over issues to & returns of Inventory Sheets to count controller???: 6. Procedures if Problems Arise: eg if items cannot be found, deliveries during count etc.7. Dates,Times, Locations of Count: Give this in Detail.8. Pronounce ‘sixtiey’ etc not sixtie for 60, same for 70, 80, etc. to avoid confusion

4) CONDUCTING THE COUNT :(NB done in detail in class)(there are variations in procedutes but following should always be adopted)1. TEAMS of 2, one person always independent of all aspects of ‘inventory section’2. Floor plan : each team gets one, shows which are they are accountable for3. Count Twice: all items, use one of following methods:

i) 1 member counts, 1 records, swapping to count their area a second time.ii) I team counts 1 area once , then another team counts it again.They give their sheets back to

controller and sign for sheets of another area.4. Tag OR Chalk :Either neatly boxes counted coloured chalk 1 colour for each count OR use tag system5. Damaged OR Very Dusty unused : inventory: mark on sheet as potential write-downs.6. Packaging Tampered with : count items inside & note details on sheet.7. Random selection & check : select some packages and check contents inside to see if description is

same as on sheet, (check they have not been changed/removed and seal replaced.)8. After count: controller + assistents must walk through warehouse and check

i) Double marks OR both tags removed : on all boxes to show counted twiceii) Check inventory sheets if 1st & second counts qty same and same as records of perpetual

inventory.iii) Have discrepencies recounted.

9. Last GRN + INVOICE + DELIVERY NOTE numbers up to date of count obtained by count controller and recorded for future reference.

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-

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107 | P a g e Auditing Notes AUDI 101must 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 sheetsii) Sign each sheet and every alteration.

13. Inventory Controller to:i) Check above 2 procedures doneii) 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.

AUDITING THE CYCLE:During the “understabding the entity and its environment” stage the auditor will walk through and gather details of internal controls and production/cost accumulation/ inventory internal controls & processes and estimate the risk of fin.stats. being misstated.then he plans the audit in accordance.

FINANCIAL STATEMENT ASSERTIONS

1) Mainly : THE ASSET is fairly presented in fin.stats.2) Assertions : which apply:

a) Rights: …b) Existence: actually existed(not overstated)c) Completeness: all that should was recordedd) Allocation & Valuation: appropriate value amount(incl.adjustments ie “carrying value” at lower of cost and net realizable value) and in

the right account headings in ledger.3) Presentation & Disclosure :

a) Complete : in terms of 4th schedule and IFRSb) Classified : correctlyc) Accurately: presentedd) Understandable : ..manner

IMPORTANT ACCOUNTING ASPECTS –IAS2 –INVENTORIES

1) IAS-international accounting standards- gives definitions and requirements for methods to value inventory and present &disclose it.2) DEFINITIONS:

a) Definition: Inventories:consist ofi) Assets held for sale in the ordinary course of business(incl. finshed goods or bought for resale)ii) Assets held in process of production(WIP)iii) Raw materials to be consumed in production process

b) 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.3) Inventory to be presented at the lower of cost and net realizable value

a) Eg damaged inventoryb) Eg obsolete inventoryc) Eg:selling price has declined to below cost price

4) Cost of inventories: a) Should consist of

i) Costs of purchase: transport + import dutiesii) Costs of conversion :production overheads & direct labouriii) Costs to bring to present location and condition: eg costs of designing a product for a client

b) MUST EXCLUDE:i) Storage costs(unless these costs are necessary in the production process before the (further), following production stage)ii) Administrative costs (exept those incurred in bringing them to present location and condition)iii) Selling costsAuditor must be satisfied that these were written off as expenses and not included in the costs of inventories

5) ‘Cost’ of manufactured goods : a) Allocating overheads to inventory must incl. only the following:

i) Fixed&variable PRODUCTION overheads.ii) Based on NORMAL capacityiii) Be allocated on a systematic basis which is reasonableiv) ABNORMAL wasted material,labour,or other abnormal production costs should be excluded.

6) Cost formulae : only the following are allowed by IAS 2.a) Specific Identifictionb) Weighted Averagec) FIFOd) Standard costs(only allowed to be used in fin.stats. if it approximates actual costs though-as a second requirement)

i) Only Variances in STD costing relating to Stock actually an hand at year end-since some will relate to stuff already sold- may affect the cost of sales)

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:

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108 | P a g e Auditing Notes AUDI 101a) Rate at TRANSACTION date, not PAYMENT date.b) Even if rate is different at year end, no change is made to inventory.

FRAUD IN THE CYCLE:1) Fraudulent Financial Reporting :

a) Presents directors with an effective opportunity for manipulating the bal.sheet.b) The directors may:

i) Include fictitious inventoryii) Understate writedowns for obsolescence,damage,etc.iii) Overstate writedowns, or exclude inventory which should be included.

c) There are hundreds of ways to include fictitious inventory.As all directors know auditor will perform physical tests of inventory,many frauds require intricate planning and a lot of deception

d) Example: the great salad oil swindle- vats had false pipes for measuring or seawater in the bottom.fraud only got discovered when the banks called in their debts and there was no oil.

e) Methods to reconcile fraudulent inventory with physical inventory:(1) Include hollow containers in the count(2) Hollow stacking: surround empty boxes with full ones(3) Attach empty container to shelf to seem heavy(4) Put bricks in proper inventory packaging(5) Repack second hand or defective to look like new.(6) Alter qty on inventory count after the count(7) Include inventory which is not what is recorded on sheets eg steal genuine nike and replace with cheap lookalike(8) Borrow from a related party for the count only(9) Have sold goods returned under false pretences for the count eg vehicles(10) Double counting : eg in transit or multiple locations(11) Obtain False 3rd party confirmations from agents or related parties(12) Include ‘on-consignment’ inventory as your own(13) Manipulate year–end cut-off.(14) Incl. goods received in physical count but not in inventory.(15) Pre-invoicing and include goods in physical count.

2) Misappropriation of assets a) How to get the goods and how to hide the theftb) How to get the goods will depend on:

i) Nature of goods: small valuable vs large immovableii) Physical control ; limited exits, cameras,etciii) Division of duties: custody & recording by same personiv) Frequency of physical & theoretical reconciliations.the more often the more difficult to stealv) 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.

TESTS OF CONTROLS AND SUBSTANTIVE PROCEDURES:TESTS OF CONTROLS

The auditors main focus will be substantive testing but some tests of controls are carried out.1) Observation:

a) of inventory count2) Inspection:

a) Cycle count amendment forms&recons. For frequency&materiality & how were resolved of discrepenciesb) Of Stores Controls : to determine the effectiveness of:

i) ACCESS : Access Control,(custody and safekeeping)ii) DOCS: Authorized documentation to record inventory movement.iii) FIFO: STORES LAYOUT, to facilitate physical implementation of FIFO.

c) Inspect Records controlling inventory movement. i) Inspecting a sample of requisitions and materials issue notes.

(1) Authorising signatures(2) Cross-ref to Job cards.

ii) Inspect a sample of inventory movements per the perpetual inventory records to “transfers to finished goods stores”3) Enquiry: of production & warehousing to see what procedures they really perform.4) Recomputation :of calculations on 1-production schedules, 2-performance reports, and 3-other costing records.

