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11 | 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!!!!
TEXTBOOK USED ETC:............................................................................................9

OWN QUESTIONS AND ANSWERS........................................................................... 10


EFT : Electronic funds transfer................................................................................................................................10

Aud 301 – ......................................................................................................................................11


CH 2 – CODE FOR PROF. ACC..................................................................................................................................11
Ch 3 companies act................................................................................................................................................11
Sec 48 company or subsidiary aquiring companies shares...................................................................................11
SEC 64 Meeting quorum and Adjournment...........................................................................................................11
SE 65 Shareholders Meetings...............................................................................................................................11

TERMS:................................................................................................................ 12

INTRODUCTION....................................................................................................13

CHAPTER 1 :INTRODUCTION TO AUDITING............................................................14

Definitions:....................................................................................................................................14

WHAT is an AUDITOR?:....................................................................................................................14

#### 3) WHY IS THERE A NEED FOR AUDITORS ?: ...........................................................................15


1-Split between Mngmnt & Ownership:...................................................................................................................15
2-Confidence in Financial Information....................................................................................................................15
3-Accountability:(directors to company / companies for treatment of environment ).............................................15

ASSURANCE AND NON-ASSURANCE ENGAGEMENTS..........................................................................15


#### 5) ASSURANCE ENGAGEMENTS:..................................................................................................................15
#### also 5) NON-ASSURANCE ENGAGEMENT (do not meet definition of an – or do not contain the Elements) ..16

Reasonable Assurance....................................................................................................................16

Limited Assurance Engagements:....................................................................................................16

####7) Statutory and Non-Statutory Engagements.........................................................................16

####8) Auditing postulates. 8 of by mautz & sharaf in philosophy of auditing 1961........................16

The accounting profession :............................................................................................................17

Accounting bodies in sa..................................................................................................................17

pronouncements which regulate the profession...............................................................................17

The financial statement audit engagement......................................................................................18


Introduction............................................................................................................................................................18
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A MODEL OF INDEPENDANT AUDIT OF FIN STATS ARISING OUT OF COMPANIES ACT (STATUTORY AUDIT).............18
The roles of the various parties...........................................................................................................................18
Role of companies act.............................................................................................................................................18
#### 9) assertions:...............................................................................................................................................18
Duties and responsibilities of an auditor:................................................................................................................19
SUMMARY: .............................................................................................................................................................19

CHAPTER 2: PROFESSIONAL CONDUCT...................................................................20

definitions......................................................................................................................................20

INTRODUCTION...............................................................................................................................20
the ifac code of ethics.............................................................................................................................................20
General guidance: Ethics and Professional Conduct................................................................................................20
The Public Interest .................................................................................................................................................21
Pronouncements relating to ethics and professional conduct in South Africa ........................................................21

THE IFAC (SAICA) CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS.............................................21


PART A - GENERAL APPLICATION OF THE CODE ...................................................................................................21
METHOD OF IDENTIFYING THREATS AND DEALING WITH THEM:.............................................................................23

PART B PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE.............................................................23


#### 3) SECTION 210 PROFESSIONAL APPOINTMENT ..................................................................................24
SECTION 220 CONFLICTS OF INTEREST 2/13........................................................................................................24
SECTION 230 SECOND OPINIONS 2/14..................................................................................................................24
#### 4) section 240 FEES AND OTHER TYPES OF REMUNERATION...............................................................24
SECTION 250 MARKETING PROFESSIONAL SERVICES 2/16...................................................................................24
#### 5) SECTION 260 GIFTS AND HOSPITALITY 2/16.....................................................................................24
#### 6) SECTION 270 CUSTODY OF CLIENT ASSETS 2/17.............................................................................25
SECTION 280 OBJECTIVITY — ALL SERVICES 2/17.................................................................................................25
#### 7) SECTION 290 INDEPENDENCE - ASSURANCE ENGAGEMENTS 2/17..................................................25

PART C - PROFESSIONAL ACCOUNTANTS IN BUSINESS......................................................................26

PART d - PROFESSIONAL ACCOUNTANTS IN SOUTH AFRICA...............................................................27


Definitions:..............................................................................................................................................................27

THE CODE OF PROFESSIONAL CONDUCT of the IRBA 2/46.................................................................28

CH 3 STATUTORY MATTERS...................................................................................29

Companies Act 2008:......................................................................................................................29


SEC 1 Definitions:.................................................................................................................................................29
SEC 2 related & interrelated persons and control................................................................................................29
SEC 3 subsidiary relationships..............................................................................................................................29
Sec 4 Solvency and liquidity test..........................................................................................................................29
SEC 8 CATEGORIES OF COMPANIES:.....................................................................................................................29
CHAPTER 2 of 2008 Companies ACT.:...................................................................................................................29
Sec 11 : Criteria for names of companies :...........................................................................................................29
SEC 13 : rights to incorporate a company :.........................................................................................................29
SEC 14 registration of a company .......................................................................................................................30
SEC 15 MOI...........................................................................................................................................................30
SEC 16 AMENDING the MOI:.................................................................................................................................30
sec 19 legal status of companies :........................................................................................................................30
SEC 21 pre- incorporation contracts.....................................................................................................................31
sec 22 :Reckless Trading prohibited.....................................................................................................................31
SEC 23 registered office :.....................................................................................................................................31
sec24 form and standards of company records....................................................................................................31
SEC 26 Access to company records:.....................................................................................................................31
SEC27 Financial year of company.........................................................................................................................31
Sec 28 accounting records:..................................................................................................................................31
SEC 29 financial statementS.................................................................................................................................31

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

cc act.............................................................................................................................................38

auditors act....................................................................................................................................38

.......................................................................................................................... 44

CHAPTER 5 : GENERAL PRINCIPLES OF AUDITING.(CH 5 IN BOOK)............................45

internal control..............................................................................................................................45
Introduction............................................................................................................................................................45
Definition of Internal control...................................................................................................................................45
definition (per SAICA booklet :'guidance for directors:reporting on internal controls').........................................45
four ASPECTS of internal control from above definition.......................................................................................45
(ISA 315). 5 components of internal control (in ch 7)..........................................................................................45
internal control objectives.......................................................................................................................................45
limitations of internal control..................................................................................................................................45
the accounting system............................................................................................................................................45
who is interested in what?......................................................................................................................................45
The characteristics of good internal control............................................................................................................46

audit evidence................................................................................................................................47
Sufficient appropriate evidence..............................................................................................................................47
sufficient evidence:..............................................................................................................................................47
appropriate evidence...........................................................................................................................................47
Influenceing factors in determining whether sufficient appropriate evidence has been obtained........................47

Financial Statement Assertions:......................................................................................................48


DIAGRAM OF ASSERTIONS:...................................................................................................................................48

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EXAMPLES OF ASSERTION CLASSIFICATION IN PRACICE: .....................................................................................49

The Auditors toolbox:.....................................................................................................................49


TESTS OF CONTROLS..............................................................................................................................................49
substantive procedures...........................................................................................................................................50

audit sampling...............................................................................................................................50
Definitions:..............................................................................................................................................................50
Intro........................................................................................................................................................................50
steps in the sampling exercise................................................................................................................................51

CHAPTER 6 : AN OVERVIEW OF THE AUDIT PROCESS.............................................52

Stages of the audit process: (know whole chapter per lecturer ) ......................................................52
Stage 1 : Preliminary engagement activities:..........................................................................................................52
stage 2 : Planning:................................................................................................................................................52
Stage 3 : putting audit -Plan and strategy - into action.........................................................................................52
Stage 4 : Evaluate & conclude................................................................................................................................52

How the stages are linked:..............................................................................................................52

role of ISA's : International standards on auditing ...........................................................................52

DETAILS OF EACH STAGE OF THE AUDIT PROCESS:...........................................................................52


Stage 1 : Preliminary engagement activities:..........................................................................................................52
III ) Stage 3 : putting audit -Plan and strategy - into action.................................................................................54
Stage 4 : Evaluate & conclude................................................................................................................................55

CHAPTER 7: IMPORTANT ELEMENTS OF THE AUDIT PROCESS...................................56

UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT:.....................................................................56


INTRO:.....................................................................................................................................................................56
DEFINITIONS: as per isa 315...................................................................................................................................56
RISK ASSESSMENT PROCEDURES............................................................................................................................56
THE ENTITY AND ITS ENVIRONMENT.......................................................................................................................56
Internal Control of Entity.........................................................................................................................................57
component : the control environment..................................................................................................................57
ENTITYS RISK ASSESSMENT PROCESS :................................................................................................................58
Component : Control Activities: (internal controls)..............................................................................................58
Component : Monitoring of Controls:....................................................................................................................58
COMPONENT: THE INFORMATION SYSTEM:...........................................................................................................58
Significant risks.......................................................................................................................................................59
Communicating with those charged with governance and management................................................................59
DOCUMENTATION:..................................................................................................................................................59

THE CONCEPT OF MATERIALITY.......................................................................................................59


INTRO:.....................................................................................................................................................................59
planning materiality and final materiality...............................................................................................................59
the nature of materiality.........................................................................................................................................59
planning materiality................................................................................................................................................59
Each audit firm uses its own type of materiality planning: either one of the following:........................................59
Setting Planning Materiality levels :......................................................................................................................60
Planning for qualitative assessment:....................................................................................................................60
the 4 Factors to be considered when quantifying planning materiality................................................................60
Final materiality......................................................................................................................................................60
The Auditor must do the following to make a final materiality decision:..............................................................60
Factors to be considered in evaluating unresolved audit differences...................................................................60
CONCLUSION...........................................................................................................................................................60

AUDIT RISK....................................................................................................................................60
INTRO:.....................................................................................................................................................................60
the risk Based approach to auditing........................................................................................................................60

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The components of audit risk:.................................................................................................................................60
1 -Inherent Risk :..................................................................................................................................................60
2- Control Risk......................................................................................................................................................60
3- Detection Risk .................................................................................................................................................61
Risk at financial statement level and at assertion level:.........................................................................................61
intro:.....................................................................................................................................................................61
Risk and materiality ...............................................................................................................................................61
Assessment of audit risk.........................................................................................................................................61
levels of risk............................................................................................................................................................61

THE AUDITORS RESPONSIBILITY TO CONSIDER FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS........62


INTRO:.....................................................................................................................................................................62
DEFINITIONS (LECTURER SAYS KNOW THESE WELL)...............................................................................................62
respoNsibility of management and those charged with governance:......................................................................63
resposibility of the auditor......................................................................................................................................63
responses to the risk of material misstatement due to fraud (DO LEARN THIS as per lecturer)..............................63
At Financial Statement level: ...............................................................................................................................63
At Assertion level:................................................................................................................................................63
Management Override:.........................................................................................................................................64
Evaluation of Evidence:........................................................................................................................................64
Management Representations:.............................................................................................................................64
fraud risk factors (do learn).....................................................................................................................................64
intro:.....................................................................................................................................................................64
fraudulent financial reporting:..............................................................................................................................64
fraud risk factors relating to misstatements resulting from misappropriation of assets:......................................65
communication with management and those charged with governance (not learn)..............................................66
fraud and retention of clients (do learn).................................................................................................................66

CHAPTER 8: COMPUTER AUDIT THE BASICS.........................................................67

COMPUTER AUDITING......................................................................................................................67
iNTRO:.....................................................................................................................................................................67
COMPUTER ENVIRONMENTS:...................................................................................................................................67
A BRIEF DESCRIPTION OF DIFFERENT COMPUTER ENVIRONMENTS:........................................................................67
INTERNAL CONTROL IN COMPUTERISED ACCOUNTING SYSTEMS............................................................................68
FACTORS PECULIAR TO COMPUTERISED SYSTEMS WHICH THE AUDITOR SHOULD BE AWARE OF..........................68

COMPUTER AUDITING......................................................................................................................68
DEFINITION OF A GENERAL CONTROL:....................................................................................................................68
CATEGORIES OF GENERAL CONTROLS....................................................................................................................69
CONTROL ENVIRONMENT AND SECURITY POLICY:...................................................................................................69
ORGANISATIONAL STRUCTURE AND PERSONNEL PRACTICES.................................................................................69
STANDARDS AND STANDARD OPERATING PROCEDURES........................................................................................70
SYSTEMS DEVELOPMENT CONTROLS (NB know very well)......................................................................................70
program change controls........................................................................................................................................71
p.............................................................................................................................................................................71

APPLICATION CONTROLS:................................................................................................................71
iNTRO:.....................................................................................................................................................................71
Definitions:..............................................................................................................................................................72
input, processing, output:.......................................................................................................................................72
PROCESSING METHODS:.........................................................................................................................................72
APPLICATION CONTROL FRAMEWORK : MASTERFILE AMENDMENTS.......................................................................72
NB..........................................................................................................................................................................72
APPLICATION CONTROL FRAMEWORK : INPUT ........................................................................................................73
APPLICATION CONTROL FRAMEWORK : PROCESSING..............................................................................................73
APPLICATION CONTROL FRAMEWORK : OUTPUT.....................................................................................................74
MENU AND DESCRIPTION OF CONTROLS above:.....................................................................................................74
summary.................................................................................................................................................................75

CAATS : COMPUTER ASSISTED AUDITING TECHNIQUES (SUMMARY –NOT NB)......................................75


HOW DO CAATS FIT IN AUDIT PROCESS..................................................................................................................76
SYSTEM ORIENTATED CAATS..................................................................................................................................76
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DATA ORIENTATED CAATS......................................................................................................................................76
FACTORS WHICH WILL INFLUENCE DECISION TO USE CAATS..................................................................................76
AUDIT FUNCTIONS WHICH CAN BE PERFORMED USING DATA ORIENTATED CAATS................................................76
APPENDIX 1: ILLUSTRATION OF WHAT A DATA ORIENTED caat CAN DO:................................................................76

THE USE OF MOBILE INFORMATION &COMMUNICATION TECHNOLOGY ON AUDITS..............................77


WHAT THIS TECHNOLOGY CAN DO..........................................................................................................................77
SECURITY IMPLICATIONS OF USING MOBILE INFORMATION AND COMMUNICATIONS TECHNOLOGY ON AUDITS.....77
Security of clients files:...........................................................................................................................................77

CHAPTER 9 : NETWORKING.(CH9 IN BOOK).............................................................78

INTRODUCTION:..............................................................................................................................78

Trends in IT....................................................................................................................................78

Networks.......................................................................................................................................78

Definitions:....................................................................................................................................78

Audit Implications of Networks:......................................................................................................78

databases......................................................................................................................................79
Definitions...............................................................................................................................................................79

audit and control implications:........................................................................................................79

Electronic Messaging systems.........................................................................................................79


Audit and control implications of EDI:.....................................................................................................................79
EFT : Electronic funds transfer................................................................................................................................80

THE INTERNET................................................................................................................................80
Risks and controls:trading on the internet:.............................................................................................................80

Computer bureaux..........................................................................................................................81
Audit implications:..................................................................................................................................................81

VIRUS............................................................................................................................................81
CATEGORIES of VIRUS:............................................................................................................................................81
Kinds of ..................................................................................................................................................................82
AUdit and control implications:...............................................................................................................................82

CHAPTER 10 : REVENUE AND RECEIPTS CYCLE........................................................83

ACCOUNTING SYSTEM AND INTERNAL CONTROLS:............................................................................83


INTRODUCTION:......................................................................................................................................................83
DOCUMENTS USED IN THE (Revenue+receipts)CYCLE............................................................................................83
CHARATERISTICS OF GOOD INTERNAL CONTROL....................................................................................................83
FLOW CHARTS AND DESCRIPTION OF THE CYCLE...................................................................................................83
Auditing the CYCLE:................................................................................................................................................85
financial statement assertions -in this cycle-(Isa 500)............................................................................................85
Important accounting aspects : specially for this cycle...........................................................................................86
Fraud in the cycle...................................................................................................................................................86
TEsts of controls and substantive procedures.........................................................................................................86
tests of controls......................................................................................................................................................87
substantive procedures...........................................................................................................................................87
DIAGRAM OF ASSERTIONS:...................................................................................................................................88
substantive procedures for the audit of debtors:..................................................................................................88
Use of audit software (substantive procedures) for debtors....................................................................................89
substantive procedures for auditing bank/cash.......................................................................................................89

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CHAPTER 11 : ACQUISITIONS AND PAYMENTS CYCLE:.............................................91

The accounting system and internal controls:..................................................................................91


documents in the cycle:..........................................................................................................................................91
characteristics of good internal control:..................................................................................................................91
flowchart and description of cycle...........................................................................................................................91

auditing the cycle:..........................................................................................................................93


Intro........................................................................................................................................................................93
Financial statement assertions and this cycle.........................................................................................................93
FRAUD in the cycle..................................................................................................................................................93
tests :......................................................................................................................................................................93
TESTS OF CONTROLS:.............................................................................................................................................93
Substantive Procedures:.........................................................................................................................................94
dual purpose tests..................................................................................................................................................94
creditors balance (trade) performing substantive procedures on :.........................................................................94
Use of audit software (substantive procedures) for creditors balances...................................................................95