SUBSTANTIVE PROCEDURES

1) Many of the tests of controls are dual purpose tests 2) Auditors Objective: (all done by substantive procedures)

a) Quantities correctb) Cost formula correctc) Reasonableness of write-downsd) 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 itselfc) Substantive tests:

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109 | P a g e Auditing Notes AUDI 101i) 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 countii) locations: confirm by enquiry, prior audit papers,visitiii) admin.planning eg organize staff to attendiv) written instructions: get a copy of clients instructions to his teamsv) 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 forvii) 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.

POST INVENTORY COUNT PROCEDURES: (BIT NB SORT OF)

1) RIGHTS : (company holds or controls rights to the inventory.)a) Consignment : enquire mngmnt if any is held for other partiesb) Imported in Transit: get listing, see from FOB,CIF- if ownership has passed or not.c) Encumbered: find out if any is offered as security. By.

i) Discuss with mngmnt.ii) Inspect bank confirmationsiii) Review directors minutesiv) Review correspondence/contracts- suppliers/&credit providers.

d) Invoices : made out to clients name (not another) check while doing valuations.2) VALUATION & ALLOCATION (at appropriate amounts) (ONLY IN MULTIPLE CHOICE)

a) Arithmatic Accuracy: i) Auditors copy VS clients copy of inventory sheet(if client did not alter the sheets)ii) Reperform casts&extentions on inventory sheets.iii) Negative item values- check sheet(should not be any)iv) Inventory sheets TOTAL vs ledger vs TB.

b) Pricing inventory purchased locally i) use sample test counted at ‘count’ to check

(1) trace pricing to suppliers invoices(2) & recalc. Formula for FIFO.(3) Or recalc formula for Weighted average if used(4) Carriage costs: enquire of costing clerk&inspect transporter invoices to make sure it was incl. in costs of items

c) Pricing imported inventory purchases. i) Get a sample of HIGH VALUE items

(1) Get suppliers invoices,shipping contracts,costing schedule and reperform unit cost calc. to verify:(a) Exchange rate on day of transaction, not payment(check with bank -rates)(b) Customs&import duties incl. –from Shipping agents invoices(c) Allocation to each item of these costs is reasonable & accurate.(d) NOTE: companies which import inventory usually have a ”COSTING SCHEDULE” with details of how costof imported goods

was arrived at – eg customs,shipping etc. (auditor traces back to source docs)(e) NOTE: there may be more than 1 supplier invoice at different prices&times for any 1 type of items sampled-check all.

d) Pricing manufactured goods i) COSTING METHOD: enquire&inspect docs to get idea of method used.ii) CHECK IF CONSISTENT with prior years, AND remains appropriate now.iii) FOR STD COSTING SYSTEM:

(1) Check appropriateness of standards setting process & adjustments to standards- enquire&inspect(2) Check variances- esp. to see no inappropriate increasing of inventory at year end.

iv) COSTING SCHEDULES VS SUPPORTING DOCS:(1) descr. of materials & prices (2) labour costs VS payroll records(3) allocation of overheads: ONLY fixed&var. Production overheads.

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110 | P a g e Auditing Notes AUDI 101(4) Based on normal capacity(5) Done on a systematic basis which is reasonable

v) COSTS OF CONVERSION: make sure no: admin. Overheads or selling expenses or “abnormal” wastage&labour&production costs.e) Lower of cost/net realizable value

i) Use a sample to verify selling price by (1) Refer to sales lists(2) Most recent sales invoice per item(3) Compare sales prices VS 1st post bal. sheet date invoices to see which is lower.

f) Obsolescence : Inventory allowance i) Discuss with management:

(1) Process used – fixed(only allowed if strong historical evidence) or detailed analysis each year.(2) Procedure for approval of allowance- eg is it approved by fin. Director after consult warehouse mngr.(3) Specific events: eg flooding this year(4) Any soon to be /or are obsolete products- eg competitor launched a competing product.

ii) Analytical procedures: this year to last tear for eg:(1) Allowance(2) As % of total inventory(3) Inventory turnover ratio(4) Days inventory on hand

iii) Indicators of obsolescence problems:iv) Reperform ageing of inventory by tracing back to source docs.v) Compare allowances raised in previous years to actual write-offs in subsequent years to check mngmnts estimates.vi) Year-end count- check if those obsolete/damage etc have been included in allowance.vii) Reperform calc.s of allowance viii) & discuss reasonableness with management as per evidence gathered.

3) COMPLETENESS a) Cut-off proves all that was purchased was included and all that was sold, was excluded.b) Attend inventory countc) Analytical review

4) EXISTENCE :a) Cut-off proves all that was purchased was included and all that was sold, was excluded.b) Attend inventory countc) Analytical review

5) GENERAL: ALL ASSERTIONS: a) Analytical review : current to last years eg:

i) Total ii) Total by category, source(local/import), locationiii) As % of Current assets,total assets.

b) Include reference to inventory + also to obsolescence, in the management representation letter.

6) PRESENTATION & DISCLOSURE : (whether fin.stats. are complete in terms of)a) IAS standards & 4 th schedule

i) Encumbrances on inventory(security)ii) Accounting policiesiii) Cost formulae

b) Consistent with evidence gathered on auditc) Amounts,facts,details accurate and consistent and agree with evidence gathered.d) Classification is appropriate : eg WIPe) Wording of disclosures is clear&understandable eg: for a reversal of impairment.

THE USE OF AUDIT SOFT WARE (SUBSTANTIVE TESTING)

1) Normally the inventory masterfile will contain at least the following fields:a) Item no.,descr,category,location,importlocal,approved suppliers,qty on hand,unit selling price,unit cost,date of last receipt&GRN no., date

of last issue & Doc. No, item value(cost*qty).2) Procedures which can be conducted on it using CAAT. 3) Enhance auditing of inventory by

(1) Stratify as category & item value – for 1-planning/2-analytical/3-selecting samples(2) Scan ERROR : masterfile for error conditions,1-duplicate ACCOUNT NUMBERS (existence),2-NEGATIVE qty or unit cost 3-negative qty AND negative unit

costs( valuation) ,3-blank fields(existence)., 4-QTY field is 0 but date last purchase is > date of last sale 5-qty = 0 but ‘value’ is above zero 6-date last purchase/sale in after year end

(3) Select samples for 1- pricing 2- inventory count(4) Reperform : 1-qty VS unit cost 2- cast totals field(5) ANALYSE by:-ALL to get evidence for WRITE-DOWNS

(a) Unit cost EXCEEDS selling price(b) Date last sale is 9 mnths before year end,date of last purchase is within 2 mnths of year end(c) Date last sale+purchase is over 9 mnths from year end(d) Where qty on hand is say over 5 times qty sold to date.

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CHAPTER 13 PAYROLL AND PERSONEL CYCLECHAPTER 13 PAYROLL AND PERSONEL CYCLEACCOUNTING SYSTEM AND INTERNAL CONTROLS

INTRODUCTION:1. Unique Characteristics:

a. Major Expense: results in an outflow of cash , to most businesses it is a MAJOR expense, not a small one.b. Involves Cash : many are still cash , exept electronic transactions.c. Internally generated transactions : most documents are internally generated, not by eg external suppliers.Fraud is thus easy

with this.d. Susceptibility to fraud: wage frauds are not uncommon because:

i. Cash is easy to conceal/stealii. Adding fictitious hours/or workers needs no external documentation.iii. Large amounts of money can be generated, by 20 extra employees, to bribe collusion wage dept.

e. Continuity of Operations: a workforce paid 1 day late is very upset, not suppliers.Thus Contingency Plans Needed.f. Major Risks Within the Cycle.

i.

DOCUMENTS USED IN THE CYCLE:1) Employment Contract/ Employee file : Employment contracts + Advert in Newspaper(proof not fictitious) +Interviewing panel results +

UIF etc. + Sick leave taken/signed etc.2) Payroll Amendment Form : used in detail to authorize all changes per mnth etc. for promotions/dismissals/ higher wages etc.3) List of Employees: provided by personnel, a list of all employees &details, needed to calc. wages&salries month end etc.4) Clockcard: card which records hrs a wage earner has worked.5) Batch Control Sheet & Batch Register: control movements of batches of clockcards between functions.6) Deduction tables & Returns: PAYE /Med.Aid /UIF etc.7) Wage journal (PAYROLL is another name) : spreadsheet listing employees names + work/cost centre + overtime&hours etc.8) Paypackets, Payslips, Salary Advices: cash goes in here./ explains deductions etc.9) Unclaimed Wage Register: book recording those who did not collect their paypackets.10) Wage /Salary Reconcillliation: recons this weeks wages/salaries to last weeks .(see example later in chapter)

CHARACTERISTICS OF GOOD INTERNAL CONTROL:1) Control Environment: important that management insists on strict adherence to controls, if employees perceive weakness frauds will

occour.2) Competent Trustworthy staff.: cash is being handled: accurate& on time & trustworthy.3) Division of Duties: recording separate to assets(cash&bank) eg clerk prepare payroll may not handle cash./ or sign cheques.

a) 1- creating clockcards 2-recording hours 3-preparing payroll 4- paying over cash/signing cheques b) Within each of these above functions : divide between Doing task & Checking it.

4) Isolation of Responsibilities : because fraud is likely , workers must be able to prove where their resposnsibility started and ended and prove they carried out their function. This is very important where cash is passed from 1 to another.a) Eg: where clockcards are passed from 1 to another : both must sign to show they 1-checked & 2-received/gave the cards so if any false

card is inserted, it can be identified who was involved /put it in.5) Access/Custody controls : especially: blank clockcards, salary account cheques, clocking device , cash(as paypackets or unclaimed

wages)6) Source document design : eg place to sign payroll journal&clockcards . Also space for normal/overtime/employee details/ etc. and gross

wages/deductions total in payroll journal etc.7) Comparison and Reconcilliation :

a) Current VS Previous weeks wages/salaries + no. of employees + amounts paid.b) Payroll (by wages dept) VS Records from User Dept(eg depatch dept etc.)c) Personell records VS Actual living people

FLOWCHART & DESCRIPTION OF CYCLE :NOTE: For every single controls column below , ADD: employees must sign docs to acknowledge control procedures they have conducted.( as per book vertabim)


1-PERSONNEL (Human Resources)

Obtain max efficiency from workforce by control: 1-Dismissals2-Recruitments3-Wage negotiations4-Labour disputes5 Keep Records for employees(Accurate Complete) produce clockcards from these.

1-Payroll Amendment Form.(PAF)2-Employees File.

1- Unnecessary or unsatisfactory :recruit/retain such employees.2- Dismissal : Incorrect procedures.3-Unauthorised amendments to employee records. -fictitious add - wage rate change

1-Requests: for new retain or old dismiss must be from 1-DEPT making request, IN WRITING 2-Signed by section head , countersigned by sect. manager,after reference to the budget.2-Pay Rate / promotions /other service conditions : 1- Decided by Wage Committee/ or Personnel Dept. after 2-Consultation with interested parties eg UNION representative 3-Consider Laws & Regulation : eg min. pay rate/overtime etc. 4-Documented + Authorised by body authorizing eg: Wage Committee/ Personell 3-Payroll Amendment Form(PAF) : all above to here + 1-Cross Ref to supporting docs + 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

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112 | P a g e Auditing Notes AUDI 101 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-TIMEKEEPING 1-KEEP VAC record of valid hrs worked2-Clockmachine commonly used3-daily hrs added for week & sent to payroll preparation.

1-Clock cards2-Batch control sheet3-batch register.

1-invalid Hrs recorded.by eg: Fictitious employee Clock for absent friend Clock in + leave premises.2-hrs incorrectly added for normal / overtime

1-Entry & Exit points of Work area: 1-limited (preferably just 1) 2-protect by turnstile mechanism(counts in/out) 3-supervised during clocking periods(watch that no double clock etc.)2-Clockcard : prepare by Personell Dept only,strictly per “authorized employee list.”3-At end of WEEK : (usual Wednesday Afternoon) 1-agree no. of cards VS list of employees in section.

2- calculate ordinary time3- calc. overtime4- divide into workable batches(25)5- Do batch control sheet:

a-ID section&weekb-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 PREPARATION:

Calc. wages&deductions. From hrs. and record on payroll.(wages journal)

1-Clock cards2-Deduction tables3-Updated List of employees4-Payroll (Journal)

1-Include fictitious employee2-Use Incorrect/ Unauthorized pay rates/hrs/deduction tables.3-Cast & Calculation errors.

1-Wage clerk check details of batch & sign register on receipt from timekeeping.2-Wage clerk prepare: 1-payroll 2-coinage schedule 3-Recon : this week VS last week (no.employees+amounts net) 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-Sign4-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 PREPARATION &PAYOUT VERY NB:

1-Prepare Pay-packets2-Distribute Wages3-Unclaimed wages recording.

1-Payroll2-Payslips &3-Paypackets4-Unclaimed wages register

1-Errors or theft of cash during 1-drawing of cash 2-making up paypackets 3-payment of employees2-Theft of Unclaimed Wages

1- 2 people to make up wage packets (where there is cash allways 2+) (and also “physical” security over cash handling tight)2- Delivery of Wages to payout: section head must 1- agree no. paypackets to payroll. 2-agree control totals : batch register ot.hrs , no. cards. 3-sign payroll to show receipt & control procedure done.3- Lock away paypackets till payout4- 2 people min. do payout :independant paymaster & foreman 5- Employees must: 1-show ID 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 payroll9- 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 entries11- Reconciliation : unclaimed wage packets to unclaimed wage register +CHECK FOR UNUSUAL OCCOURANCES eg more unclaimed in one section than another.

POINTS BY LECTURER:112

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113 | P a g e Auditing Notes AUDI 101-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-DEDUCTIONS: PAYMENT & RECORDING.

1-To record liabilities in respect of deductions& settle them in time

1-General Ledger2-Payroll (wage journal)3-Cash Payment Journal4-Return form

1-penalties due to non-payment or late payment or underpayment.2-criminal/civil charges due to non-payment (this is theft)3-Overpayments : losses due to

1-One Single Person to raise & pay deductions :isolate responsibility so no confusions develop 2-a strict monthly schedule for : 1-post entries to raise liabilities for deductions 2-make payments timeously 3-supervisory checks on above activities3- 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

AUDITING THE CYCLE INTRODUCTION

1) Risk of misappropriation is high so direct lots of resources to this one2) EXPENSE total, not a BALANCE total which can be reconciled to an asset.3) Auditor must be reasonable certain controls operated efficiently throughout the year to produce VAC total.4) Substantive tests:

a) Test recording of hoursb) Confirm employees do existc) Test week to week changes to PAF d) Accuracy of calculations & deductionse) Confirm deductions are paid overf) Extensive Analytical review

5) BASE WEEK METHOD: common method is to test 1 or 2 base weeks to be sure they are 100% correct, then just compare& recon them to all other weeks in year and do ANALYTICAL COMPARISONS.