CHAPTER 12 INVENTORY AND PRODUCTION CYCLE................................................96

ACCOUNTING SYSTEM AND INTERNAL CONTROLS:............................................................................96


INTRODUCTION:......................................................................................................................................................96
Characteristics of the cycle.....................................................................................................................................96
Documents in the cycle...........................................................................................................................................96
3 Objectives of the cycle.........................................................................................................................................96
Risks of the cycle....................................................................................................................................................96
Auditing the cycle:..................................................................................................................................................99
Financial Statement Assertions ...........................................................................................................................99
Important accounting aspects –ias2 –inventories.................................................................................................99
fraud in the cycle:.................................................................................................................................................100
tests of controls and substantive procedures:.......................................................................................................100
Tests of controls.................................................................................................................................................100
substantive procedures......................................................................................................................................101
POST INVENTORY COUNT PROCEDURES: (bit nb sort of)....................................................................................101
the use of audit soft ware (substantive testing).................................................................................................102

CHAPTER 13 PAYROLL AND PERSONELL CYCLE.....................................................104

accounting system and internal controls........................................................................................104


Introduction:.........................................................................................................................................................104
Documents used in the cycle:...............................................................................................................................104
characteristics of good internal control:................................................................................................................104
flowchart & description of cycle :..........................................................................................................................104

Auditing the cycle.........................................................................................................................106


introduction..........................................................................................................................................................106
Assertions:............................................................................................................................................................107
fraud in the cycle..................................................................................................................................................107
audit procedures: salaries & related accounts....................................................................................................107
audit procedures :Wages & related Accounts:...................................................................................................108
the use of audit soft ware (substantive procedures).............................................................................................108
HOW TO DO A RECONCILLIATION FOR SALARIES AND WAGES AS PER IAS ACC. STANDARDS IN THE NOTES TO THE
FIN. STATS............................................................................................................................................................109

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TEXTBOOK USED ETC:


AUDITING NOTES FOR SOUTH AFRICAN STUDENTS : JACKSON AND STENT : LEXIS NEXIS PUBLISHERS 2000 6TH EDITION
GRADED QUESTIONS ON AUDTING GOWAR & JACKSON
POOPEDI

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OWN QUESTIONS AND ANSWERS


1) 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 5/13
5) 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 : YES
16) 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 access
c) 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 TRANSFER


1) 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 1-bank deposit slip 1-deposits not 1-CRJ daily by date & number from receipts (if rec. issued)
Receipts 2-CRJ recorded/or timeously 2-Queries from debtors : by person independent of
3-DL 2-recorded deposits may 1’debtors’ & 2’banking&recording of cash functions.’
4-GL (a)inaccurate 3-recon1 bank statement TO cash book mnthly +
(?remittance (b)overstated(fictitious) independentof banking&recording employee + reviewed by

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list/receipts (c)cr to wrong debtor senior official.
issued/customer 4-recon2 CRJ supervisor (a)CRJ vs gaps 1dates 2sequential
remittance advice)? (b) test CRJ to DL
5-recon3 DL to GL control acc. Independent employee
regular

Assertion : valuation & allocation : isn’t it a bit similar to ‘classification and presentation’ , what the difference between italics.
1) What is a year end creditors recon? what is a creditors list- a ledger Y/N?

1. HOW DO the method for doing a inventory count while there is dispatch going on in the background?
2. What is the yellow here, so variable selling costs eg marketing or commission must be subtracted from ‘closing stock’ in the financial
statement or how??normall this is a period cost is it not :? Definition:Net Realisable value :
i. The estimated selling price in the ordinary course of business less the estimated costs of completion and the
estimated costs necessary to make the sale.

AUD 301 –
CH 2 – CODE FOR PROF. ACC
a. SEE PG 2/28&29 NO 13 .1 – HOW CAN AN AUDITOR DO THE BOOKS AS WELL AS DO THE AUDIT OF THE BOOKS?????
b. What if a private company may offer its securities to the public OR it does not restrict transfer of its shares- is it then a public
company?

CH 3 COMPANIES ACT
SEC 48 COMPANY OR SUBSIDIARY AQUIRING COMPANIES SHARES
1. A company may ‘buy back’ its own shares, but this is also a distribution and sec 46 must be adhered to (resolution +statement + liquidity&
solv. Test)
2. WHERE a buy – back has taken place,the following MUST happen :
2.1. ‘stated capital ‘ must be reduced by formula : [no. of shares acquired] * [stated capital/no. of issued shares]-why not just deduct IT
FROM STATED CAPITAL? WHY MUST YOU USE THIS FORMULA ? WHAT DOES IT MEAN OR DO SPECIAL OVER AND ABOVE PLAIN
SUBTRACT’
2.2. The share certificates get cancelled and they revert to “authorised shares”
3.
1. Voting : to be done by either
1.1. Show of hands ( each member present has only 1 vote no matter how many shares.)(who gets to choose which method ? isn’t this a bit
unfair – bulldoze the meeting?-check the act)
1.2. Polling those present & entitled to vote. ( each member gets voting rights per number of shares)
SEC 64 MEETING QUORUM AND ADJOURNMENT
1. Sec 64 provides for both a votes quorum and a person quorum
1.1. Votes Quorum: a shareholders meeting may not begin until person holding 25% (MOI may specify higher or lower)of voting rights in
at least ‘1 matter to he decided’ are present.( eg preference shareholders may only be able to vote on matters affecting preference
shares)
1.2. Person Quorum: if a company has over 2 shareholders , meeting may not begin OR a matter be debated until
1.2.1. Min 3 Shareholders present.
1.2.2. The ‘votes quorum’ explained above is satisfied (is it or OR is it AND here – check act)
1.3. Time : if person+votes quorum requirements are not met within 1 hr of meeting start time, it is auto postponed for 1 week ,without
any 1- motion to postpone 2- vote or 3- further notice.
SE 65 SHAREHOLDERS MEETINGS
1. There are only 2 types of resolution , either 1 - ordinary or 2- special resolution. Every resolution must be 1 of the 2.
2. BoD may propose ANY resolution to be considered by the shareholders AND may determine whether by :
2.1. Meeting OR
2.2. Written Consent ( no meeting)
3. Any 2 shareholders may propose a resolution on any matter on which they can exercise votes. ,(check act – can 2 old grannies or
competitors with 1 share each they just waste everybodies time interminably?)

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TERMS:
1) Verify: means determine somethings truth or falsity.
2) AUDIT OBJECTIVE
3) FORMING AN OPINION : make up your mind.
4) FAIR PRESENTATION of fin info/ fin stats : properly ,correct
5) Cycles of company.( in duty segregation)
6) Functions of company( in duty segregation)
7) material : do make a difference.
8) misstatement : wrong entry/number etc.
9) appropriately :
10) Corroborative Evidence : evidence which confirms/corroborates something eg: to obtain info from a debtor to confirm his account is
what it says.
11) ASSURANCE GIVER.
12) ASSURANCE ENGAGEMENT
13) Audit Differences : show a material misstatement in Fin.Stats. or Not.( OVERS AND UNDERS SCHEDULE)
14) OVERS AND UNDERS SCHEDULE: shows all the “Audit Differences” which are the differences between what the fin. Stats. Say and
what auditor works out to be the real figures.
1) Definition; ISA315 :risks that require : Special audit consideration
15) Emoluments :
16) Misallocate : eg an expense to wrong account
17) Batch Control System: system of controlling physical movement of data (eg invoices,wage cards,printouts output) to and from user
Depts.
18) Compilation engagement :
19) Agreed upon procedure engagement :
20) Conducted : done,eg employees conducted a control procedure
21) Casts: means addition in accounting of number of fields.
22) Extentions:
23) Allocate : overheads for job costing/manufacturing/std.costing. or allocate expenses etc to correct account in ledger
24) Accumulate : costs eg direct labour and materials, to each specific account by journalizing it for job costing or std.costing

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INTRODUCTION
1. Text Book :Jackson & Stent :Auditing notes for SA students. + Graded Questions edition 9 from same authors second book.
2. Coursework semester 1: Chapter 1+5+7+8 then briefly back to 3 one or 2 sections
3. 2/3 tests +3/4 assignments
4. Lect: Mr Poopedi, 3rd floor Kblock 1st room on left.
5. Lectures :mon 1st ,wed 2+3 , fri some or other.

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CHAPTER 1 :INTRODUCTION TO AUDITING


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

Income Statement

Cash Flow Statement

Statement of Equity

-------------------------------------------------------------------------------------------------------------------------------------

DEFINITIONS:
1. #### 1) Auditor: ? ASSURANCE GIVER. : from word “audire” Latin means “to hear” from owner hear/audit to employ a auditor …. Is
an :
1.1.1.1. “independent professional accredited accountant who “
1.1.1.2. expresses a conclusion
1.1.1.3. designed to enhance the degree of confidence
1.1.1.4. of the intended users
1.1.1.5. other than the responsible party ,
1.1.1.6. about the outcome of the evaluation or measurement
1.1.1.7. of a subject matter
1.1.1.8. against the criteria (attempt to enhance credibility of a “statement; event ; figures)
2. Professional skepticism:ISA 200 : an attitude that includes
2.1. - a questioning mind,
2.2. 2being alert to conditions which could indicate possible misstatement due to fraud or error ,
2.3. and a critical assessment of audit evidence.

WHAT IS AN AUDITOR?:
1. An Auditor =Define : (SEE DEFINITION ABOVE IN ‘DEFINITIONS’) ASSURANCE GIVER. : from word “audire” Latin means “to
hear” from owner hear/audit to employ a auditor.
2. An Audit = ASSURANCE ENGAGEMENT. : it complies with all 5 aspects of an assurance engagement : subject matter, criteria,
3 way relationship, written report, sufficient appropriate evidence.
3.
1 “the independent professional accountant
2 expresses a conclusion
3 designed to enhance the degree of confidence
4 of the intended users
5 other than the responsible party ,
6 about the outcome of the evaluation or measurement
7 of a subject matter
8 against the criteria (attempt to enhance credibility of a “statement; event ; figures)
4. International Framework for Assurance Engagements : defines an assurance engagement as: “ in which the practitioner
expresses a conclusion designed to enhance the degree of confidence of the intended user…”
5. The basic premise = ‘Enhance credibility of information’ or ‘increasing degree of confidence of users’
#### 2) TYPES OF AUDITOR:
1- Independant of what
2- Enhance whos confidence
3-What do they do
4 anything else might want to add

a. EXTERNAL AUDITORS
i. 1-Independent of company audited opinion - 2- lend credibility + enhance confidence users of fin stats 3-
fin stat fairly present fin pos + results .4-for statutory purposes, more for external users needs,less ,but also,for
internal(head office confidence subsidiary)
b. INTERNAL AUDITORS
i. 1-Independent (of dept audited) assignments –2-for mngmnt confidence- 3- efficiency, economy,
effectiveness –business processes+ internal controls. ,4- for internal users not external,not for statutory purposes.
c. GOV. AUDITORS
i. 1-Independent of gov. dept. audited – 2 enhance senior Gov. confidence in lower -
d. FORENSIC AUDITORS
i. Independent of entity under investigation –2- for client eg police, court etc 3-investigate + gather evidence
fin mismanagement ,fraud, theft..
e. SPECIAL PURPOSE AUDITORS.
i. Environmental auditors(compliance enviro. Regulations) – Vat auditors(SARS) – enhance confidence SARS

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6. COMMON ESSENTIAL CHARACTERISTIC THREAD RUNNING THROUGH : 1. Characteristic of INDEPENDENCE. …….if
not independent=NOT A VALID AUDIT.
7. OTHER ESSENTIAL CHARACTERISTICS: IFAC code ethics for Prof. Accountants.
1 INTEGRITY :STRAIGHTFORWARD , HONEST , moral
2 OBJECTIVITY / INDEPENDENCE :UNBIASED ,HONEST impartial, fair, not influenced by prejudice/bias
(independent) . ……. UNBIASED ,HONEST impartial, fair, not influenced by prejudice/bias . If not
independent=NOT A VALID AUDIT.
3 PROFESSIONAL COMPETENCE and DUE CARE:maintain PROFESSIONAL KNOWLEDGE/SKILL AT
REQUIRED LEVEL &PERFORMING WORK DILIGENTLY.( eg auditors must attend min 1 symposium on IFRS per
year by SAICA law to be a member)
4 CONFIDENTIALITY: respecting the confidentiality of client information.
5 PROFESSIONAL BEHAVIOUR: COMPLY LAWS &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 reliable
2. Gov. can trust Fin Info to set the tax rate equitable basis, run economy
3. Investors direct toward needs which?-risk/return
4. Develop economy as a whole- ensure funds go to sound mngmnt,strong productivity,sound FinPos
5. 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 entity
1.3. ISA 200 warns objective is NOT to DISCOVER FRAUD or ENSURE COMPLIANCE WITH THE LAW.(this is mngmnts
responsibility.) auditor only : " reasonable expectation of detecting such if they affect fair presentation ie: if fin. info.
contains material misstatement.

Know the following – from an example question on objective of audit( tell friend if objective of audit guarantees good investment in
company)
1.3.1.1. The opinion of auditor does :
1.3.1.1.1. It enhances the credibility of the fin stats
1.3.1.1.2. Does not guarantee future viability of the entity
1.3.1.1.3. Does not guarantee efficiency or effectiveness with which management has conducted the
affairs of the entity
1.3.1.2. The audit provides reasonable but not absolute assurance that the statements taken as a whole are free
from material misstatement.
1.3.1.3. The inherent limitations of an audit affect the objective of an audit to some degree
1.3.1.3.1. Use of testing
1.3.1.3.2. Inherent limitations of Accounting & internal controls
1.3.1.3.3. Persuasive rather than conclusive
1.3.1.3.4. Subjectivity of AUDITORS work
1.3.1.3.4.1. Obtaining audit evidence – planning audit in different way
1.3.1.3.4.2. Conclusions he then made (each makes own conclusion)

#### 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)

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(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 engagement
b) 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,

REASONABLE ASSURANCE.
1) Auditor DOES NOT ever CERTIFY / or CONFIRM CORRECTNESS :he only EXPRESSES AN OPINION on it's FAIR PRESENTATION.
2) Reasonable assurance THAT NO misstatement done- NOT 100% correct to be sure! A REASONED OPINION IS GIVEN.
3) Why Auditor Cannot Certify Financial Statements: due to inherent limitations of the audit as follows : per ISA 200
4) #6) THE INHERENT LIMITATIONS OF AN AUDIT : ISA 200
a) Per lecturer answer:
i) Use of testing
ii) Accounting & Internal controls limitations
iii) Auditors Subjective judgement
(1) interpretation of the results could differ
(2) different ways of obtaining audit evidence/planning audit
iv) Evidence persuasive not conclusive
v) (add subjective eg depreciation/bad debts/inventory obsolecence + mangmnt not give all info + check all laws complied not
easy + time vs cost benefits.

vi) THE NATURE OF FINANCIAL REPORTING : (subjectivity of financial statements & auditors approach to audit.- )
(1) Subjective account balances eg depreciation ,impairment, bad debts, inventory obsolescence.( Mngmnt must
apply judgement in the preparation of fin stats)

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 COST
ix) The audit must be finished in a certain time after end of reporting period and benefit of doing this must not exceed the
cost to get it done in time(exhorbitant-1000auditors/hr)

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 audit
2) 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.

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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 feasable
c) 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 :INDEPENDANCE
a) 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.
6) 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 money
e) INDEPENDENCE :OF PARTICULAR IMPORTANCE IS PRINCIPLE OF OBJECTIVITY.
f) Integrity + Prof Skills&due care +Objectivity +Confidentiality.

ACCOUNTING BODIES IN SA
1) SAICA S A institute of chartered accountants.
a) Registeredwith IFAC international federation of accountants – looks after interests of professional accountants.(all types)
2) ACCA Association of chartered certified accountants.
3) CIMA Chartered institute of management accountants
4) IRBA Independant regulatory board for auditors brought intp being by Auditing Profession Act.to replace PAAB public accountants
and auditors board.public accountants and auditors act was repealed same time
a) Looks after intersts of auditors + pulic + discipline auditor members.
b) ALL AUDITORS must register with the IRBA after passing part 1+2 of saica exam and be member of saica-AS PER LAW.
5) IFAC : international federation of accountants - releases the Code of Ethics of professional accountants
6) IAASB- international auditing and assurance standards board formulate the:
7) IFAE :International Framework for Assurance Engagements
8) IASB : international accounting standards board releases IFRS –international fin. reporting standards.
9)
10) IFAC (international federation of accountants)
11) ISA –International standards on auditing
a) ISRE –review engagements
b) ISAE- Assurance angagements
c) ISRS- related services

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 accountants
ii) Conduct audit accordance International standards on auditing.
b) Legislation to ensure : ( some examples of 8 or more)
i) Companies Act 2008
ii) SAICA constitution and by-laws.
iii) Auditing profession act 2005
iv) IRBA rules& code

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v) IFAC code of ethics for professional accountants
vi) 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.

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


SHAREHOLDERS
a) Provide finance for business
b) Appoint directors
c) Appoint auditors (to opinion assertions of directors to shareholders fair)
d) Receive Annual Fin. Stats.

DIRECTORS
e) Running company
f) Reporting results OF THEIR STEWARDSHIP to shareholders.

AUDITOR
g) Independant opinion Fin info. fairly presents fin. Pos + fin Res.
h) Report to shareholdersl

SHAREHOLDE
DIRECTORS
RS

AUDITORS

ROLE OF COMPANIES ACT.


From old companies act, not new one:
1) States all companies must be audited
2) 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)

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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
2. 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 opinion
6. Due Professional Care & Competence
7. Confidentiality/ independence/ professional behavior/integrity.
8. Independent : maintain independent attitude
9. Report Reportable Irregularities
10. 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 CONDUCT


DEFINITIONS
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 entity
1.2.2. 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 dependant
1.5. Close family : parent, child or sibling who is not an immediate family member
1.6. 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 matter
three party relationship
other 2
written assurance report
sufficient 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 business
3. 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
4. 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 CONDUCT


1) As per SAICA: The pre-eminent attribute of Auditors is = 1- skills & 2-integrity
2) Ethics: dictionary = a set pf principles, or morals, rules of conduct
3) Morals: dictionary= concerned with the distinction between right and wrong,virtuous in general conduct,
4) Sources for ethical guidance:
a) corporate code of conduct
b) older leaders/collegues
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2121 | P a g e Auditing Notes AUDI 101
c) parents, religion, role models.
5) questions to ask for an ethical question:
a) Greatest good for greatest no. of people
b) Would I be comfortable explaining my decision to a person I respected for their morals
c) Is decision honest & truthful
d) If my action to others Is it how I want others to act toward me
6) Issues affecting accountants: eg:
a) Did I act independently
b) Should I use confidential info from a client for my own advantage
c) Should I report a client who evades tax to the authorities

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 in
i) PUBLIC PRACTICE: professional accounting firm for tax,accounting or auditing
ii) 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 2/5
a) Part A 100-150 General application of the code
b) Part B 200-190 Professional Accountant in Public Practice
c) Part C 300-350 Prof. Acc. In Business
d) Part D 400-495 Prof. Acc. In South Africa.

PART A - GENERAL APPLICATION OF THE CODE


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 interest
2.2. Self review
2.3. Advocacy
2.4. Famililiarity
2.5. intimidation
3. Safeguards (2 categories 1-regulation&legislation by profession/law 2-work environment )
3.1. Sound leadership
3.2. Procedures Policy documented
3.3. Employees grievance structures
3.4. Client structures
3.5. Disciplinary mechanism

#### 1) NB
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2222 | P a g e Auditing Notes AUDI 101
(i) The code has 5 fundamental principles: (whereas pre-eminent attributes are skills & integrity, these are the
principles-note independence not here)
1. INTEGRITY * straightforward honest fair truthful
2. OBJECTIVITY /INDEPENDENCE Bias, conflict of interest, or undue
influence of others
3. CONFIDENTIALITY

disclose confidential information acquired as a result of a professional


4. PROFESSIONAL BEHAVIOR comply with relevant laws and
regulations
5. PROFESSIONAL COMPETENCE AND DUE CARE (skills) * professional knowledge and skills
FUNDAMENTAL PRINCIPLES

NB
6. INTEGRITY sect 110 of IFAC code of ethics for professional accountants (SAICA code)
a. Straightforward honest fair truthful in professional and business relationships
b. Should not be associated with info. they believe is false, misleading(omission or inclusion) or
recklessly provided.
7. OBJECTIVITY (INDEPENDENCE) sect 120
a. Should not compromise their professional or business judgement because of Bias, conflict of
interest, or undue influence of others. Be fair, maintain professional scepticism.
8. CONFIDENTIALITY sect 130
a. professional accountants should not
i. * disclose confidential information acquired as a result of a professional or business
relationship, without specific authority or unless there is a legal or professional duty to do so.
ii. * use confidential information acquired as a result of professional and business relationships
to their own personal advantage or the advantage of third parties.
b. 4.2 professional accountants must maintain confidentiality in a social environment and must be alert
to the possibility of unintentially disclosing confidential information to friends, long-term business associates
or a close family member (parent, child or sibling), or an immediate family member (spouse or dependent).
c. 4.3 a professional accountant should attempt to ensure that staff under his or her control and
anyone from whom advice or assistance is obtained in respect of an assignment, respect the duty of
confidentiality.
d. 4.4 if a relationship between a professional accountant, a client or employer ends: the duty of
confidentiality remains.
e. 4.5 disclosure of confidential information is permitted when
i. * disclosure is permitted by law and is authorised by the client or emplcer in the case of a
professional accountant in business)
ii. * disclosure is required by law e.g.
• providing evidence in the course of legal proceedings
• disclosing infringements of the law to the appropriate public authority.
iii. * there is a professional duty or right to disclose e.g.
when reporting on the quality review of a member body
iv. • in response to an enquiry or investigation by a member body or regulatory body
v. • to protect the professional interests of a professional accountant in legal proceedings or
vi. • to comply with technical standards or ethics requirements
f. 4.6 In deciding whether to disclose confidential information a professional accountant should
i. consider whether the interests of all parties could be unnecessarily or unjustly harmed by the
disclosures
ii. * whether all relevant information is known and substantiated (disclosing unsubstantiated facts or
incomplete information could be unfairly damaging to other parties and is unprofessional)
iii. whether the method or type of communication is appropriate and the recipient of the information is
appropriate.
9. PROFESSIONAL BEHAVIOR sect 140
a. 5.1 This fundamental principle requires that professional accountants
comply with relevant laws and regulations
b. * avoid any action that may bring discredit to the profession (acts in a way which negatively affects
the good reputation of the profession)
c. * market and promote themselves in an honest and truthful manner
10. PROFESSIONAL COMPETENCE AND DUE CARE sect 150
professional accountants are required to
a. * maintain professional knowledge and skills at a level which ensures that clients or employers
b. (in the case of professional accountants in business) receive competent professional in service
c. * act diligently in accordance with applicable technical and professional standards when
d. providing professional services.
e. 3.2 to maintain professional competence a professional accountant must remain abreast of relevant
technical, professional and business developments.
f. 3.3 acting diligently (with due care) requires that the professional accountant act carefully,
thoroughly and in accordance with the requirements of the assignment.
g. 3.4 a professional accountant must ensure that those working under his or her authority in a
professional capacity have appropriate training and supervision.
THREATS

#### 2) NB
THREATS

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Now that the fundamental principles have been described, it is necessary to consider the circumstances which can
threaten compliance with the fundamental principles. The code categorises them as follows:
1. SELF-INTEREST THREATS, -self & close & immediate family -which may occur as a result of the financial or
other interests of a professional accountant or of an immediate or close family member, e.g. the professional
accountant has shares in a company which is about to become an audit client.
2. SELF-REVIEW THREATS, which may occur when previous work needs to be re-evaluated by the
professional accountant responsible for that work, e.g. the professional accountant has written up the accounting
records of a client for which he or she has also been appointed to audit
3. ADVOCACY THREATS, -means not to be biased -which may occur when a professional accountant
promotes a position or opinion to the point that his or her subsequent objectivity may be compromised, e.g. a
professional accountant values a client’s shares and then leads the negotiations on the sale of the client’s
company.
4. FAMILIARITY THREATS, which may occur when, because of a close relationship, a professional accountant
becomes too sympathetic to the interests of others; e.g. the professional accountant fails to report a fraud at a
client because the perpetrator is a close friend.
5. INTIMIDATION THREATS, which may occur when a professional accountant may be deterred from acting
objectively by actual or perceived threats, , e.g. a professional accountant in business fails to report a fraud
perpetrated by his section head because he fears he himself will be dismissed by the section head.
NOT ALL THREATS NEATLY FALL INTO THE ABOVE CATEGORIES! THIS DOES NOT MEAN THEY ARE NOT
THREATS, AND MUST STILL BE ADDRESSED.
(ii) As per Conceptual framework approach-It then provides the approach they should adopt for threats &
safeguards.

METHOD OF IDENTIFYING THREATS AND DEALING WITH THEM:


METHOD :
i) Identify threats to the compliance with fundamental principles
ii) 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
SAFEGUARDS
Unless the threat is clearly insignificant, the professional accountant is obliged to apply safeguards which will eliminate or
reduce the threat to an acceptable level.

1 How does the professional accountant decide whether a threat is clearly insignificant? There is no magic
formula or “hard and fast” rule. The decision
1. professional judgement as per definition of matter –firstly it will be a matter of his own professional
judgement
2. public interest -must take into account the public interest — if the public interest is threatened , it is most
likely to be significant.
3. reasonable and informed third party -should be one which a reasonable and informed third party having
knowledge of all relevant information would make.
2. Safeguards fall into two categories
2.1 By : 1-Profession or 2-Law (legislation or regulation) -safeguards created by the profession,legislation
or regulation eg:the Companies Act which presents a professional auditor in public practice from being a director
in his/her audit cient
2.2 work environment -safeguards in the work environment : eg a company has sound procedures to protect
an employee (a professional accountant in business) from intimidatory threatsfrom the employees manager
3. If no suitable safeguard can be put in place, the prof.accountant will be obliged to withdraw from the business
relationship.-employee or assurance engagement.

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.

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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 principles
1.1.2. THREATS : 1- integrity+professional behavior (dishonest business) 2- objectivity( independent) –no shares held or
family relationships.
1.1.3. SAFEGUARDS :screening client- as per ISQC1+ISA220 have suitable procedures to check 1- screen 2- independence
problems , Method: discuss bankers,lawyers, managers,ALSO you are allowed to /should ask last accountant or auditor , search
internet etc.
1.2. ENGAGEMENT ACCEPTANCE: sect 220
1.2.1. RESPONSIBILITY : competent/ facilities to do it
1.2.2. THREATS: professional competence & due care : threat to : “Self Interest”
1.2.3. SAFEGUARDS: prodedures+ policies by firm- enough skills on team, experts, enough time frame.
1.3. CHANGES IN PROFESSIONAL APPOINTMENT:
1.3.1. : :NEW: get clients permission and define boundries of what may be discussed : in writing to discuss his affairs fully
and freely with the old accountant- if he is hiding something he wont give this permission and probably should not be taken
on.To be asked of old accountant: eg if client has poor relationships with his professional advisors.
OLD:1- get client permission & boundries to discuss with new accountant in writing from client. 2- be honest and
unambigous 3- assign senior to handle transition to prevent bad professional behavior eg crtitisism.4- there is a
danger of divulging confidential information of clients to the new proposed accountant.

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
1.5. 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 threats
1.9. 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 staff
1.11. 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 NOT
1.11.2. 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 gifts
1.17. THREATS : intimidation(disclosure) and familiarity
1.18. SAFEGUARDS : quality ethics committee: approval ; notice to employees & clients of policy of not accept gifts.

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#### 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 principles
ii) 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.

ie:

IDENTIFY THREATS TO THE COMPLIANCE WITH 5 FUNDAMENTAL PRINCIPLES : Identify threats to independence,
THREATS: 1-self interest / 2-self-review /3-familiarity/ 4-intimidation / 5-
advocacy
EVALUATE WHETHER SIGNIFICANT, apply safeguards if not significant : 3 checklist to decide:(as per usual) 1 has
requirement of independence in MIND and APPEARANCE been maintained. 2- Any public interest in matter?
3- what would a reasonable 3rd party’s viewpoint be.
SAFEGUARDS: 1-policy 2-leadership 3- disciplinary 4-employee complaint/question avenue - 5-use clients
structures in place eg audit committee

THE FOLLOWING ARE THE RULES FOR INDEPENDENCE IN DIFFERENT CIRCUMSTANCES, EACH BROKEN DOWN INTO THE
CONCEPTUAL PARTS
See textbook pg 2/17 for long TABLE of examples below for Sect. 290. : the headings are all named here below but no time to do all-
only some are done

1. DIRECT/INDIRECT FINANCIAL INTEREST IN AUDIT CLIENT :for any type of assurance engagement, not just
statutory audit : (SELF INTEREST)
3.1.1.0. Immediate family member may not have a direct/indirect financial interest in audited entity BUT
3.1.1.1. Close Family member may – if client is informed&independent review is done of his work.
3.1.1.2. 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.
3.1.1.3. 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.

2. Firm Itself has FINANCIAL INTERESTS IN FINANCIAL STATEMENT AUDIT CLIENTS. : (SELF INTEREST)
3.1.2.0. Firm has direct interest in fin stat audit client : MUST DISPOSE
3.1.2.1. Firm has material indirect interest in fin stat audit client ; MUST DISPOSE till immaterial
amount left
3.1.2.2. Firm has material fin interest in entity which has a controlling interest in a fin stat audit client:
MUST DISPOSE till immaterial amount left
3.1.2.3. Firm & client(or director or controlling owner) have a financial interest in any same 3rd
party(they are ‘partners’. MUST DISPOSE till/unless immaterial amount left OR none can exercise significant
influence over 3rd party
3.1.2.4. Partners who have a financial interest in a financial statement audit client of the firm and
3.1.2.4.1. Assist with audit or provide non-assurance services : must dispose of

25
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3.1.2.4.2. 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.)

3. FIRM HAS FINANCIAL INTERESTS IN NON- FIN STAT AUDIT CLIENTS: (SELF INTEREST)
3.1.3.0. Firm has Direct interest: : MUST DISPOSE
3.1.3.1. Firm has Indirect Interest: MUST DISPOSE till immaterial amount left
3.1.3.2. Firm has Material interest in entity with a controlling interest in client : MUST DISPOSE till
immaterial amount left

4.LOANS & GUARANTEES


3.1.4.0. 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)
3.1.4.1. 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)
3.1.4.2. 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

5. CLOSE BUSINESS RELATIONSHIP WITH AUDIT CLIENT (SELF INTEREST & INTIMIDATION )
3.1.5.0. Firm or team with client or client mngmnt : eg joint venture or auditor distributes clients product
as well : TERMINATE or REDUCE MAGNITUDE o
3.1.5.1. 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.
6.FAMILY & PERSONAL RELATIONSHIP
7.EMPLOYMENT WITH ASSURANCE CLIENTS
8.RECENT SERVICE WITH AN ASSURANCE CLIENT
9.SERVING AS AN OFFICER OR DIRECTOR ON THE BOARD OF AN ASSURANCE CLIENT
10. LONG ASSOCIATION OF SENIOR PERSONELL WITH ASSURANCE CLIENT
11. FIN STAT AUDIT CLIENTS THAT ARE LISTED ENTITIES
12. PROVISION OF NPN-ASSURANCE SERVICES TO ASSURANCE CLIENTS
13. PREPARING ACCOUNTING RECORDS AND FIN STATS FOR AN ASSURANCE CLIENT
14. VALUATION SERVICES
15. TAXATION SERVICES TO FIN STAT AUDIT CLIENT
16. PROVISION OF INTERNAL AUDIT SERVICES TO A FIN STAT AUDIT CLIENT
17. PROVISION OF IT SERVICES TO A FIN STAT AUDIT CLIENT
18. TEMPORARY STAFF ASSIGNMENTS TO FIN STAT AUDIT CLIENTS
19. PROVISION OF LITIGATION SUPPORT SERVICES TO A FIN. STAT AUDIT CLIENT
20. PROVISION OF LEGAL SERVICES TO A FIN STAT AUDIT CLIENT
21. RECRUITING SENIOR MANAGEMENT ON BEHALF OF AN ASSURANCE CLIENT
22. CORPORATE FINANCE AND SIMILAR ACTIVITIES
23. FEES AND PRICING
24. GIFTS AND HOSPITALITY
25. ACTUAL OR THREATENED LITIGATION BETWEEN FIRM AND AUDIT CLIENT

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 2/36


a) 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 GM
iii) Unethical/ or illegal earnings strategies- eg illegal products
iv) Lie/intentionally mislead (incl. remain silent) 1-auditors eg fictitious sales2- regulators eg customs
v) 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 profits

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c) 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 training
b) THREATS : professional Competence & due care
c) SAFEGUARDS : use safeguards listed under ???sect. 310.??? & obtain advice what to do or get
training.