ASSERTIONS:1) OCCOURANCE : most important one because The Highest risk = overstatement of expense by incl. fictitious payments2) ACCURACY: 3) CUT- OFF: 4) CLASSIFICATION : in the proper accounts5) 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.

FRAUD IN THE CYCLE1) FRAUDULENT FINANCIAL REPORTING

a) Not really a lot of scope for this, exept profit by manipulating the expense accountb) Illegal immegrants: by not reporting their wages a form of fraudulent financial reporting is taking place.

i) Wages not reportedii) Contingent liabilities ie possible fines/penalties not reported

2) MISAPPROPRIATION OF ASSETS a) Wage fraud :

i) OCCOURANCE :Include dummy employees : MASTERFILE+ CLOCK CARD etc (1) Not remove if retire/dismissed/resign(2) Collusion is required eg foreman & wage clerk , also possibly fictitious employee.(3) Note : They MUST get the cash into their own pockets somehow-this is a tricky part

ii) OCCOURANCE :Unauthorized rate/scale changesiii) OCCOURANCE :Employee paid for Fictitious hours eg foreman authorizes overtime never worked & split proceeds , or clock in for

absent friendiv) VARIOUS ASSERTIONS :Tax evasion schemes - by directors usually , eg company cars for directors not declared and PAYE not

deducted & fringe benefit not reported.This is a reportable irregularity per Auditing Profession Act.

AUDIT PROCEDURES: SALARIES & RELATED ACCOUNTS

1) OCCOURANCE: a) Check if genuine living people :Sample of Employees from wage register,

i) Inspect Personel file (various docs verify he exists)ii) Signature : compare “salaries register” one to “employee file” one. iii) Vouch ; trustworthy eg fin acc. To vouch for people you don’t knowiv) Vouch ; with dept. manager if if worked there in dept.v) If Doubt, do surprise verification: physical check on person.vi) Discuss with Personell Staff, & Examine employ/dismiss Docs to:

(1) Make sure removed from salaries register on correct date(2) Employ/dismiss Docs Properly Authorised

vii) Examine: PAYE /UIF returns for employee name&tax no. etc. VS employee fileviii)AUDIT SOFTWARE: Check masterfile for Error conditions which show fictitious employee

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114 | P a g e Auditing Notes AUDI 101(1) Duplicated/missing ID no.(2) Duplicated/missing Tax No.(3) Duplicated: employee no (only duplicated)(4) Duplicated: Bank acc. No.

2) ACCURACY , CUT-OFF , CLASSIFICATION a) Inspect : Salaries register Gross salary VS personnel section listingb) Inspect: if there were lately salary changes – inspect authorized list of salary increases VS actual salary paid to see if correct one was

used.c) Deductions: PAYE/Med aid etc check if correct was made, if wrong ask personell&employeed) Returned Salary Cheques: correct crossings, + suspicious endorsements + correct amount per salary register.e) Recompute: 1-deductions & 2-salaries register casts & cross-casts. f) DATES & details : on Paid cheques VS return forms for : deductions Clearing Accounts+ salaries paid pertain to correct cut off AND

deductions paid timeously. 3) GENERAL ANALYTICAL PROCEDURES:

a) Salaries : Month TO Month any large fluctuations by division/branch/dept etc. b) Ratio & Trend :

i) Commission % of TOTAL SALES ii) Salaries as % of TOTAL EXPENSES

c) Payroll ledger accounts : STRANGE/’out of ordinary’ amounts eg 13 th cheque/ lump sum payments4) ASSERTIONS PERTAINING TO PRESENTATION & DISCLOSURE:

a) Disclosures in notes: i) Complete in terms of IAS (international acc. Standards) and 4th schedule eg directors emoluments& post employment benefitsii) Consistent with Evidence gathered on the auditiii) Amounts, facts details accurate & agree with evidenceiv) Classification: of info is appropriate.v) Wording Clear & Understandable

5) NOTE 1: illegal employees : if auditor has a suspicion :a) Do a reverse identification ( employee against list, not visa versa)b) Alert to unsupported paymentsc) Alert secret bank accounts.

6) NOTE 2 : Salaries by EFT:a) Obtain mnthly schedule of EFT from bank = 3rd party evidence used to gather substantive evidence

7) NOTE 3: Month to month Recon :a) Use it to vouch & verify movements on the Payroll Journal eg incr. means you check appointsments documentation and salary increase

authorizations.

AUDIT PROCEDURES :WAGES & RELATED ACCOUNTS:

1) OCCOURANCE: a) We will assume the base week method has been chosen, for the following procedures:At the planning stage a number of weeks should

be pre-selected at which a surprise attendance at the wage payout will take place:i) Arrive after paypackets prepared but before payoutii) Take custody of all paypackets agree name number amounts to Payroll.iii) Disribute wages :Accompany paymaster and check:

(1) ID of each (2) Ask foreman if the employees are authentic(3) Unclaimed Wages :

(a) Check if noted in Unclaimed Wages Register + on Payroll(b) On later visit ask for the employees & ID .(c) Inspect the U.W. Register all entries since last attendance.

(i) Employees appearing Regularly :Check authentic each employee (ii) Confirm re-banked in reasonable time (deposit slips/ copies on UWregister/bank records)

iv) Personell Records (of a sample of employees at the attendance)(1) Check files for evidence (eg: contract, UIF/PAYE, advertisement, union details, medical details)(2) PAYE/ UIF – check their names were included on the returns.

b) EFT Payouts :i) ID : still check ID ‘s and physical inspection at workplace of employeesii) AUDIT SOFTWARE: Check masterfile for Error conditions which show fictitious employee

(1) Duplicated/missing ID no.(2) Duplicated/missing Tax No.(3) Duplicated: employee no (only duplicated)(4) Duplicated: bank acc. No.

c) CHECK HRS RECORDED WERE ACTUALLY WORKED (occourance) i) The following tests of control during the base week are done

(1) Observe if clocking controls limit fictitious people & hrs (in morning/evening) (2) Integrity Foreman : ask management of his integrity(3) Foremans Signature : inspect it authorizing the overtime(4) Reperform calc. of hrs worked on clockcard(5) Evaluate possibility of hrs could be credited to employee after ‘clocking’ eg during payroll preparation.

ii) The rest of the year is checked by comparing to he base week., any large fluctuations are followed up.2) ACCURACY , CUT-OFF, CLASIFICATION:

a) FOR WEEKS of surprise attendance :check payroll& supporting docs, to confirmi) Wage rates are authorized (employee list)ii) Total hrs calculated correct AND overtime+normal are correct.iii) Deductions correct as per tables

b) RECALCULATION: i) Extentions& casts correct ii) Gross wages- deductions=net pay iii) Classification: postings from Journal to legder are to correct accounts.

c) DEDUCTION CLEARING ACCOUNTS: check if cleared timeously – by inspect cheques and bank transfer documents.3) COMPLETENESS

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115 | P a g e Auditing Notes AUDI 101a) If suspect wages paid not recorded(eg illegal immigrants)

i) Reverse ID check (shelf to sheet)ii) Enquire senior mngmnt illegal workersiii) Alert to unsupported payments –esp.cash amountsiv) Check validity of ‘casual wages’

4) GENERAL / ANALYTICAL PROCEDURES a) on each subsequent visit after base week , b)c) Wages : week to week any large fluctuations by net wages,/division/branch/dept etc. d) To Total wages last year e) Production /or total no. employees vs Wages f) Trace Ledger wage balances to Trial Balance g) Ratio & Trend :

i) Commission % of TOTAL SALES ii) Salaries as % of TOTAL EXPENSES

h) Payroll ledger accounts : STRANGE/’out of ordinary’ amounts eg 13 th cheque/ lump sum payments5) ASSERTIONS AS TO PRESENTATION & DISCLOSURE:

a) Only related disclosures eg: post employment benefits.

THE USE OF AUDIT SOFT WARE (SUBSTANTIVE PROCEDURES)1) If weekly transaction files + computerized & on masterfile :

i) Masterfiles can be :(1) SCANNED for ERROR conditions :

(a) Missing names, employee numbers, tax reference no. etc.(b) No amounts in ”year to date’ earnings field(c) Negative earnings (there should be none)(d) Net wages > Gross earnings of employee (none should be found)

(2) STRATIFIED & SUMMARISED by(a) Section /branch / region / for Analytical review

(3) EXTRACT :(a) List of 1- employed 2- resigned/dismissed and COMPARE to PAF(b) Random Sample of employees for : physical identification.(c) Random Sample of employees for : pay rates /grades verified against physical documentation

(4) Masterfiles contain usually:(a) Name,number, address, grade, section/branch/region, leave entitlement, date employed, date dismissed/resign,

earnings&deductions for current week/month, same for current year .

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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.

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!!!!

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FINANCE AND INVESTMENT CYCLE ch14FINANCE AND INVESTMENT CYCLE ch14DIAGRAM OF ASSERTIONS:


1 COMPLETENESS (ALSO ? VALIDITY) # # #2 OCCURRENCE # #

3 EXISTENCE #

4 ACCURACY # #

5 CUT OFF #


7 RIGHTS and OBLIGATIONS # #


INTRO: 1. Consists of 3 parts :

a. Raising finance & repayment of principle : eg debentures / equity shares issued/ loans etc.b. Obligations therefrom : Interest & dividends abligationsc. 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.

CHARACTERISTICS OF THE CYCLE 1. FREQUENCY OF TRANSACTIONS : VERY FEW2. SIZE OF TRANSACTIONS : larger usually3. HIGHLY REGULATED ENVIRONMENT - LEGAL & REGULATORY : these frequent eg companies act & MOI for shares issue/dividends, 4. NON-ROUTINE INTERNAL CONTROLS : not falls under usual controls/don’t work here5. NON-STANDARD DOCS. : eg GRN / invoices not used much. So more share issue certificates, loan agreement6. LINKS TO OTHER CYCLES: a foot in revenue cycle & PAYMENTS cycle. Normal controls over eg cheque payments , to be used. 7. MAJOR RISKS IN CYCLE:

a. Understates COMPLETENESS of long term liabilitiesb. Overstates EXISTENCE&VALUATION c. Legal & Regulatory : eg invalid ‘illegal’ transactions : OCCOURENCE : eg long term loan in contravention of articles.

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 reportiii. 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 assetsv. 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 providingx. CONTINGENT LIABILITIES : COMPLETENESS : same, fail to recognize eg pending lawsuit per lawyers estimate of

outcomexi. 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.

THE AUDIT PLAN FOR THE CYCLE JUST 3 PARTS AS PER CH SOMETHING OR OTHER BEFORE,IN ‘AUDIT PLANS’:

1. ASSESING RISK OF MISSTATEMENT: a. USE CONVENTIONAL METHODS:

i. ENQUIRY: mngmnt, production personnel about impairments, legal advisors about contingent liabilites.ii. OBSERVATION & INSPECTION minutes of meetings, observe mnftr process, review long term loan agreements.iii. ANALYTICAL PROCEDURES : vs industry normsiv. OTHER PROCEDURES : ask previous audit team, industry journals, industry specialists.v. HOLD DISCUSSIONS AMOUNG AUDIT TEAM: experienced members + questions from new members

b. Lecturer notes:i. NATURE & significance of tangible & intangible assets ii. Nature & incidence Additions&disposalsiii. How assets were fundediv. Mngmnts expected returns on assetsv. Strategic plans for growing assets : + capital commitments for capital expenditures approved

2. RESPONDING TO RISK AT FIN STAT LEVEL: a. Because of risk as per characteristics of cycle above,

i. Technically strong & Experienced audit members only to be assigned to this cycle .3. RESPONDING TO RISK AT ASSERTION LEVEL:

a. NATURE, TIMING & EXTENT OF TESTS to be decided.i. NATURE:

1. since few transcations , auditor may limit tests of control AND concentrate on substantive tests.(often 1 by 1) and account as a whole.This IS THE “NORMAL APPROACH” as done below. BUT if VERY many transactions were done, then “tests of controls “ would also be done, and this would influence how much “substantive testing” could be done (lessened by. )

2. NORMAL APPROACH : a. 1-Verify opening balance (from prior yrs closing bal.) , b. 2-Vouch transactions(occourance, accuracy, classification, cut-off, & completeness) , c. & Vouch adjusting journal entries,d. 3-Verify /calc closing balance (cast & presentation&disclosure) -& per Fin. Stats. from there. e. EASY – opening –middle -closing

ii. TIMING: nothing about this cycle makes this critical ,so at interim or final stage. Often auditor is consulted anyway about eg share issue etc, so some audit work is done then sommer as well.

iii. EXTENT: the ‘extent’ of substantive testing (1 by 1) is influenced by if there are MANY or FEW transactions(big or small entity). If big then extent of substatntove (statisticllly how many to test) would be influenced by strength of internal controls in cycle.If small sommer ALL are tested.