5) #### 8) SECTION 340 FINANCIAL INTERESTS 2/38


a) 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 2/39


a)
2) Section 410 Tax practice 2/40
a) RESPONSIBILITY: Not be associated with a return that is :
i) False, misleading info.
ii) 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

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(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 2/41


4) Section 430 Discrimination 2/42
5) Section 440 Cross border activities 2/42
6) #### 10) Section 450 Publicity, advertising and solicitation 2/43
a) ADS & PUBLICITY
i) : 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/ prices
ii) Basis of fees calc. can be shown
iii) NO testamonials/endorsements
c) SOLICITATION :
i) Direct mailing yes, unless asked to refrain
ii) No cold call if in ‘public practice’, but yes for if in ‘business’

7) Section 460 Responsibilities to colleagues 2/44


8) Section 470 Recruiting 2/44
9) Section 480 Signing of reports or certificates 2/45
10) Section 490 Stationery and letterheads 2/45
11) 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) 2/47
7) # 11) Acts which will be improper conduct:
a) Contravention of Auditing Act/relevant other act
b) Dishonesty
c) Failure reasonable care&skill or not work doing at all
d) Evading/assisting to evade tax-duties-levies-rates
e) Divulging confidential info.
f) Contingent fees
g) Accept 3rd party commission unless client knew of it.
h) Vouch accuracy forecasts
i) Trainee accountants contraventions
impose restraints on after finished time except taking your clients 1 year not permitted
Require compensation for cancelling training contract
j) Fail responsibilities iRBA – pay fees + respond communications
k) Contraventions in respect of relinquishing engagements
l) Fail to resign if client requests it
m) Abandon practice without notice to clients
n) Soliciting/advertising/canvassing for work in manner not permitted by code
o) Contraventions other provisions of IRBA code
p) Improper/unprofessional/dishonourable/or brings profession into disrepute

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CH 3 STATUTORY MATTERS
COMPANIES ACT 2008:
SEC 1 DEFINITIONS:
SEC 2 RELATED & INTERRELATED PERSONS AND CONTROL
1. Individual :
1.1. An individual is related to another individual if they are : married, or live together in a relationship similar to marriage, or
1.2. Or are separated by no more than 2 degrees of natural or adopted consanguinity of affinity.
2. Jurustic person
2.1. An individual is related to a juristic person if he controls the juristic person directly or indirectly
2.2. Juristic is related to juristic if :
2.2.1. Either of them direct or indirect controls the business of the other
2.2.2. Or both are controlled by the same individual , or the business in them is controlled by the same individual.
3. Control :
3.1. as used in these definitions could be due to majority shareholding
3.2. OR due to as shareholders agreement
SEC 3 SUBSIDIARY RELATIONSHIPS
1. A juristic person is a subsidiary of another juristic person if:
1.1. Either : It is able to directly or indirectly exercise a majority of the voting rights pursuant to a shareholders agreement or
otherwise OR
1.2. OR : has the right to appoint or elect directors of that company who control the majority of the votes at a board meeting.
SEC 4 SOLVENCY AND LIQUIDITY TEST
1. If , concerning all reasonable foreseeable circumstances of the company :
1.1. Assets fairly valued EQUAL OR EXCEED the liabilities fairly valued (the fair value of the assets & liabilities MUST include any
reasonably foreseeable contingent assets & liabilities)
1.2. It appears it will be able to pay its debts as they become due in the ordinary course of business FOR A PERIOD OF 12
MONTHS following this test.
SEC 8 CATEGORIES OF COMPANIES:
As per Act ONLY 2 types of companies may be formed, : profit & non-profit ,with various SUB-TYPES thereafter.
1. PROFIT COMPANY : incorporated only for the financial gain of shareholders
1.1. STATE –OWNED COMPANY : Abbr : SOC Ltd.
1.2. PRIVATE COMPANY: Abbr : (Pty) Ltd. Or Proprietry Limited
1.2.1. MOI must
1.2.1.1. Prohibit offering shares to public
1.2.1.2. Restrict transferability of shares( eg: an existing shareholder may have to get permission from other
shareholders to sell his shares)
1.2.1.3. Cannot be a SOC
1.2.1.4. At least 1 directors
1.3. PERSONAL LIABILITY COMPANY: Abbr : Inc. or Incorporated
1.3.1. MOI must
1.3.1.1. Meet criteria of private company
1.3.1.2. AND state it is a personal liability company in MOI – clause which directors & past directors are jointly &
severally liable with company for debts in terms of office eg auditor, lawyer etc.
1.3.1.3. At least 1 director
1.4. PUBLIC COMPANY: Abbr : Ltd. Or Limited
1.4.1. A profit company which is not a Pty or SOC or Inc.
1.4.2. At least 3 directors
2. NON- PROFIT COMPANY : Abbr : NPC
2.1. incorporated for public benefit, income & property not distributable ONLY as compensation for services rendered.( to directors
,members etc)

3. There are two other types of company that are ‘recognized’ or basicly ‘implied’ by the ACT due to certain ‘provisions’ in the act .
3.1. Companies where all shares are owned by related persons – which results in a diminished need to protect minority
shareholders.
3.2. Where all shareholders are directors – which results in a diminished need to seek shareholder approval for certain board
actions.
CHAPTER 2 OF 2008 COMPANIES ACT.:
SEC 11 : CRITERIA FOR NAMES OF COMPANIES :
1. May Be : Any language + certain symbols + brackets
2. May not BE :
2.1. Not the same/similar to company , cc, registered trade mark , mark/word/expression protected under any act ,
2.2. Not mislead into believing it is associated with another Person , Entity , the State, Foreign State , Head of State , Head of Gov or
International Organisation.
2.3. No word constsiutes : propaganda for war , incite violence or harm , advocate hatred based on race/ethnicity/gender/religion.
SEC 13 : RIGHTS TO INCORPORATE A COMPANY :
1. You need so many people to incorporate a company :
1.1. Profit : One or more persons
1.2. Non-Profit : three or more
2. Procedure : complete & sign the MOI (or proxy) , FILE a Notice of INCORPORATION , PAY THE FEE.
3.

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SEC 14 REGISTRATION OF A COMPANY


1. COMISSIONER ASSIGNS : registration no, puts info on companies register, endorse NOI and MOI, issue & deliver a registration
certificate.
2. The registration certificate is evidence – complied with requirements & registered.
SEC 15 MOI
1. Each provision of MOI must be consistent with Act or it is void
2. MOI deals with :
2.1. Details eg : date& type of company
2.2. Alteration of moi
2.3. Authorized shares number & class
2.4. Authority to issue debt instruments (of board to)
2.5. Shareholders meetings eg notice, quorum, resolutions,locations
2.6. Directors : composition of board, meetings,committees, compensation
2.7. Own Specified Things : eg not allow dealing in derivatives etc. , or stricter quorum requirements etc.
3. In Addition to the MOI : the board may add rules NOT addressed in the MOI or Act. These rules must be :
3.1. consistent with ACT & MOI or THEY ARE VOID
3.2. Published in terms of requirements for publishing rules contained in the MOI.
3.3. They take effect:
3.3.1. 20 business days after rule has been published OR on date specified in rule itself
3.3.2. Binding on interim basis till next shareholders meeting , then if ratified at meeting by ordinary resolution – binding on permanent
basis.
3.3.3. If not ratified , directors may not make a substantially similar rule within 12 mnths from unless approved in advance by an
ordinary shareholders meeting.
4. THE MOI and RULES are binding between :
4.1. Company & shareholder
4.2. Among shareholders
4.3. Between company & director/prescribed officer or any person on AUDIT COMMITTEE or on ANY COMMITEE OF THE BOARD.
SEC 16 AMENDING THE MOI:
1. The MOI may be amended if a special resolution to amend it—
1.1. (i) is proposed by—
1.1.1. (aa) the board of the company; or
1.1.2. (bb) shareholders entitled to exercise at least 10% of the voting rights that may be exercised on such a
resolution; and
2. (ii) is adopted at a shareholders meeting, or in accordance with section 60, subject to subsection
(3).
3. Notice of amendment + prescribed fee
4. If Court order to amend – no resolution needed –board just effects
Q
16. (1) A company’s Memorandum of Incorporation may be amended—
(a) in compliance with a court order in the manner contemplated in subsection
(4);
(b) in the manner contemplated in section 36(3) and (4); or
(c) at any other time if a special resolution to amend it—
(i) is proposed by—
(aa) the board of the company; or
(bb) shareholders entitled to exercise at least 10% of the voting rights
that may be exercised on such a resolution; and
(ii) is adopted at a shareholders meeting, or in accordance with section 60,
subject to subsection (3).

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 want
3. 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

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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.
2. The COMISSION has the power to give the company 20 days to answer why it should be allowed to carry on trading, if they believe ther is a
problem.
3. Note- many companies go through a period of “temporary insolvency”, - it is assumed that the commission will allow the company to carry
on trading under ‘temporary’ circumstances like this- not very clear- must research
SEC 23 REGISTERED OFFICE :
1. Must continually maintain a office in the republic- must file notice of change of address.
SEC24 FORM AND STANDARDS OF COMPANY RECORDS.
1. Company must keep for 7 years in written, or electronic form which allows it to be converted to written in a reasonable period, all docs in
terms of this act OR OTHER REGULATION.- either at registered office or other location in republic- if not at registered office or if they are
moved, notice of location of records must be filed with CIPRO.
2. DOCS as per act to be kept:
2.1. MOI copy + amendments + RULES
2.2. Record of directors :
2.2.1. Name & former names
2.2.2. ID no. or Date of birth.
2.2.3. Passport no & nationality if not a south African.
2.2.4. Occupation
2.2.5. Date of most recent appointment as director( ?? for this company or any one??)
2.2.6. Name & retistration no. of every other company or foreign company of which he is a director.
3. Copies all reports presented at AGM
4. AFS
5. Acc. Records as required by ACT.
6. Notice & minutes of shareholders meetings, inc. all resolutiions adopted &supporting docs thereto.
7. Written communications sent to shareholders(all share classes)
8. Minutes of directors meetings & directors committees & audit committee.
9. Every PROFIT company must maintain
9.1. a SECURITES REGISTER.
9.2. Register of company secretary & auditor - if they are supposed to have these 2 types.
SEC 26 ACCESS TO COMPANY RECORDS:
1. A shareholder or person who has a beneficial interest in any securities may copy & inspect info in records as listed to be stored for 7 years
above sec 24.- also for any other records specially named in MOI .
2. This right of access DOES NOT EXTEND TO : minutes of meetings & resolutions of directors, directors committees or the audit committee.
3. This right is in addition to OTHER RIGHTS GRANTED BY THE ‘PROMOTION OF ACCESS TO INFORMATION ACT’ , OR SEC 32 OF CONSTITUTION,
OR ANY OTHER REGULATION.
4. It is an offence by company to attempt to frustrate, impede,refuse or interfere- if someone want to exercise such right.
SEC27 FINANCIAL YEAR OF COMPANY
1. Accounting period- in notice of incorporation- may change it
SEC 28 ACCOUNTING RECORDS:
1. Accurate & complete in one of the official languages.
2. Swatisfy requirements of ACT & any other law to facilitate preparation of financial statements
3. Must include any prescribed accounting records eg: fixed asset register.
4. COMPANY is GUILTY of an OFFENSE to : with intention to mislead/deceive any person :
4.1. fail keep accurate or complete records.
4.2. Falsify or ALLOW to be falsified
4.3. Keep other than in the prescribed manner & form

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 OR
1.5.3. 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 incomplete
3. 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 IFRS
5. A SUMMARY of FIN STATS is aloowed provided 1st page PROMINENTLY STATES :
5.1. That the doc. Is a summary, and which docs were summarized
5.2. Steps to obtain a copy of the original full fin stats which were summarised
5.3. Statements were audited OR
5.4. OR independently reviewed OR
5.5. 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

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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??)
3. Be approved by board
4. 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 charge
7. AUDIT - PUBLIC Company :
7.1. Must be audited
8. AUDIT - ANY OTHER COMPANY TYPE :
8.1. Fin Stats must be EITHER Audited OR Independantly reviewed
8.2. The INDEPENDENT REVIEW requirements will be formulated by the minister
8.3. EXCEPTIONS :
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 OR
8.3.3.2. 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

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3333 | P a g e Auditing Notes AUDI 101
(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
SEC 34 ADDITIONAL ACCOUNTABILITY REQUIREMENTS FOR CERTAIN COMPANIES
1. Public & SOC must comply Ch 3 of ACT
1.1. Auditor + audit committee + company secretary
2. Private +personal liability+ non-profit need not comply with extended requirements in Ch3 of act unless MOI requires it
PART D of CH2 – CAPITALISATION OF COMPANIES
SEC 35 LEGAL NATURE OF COMPANY SHARES & REQUIREMENT TO HAVE SHAREHOLDERS
1. A SHARE IS movable property, transferrable in any manner provided for in act or other legislation.
2. A share does not have Par Value or Nominal value- only no-par value shares are allowed anymore.
2.1. Old par value shares still retain their rights & description, but will need to be converted to no-par value in due course- the transition
rules have not yet been established yet.
3. A Company may not issue shares to itself
4. An authorized share has no rights associated with it until it has been issued.
SEC 36 AUTHORISATION FOR SHARES
1. MOI must set out:
1.1. Classes & no. of shares that company is authorized to issue
1.2. A distinguishing designation (name ) for each type of share
1.3. -The preferences of shares (eg to dividends – ie preference shares procedures)
1.4. & The limitations of shares (eg: aspects of voting)
1.5. & 3-Rights of shares (eg: voting)
2. EXCEPTIONS : The MOI may authorize a certain no. of shares for subsequent classification by board or specify a class without specifiying
preferences/limitations/rights , but only if unissued
3. CHANGES TO SHARES : AUTHORISATION/ number /classification & preferences ,rights ,limitations may only be changed by :
3.1. Change MOI by Special resolution OR
3.2. OR By Board (unless MOI prohibits it)
3.2.1. IF any of these actions are carried out the board MUST amend the MOI and file a notice of amendment.
SEC 37 PREFERENCES , RIGHTS, LIMITATIONS AND OTHER SHARE ITEMS.
(1) All of the shares of any particular class authorised by a company have preferences, rights, limitations and other
terms that are identical to those of other shares of the same class, except to the extent that the company’s
Memorandum of Incorporation provides otherwise.
(2) Each issued share of a company, regardless of its class, has associated with it one general voting right, except
to the extent provided otherwise by—
(a) this Act; or
(b) the preferences, rights, limitations and other terms determined by or in terms of the company’s
Memorandum of Incorporation in accordance with section 36.
(3) Despite anything to the contrary in a company’s Memorandum of Incorporation—
(a) every share issued by that company has associated with it an irrevocable right of the shareholder to vote on
any proposal to amend the preferences, rights, limitations and other terms associated with that share; and
(b) if that company has established only one class of shares—
(i) those shares have a right to be voted on every matter that may be decided by shareholders of the
company; and
(ii) the holders of that class of shares are entitled to receive the net assets of the company upon its
liquidation.
(4) If a company’s Memorandum of Incorporation has established more than one class of shares the Memorandum
of Incorporation, in setting out the preferences, rights, limitations and other terms of those classes of shares, must
provide that—
(a) for each particular matter that may be submitted for a decision to shareholders of the company, at least one
class of the company’s shares has voting rights that may be exercised on that matter; and
(b) the holders of at least one class of the company’s shares, irrespective of whether it is the same as any class
contemplated in paragraph (a), are entitled to receive the net assets of the company upon its liquidation.
(5) Subject to any other law, a company’s Memorandum of Incorporation may establish, for any particular class of
shares, preferences, rights, limitations or other terms that—
(a) confer special, conditional or limited voting rights;
(b) provide for shares of that class to be redeemable, subject to the requirements of sections 46 and 48, or
convertible, as specified in the Memorandum of Incorporation—
(i) at the option of the company, the shareholder, or another person at any time, or upon the occurrence of
any specified contingency;
(ii) for cash, indebtedness, securities or other property;
(iii) at prices and in amounts specified, or determined in accordance with a formula; or
(iv) subject to any other terms set out in the company’s Memorandum of Incorporation;
(c) entitle the shareholders to distributions calculated in any manner, including dividends that may be
cumulative, non-cumulative, or partially cumulative, subject to the requirements of sections 46 and 47; or
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3434 | P a g e Auditing Notes AUDI 101
(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)—
(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 MOI
2. 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 scheme
2.5. 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 meetings
2.2. Vote on appointment of directors
2.3. 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 related
or inter-related to the company, a director or a prescribed officer; and
(ii) does not have any interest in, or relationship with, the company that
might conflict with the duties of a trustee; and
(b) the board is satisfied that the person has the requisite knowledge and
experience 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 to
1.2. Board is satisfied :
1.2.1. Liquidity / solvency test
1.2.2. 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)
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3535 | P a g e Auditing Notes AUDI 101
2. If contravenes MOI it is void & fin directors may be liable
3. 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 to
1.1. Director of company or related company eg holding company
1.2. Any prescribed officer s
1.3. A related company itself
1.4. member of a related company
1.5. Or any person related to such company , prescribed officer , director , member
2. PROVIDED that:
2.1. MOI conditions adhered to
2.2. Board satisfied ;
2.2.1. Liquidity&solvency test
2.2.2. 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 liable
4. 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 money
5.2. 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 company
5.4.2. Anticipated expenses on behalf of company
5.4.3. 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. Dividends
1.2. Share ‘buy backs’
1.3. Payments in lieu of capitalization shares
1.4. Incurring a debt for the benefit of a shareholder
1.5. 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 order
2.2. 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 UNCERTIFICATED