AUDITING FAIR VALUE: 1. It is ISA 540 : “accounting estimates & fair value & related”. This is dealt with separately here first because it maybe is very important or

something.2. TEN POINTS TO GIVE SOME GUIDANCE FOR COMPLEX FAIR VALUES IN GENERAL.:

i. Obtain understanding : how entity process works : fair value calc + internal controls : enough to ID risk of material misstatement at assertion level.

ii. Check “Measurements’ & “Disclosures” in accordance with IAS /IFRS ‘siii. Intention of Mngmnt : if it’s important in IAS about HOW measure+dislose (affects or not) for this one then

1. Consider mngmnts history in carrying out stated intentions2. Review docs. To (Minutes/budgets) to clarify mngmnts intentions3. Logic & Reasonableness of mngmnts intentions- consider4. Mng,nt ability to carry out these intentions - consider

iv. Evaluate if measurement method is Consistently applied

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119 | P a g e Auditing Notes AUDI 101v. See ISA 620 if you engaged an expertvi. Where ‘meaurement’ incl. forecasts/assumptions (eg private company valuation) then:

1. Assumptions reasonable2. Appropriate valuation model used3. 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 valuesix. Written mngmnt representations as to fair values used eg: reasonableness of significant assumptionsx. If needed discuss fair values with those charged with governance ( eg if significant use is made of fair values – lots of)

AUDIT PROCEDURES – FINANCE CYCLE KNOWLEDGE OF THE BUSINESS:

a) If issue of shares & obtaining funding can be classified as entities core business.b) Authorization requirements for issueing shares & OBTAINING FUNDSc) Statutory requirementss for issueing shares

SIGNIFICANT BALANCES

DOCUMENTS AND RECORDS

RISKS

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FINANCING ACTIVITIES : ASSERTIONS

SHARE CAPITAL:1. Read regulations new companies act 2008 -35-442. Statutory&JSE listing requirements for public companies & JSE are onerous and not covered by this syllabus/textbook3. 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 capitalii. 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 shareholdersiii. 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 actv. Register of shareholders VS GL VS SFP VS minutesvi. Registr ar : lodged with registrar in 1 mnth ?, + fee paid – inspect Notification from ministervii. 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/prefg. CLOSING BALANCE: fin stats StChEq amount = stated capital account close. bal.h. PRESENTATION & DISCLOSURE:

i. INSPECT AFS f or1. : COMPLETENESS Correctly done :

a. Show No. shares issued & authorizedb. Show rights& preferences& restrictions per classc. Directors issued to

2. OCCOURANCE :Consistent with evidence gained on audit3. ACCURACY :Amounts,facts,dates,accurate4. 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 journalsii. Valuer: qualifications + independence + suitabilityiii. Same asset : is it the same one as referred to in valuationiv. 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 upf. CLASSIFICATION : ? skim upg. PRESENTATION & DISCLOSURE

i. inspect AFS for120

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121 | P a g e Auditing Notes AUDI 1011. COMPLETENESS: per GAAP all movements in reserves disclosed etc.2. OCCOURANCE: consistent with evidence obtained on audit3. ACCURACY: amnts , facts details accurate ,per evidence gathered4. CLASSIFACTION & UNDERSTANDABILITY: appropriate wording & understandable5. VAL. & ALLOC.: skim6. RIGHTS & OBLIGATIONS: skim

h. C/B closing balance: trace it from General ledger all reserves to fin stats(in StCHEq for reserves)

DEBENTURE1. 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/nc. 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 authorizedd. 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 correctb. 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 periodf. CLASSIFICATION : debenture liability account :confirm cash posted to only this oneg. PRESENTATION & DISCLOSURE:

i. inspect AFS for1. COMPLETENESS: per GAAP complete eg : disclose security granted , redemption/conversion conditions.2. OCCOURANCE: consistent with evidence gathered on audit3. 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: 3 rd party confirmation from debenture holders: interest rate /premium/amount etc. relates to all assertions

LONG TERM LOANSa. Dominant risk = completeness , ie loans NOT recorded.b. Audit plan is : substantive for each loan : O/B , movement, adjustments,C/B., 2- then also do assertions per transaction 3- +

supplement with some account balance assertions.c. Accounting : rem if there is a premium on redemption, it is amortised at effective annual interest rate each year to increase

principle. Else, accounting is standard for loans.d. O/B : last yr closing = this yr O/B (check work papers & fin stats)e. ALL AUDIT PROCEDURES ARE SAME AS FOR DEBENTURES, BUT 1 EXTRA IS ADDED: “”COMPLETENESS”” f. COMPLETENESS :

i. mngmnt written representations : that all have been included.ii. Inspect evidence Unrecorded: minutes, records,steering committee minutes – evidence of unrecorded loansiii. 3 rd party confirmations : from old creditors whose balance is significantly lower or zero /goneiv. Source of funding assets: enquire where money came fromv. Interest payments : INSPECT : that loan relating to each interest payment has been recorded.vi. Analytical reiew: current balances VS last yr & interest paid etc.

FINANCE LEASES1. 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 classifyiii. Schedule leased assets: enquiry inspect: confirm that operating VS finance types are correctly recorded.iv. Source of funding assets: enquire where money came fromv. 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 etcc. Minutes ; BoD authorize leased. MOI : allowed per MOI

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122 | P a g e Auditing Notes AUDI 101e. 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 classifyg. PRESENTATION & DISCLOSURE :

i. inspect AFS for1. COMPLETENESS: per GAAP complete eg : disclose terms, accounting policies, terms, encumbrances,

reconciliations.2. OCCOURANCE: consistent with evidence gathered on audit3. 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)

PROVISIONS CONTINGENT LIABILITIES & CONTINGENT ASSETS:1) These ARE often unique to particular industries and are not the same as bad debts/inventory obsolescence Provisions for refunds/court

cases/cleaning environment – not for bad debts that is not a provision.2) Provisions: Assertions for ACCOUNT BALANCES 3) Contingent Liabilities : this is not ever recognized, it is only DISCLOSED, so Assertions for PRESENTATION AND DISLOSURE are the only

ones used.4) DEFINITIONS:

a) Provision : liability of uncertain timing or amountb) Liability: present obligation , result past even, expected outflow resources, c) Contingent liability: possible obligation that arises as a result of a past even and whose existence will only be confirmed by the

occourance or non-occourance of an uncertain future event not wholly in the control of an entity.5) RECOGNITION:

a) Provision : if there is a present obligation as a result of a past event, it is probable that outflow of resources will be required to settle, reliable estimate can be made of amount.else it is a cont.liab.

b) Contingent liabilities: they are not recognised, but must be disclosed.c) Contingent Assets: not recognized , but must be disclosed ( if probable : just only disclosed ; if virtually certain : recognitiond) Commitments: these must be disclosed , eg contract signed and committed to for future capital expenditure . to ID these auditor does

same procedures as for provisions & contingent liabilities /assets.

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 thingsb. Provisions: Compare lat YR to This Yr: find any major reductions /changes and confirmc. 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 SARSg. 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 concernedii. 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 MAYBE3. 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 farvi. Legal council or expert advice ; seek if needed eg: industry expert etc.

d. ACCURACY : skim it uit e. CUT OFF: skimf. OBLIGATIONS : enquire mngmnt & inspect docs, that the provisions ETC are of the entity and not someone else like

directors/owners etcg. VALUATIONS: since these are estimates , the accountant should use “ISA540: accounting estimates”.

a. ISA540 requires: i. ID risk of material misstatement

1. Check GAAP2. Mngmnt ID’ing of transactions etc that give rise to Acc Estimates.

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123 | P a g e Auditing Notes AUDI 1013. Mngmnt method of estimation

ii. Review Prior yr acc. Estimates outcomes.iii. Test & review mngmnt proceduresiv. Test the data usedv. Assess reasonableness – VS last years’ results OR similar estimates elsewherevi. Compare to industry standards for these estimatesvii. Get an expert if needed

h. 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 audit3. ACCURACY: amounts facts etc 4. CLASSIFACTION & UNDERSTANDABILITY: appropriate & clear + understandable wording.5. VAL. & ALLOC.:6. RIGHTS & OBLIGATIONS

i. C/B : closing balance: trace it from General ledger all reserves to fin stats(in StCHEq for reserves)

AUDIT PROCEDURES: INVESTMENT CYCLE 1. THIS CYCLE is all treated as assertions for ‘ACCOUNT BALANCES’ & ‘DISCLOSURE & PRESENTATION’ , “transactions” is only for

acquisitions & disposals.2. IAS’s ; IAs 16 :PPE, also 36 impairment, 38 intangible , 40 investment property.