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:\

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3636 | P a g e Auditing Notes AUDI 101
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.
2.3. For all directors are shareholders company : any matter decided by majority quorum board does not need to be referred to a
shareholders meeting- they may decide it on the spot anytime/anywhere – but if these conditions not satisfied then shareholders
meeting must be held.
SEC 58 SHAREHOLDERS RIGHT TO BE PRESENT BY PROXY:
1. Shareholder may appoint proxy for : vote / participate / speak in meeting + give consent outside a meeting
2. Proxy appointment must ;
2.1. In Writing, Dated , Signed by shareholder.
2.2. Can be given anytime
2.3. Valid 1 year, unless longer/shorter was stated in the proxy agreement.
2.4. Contain a restriction on transferability of proxy’s authority to another person.
2.5. Must be communicated to the company itself (delivered) before proxy can exercise his rights.
2.6. The proxy need not be a shareholder.
SEC 59 RECORD DAY FOR DETERMINING SHAREHOLDERS RIGHTS :
1. The “record date” is the exact time when it is decided which shareholders are to receive notice of shareholders meeting + receive
dividends etc. (cut-off date).this is important because in listed companies the shareholders change all the time.
SEC 60 SHAREHOLDERS ACTING OTHER THAN AT MEETINGS
1. A resolution (except AGM)which can be voted on at a shareholders meeting may instead be submitted to the shareholders and they can
then vote on it in writing ( no need to hold a meeting)
1.1. Must be voted on within 20 days of submission to shareholders
1.2. Same voting & quorum & effect as if it was done at a meeting
1.3. Election of a director may also be done in this way.
1.4. Results & resolution adopted Must be communicated to EVERY shareholder within 10 business days.
2. Anything in Act or MOI that is supposed to be conducted at AGM may not be done like this ie: by post – it must be at a standard AGM.
SEC 61: SHAREHOLDERS MEETINGS
1. The board or any person specified in RULES or MOI may call a shareholders meeting at any time.
2. As per Act : a shareholders meeting MUST be held for: (subject to sec 60 above)
2.1. When board is required by ACT or MOI to refer a matter to the shareholders for decision
2.2. To fill a vacancy on the board
2.3. If MOI requires it at any time
2.4. For AGM
2.5. If 1 or more written demands from shareholders holding min. 10% of shares which are entitled to vote on the matter at hand. The
demand must describe the specific purpose for the meeting AND frivolous or vexatious demands can be set aside by by the court.
3. Unless MOI specifies otherwise the meeting can be in a local or foreign country, and the BOD can determine the location of the meeting.
4. The AGM :
4.1. Initially max 18 mnths from incorporation, then every fin. Year thereafter. Never more than 15 mnths after the last AGM – if the 18
mnths rule caused some weird time lags/mix ups
4.2. AGM must at a minimum provide for the following business to be transacted :
4.2.1. DIRECTORS REPORT
4.2.2. AUDITED FIN STATS.
4.2.3. AUDIT COMMITTEE REPORT
4.2.4. ELECTION OF DIRECTORS TO EXTENT REQUIRED BY MOI OR ACT
4.2.5. APPOINTMENT ODAYS F : AUDITOR & AUDIT COMMITTEE
4.2.6. ANY MATTERS RAISED BY SHAREHOLDERS (WITH OR WITHOUT ADVANCE NOTICE TO THE COMPANY)
SEC 62 NOTICE OF MEETING :
1. TO EACH SHAREHOLDER : PUBLIC OR NON-PROFIT = 15 DAYS , ANY OTHER TYPE OF COMPANY = 10 DAYS BEFORE.
2. MOI MAY PROVIDE FOR LONGER PERIOD.
3. AGM NOTICE TO INCLUDE : summary of fin stats + info where to get the copy of originals from.
4. Notice of any shareholders meeting must include:
4.1. Date/time/location/record date(ie: cut – off).
4.2. General purpose of meeting & any specific purpose a shareholder demanded the meeting for where applicable.
5. Copy of proposed resolution & notice of % of voting rights (ie : ordinary or special) required to adopt it.
6. A reasonable prominent statement that :
6.1. A shareholder may appoint a proxy
6.2. A proxy need not be a shareholder
6.3. It is a requirement of the act that personal identification by shareholders/proxys ids required
6.4. Notice that the meeting provides for electronic communication if applicable
SEC 63 CONDUCT OF MEETINGS
2. Before shareholder/proxy may join meeting:
2.1. Present identification
2.2. Person presiding must reasonably satisfied verified
3. Unless MOI prohibits
3.1. Shareholders meeting electronic communication
3.2. Only 1 or 2 shareholders by electronic, the rest not, provided method enables all persons(using&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)

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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)
2.3. Time : if person+votes quorum requirements are not met within 1 hr of meeting start time, it is auto postponed for 1 week ,without
any 1- motion to postpone 2- vote or 3- further notice.
SEC 65 SHAREHOLDERS RESOLUTIONS
4. There are only 2 types of resolution , either 1 - ordinary or 2- special resolution. Every resolution must be 1 of the 2.
5. BoD may propose ANY resolution to be considered by the shareholders AND may determine whether by :
5.1. Meeting OR
5.2. Written Consent ( no meeting)
6. Any 2 shareholders may propose a resolution on any matter on which they can exercise votes. ,(check act – can 2 old grannies or
competitors with 1 share each they just waste everybodies time interminably?)
6.1. AND may require that the resolution be considered at
6.1.1. A Meeting demand by shareholders
6.1.2. The next shareholders meeting
6.1.3. By written consent.
7. All Proposed Resolutions should be expressed with sufficient clarity and specificity and be accompanied by sufficient info. to enable
shareholder to decide whether to participate & influence outcome of vote.
8. ORDINARY RESOLUTION:
8.1. 50 % of voting rights to win.
8.2. MOI can specify anything over 50% for different things, eg 60 % for investment decisions, 70% for capital expenditure, BUT for removal
of Director the 50% CANNOT be changed at all by law.
9. SPECIAL RESOLUTION : 75% of voting rights exercised on resolution.
9.1. MOI can specify lower (??higher too??) % for different matters but there must at all times be a difference of Min. 10 % between
ordinary/special
9.2. A special resolution ,not ordinary, is required to:
9.2.1. Amend MOI
9.2.2. Approve voluntary winding up of the company.
9.2.3. Approve any proposed fundamental transactions as per Ch 5 of Act eg:
9.2.3.1. Mergers
9.2.3.2. Amalgamations or mergers
9.2.3.3. Schemes of arrangement
9.2.4. Other matters in Act as well may require spec. resolution: 1-financial assistance to a director, 2-issuing shares to a director.
9.2.5. MOI can stipulate matters.
SEC 66 BOD, DIRECTORS AND PRESCRIBED OFFICERS.
1. The business and affairs of company must be under a BoD.
2. BoD has the ‘authority’ to exercise the powers and perform the function of the company, unless the MOI provides otherwise.eg MOI may
prohibit company and thus BoD from from acquiring financial derivatives.
3. Number of Directors:
3.1. Private Company : at least 1 director
3.2. Public Company : at least 3 directors
3.3. MOI may stipulate higher minimum no. of directors..
4. MOI may specifically provide for :
4.1. allow that any person specially named in the MOI may directly appoint & remove one or more directors - BUT in a ‘profit’ company MOI
must provide for at least 50% of directors and any alternates to be elected by shareholders (can these 50% be fired by appointed
person though? –check up do not know yet???/)
4.2. A person may be allowed to be an ex-offico director by virtue of his status & position in company
4.3. The appointment of alternate directors
5. Person ineligible /disqualified may not be director- must be nullified
6. A Director Must consent in writing to be a director.
7. Remuneration for services as director
7.1. Company may pay remuneration to directors for services as directors unless MOI states otherwise.
7.2. may only be paid in accordance with a special resolution passed in last 2 years.
SEC 67 FIRST DIRECTOR OR DIRECTORS
1. Each incorporator of a company is a director and will serve until sufficient other directors have been appointed.

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 & subsidiary
1.2.1.2. Cause harm to entity / subsidiary
1.2.2. Communicate to board at earliest practical opportunity pertinent info UNLESS
1.2.2.1. Immaterial
1.2.2.2. Generally available to public / or known to directors
1.2.2.3. Bound by confidentialty – ethical or legal
1.2.3. Exercise 1-powers + 2-functions of director in
1.2.3.1. Good faith

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3838 | P a g e Auditing Notes AUDI 101
1.2.3.2. Best interests of company
1.2.3.3. Degree 1- care 2- diligence 3 – skill reasonable expected of functions of director
1.2.3.4. ??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 company
1.3.3. 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 company
1.3.3.2. Employees you consider diligent & responsible
1.3.3.3. 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 director
1.4.3. 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 companies
2.2. Quorum special resolution = 75% of voting righs that were exercised on the occasion min 10% difference between ordinary&
special if moi state different
2.3. Special resolution needed for : amalgamations&mergers,+ moi change + disposal greater part assets + voluntary winding up
2.4. 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
meeting
2.6. 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
dishonesty
2.7. 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 fails
3. 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 quorum
2.8.

CC ACT

AUDITORS ACT

1. Reportable irregularity
1.1. Five questions to ask to see if it is:
1.1.1. Committed by person responsible for Management ?
1.1.2. Is it an Unlawful Act or Omission ?
1.1.3. Does it result in Material Financial Loss ? ( if answer is no see Q4)
1.1.4. Is it fraud or theft ? ( if answer is no see Q5)
1.1.5. Is it a Material Breach of Fiduciary Duty ?
1.2. If BOTH question 1 and 2 , plus any one of 3-4-5 are yes , then IT MUST BE REPORTED TO THE IRBA
1.3. REPORTING TO IRBA:
1.3.1. When : 1st report is to be done “without delay”
1.3.2. Next : Report to Mngmnt within 3 days , then do a second report within 30 days to the IRBA again stating EITHER:
1.3.2.1. No reportable irregularity is taking place OR
1.3.2.2. It was stopped AND measure were taken to prevent & recover loss OR
1.3.2.3. The reportable irregularity is continuing
2.
Fairness
Accountability
Responsibility
Transparency
COMPANIES ACT:
May not be auditor:
1) Director.officer,employee of company
2) Director.officer,employee of company or of any company offering secretarial work to the company.
3) Partner, employee,employer of any director of the company
4) Person or partner or employee of regular bookkeeper/secretarial work of company.
5) At any time in fin year was a director or officer of company.
a) Unless : if habitually a bookkeeper/secretary:
i) Private company
ii) Shareholders agree writing
iii) In audutiors report
iv) No shares owned by public company
v) Auditor registered IRBA

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3939 | P a g e Auditing Notes AUDI 101

1) Rotation of auditors: 5 yrs , or if >2 yrs, then stop , then must wait further 5 years.
2) Removal of auditors:auditor appointed casually or by directors or first appointment – can be removed on 28 days notice ,before AGM
umless he suspects any reportable irregularities.,
a) BUT auditor normally appointed may not be removed exept at AGM by ¾ majority of those present
3) Right of access by auditor: at all times & may require explanations as he /she thinks necessary of directors& officers.BUT: audiror of
Holding company ONLY has access to old Financial Stat. of subsidiary , not books /records books and records or premises of company :
because he is not the auditor.But he may require explanations + REQUEST INFORMATION from the directors of the subsidiary company as
he deems necessary.
4) General Meetings of company for Auditors: auditor has right of access to ;
i) Attend all such meetings
ii) Receive all notices regarding such meetings
iii) Be heard at such meetings on any business of the meeting which CONCERNS HIM AS AUDITOR.
5) Auditors duties: report on all such matters said by act or any other acts.
a) Examine afs and gafs to be laid before AGM
b) Ensure proper acc. Records and returns received from branches not visited.
c) Minute books and attendance registers of meetings kept as requires by act
d) Register of directors interests in contracts have been kept.and entries agree with minutes of meetings.
e) Existence of securities
f) All info + explanations auditor deems necessary.
g) AFS in accordance acc. Records& returns
h) Gafs comply with act
i) Tests to Gafs &Afs fairly present
j) Directors report – conflict fair presentation / distort meaning of fin stats
k) Not carrying on business+ no intention= report to registrar
l) Comply any other duty imposed by act on him
m) Comply auditing profession act
6) ####ASSSOSIATION AGREEMENT :
a) To regulate the internal affairs of corporations
b) Voluntary
c) Binding on all new & present members
d) No constructive notice
e) Amendments & dissolutions in Writing & signed by members
f) May be amended & ddissolved
CC Act
1) Founding statement: basic document bring cc into being = memorandum of company but simpler
i) Name
ii) principle business
iii) postal + physical address
iv) full name + ID of each member
v) % of each members interest
vi) Contribution
vii) Accounting officers name& address
viii) Fin year end date.
2) Disposal deceased members interest:
a) Executor to heir if he qualifies(not mad)+ other members consent
b) If no consent in 28 days : he may sell it to
i) Corporation(cc)
ii) Any other remaining member
iii) Any other person who qualifies both ways as above.( if members disapprove then may purchase themselves)
3) Cession of membership by order of court: on application to
a) Incapable of performi9ng role eg unsound mind
b) Guilty of conduct prejudicial : eg reckless/negligence
c) Impractical to other members: eg such member never present
d) Other circumstances render just & equitable to cease to be eg acts in own interests detriment cc.
All For ‘not pull their weight’ , and also court decides on payment

PER EXAM SCOPE :JULY ONLY


1. Difference Between External & Internal Auditor : see the Q 5 on class answers to class quiz
2. Reportable irregularities :
2.1. Reportable irregularity
2.1.1. 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 IRBA
2.1.3. 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 OR
2.1.3.2.2. It was stopped AND measure were taken to prevent & recover loss OR
2.1.3.2.3. 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

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4040 | P a g e Auditing Notes AUDI 101
3.1.2. principle business
3.1.3. postal + physical address
3.1.4. full name + ID of each member
3.1.5. % of each members interest
3.1.6. Contribution
3.1.7. Accounting officers name& address
3.1.8. 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 engagement
So 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 future
5.2. Conflict of interest
5.3. Collusive & other irregularities
5.4. Professional status – professional obligations
5.5. Internal controls reduce risk of errors & irregularities
5.6. GAAP application results in fair statement fin stats
5.7. Fin data is verifiable
5.8. 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/responsible
7.1.1.2. Then audit must be –to express opinion if fairly presented
7.1.1.2.1. Free of restriction
7.1.1.2.2. Satify existence liabilities & assets
7.1.1.2.3. Proper accounting records at least 1 of official languages
7.1.1.2.4. All vouchers/docs /records in opinion auditor needed have been obtained
7.1.1.2.5. No reportable irregularities
7.1.1.2.6. Comply auditing pronouncements/ standards isa’s
7.1.1.2.7. Auditor complied all laws relevant to audit
7.1.1.2.8. 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 AGM
7.1.4. 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 act
7.1.6. Register of directors interests in contracts have been kept.and entries agree with minutes of meetings.
7.1.7. Existence of securities
7.1.8. All info + explanations auditor deems necessary.
7.1.9. AFS in accordance acc. Records& returns
7.1.10. Gafs comply with act
7.1.11. Tests to Gafs &Afs fairly present
7.1.12. Directors report – conflict fair presentation / distort meaning of fin stats
7.1.13. Not carrying on business+ no intention= report to registrar
7.1.14. Comply any other duty imposed by act on him
7.1.15. 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. Not allowed to be charged for assurance engagements
9.2. 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 co
12.3. MOI says directors& past directors personally liable for debts of company
12.4. All members :
12.4.1. NATURAL PERSONS(no juristic)
12.4.2. Punlic accountants & registered with IRBA
12.4.3. Directors
12.4.4. All directors ALSO members (both ways)
12.5. Or: partners all are OR sole proprietor = IRBA auditor& public acc
13. 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

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4141 | P a g e Auditing Notes AUDI 101
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 this
14.2. 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 present
15. 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 to
16.1.2. Board satisfied ;
16.1.2.1. Liquidity&solvency test
16.1.2.2. 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 liable
16.3. WRITTEN NOTICE : of any resolution to do this to : all shareholders(unless every one is a director) & ‘trade unions’ within 30 days of
adoption
16.3.1. 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 mnths
18.3. 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 AND
19.1.2. It will perform the functions of it for the subsidiary
19.2. Any vacancy to be filled in 40 bus.days
19.3. Each member MUST BE ;
19.3.1. Director
19.3.2. 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 year
19.4.2. 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’s
20.1.3. Comply SAICA
20.1.4. Comply ACT & laws & name all acts
20.1.5. Due care & professional sceptcism
20.1.6. Independent attitude
20.1.7. Report reportable irregularities
20.1.8. 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 :
21.1. Resposibility : assets& action of company & corrective action
21.2. Fairness : interests of all stakeholders
21.3. Accountability: justify decisions its to stakeholders
21.4. 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 notes
26. 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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4545 | P a g e Auditing Notes AUDI 101

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,mngmnt
2. 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 SYSTEM


1) 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-COMPUT
4) 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...) etc
2) 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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4646 | P a g e Auditing Notes AUDI 101

INTERNAL CONTROL
FOR THE BUSINESS
AS A WHOLE

OPERATIONS:
ECONOMY INTERNAL COMPLIANCE WITH
EFFICIENCY
EFFECTIVENESS FINANCIAL LAWS AND
CONTROL REGULATIONS

ACCOUNTING CONTROL
SYSTEM PROCEDURES

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 goods
2. A TRANSACTION PASSES THROUGH 4 STAGES:
i) Authorising
(1) Purchase order authorised by chief buyer
(2) Checking & approve supporting docs. For a payment to a creditor.
ii) Executing
(1) Order placed with supplier by the order clerk
(2) Preparing the cheque realisation and cheque (SEPARATE CUSTODY OF CHEQUE)
iii) Custody of Asset
(1) Goods rec. by receiving clerk & placed in store.
(2) Signing cheque (NB person who has signing power auto has SEPARATE HAS CUSTODY OF CASH)
iv) Recording
(1) Transactions entered into acc. records by acc. clerk.
(2) Recording payment in records & posting to ledgers.
3. MOST IMPORTANT DIVISION : 3 & 4 are the most 'incompatible'. 'Defalcation' is easiest if both are same ou. Esp:
SMALL BUSINESSES.
i) NEXT BEST is 2 & 3 & 4. :For the same reasons.
ii) 1 & 2 can be combined most easily : because if the others are segregated ,defalcation is likely to be identified.
iii) GOOD SEGREGATION : starts with divide the companies CYCLES into FUNCTIONS , then further segregate duties
within FUNCTIONS. ( each Function = Segregated duty./a New person and each cycle =
authorisation/executing/custody/recording)
4) Isolation of responsibility –
1. FULLY AWARE OF THEIR RESPONSIBILITIES : Internal controlsER must be .
2. ACCOUNTABLE FOR THEIR PERFORMANCE ; Internal controlsER must be .
3. Acknowledge in writing that they have peformed control procedure :IDENTIFY & ISOLATE employee responsible.
i) SIGNITURE fulfils 2 functions :(or fingerprint login)
(1) ISOLATE+IDENTIFY which person was responsible for delivery.
(2) ACKNOWLEDGEMENT of delivery.from supplier . to purchaser.
5) Custody / Access Controls.
1. ONLY to PROTECT COMPANIES ASSETS.( policies & procedures)
i) PHYSICAL & NON PHYSICAL ASSETS.Cash in Bank(only entry in book to show), Investments (only papers to show), Debtors
(only an entry in book to show).
ii) Custody/access controls designed to;
(1) Prevent damage to
(a) NON-PHYSICAL : Debtors get legal dont pay status from too long time wait to pay,with no court action.
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4747 | P a g e Auditing Notes AUDI 101
(b) Physical :
(2) Prevent deterioration of
(a) NON- PHYSICAL ASSETS eg: debtors get behind in payments.
(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

SUFFICIENT EVIDENCE:
1) SUFFICIENT means if QUANTITY of evidence is enough.
2) Evidence is Cumulative : eg debtors test = 1-debtors circularisation +2-test if debtors pay( very good evidence they exist!)
3) To calc. quantity of evidence needed =NO hard and fast way ,only :USE professional Judgement + statistical methods.This is done
as part of the "AUDIT PLAN" stage.

APPROPRIATE EVIDENCE.
1) APPROPRIATE means if QUALITY of evidence is enough. Further broken down into:
a) RELIABILITY (source & nature)
b) RELEVANCE (to assertion being tested)
r
2) RELIABILITY : Hierarchy of Reliability of Evidence:
a) Most Reliable =Developed by auditor : eg inspect stock.
b) Reasonably Reliable =Evidence from 3rd party(not client) if 1-Independant 2-Reputable 3-Competent eg attorney
c) Less Reliable = From 3rd party BUT passed through client. Eg: bank statement.
d) Less Reliable = Evidence from clients SYSTEM and where related controls it passed through were Effective
e) Least reliable = Evidence provided by client (lacks independance)
f) Written more reliable than oral.(easy denied)
g) Original documents More than Photocopies /facsimiles.
Also, REM these are guidelines, eg if competence +integrity of directors&employees are strong &acc.sys and internal controls are strong,
evidence from client could be very reliable.
Eg sheet to shelf = existance BUT shelf to sheet =completeness.
3) RELEVANCE :
a) Evidence MUST be MATCHED to assetion tested : eg; self stock count= 'existence'+some 'valuation' BUT not 'rights' eg could
be uncollected but sold .NOR 'completeness' yet eg must first be traced to records to determine if all were included in records.
b) Eg tests of controls as to accuracy will not prove validity or completeness.
c) A single procedure could be relevant to more than 1 assertion though.

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.

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4848 | P a g e Auditing Notes AUDI 101
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.

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 received
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

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 . .. .
:Disclosed
2.3. 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 ledger
3. 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 ledger
3.5. ACCURACY amounts disclosed in eg notes are not junk
3.6. 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:

TRANSACTION PRESENTATION
ASSERTION ACCOUNT BALANCES
EVENTS DISCLOSURE
1 COMPLETENESS # # #
2 OCCURRENCE # #
3 EXISTENCE #
4 ACCURACY # #
5 CUT OFF #
6 CLASSIFICATION (and for
Pres.& Disclosure : # #
UNDERSTANDABILITY)
7 RIGHTS and
# #
OBLIGATIONS
8 VALUATION and
ALLOCATION # #

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4949 | P a g e Auditing Notes AUDI 101
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)
1.1.2. 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&EVENT Occourence Completeness Accuracy Cut-Off Classify&Undrstd


S

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


BALNCES
Plant &Equipment All in bal.sheet All owned is Holds rights to reflected at
existed at time of included,none left ownership+2- appropriate amount
bal. sheet out. Encumberences incl
on ownership allocat.1Obsolete+
disclosed. 2-Depreciation
Note: when "presentation and disclosure ' is done for Sales transactions and above,it is far more complex for plant & equip(deprec)

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


DISCLO.

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 with
b. SUBSTANTIVE PROCEDURES. =to test if verify / substantiate 1-TRANSACTIONS 2-BALANCES

TESTS OF CONTROLS
1) CATEGORIES OF TESTS OF CONTROLS:
i) REPERFORMANCE : repeating 1-Wholly 2- In Part control procedures eg: reperform bank recon.
ii) INSPECTION : verify on docs. if contrl procedures did happen : eg: verify if transaction authorisation signiture is there.
iii) ENQUIRY; ask person CONCERNED with control procedure as to effective operation of.,NOT just accept mngmnts
word. Eg : find out who performs each procedure and what they do.
iv) OBSERVATION: watch process/procedure being performed eg:watch what a receiving clerk does when supplier delivers
goods.
2) Tests of Control are performed to obtain evidence of whether
i) Controls suitably Designed to
(1) PREVENT
(2) DETECT
(3) CORRECT material misstatements
ii) Operated effectively THROUGHOUT PERIOD AUDITED.

3) Good results reduce control risk and hence audit risk , then less time need spent on substantive tests.
4) LIMITATIONS OF : tests of controls:
a) Good when checked but not in the rest of the Fin. Year.
b) Inherent risk? ch7eg 1-only test some 2- subjectivity-auditor own method 3-
5) LIMITATIONS OF : internal controls:
i) Cost exceed benefit –limits capacity of int.controls.
ii) Directed at routine transactions. –miss non-routine eg sell copier.
iii) Human error. – eg: calc. discount after vat.
iv) Collusion- eg fraudulent paypacket- collude wage clerk,foreman,personell mngr.
v) Mngmnt Override /Abuse of responsibility over internal control.- eg mngr overrides stop on purchases for overdue acc.

49
5050 | P a g e Auditing Notes AUDI 101
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;
a) Tests Of Detail.
b) Analytical Procedures.(very powerful tool)
3) CATEGORIES OF SUBSTANTIVE PROCEDURES:
i) REPERFORMANCE : repeating 1-Wholly 2- In Part same procedures performed by client eg:debtors age analysis.
ii) INSPECTION : inspect 1-docs+records, or 2-tangible assets eg: inspect fixed asset to verify existence or inspect .
"Confirmation Of Balance Certificate" from long term loan creditor.
iii) ENQUIRY : 1-oral or 2-formal written : to inside or outside entity to get 1-Corroborative evidence or 2-Plain knowledgeable
person inside or outside entity.
iv) CONFIRMATION : procedure of obtain response to an enquiry to corroborate info. in the acc. records. knowledgeable person
inside or outside entity
v) RECALCULATION : check arithmatic on source docs & records. Eg: check depreciation calc.
vi) ANALYTICAL PROCEDURES : analysis of ratios + trends , then investigate inconsistent deviations .(statistics)
4) Substantive procedures are performed on
a) Balances Assertions= ; Existence, Completeness,Rights&Obligations,Valuation&Allocation.,
b) Transactions Assertions= ; Occourence,Completeness,Cut-off,Classification&Understandability,Accuracy
5) Financial stat. consist of only
a) Collection of balances - bal sheet
b) Summary of totals – inc.stat
6) VOUCHING AND VERIFYING:
a) Vouching: (To Vouch) TRANSACTIONS auditing.
b) Verifying : BALANCES auditing.
c) Example:
i) VOUCH – a sales transaction = inspect docs + enquire discounts + recalculate
ii) VERIFY – a debtors balance = confirmation in writing from debtors + enquiries as to calc. of prov.bad debts. +reperform aging
analysis of debtors.
7) DUAL PURPOSE TESTS : some tests can be a test of control and substantive test at same time eg: bank recon. Reperform = test of
control(recon is a control) and substantive test (bank balance).

AUDIT SAMPLING

DEFINITIONS:
1) From ISA 530 : 'audit sampling and other means of testing': gives definitions
2) AUDIT SAMPLING
a) application of PROCEDURES to LESS THAN 100% OF ITEMS in balance or class of transactions ,to EVALUATE AUDIT EVIDENCE
on the some characteristic of sample to form CONCLUSION ON POPULATION
3) ERROR:
a) 1-Test of Controls =Control deviations 2-Substantive testing= Misstatements OR
4) TOTAL ERROR :
a) 1-Rate of Deviations 2-Total Misstatement . AND
5) ANOMOLOUS ERROR:
a) ERROR FROM ISOLATED EVENT,not representative of population.
6) POPULATION :
a) Total set of data from which samples are selected.eg all items in an account balance or class of transactions.
7) SAMPLING RISK:
a) RISK THAT the auditors conclusion is not true for total population because sample is not representative of the total
population .(Sample could be selected by stat or non-stat approach-any).There are 2 types of Auditing Risk:
i) Risk 1-tests of control =auditor judges them to be more effective than they actually are. 2- Tests of Detail- error exists where it
does not : this type 1-AFFECTS AUDIT EFFICIENCY :causes more work for auditor to establish that initial conclusions were
incorredt.
ii) Risk 2-tests of control = auditor judges them to be less effective than they actually are. 2- Tests of Detail- error does NOT exist
where it does. : This type2-AFFECTS AUDIT EFFECTIVENESS : more likely to lead to an inappropriate audit opinion than assesing
risk to be higher than it is..
8) NON-SAMPLING RISK : risk of
a) apply sampling plan incorrectly, or
b) used inappropriate procedure
c) misunderstood results of sampling exercise.
9) SAMPLING UNIT.
a) :INDIVIDUAL ITEMS making up a population eg: cheques listed on deposit slips/credit entries on bank statements.
10) STATISTICAL SAMPLING :
a) any approach that has following characteristics or it is non-statistical.
i) Random selection of a sample.
ii) Use of probability theory -to evaluate sample results (INCL.MEASUREMENT OF SAMPLING RISK.)
11) STRATIFICATION :
a) DIVIDING a population into sub-populations each with similar characteristics eg : debtors balance >1000.

INTRO.
1. Only some items all are tested eg:loans to directors,but mostly sampling is used due to Resource & Time efficients.

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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 procedure
2) Determine procedure
3) Confirm population is appropriate & complete
4) Define units
5) Get sample size
6) Select sample
7) Perform audit procedure
8) Analyse nature & cause of errors
9) Project results over population
10) Evaluate
11)

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5252 | P a g e Auditing Notes AUDI 101

CHAPTER 6 : AN OVERVIEW OF THE AUDIT


PROCESS.
KNOW/LEARN WHOLE CHAPTER PER LECTURER :
STAGES OF THE AUDIT PROCESS: (KNOW WHOLE CHAPTER PER LECTURER )
STAGE 1 : PRELIMINARY ENGAGEMENT ACTIVITIES:
i) ESTABLISH/CONTINUE : Performing Procedures to decide whether to Establish/Continue a Relationship.
ii) CAPACITY :Establish if auditor has the Capacity / Resources / if Client can be appropriately serviced or not.
iii) ETHICAL :Evaluate if Firm can comply with ethical requirements. Eg independance
iv) 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 stage
2- 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.)

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 = ISA210 -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:


REASONS WHY AUDIT FIRM MAY NOT WISH TO START RELATIONSHIP.
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

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4. Audit Fees payment /if they will pay fair fees or not.
5. Client Impose Limitations On Audit. Eg restrict access to information.
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.
(ii) Same as above exactly.

(2) COMPLIANCE WITH STANDARDS: ISA 220 R +ISQCI STIPULATE :


(a) INTEGRITY:
(i) ESTABLISH/CONTINUE :Performing Procedures to decide whether to Establish/Continue a
RelationshiISA220R etc : of key management,principle owners, those charged with governance.
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.
6. Reasons For Change Of Auditors.; if suspect reasons

(b) CAPACITY :ESTABLISH IF AUDITOR HAS THE CAPACITY / RESOURCES / IF CLIENT CAN BE APPROPRIATELY SERVICED OR NOT.
(i) Technical Skills -competence in firm or access to other auditors or experts who do have the skills.
(ii) Resources : -Staff,computers etc.
(iii) Time. – Necessary to complete within deadline.
(iv) Personnel needed to perform quality control reviews.

(c) ETHICAL :Evaluate if Firm can comply with ethical requirements. Eg independance
(i) Conflicts of interest : eg both offer same services to same market.
(ii) Threats to independance :of team,auditor,experts /or if adequate safeguards possible to stop threats.
(iii) Any other situations ; possible contraventions of Code of Professional Conduct.
(d) TERMS OF ENGAGEMENT
(i) This is formalising terms of engagement into an engagement letter, and having it signed.
(ii) Audit commitee of client must understand terms exactly
1. '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)
(iii) ISA 210 –auditor right to decide , but client must agree to how audit will be conducted.
(iv) The 'Letter of Engagement' should contain reference to:
1. Objective :Implied or Stated :ie to express an opinion on the fin.stats.
2. Managements Responsibilities
a. Preparation of Fin.Stats : plus refer to basis of preparation ie: IFRS. international fin.reporting
standards.
b. Accounting Records Maintenance of.
c. Accounting Policies selecting
d. Safeguarding Assets.
e. Internal controls.
3. Scope of Engagement + refer to laws etc eg:ISA's.: outline of what is to be done.
4. The Form of Reports : that will be produced.
5. Inherent limitations , risk not detecting misstatements : sampling methods +internal controls
6. Auditors Independance : auditor chooses tests + must be given access to all info needed.
7. Managements duty prevent illegal acts + auditors duty : Reportable Irregularities to Gov.
8. Written confirmation of oral representations by client: auditor expects this from client.
9. Weakness in internal control will be brought to mngmnts attention.
10. Other parties Involvement : experts, previous auditor, other auditors,internal audit.
11. 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
12. Name of Auditor responsible : not just the firm, but person himself responsible.
13. Performance Arrangements : Stockcount dates, meetings dates to be held.
14. Any Audit Deadlines.
15. Fee's : basis of computation and invoicing arrangements.
16. Must sign letter.

(3) P ROCEDURES TO GATHER PRELIMINARY ENGAGEMENT INFO .


(i) Relationships to team/auditors : enquiry if any family etc.relationships exist(regular written from staff)
(ii) 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
(iii) Outside Inquiry/ : of firms bankers,legal council,etc (permission must be sought first)
(iv) Observation & Inspection :of operations etc. and also of :
(v) Observation & Inspection: of Public Documents or made available : by client eg: group reports.
(vi) Other Audit Procedures :Database searches : eg. internet
(vii) Other Audit Procedures :Previous Auditor : communicate with , in compliance with code of Professional
Conduct.