KNOWLEDGE OF BUSINESS HERE

IAS’S INVOLVED

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SIGNIFICANT BALANCES

DOCUMENTS AND RECORDS

RISKS

MAIN ACTIVITIES

PPE1. 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.

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125 | P a g e Auditing Notes AUDI 1013. 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.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 youiii. Scan for Error - conditions:

1. Missing2. Duplicated3. Blank fields4. Negative book value5. Anomalies: eg Depr. Exceeds Acc depr

iv. Recalc - all casts & extensionsv. Sorted & summarized for comparisons -by class/location/year etc for comparisonsvi. 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 them3. 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 disposalsb. Equipment Removed : fixed items obviously removed (leave a gap on floor),make sure they were not

disposed of quietlyc. Enquire New equip replace Old : if so check if old was disposed or notd. 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

disposed5. 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

etc2. 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 & capitalisediii. RIGHTS:

1. O/B assets c hange : 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 etcc. Other assets: sales agreements & invoices.

3. Jeoperdising rights: check not behind with payments ; statements & payment records & supplier contact4. 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

accounts4. C/B : agree Fin Stat to prior year work papers, general ledger5. Why N othing 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 reasonablee. 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 oldh. Disposals: check if deprec. Method /Useful life/ etc is reasonablei. Reperform : deprec.: Calc. to be sure accurate, compliance with policy etc.j. Discuss Procedures with Directors: does fin director review policies etc, reasonableness etck. 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

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126 | P a g e Auditing Notes AUDI 101c. Supporting docs: check any docs which support estimates for: 1-assumptions made 2- bases/methods

used 3- % rates used.d. Discuss mngmnt:

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 assetsiii. Performance bad: if “economic value from use” is very impaired -iv. Discontinue operations: if “economic value from use” is very impairedv. 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 rulec. Check if cost model/reval model correct policy used – revalue one revalue alld. 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 audit3. 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

asset3. 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: u check 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 periodiv. 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

asset3. 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 disposaliii. CUT-OFF: check dates in correct periodsiv. CLASSIFICATION: check disposal correctly classified when recorded /(removed) in acc.dep., depr, asset accounts, etc.

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INVESTMENT IN SHARES1) 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 providedii) Written representation mngmnt : that list is completeiii) Dividends match: match to investments, to make sure all investments recordediv) 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.

d) VALUATION & ALLOCATION: i) O/B with prior year work papers & fin stats.ii) C/B:

(1) FAIR VALUE: per ias 32 must be valued at fair value(2) If value up/down , but not below cost – can go to SCI or direct equity – but must be consistent.(3) LISTED :So : confirm JSE price at year end(4) UNLISTED : possible independent valuation, inspect base & method , reasonableness, reperfom calc. , get fin stats of investee, to

value. Etc.(5) If disclosed at cost, not fair value- must be disclosed & explained why.(6) Reperform : calc. number*price(7) Use ISA 620 for independent expert (valuer)(8) ISA 540 : fair value estimates.

6) AUDIT PROCEDURES for CURRENT YEAR MOVEMENTS: transaction assertions:a) Authority to sell/buy: minutes BoD, b) Brokers Notes : evidence of purchase/salec) Non -listed : check contracts of sale, authorized, descr, price qty.

: PRESENTATION & DISCLOSURE :ii. inspect AFS for

1. COMPLETENESS: per GAAP complete eg : disclose terms, accounting policies, fair value, encumbrances, dividends etc2. OCCOURANCE: consistent with evidence gathered on audit3. ACCURACY: amounts facts etc 4. CLASSIFACTION & UNDERSTANDABILITY: wording appropriate & clear + understandable wording.5. VAL. & ALLOC.:

INVESTMENT IN GRANTING LONG TERM LOANS1. VERY Similar to Debtors audit procedures basicly the same thing2. MAIN RISK : fictitious loans, or failure to write down a loan that is a ‘doubtful debt’ / and security is inadequate3. Customer should supply a schedule of loans , same as asset register etc.– auditor will in effect audit this schedule.4. ACCOUNTING SPECIAL PROBLEMS : loans with a ‘premium” on repayment must have this premium amortised , same as for debentures .

this is complex and must be double checked, without the premium it is straightforward

5. AUDIT PROCEDURES : a. O/B : opening balance : by inspection prior yrs working papers, agree open balance with last yrs closing balanceb. ACCOUNT BALANCES : (only use acc.bal. assertions )

i. COMPLETENESS: 1. payment records/ minutes/correspondence for misclassified loans , esp. staff&directors2. 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 bookiv. 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 madeb. MOI : powers to make loans made (inlc to directors)

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128 | P a g e Auditing Notes AUDI 101c. directors loans: solvency/liquity test, special resolution. – sec 45 Comp.Act , see minutes,contract,

correspondence.d. related party loans: fair & arms length transaction? y/ne. 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 recivedb.

3. ACCURACY: REPERFORM : allocation of repayments into interest / principle accounts4. CUT-OFF: dates on receipt- correct acc period?5. CLASSIFICATION: REPERFORM posting to confirm correct allocation.

d. C/B: “VALUATION assertion”: i. REPERFORM: TOTALS cast loan summary & General Ledger accountsii. loan summary to GL : Agree iii. 3 rd party confirmation : letters to confirm they got a loan & amount & interest etc.iv. Write downs: ENQUIRE of directors if any reason to write down loans : 1- late payments 2- financial trouble 3-v. Current assets : recompute cuurent yr portion of long term loan.

6. PRESENTATION & DISCLOSURE : (special own assertions) iii. inspect AFS for

6. COMPLETENESS: per GAAP complete eg : disclose loans to directors, etc7. OCCOURANCE: consistent with evidence gathered on audit8. ACCURACY: amounts facts accurate & agree with audit evidence obtained etc .9. CLASSIFACTION & UNDERSTANDABILITY: wording appropriate & clear + understandable wording.10. VAL. & ALLOC.: skim it uit.

INTANGIBLE ASSETS

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CH 15 GOING CONCERN & FACTUAL SOLVENCY:CH 15 GOING CONCERN & FACTUAL SOLVENCY:1. ISA 570- “going concern” 2. Going concern basis : 1-close down OR 2-curtail significantly OR 3-assets < liabilities.3. IF IT IS NOT A GOING CONCERN : HOW DO YOU DO THE FIN STATS:

a. then you MUST DISCLOSE : 1-this fact & 2-basis they are prepared on , 3-and reason .

AUDITORS INTEREST IN GOING CONCERN : 1. GOING CONCERN ASSUMPTION : DIFFERENCE between : inventory is valued different on 2 basis’s (forced sale liquidation low price)-PPE

cannot be valueds on going concern basis because you cnnot get that much froma forced sale, and if they are usung the method of vauing per what the asset is worth to the entity per fututr e cash flows, this method cannot be used .!