(II) STAGE 2 : PLANNING:

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1) INTRODUCTION:
a) ISA 300R "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
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 assembled
iv) Supervision +Review : and proper review of their work ,of audit team , facilitated
v) On time : completion of work planned

1) AUDIT STRATEGY :E STABLISH AN OVERALL AUDIT STRATEGY.


a) Audit Strategy sets the (below): of the audit and GUIDES THE DEVELOPMENT of the audit plan.
i) SCOPE- eg:if it is maybe a statutory audit , or maybe JSE listed company , so securities exchange commission
requirements to be adhered to.
(1) fin. Reporting standards pertaining to type of audit
(2) audit coverage: eg inventory locations,divisions.
(3) invovement of other auditors
(4) any specialised knowledge need
(5) auditors reliance on any internal auditors work, + availability of
(6) computer auditing effect on audit –data etc.
ii) TIMING- :- reporting deadlines
(1) companies Year End /interim reporting schedule
(2) Meetings
(3) timing +types of Reports
(4) timing of types of Reports From Other Experts
(5) Visits timeing
(6) Computer Audit Visits timing
iii) DIRECTION –eg : Material account headings, Materiality levels, Risk factors.
(1) Materiality levels
(2) Significant Risks
(3) Fin Statement Level impact of risks eg assign more experienced staff.
(4) Internal Control Soundness
(5) Volume of transactions
(6) Significant Industry Changes eg management, laws, IT etc.
b) CHECK RESOURCES NEEDED : staff- experience,+management of eg :meetings, quality control reviews,evaluations etc.
2) AUDIT PLAN :develop one. To plan the team must first do following 3 things:
i) OBTAIN UNDERSTANDING :OF ENTITY AND ENVIRONMENT INCL. INTERNAL CONTROL.
(1) eg check if there is a risk of directors overstating stock, and of internal controls to determine no. of samples
to take ,one cannot do planning without first study Entity.
ii) MATERIAL MISTATEMENT :ASSESS RISK OF IN THE FINANCIAL STATEMENTS.
iii) MATERIALITY :decide what is material, and what is not .
a) The audit plan is far more detailed than audit strategy
b) AUDIT PLAN MUST CONTAIN:
i) Planned Procedures :Risk Assesment:
(1) NATURE 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) Planned (Audit) Procedures : At Assertion Level : to respond to the risk identified above.
(1) NATURE of Procedures : for each MATERIAL CLASS of Account Balance, &Transactions, &Disclosure.
(2) TIMING of Procedures : for each MATERIAL CLASS of Account Balance, &Transactions, &Disclosure.
(3) EXTENT of Procedures : for each MATERIAL CLASS of Account Balance, &Transactions, &Disclosure.
iii) Plus Any Other Procedures Needed: to comply with ISA’s
c) DOCUMENTATION: ALL AUDIT PLAN + AUDIT STRATEGY MUST BE DOCUMENTED FOR:
i) REFERENCE FOR TEAM
ii) PROOF OF PROPER PLANNING BY TEAM
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 sales

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ii) Auditors Toolbox : this is where he uses it, ie; 1-substantive tests 2- tests of controls, both done by:
(1) Inspection : check records /assets etc
(2) Observation : watch internal controls
(3) Inquiry and Confirmation : ask receiving clerk about controls, debtors circulation
(4) Recalculation: : eg discounts on sales invoices
(5) Analytical Procedures : check ratios+stats etc
(6) Reperformance : eg reperform year –end bank recon.

c) RESPOND TO SIGNIFICANT RISKS : By carrying out Tests Of Controls +Substantive Tests Tests (to gather
sufficient evidence to reduce risk to an acceptable level.) eg check for laws and regulations etc.j

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

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 for
ii) Adverse
iii) Disclaimer
iv) 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 audit
1.2. Auditors understanding of accounting system & controls
1.3. Internal audit : assessment of work of
1.4. Inherent & control risk assessments & revisions thereof
1.5. Evidence work of assistance – when it was performed & that was supervised
1.6. Evidence of nature timing extent of audit procedures performed & identify items tested +results of test.
1.7. Evidence of WHO performed these procedures & when
1.8. Procedures on work of other auditors on related fin stats ( eg subsidiary)
1.9. Analysis of transactions
1.10. Analysis of significant trends & ratios
1.11.
2. Legal & organizational structure
3. Info on economic & legislative & industry ENVIRONMENT
4. Copies of important minutes, agreements & legal documents
5. Copies of financial statements
6. Copies of auditors report
7. Copies of all communications with experts, 3rd parties , other auditors
8. Copies of letters , notes to Entity incl. terms of engagement discussions, weaknesses in internal control etc.
9. Letters of representation – from the entity
10. Conclusions reached by auditor on : significant aspects of audit , esp exceptions & unusual matters were resolved & treated

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CHAPTER 7: IMPORTANT ELEMENTS OF THE


AUDIT PROCESS.
UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT:
INTRO:
NBLEARN
a) 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….

DEFINITIONS: AS PER ISA 315


NB
a) 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.
b) Significant risk : A risk of Material Misstatement that in the auditors judgement , is one that requires Special Audit
Consideration
c) Audit risk – risk that an auditor gives an inappropriate conclusion when there is a material misstatement , so if
he says there is no material miststement when there actually is one.
d) 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.
e) 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.
f) MATERIAL WEAKNESS: A weakness In Internal Control that could have a Material Effect on the Financial Statements.

RISK ASSESSMENT PROCEDURES


NB
1) RISK ASSESSMENT PROCEDURES (5) :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.

a) ENQUIRY: :I.T.(i.t.), legal personell(fraud,contracts interpretation),sales personnel(sales),production


b) Inspection : check records /assets etc
c) Observation : watch internal controls/ mnftring operation
d) ANALYTICAL PROCEDURES : ratio & trend,unusual, prior years etc
e) Recalculation
f) Reperformance
g) OTHER AUDIT PROCEDURES :trade journals,internet,lawyers,bankers,
h) PREVIOUS AUDITORS

2) Remember though : When using auditors toolbox – substantive tests + tests of controls :same type procedures used

3) And for doing only ‘Preliminary Evaluation’ it is:


(viii) Relationships to team/auditors : enquiry if any family etc.relationships exist(regular written from staff)
(ix) Inquiry : of firms bankers,legal council,etc (permission must be sought)
(x) Observation & Inspection :of operations etc. and also of :
1. Observation & Inspection: of Public Documents or made available : by client eg: group reports.
(xi) Other Audit Procedures :
1. Other Audit Procedures :Previous Auditor : communicate with , in compliance with code of Professional
Conduct.
2. Other Audit Procedures :Database searches : eg. internet.
4) Discussion

THE ENTITY AND ITS ENVIRONMENT.


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 Entity
e) 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
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5757 | P a g e Auditing Notes AUDI 101
(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 not
ii) 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 company.
(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


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 : THE CONTROL ENVIRONMENT


Sets the tone of organization and influences control consciousness of staff,positive audit risk factor if good,fraud les

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

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(vii) Good HR policies : Training & development , Compensation fair & benefits ,get competent ethical staff.

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 : 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 which
3) Auditor ONLY concerned with those ones where MATERIAL MISSTATEMENT likely. EG:
a) Authorisation of transactions
b) Segregation of duties
c) Physical control over assets
d) Comparison + reconciliation
e) Access controls
f) Custody controls over eg: blank cheques
g) Good document design etc etc etc

COMPONENT : 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 reviews
ii) Weekly IT manager srutinises logs+exeption reports
iii) Telesales manager replays recordings check procedure
3) Info. Is Gathered on this by
a) Inspection :Documents on ‘monitoring activities’ /’performance reviews’.
b) Discussion :Internal auditors discuss with

COMPONENT: 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 + Disclosures
v) 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
(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 - disruption
ii) 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

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(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
NB
1) Definition; ISA315 :risks that require : Special audit consideration
2) Classed as: low medium high , or specific or pervasive , increased or decreased
3) 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/unbundling
4. Related : parties , significant transactions with –to do with risk- eg: inter-company transactions
5. Estimation :/ Subjectivity/ High degree: in measurement of fin. Info. –to do with risk-estimate provision bad debts.
6. Outside Normal Operations :/unusual Transactions –to do with risk-eg: BEE transactions
2) Auditors Response to:
1. Experienced staff
2. 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 THOSE CHARGED WITH GOVERNANCE AND


MANAGEMENT.
1) Auditor MUST : ASAP inform management or governance personell of material weaknesses in Internal controls and Risk
assessment process.

DOCUMENTATION:
Auditor MUST document his all work .

THE CONCEPT OF MATERIALITY.


NB
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 :
a) If omission or misstatement could affect users decisions
b) Size of item judged from particular circumstances.
c) Threshold or cut-off point rather than a qualitative characteristic - to be useful.

PLANNING MATERIALITY AND FINAL MATERIALITY


1) ISA320 says Auditor must consider materiality at 2 places:
a) PLANNING STAGE:when determining nature,extent + timing of testing (planning materiality)
b) FINAL STAGE :when evaluating the effect of any misstatement (final materiality)

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.

PLANNING MATERIALITY
EACH AUDIT FIRM USES ITS OWN TYPE OF MATERIALITY PLANNING: EITHER
ONE OF THE FOLLOWING:
a) GENERAL WAY In a: just take the biggest money accounts, less for smaller money accounts.
b) PERCENTAGE AS a % : of account balances
c) FORMULA use a.

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SETTING PLANNING MATERIALITY LEVELS :
a) The Plannning materiality level is INVERSE to audit risk) : ie Low Materiality Level =1% High Materiality level = 10 % so if level
is high , risk is low and visa-versa.

PLANNING FOR QUALITATIVE ASSESSMENT:


a) After studying firm you get an idea of disclosures to look out for and plan accordingly.eg:litigation,licences

THE 4 FACTORS TO BE CONSIDERED WHEN QUANTIFYING PLANNING MATERIALITY


a) USE OF PRESET GUIDELINES: eg % or formulas
b) SPECIFIC INFORMATION : its importance to users (special additional info. Eg conditions of loans)
c) LEGAL REQUIREMENTS : eg special figures for JSE must be carefully audited
d) PRELIMINARY /FINAL FIGURES : if clients final figures differ a lot, materiality might have to be adjusted a bit

FINAL MATERIALITY
THE AUDITOR MUST DO THE FOLLOWING TO MAKE A FINAL MATERIALITY
DECISION:.
i) ANALYSE AND Project :the errors in sample over population specified
ii) DECIDE IF FURTHER TESTS :should be carried out or whether client should be asked to check the population in detail for
further errors.
iii) DISCUSS WITH CLIENT MNGMNT :all misstatements in detail with management in order to attempt to have them
rectified .If client does NOT correct them , it could be for following reasons: (then auditor will have to qualify his report IF it is
material )
(1) Disagree with Auditor : eg eg client says stock is not obsolete, or something is not a financial lease per IAS 17 so
not to be capitalized etc.
(2) Do not regard as Material : client says it would not influence a user
(3) Directors Crooking the Books : eg want some ratio, so get stubborn
(4) Regard it as ‘too much hassle’ to make changes. : all the fin stats
(5) Do not care if Fin Stats. Are Qualified. :stuff you

FACTORS TO BE CONSIDERED IN EVALUATING UNRESOLVED AUDIT DIFFERENCES


i) Known errors and likely errors : known = sales invoices wrong period(strong ground) Likely= provision bad debts(weak
ground for auditor)
ii) Misstatements should not be considered in isolation: seek patterns
iii) Statutory and other contractual obligations :eg directors emoluments,contractual obligation need keep fixed ratio
iv) Nature of the misstatement.: eg: IFRS standards important, misallocate expense less, director cheat more,
v) Impact of the misstatement: Specificly on Popular figures & ratios eg :EPS (earnings per share)
vi) The absolute and relative size of the misstatement.: if 1 milllion is Relatively – unimportant , But Absolutely – just too
much , then auditor takes action anyway.
Basicly , to overlook some misstatement because client will be unhappy is Unprofessional.

CONCLUSION
1) No magic formula, takes years of experience , confidence grows as experience increases.

AUDIT RISK.
INTRO:
1) As per International Framework for Assurance Engagements :assuance engagement
a) Definition: (AUDIT) RISK is “ the risk that the practitioner expresses an INAPPROPRIATE CONCLUSION when the subject
matter info. is MATERIALLY MISSTATED ”.
2) As per ISA200 :
a) Definition: (AUDIT) RISK is “ the risk that the practitioner expresses an INAPPROPRIATE CONCLUSION when the subject
matter info. is MATERIALLY MISSTATED in the FINANCIAL STATEMENTS ”.
3) So it is just the risk the auditor gives an UNQUALIFIED OPINION if he should have given a QUALIFIED OPINION.

THE RISK BASED APPROACH TO AUDITING


The 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
.

THE COMPONENTS OF AUDIT RISK:


NB
1) Per ISA 200 audit risk has 3 components

1 -INHERENT RISK :
1) Is NOT controllable by auditor
1) Built in risk eg: complex transaction calc’s MORE than simple transaction calc’s, or jewelry value more than
cricket bat value.

2- CONTROL RISK
2) Is NOT controllable by auditor

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1) If Internal controls do not do their job properly. Due to :1-Good=Costly ,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
3) Is controllable by auditor – if inherent + control risk is high , he must increase experience staff,or no. of samples, etc,
to reduce detection risk.
4) May arise because 3 reasons: auditor
a) Selects :an Inappropriate audit Procedure
b) Misapplies :an Appropriate procedure
c) Misinterprets :results of a test

RISK AT FINANCIAL STATEMENT LEVEL AND AT ASSERTION LEVEL:


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

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 staff
b) Supervision More
c) Professional skepticism Emphasise team
d) Surprise visits : add more unpredictability elements –
e) Change Audit : make plan different to in past

ASSERTION LEVEL:
1) Possible reasons:
a) Account Type : eg involve high degree of estimation: stock count fresh vegetables,or provision bad debts
b) Complex Transactions : eg sale &leaseback , contract accounting
c) Estimation /Judgement Involved : bad debts provision
d) Asset Vulnerability : eg cash
e) Near Year End :of fin period.Unusual OR Complex transactions : to manipulate transactions.
f) Non-Routine/Unusual Transactions: sale of old assets
g) 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. 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

ASSESSMENT OF AUDIT RISK


1) The more checking up it takes for something , the higher the misstatement risk and thus higher AUDIT RISK.
2) Eg: a leased asset attracts more risk of misstatement than a bought item because there is more checking up to be
done: assertion : valuation(more) + rights(more) + existence (easy) .If you add incompetent financial manager,then the risk
is even higher.

LEVELS OF RISK
1) TYPES OF LEVELS:
a) ISA’s only give ‘significant’ Definition; ISA315 :risks that require : Special audit consideration
b) Some audit firms have : high,medium,low
c) Some have :pervasive
d) Some have increased or decreased

2) Must have some or all of Following Characteristics:


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.

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3. Complex :transactions From–to do with risk-merger/acquisition/unbundling
4. Related : parties , significant transactions with –to do with risk- eg: inter-company transactions
5. Estimation :/ Subjectivity/ High degree: in measurement of fin. Info. –to do with risk-estimate provision bad debts.
6. Outside Normal Operations :/unusual Transactions –to do with risk-eg: BEE transactions

2) Auditors Response to:


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

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) Consider fraud when identifying and assessing risk of material misstatement
(2) Respond to assessed,identified, or suspected risk.

DEFINITIONS (LECTURER SAYS KNOW THESE WELL)


NB
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 3
3) FRAUD RISK FACTORS : Events or Conditions that show an Incentive, or Pressure or provide Opportunity to commit fraud. 2/5
4) 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.
6) 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)
NB
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 lecturer
iv) 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.

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7) 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 company
d) 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:
NB
1) Responsibility for the 1- Prevention 2-Detection of fraud lies with those charged with 1-governance 2- management
2) Strong control environment – responsibility also rests with those charged with 1-governance 2- management .
3) Management responsible for Concious assessment of of risk of fin stats materially misstated.

RESPOSIBILITY OF THE AUDITOR


NB
Where does that leave the auditor?
1) Professional Scepticism {even mngmnt with integrity can be tempted to fiddle fin stats to meet group performance targets}
2) Audit Team { auditor must make team aware of duty to watch out for fraud}
3) Other Information:

a) 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.
(1)
b) Make Inquiries: management,internal audit,others eg legal council,hr mngr,operational personnel –if any fraud/suspected
c) Governance : obtain an understanding of how those charged with governance exercise their responsibility by:
i) Attend meetings at which such matters are addressed.
ii) Read minutes of those meetings.
iii) Enquiry of Governance people.

d) Analytical procedures : unusual or unexpected relationships eg unusual fluctuations in gross profit percentage.
e) Other sources: eg: from previous audit engagement at client
f) Fraud Risk Factors : if any are present from assessing Entity and Environment.
4) Financial statement & Assertion level : Identify and Assess Risk of Material Misstatement due to FRAUD at level of
5) Financial Statement and Assertion level :determine Audit Response

RESPONSES TO THE RISK OF MATERIAL MISSTATEMENT DUE TO FRAUD


(DO LEARN THIS AS PER LECTURER)
NB
AT FINANCIAL STATEMENT LEVEL:
1. Assign appropriate staff:
1.1. Strongly Independent /Strong Willed
1.2. Competent
1.3. Experienced
1.4. 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:
1. Nature ,timing ,extent :consider of tests to minimize risk of misstatement in assertions
2. Nature ,timing ,extent ;
2.1. Remember difficult to detect concealed things
2.2. 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)

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6464 | P a g e Auditing Notes AUDI 101
MANAGEMENT OVERRIDE:
CHARACTERISTICS OF FRAUDULENT JOURNAL ENTRIES:
1.1. Unusual Accounts :entries made to unusual,unrelated,or seldom used acc’s
1.1.1. 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 descriptions
1.4. 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 initial assessment of risk of misstatement again ISA 240 (redrafted gives
lengthy list of circumstances to consider:eg
1.1. Acc records discrepencies :non-timeous recons, unauthorized trasactions eg travel expense,unneeded
access to records possible by eg foreman,tips /complaints
1.2. Conflicting evidence : unexplained recon items,unusual ratios eg commission up but sales
same,implausible explanations from employees,excessive charges /payments to eg lawyers/suppliers
1.3. Missing evidence missing purchase orders,
1.4. Management-auditor : Problematic or unusual relationships between auditor and : deny access to
records,overd:one time pressures,intimidation of team,unwillingness to allow (reasonable)CAATS.etc
2. Consider if un- fraud- like misstatements could be intentional ,esp. if their effect on fin. Stats. Is very significant.