2. AUDIT RISK : large company less risk than in a small company . Sufficient appropriate evidence needed.3. AUDITORS OBJECTIVE /RESPONSIBILITES :NB:::::::::!!!!!!!!!!!!!!!!!!!!!!!!!

a. Evidence - gatherb. Evaluate c. Report

4. WHEN DOES AUDITOR CONSIDER APPROPRIATENESS OF ‘GOING CONCERN’?: answ = in ALL stages of the audit.a. Planning: material uncertainties - b. During Performance Of Audit: if evidence is found- material risk must be re-evaluatedc. In Evaluating & Concluding Stage : d. In Review Of Subsequent Events Stage:

: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 ratios2. net liability or Net current liability 3. cannot pay loans due soon4. suppliers&creditors withdraw financial support5. dividends arreas /discontinuance6. cannot pay creditors7. change to cash from credit at suppliers8. more in textbook

ii. OPERATING: 1. Mngmnt intend to cease / liquidate etc2. loss key mngmnt without replacement3. Tech obsolescence of products4. Emrgence higjly successful competition5. Cheap imports threat6. Shortage supplies raw materials7. Loss major market/franchise/patent etc

iii. OTHER: 1. Non-comliance capital/other statutory requirements2. Pending Legal proceedings with possible too large penalties3. Change in tax concessions/banning of product /other legislative etc4. 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 sort2. Support form holding comapnay etc3. Record of mngmnt resolving similar crisies effectively4. 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.

:OBTAINING INFO ON GOING CONCERN:***********1. Specificl points to consider:

a. Analyse cash flow/budget reports discuss with mngmntb. Aanlyse last fin statsc. Review loan/debenture agreements to see if not breachedd. Minutes shareholder /BOD meetings evidence of problemse. Enquire of lawyers pending claims penaltiesf. Examine financial assistance promises by 3rd parties to see financial viability /existence/legality/enforceabilityg. Unfulfilled customer conract : examine penalties , ability to perform them etc.h. Events after year end – reviewi. Mitigating factors review

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MITGATING FACTORS EVALUATING1. Evaluate: mngmnt plans eg

a. Raise additional fundsb. Cost cuttingc. Increase salesd. Disposal of assets

2. Auditor must:a. Evidence : gather of feasibility eg: increase sales-is it really possible

i. Underlying assumptions : of mngmnt : examine if reasonableii. Negative side of plans examine: every plan has negative effects too eg increase sales= more costs to effect it as welliii. Written representation of mngmnt to commit themselves to these plans

3. Remember THAT : any mitigating factor must be looked at, but it DOES NOT necessarily mean it will help, there may be other factors which will nullify them like the product is obsolete , even though subordination/backranking agreements have been concluded etc.

AUDIT REPORT:1. AUDIT CONCLUSIONS:

a. Decide if Material uncertainty exists of going concern overallb. If it exists it must be Disclose in fin statsc. Proper disclosure:

i. ADEQUATELY DESCRIBES situation in notes.1. State clealy there is GOING CONCERN PROBLEM2. 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 but2. Material uncertainty exists3. It is properly disclosed4. 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 appropriate2. Material uncertainly exists3. HAS NOT been properly disclosed in notes4. 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)

iv. ADVERSE OPINION – inappropriate basis (2 nd one ) 1. Fin stats are presented on going concern basis2. In opinion of auditor this is NOT ALLOWED – it may NOT be presented on going concern basis, but on another

basis only.3. EVEN IF proper disclosure in notes of situation has been made, it will make no difference, there must still be an

adverse opinion because they may NOT be presented on a going concern basis.v. DISCLAIMER OF OPINION

1. Fin stats are presented on going concern basis2. Proper disclosure has been made3. BUT auditor cannot be sure if it should be allowed or not- he cannot make up his mind about it , this is a very

uncommon occuence per ISA 570

FACTUAL VS COMMERCIAL INSOLVENCY 1. COMMERCIAL : assets is larger than debt, but there is not enough free cash to pay the creditors, maybe only inventory&assets , no cash

!2. FACTUAL :

a. LEGAL IMPLICATIONS OF FACTUAL i. COMMON LAW FRAUD redo not done yet !!! ii. COMPANIES ACT 2008 sec 22 : redo – reckless trading + gross negligenceiii. AUDITING PROFESSIONS ACT sec 45 redo

AUDITING A BACKRANKING AGREEMENT:1. It is if creditor says he gets paid last after other creditors if insolvent.2. Things to audit :

i. Contract itself: 1. In form prescribed by SAICA2. Written form3. Signed both parties4. Due authority to sign5. Complies legal formalities6. Is Between client & creditor

ii. 3 rd party acceptance : check if any supplier agreed to supply more because of this agreement -this means it may not be cancelled because creditor is relying on it(seems to be a law that you may then not cancel)

iii. Financial situation of creditor :

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131 | P a g e Auditing Notes AUDI 1011. Has he the financial substance to do this- what if he goes insolvent – what then? His creditors can claim the

debt2. 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 recovervii. 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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RELIANCE ONOTHER PARTIESRELIANCE ONOTHER PARTIES

Component audior:1. Sufficient appropriate evidence: must be able to be INVOLVED in work of other audiot enough to obtain sufficient appropriate

evidence2. Pro – qualifications :

a. Regulated body in countryb. Invoved : musty be able to be involved in his workc. Skills , competenced. Independence, objecticve, confidentiality & other ethical requirements

3. Significant component: for a ‘significant one ‘ you musta. Determine risk of misstatement togetehr with himb. This Means at a minimnum:

i. Discuss risk with himii. Obtain his documents on auditiii. If Significant Risk is found – you must be able to must evaluate further audit procedures with him together.

4. Timely basis communicate ; group engagement auditor must convey to component auditor on a timely basisa. Work to be performedb. Use to be made of the work by main teamc. Form & content of componenets aud.’s communication with main teamd. Request component auditor confirm he will co-operate with main teame. Component materialityf. Ethical requirementsg. Current Related parties list + request for any extra ones found to be communicated to himh. Identified significant risks

5. REQUEST compon. Aud to communicat in writing: a. If complied ethical requirements?b. Fin info he is bisy auditingc. Law & regul – non- compliance by company client that could cause significant riskd. List uncorrected misstatementse. Management bias at client f. Internal control deficienciesg. Significant matters identified eg: fraudh. Any other matters he wants to highlighti. His overall d=findings/conclusion/opinion

6. Evaluate comp.aud work – use convetional evaluation of workpapers tequniques7. Must communicate to client : governance bodies: 1- involvement 2- bad quality of his work 3-com.aud. was resticed acess , he could

not get to info. 4- fraud or suspected fraud at component.

8. IINTERNAL AUDIT:a. Communication – 1-free 2- regular 3-access to his docs etcb. Due prof care : 1- manuals, docs, programs, policies etc 2- planned , supervised,reviewed,documentedc. Technical competence : 1- supervisor 2- others skills etcd. 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/n2-qualifcations & body3-undersatnding of field by auditor – learn4-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 requiremnts5-Evaluate adequacy : 1- reasonable 2-data used 3- consistent orher audit eveidence 4- relevance of methods & assumptions used by

Subsequebt evebts identify:1-minutes2-cash flow/budgets/forecasts3-accc.books in new year4- mangmnt representation in writing about5- lawyer cases penalities etc

6- sale major assets7-status tentative eg bad debts allowance8-megers acquisitions 9-going concern10-Share issues 11-any unuasual accounting adj.

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