MANAGEMENT REPRESENTATIONS:
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.

1. Auditor must get written confirmation from management that:


1.1. Fraud Internal controls: Mngmnt responisible for design+implement Internal controls to prevent & detect
fraud
1.2. 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-mngmnt
1.4. Suspected fraud : mngmnt has disclosed to auditor SUSPECTED fraud , esp communicated by others eg:
employees,analysts,regulators.
2.

FRAUD RISK FACTORS (DO LEARN)


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

FRAUDULENT FINANCIAL REPORTING:


INCENTIVES/PRESSURES
1. PROFITABITLTY /FINANCIAL STABILITY : threatened by economic,industry operating conditions
1.1. Competition so declining margins
1.2. High Vulnerability to Change :rapid change eg interest rates, technology,eg electronics companies.
1.3. Operating losses : threaten going concern
1.4. 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 influence
2.2. 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.

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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 firm
3.3. 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.

OPPORTUNITIES
1. NATURE OF INDUSTRY/OPERATIONS:

1.1. Non-Same auditor Related Party transactions :significant transactions inter-group


1.2. 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 company
3.2. 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.

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
determining
3. History of law/fraud allegations: any regulations or fraud eg insider trading
4. Share price/earnings trend :Excessive interest by mangmnt in increasing /maintaining entitys share price/earnings
trend
5. Tax :Interest by mngmnt in unappropriate means to minimize reported earnings for tax : eg understating sales.
6. Personal/business transactions : No interest in differentiating eg: takes holidays & charges company.

FRAUD RISK FACTORS RELATING TO MISSTATEMENTS RESULTING FROM


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

OPPORTUNITIES
1. NATURE:
1.1. Cash : large amounts on hand
1.2. Inventory characteristics : eg small size high value –jewelry
1.3. Assets :Easily convertible : eg bearer bonds /diamonds
1.4. Assets: Characteristics : small, marketable,lacks ID ,eg power tools

2. INTERNAL CONTROL:
2.1. Inadequate segregation of duties
2.2. Lack of management supervision : eg goods into /out stores with no supervision.
2.3. Poor personell practices : screening for sensitive jobs (incl. storeman)
2.4. Recons: inadequate record keeping for the coming recon of assets, or asset recon itself inadequate.
2.5. Lack proper purchases authorization.
2.6. Physical safeguards : poor over assets
2.7. Timely and appropriate documentation for transactions: lack of eg: let customers take goods but do
paperwork later.
2.8. Mandatory vacations employees in key control positions: they normally do not want to take a holiday
because they cannot cover up in that time.
2.9. Senior management expenditures: inadequate authorization,review and control eg: travel claims.
2.10. IT personel ‘do what they want’ : esp. if Mngmnt has inadequate understanding of IT: IT personell might
change debtors balances in masterfile.

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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.

COMMUNICATION WITH MANAGEMENT AND THOSE CHARGED WITH


GOVERNANCE (NOT LEARN)
1) Matters for auditor to consider when identifies misstatement resulting from fraud:
a) Confidentiality- it is inappropriate to simply inform all and sundry about it, ie SARS,creditor,trade union.
b) Management fraud : should always be reported 1 level higher,(+to section chief eg: to fin or other manager
if needed) than suspect eg paymaster to financial manager, financial manager to audit comitee/chairman (those
charged with governance)If this is not successful it may be necessary to report to IRBA as reportable irregularity.
c) Absolute evidence of fraud is not needed but at least sufficient appropriate evidence befor e wild
accusations.
d) Entire matter should be documented
e) As per Auditing Professionact: to be a “reportable irregularity” the auditor only needs “reason to believe”, not
absolute evidence.
2) Parties to whom auditor must communicate fraud
a) Mangement : +1 level above suspect.
b) Those charged with governance: Audit committees + {BoD is the ultimate level charged with
governance}. + And Audit committees (law says public companies must have one) Folowing matters MUST be
reported to these ?2?:
i) INTERNAL CONTROL MATERIAL WEAKNESS (mngmnt is not doing their job)
ii) Questions regarding mngmnt integrity
iii) Mngmnt fraud
iv) Other fraud resulting in material misstatement of fin. Stats.
c) Regulatory and enforcement authorities:
i) Confidentiality stops auditor from reporting to 3rd party exept:
(1) To IRBA as per Act(law)
(2) Court or statute requires certain disclosure
(3) Client gives permission
d) Proposed successor auditor:
i) If permission not granted by client to discuss with proposed new auditor then old may not discuss with new
auditor ,but he must say permission has not been granted.

FRAUD AND RETENTION OF CLIENTS (DO LEARN)


NB
1) It is NOT in best interests of Firm& Auditing Profession to retain clients where fraud is a frequent occourance.Particularly if mngmnt do
not take decisive action to eradicate fraudulent practices.
2) There is a high audit risk there .
3) If Resigning for ANY reason, per Companies act, must deliver to COMPANY + REGISTRAR written NOTIFICATION in the
PRESCRIBED FORMAT that he has NO REASON TO BELIEVE that a REPORTABLE IRREGULARITY ,HAS , or ,IS ABOUT TO ,
take place,other than which has already been reported to the IRBA (independent regulatory board for auditors) BEFORE
RESIGNING.
4) It should not be an option to resign from an audit before it is complete, just to get out of a time consuming or lengthy situation,
overriding duty,professional manner,honesty,integrity,fulfil audit.

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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 hardware,software,and 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) 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:


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 aspescts 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: Easy since only 1 dept to control access etc. to.
(iii) Batch Control System: system of controlling physical movement of data (eg invoices,wage cards,printouts
output) to and from user Depts.

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) 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.
(ii) Facilities and data risk spread : hardware + data access by many more depts. widened this risk too.

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.

NETWORKED SYSTEMS
(a) Definition: number of pc s linked together by data cable, each has own powerful processing capabiliteies, but can
share networked computers data and processing power.
(b) Characteristics:
(i) Power: 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 neede so a high level of knowledge is needed to run it.

USE OF OUTSIDE SERVICE PROVIDERS


(a) Similar to a centralized IT dept. but run by another firm.Very common example is a ‘computer bureau”Information can
be delivered /collected in hardcopy or magnetic tape or electronicly.
(b) 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..

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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.

A
(2) a

INTERNAL CONTROL IN COMPUTERISED ACCOUNTING SYSTEMS


1) The 7 (+1 = controls monitoring,review,development) characteristics of good internal control as applying to computer
environment:
i) THE CONTROL ENVIRONMENT :
(1) increases the need :Intoduction 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: record of who accesed 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) 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 signitures,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.

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 an irregularities
(a) 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) 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.
(6) Uniform processing of transactions : if error in program, all transactions will be wrong eg: extra vat calculated
etc.
(7) Potential for increased mngmnt supervision: appropriate software – eg sales reports,analyses, expense
fluctuations,stock movement reports.

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.
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3) Definition: Application Controls :relevant to a specific task within the accounting system eg wage cycle, purchases cycle,

CATEGORIES OF GENERAL CONTROLS


1) Control environment and security policy
2) Organizational structure and personnel practices
3) Standards and standard operating procedures
4) System development controls
5) Program change controls
6) Continuity of operations
7) Access controls
8) Documentation.

CONTROL ENVIRONMENT AND SECURITY POLICY:


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 control
c) Mngmnt style : that promotes good controls.
d) Organizational structure : that promotes to good controls.

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 PRACTICES


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

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.

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4)

BoD
Board of Directors

Steering Commitee

IT Manager

Application
Technical Help Desk
Development and Security
Administrators /Operations
Programming

5) APPLICATION DEVELOPMENT AND PROGRAMMING. :


a) Business system analysts
b) programmers
6) TECHNICAL /ADMINISTRATION
a) Db admin
b) OS admin (and hardware)
c) Network admin
7) HELP DESK/OPERATIONS 1st tier questions ,backups, refer 2nd tier questions
8) SECURITY access,logs follow up,passwords issue.

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


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 .

STANDARD OPERATING PROCEDURES:


(3) 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 NB
3) For a new system eg payroll or internet shop, new hardware,software,OS,procedures etc must be got
4) RISKS:
i) Costs get out of control
ii) Sytem design end up does NOT suit user at end.
iii) Errors,bugs
iv) Business analyst incorrectly implements accounting procedures etc
v) Not enough controls implemented- users access too easy etc.
vi) No-one knows how to use it
vii) Transfer info old to new system causes errors.

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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 commitee
iv) USER REQUIREMENTS : business analyst + auditors consult(int +ext) + mngmnt of depts. sign off approval
v) SYSTEMS SPECIFICATIONS AND PROGRAMMING : specifications documented + programming by international
standards –flow chart etc.
vi) TESTING : debugging, test data run, integration other programs, if users happy
vii) FINAL APPROVAL : test results approved by all involved, + final all users-mngmnt-IT-internal audit approval
viii) 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 OR
3. shut down old start new
(iv) PREPARATION AND ENTRY:
1. File comparison – old to new data +resolve discrepencies
2. 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.
x) 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”
(a) Similar standards as for 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.

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: only for the software : programs & procedures to satisfy users for 1 task eg: payroll
(2) Suggested framework for application controls: = 10 KEYWORDS:
(a) Masterfile Amendments
(b) Input , Processing ,Output
(c) VAC: Validity Accuracy, Completeness.
(d) Prevention, Detection, Correction.
(3) When input/output/ processing is more real time than segregated(tech), we
(a) More access+programmed controls , less manual controls
(b) More Preventative , less than detective+corrective.

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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
(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

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(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 docs
2. Authorization of transactions
(ii) ACCURACY :
1. Source doc design
2. Independent checks
3. Batch
(iii) COMPLETENESS:
1. Independent checks
2. Batch
(b) Step 2:ENTER SOURCE Data Via Keyboard
(i) VALIDITY:
1. Access to application specific Program module
2. Batch
(ii) ACCURACY :
1. Screen Aids
2. Batch
3. Program checks
(iii) COMPLETENESS:
1. Screen Aids
2. Batch
3. Program checks (all same as above one!)
(2) ON-LINE INPUT
(i) VALIDITY:
1. Access to application specific program module
2. Program Checks
(ii) ACCURACY:
1. Screen aids
2. Program checks
(iii) COMPLETENESS:
1. Screen aids
2. 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

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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
(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 amounts
2. Hash Totals : totals of any numeric field eg: invoice number
3. 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 31/07/2008
2. Control totals for batch : see (i) above
3. Transaction Type : eg invoices
4. 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 totals
5. 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 access
4. Time of day

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5. 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 VER Y NB
(i) CONTROLS BUILT INTO the software, this list is not exhaustive :
1. Alpha –numeric – if letter or number
2. Range checks –min AND max
3. Limit checks – min OR max
4. Limit test after processing – not on entry
5. Check digit – extra digit on end of field, formula checks if field generates it,no db
6. Size checks – field too many characters
7. Missing data checks – detect blanks
8. Reasonable checks – eg not more than 50 Hrs per week
9. Reasonableness test after processing : eg wage of 100000000
10. Sequence checks –duplications/gaps in numbers
11. Verification checks – masterfile lookup if correct account number
12. Data approval checks –credit limit for all sales
13. Internal label check – if computer file name correct
14. Generation number check – correct file generation loaded ( old/ new etc)
15. Retention date checks –if file expired
16. Arithmetic accuracy check – eg reverse multiplication for 3*5= 15 : do 15/5=?
17. Cross casts – acc
18. Run to run totals: closing balance 10th compared to opening balance 11th ,and also to total debits minus
credits etc. and more at same time same time etc etc.
19. Reconciliation of related subsystem balances – debtors legder to debtors control acc.
(h) Logs and reports
(i) Audit trails: eg intrest or PAYE rates used/ or summaries + list transactions
(ii) Run to run balancing reports – see above
(iii) Override reports- abuse of privaledges
(iv) Exception rports- outside parameters set for control purposes eg wages > 40 hrs
(v) Before and after images- database images before/after updates in case error
(vi) Activity reports-usage times etc per user on pc, using resource
(vii) Computer generated transaction listing- all automaticly generated re-orders/purchases by computer
(viii) Access & access violation reports – sensitive eg – payroll + EFT
(i) Output handling controls
(i) clear report identification :name, time+production number , period covered/date,numbered pages
(ii) distribution checklist : who is to receive them
(iii) register sign: must sign for receipt
(iv) printing restricted to specific printers: confidential info eg salary slips – HR managers office printer only.
(v) stationary design: eg sealed envelope salary slips
(vi) shredding/ destroy: eg carbon paper or printer ribbons etc.
(j) Reconciliation and review
(i) Control clerk:activity reports : output and processing
(ii) Control clerk:control totals from input : eg batch controls
(iii) Control clerk:sequence checks numbering on docs
(iv) Control clerk:document count : eg must be 200 cheques for 200 payments
(v) User dept :recon : with processing dept : eg foreman calc. 5000 wage hrs, payment should be for
5000 wage hrs.
(vi) User dept : recon :reports : to 1-source docs 2- physical assets
(vii) User dept :reasonableness: review output for:

SUMMARY
Computers do not change the FUNCTIONS which mus occour in a cycle: eg in a wage system:
Personnel records
Time keeping
Payroll prep and record
Pay
Pay deductions over
Unclaimed wages accounted for.

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)

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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
(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

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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 software 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)

INTRODUCTION:
1) In large companies access to computer resources must be controlled:
a) For 1-tapping the Telephone line
b) 2-points of access plugs
c) Maintaining the
i) 1-integrity and
ii) 2- security of data actually transmitted
2) Auditor is not a expert BUT must call on experts if need be! For technical stuff.

TRENDS IN IT
1. Move from mainframes to personal computers-move to end user computing-processing power +storage-division of
duties&data integrity and confidentialtity under threat if correct controls not put in place (due to everybody has access now,not just 1
central mainframe)
a. Auditor benefits – uses laptop computers
2. Client-server architecture : simplest is a LAN, applications+databases scattered throughout organization,same
implications for auditor as in introduction above.
3. Open sytems: many applications all use same standards, so communicate/exchange data easy.eg word+wordplus+others.
Has implications for auditor.
4. Image processing: scan backups for audit trails
5. CD,USB,DVD : opportunity&threat= + easy to store stuff for auditor.& stealing info
6. Smartcards: contains microprocessor, not magnetic stripe.= better controls-(storage+processing)
7. Communications technology: EFT,EDI,wireless etc.
8. Web enabled: access application via the internet.

NETWORKS
1) Why we have them: Comes from people wanting to share printers,so to buy less printers, now expanded to any resource incl.
processors/database etc etc.

DEFINITIONS:
1) LAN: local area network : is a Data Communications System, links independent resources, normally by cable,in a small geographical
area/building.For 1-share resources+ 2-communicating.
2) WAN: wide area network : same as LAN, exept :
a) Wider geographical area – Eg: to Branches/trading partners(use EDI)/service providers(banks).
b) Extra resources eg: routers,gateways,bridges.
c) Additional considerations: - see cost/security/access control to use either
i) Use leased line OR
ii) Switched line OR
iii) Lines in analogue(needs modems to convert to computer digital) or digital(uses diginet connections).
3) VAN: value added networks: Business entities which provide a message transmission service: they connect you to 3rd parties/ or trading
partners for a fee so you don’t have to buy expensive equipment.
4) VPN: virtual private network: uses encryption to provide a secure ‘tunnel’ using the internet to connect companies to remote
offices/users.Cheaper than leased/owned lines.
5) Internetworks: signify linking of LANS,WANS, to many other LANS,WANS, also to mainframes,PCs etc. Risks remain same.
6) Server : Powerful microcomputer which controls the usage and makes available to the network : a particular resource eg; printer/
files/e-mail etc. and makes it available.
7) Distributed Processing: where 1-processing + 2-storage is distributed amoungst a number of different computers and processors and
could take place on various remote sites, not just on 1 easily controlled site.1-Security of link + 2-Access control is very important.

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.
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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 attempts
iv) Use Industry standards – to ensure network is developed in right way.
v) 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 communication
ii) 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 minimized
b) Contains all: information needed for use by sharing in common programs&users
c) Quickly accessable : by all authorized users
d) Simultaneous : accessability by many users with the same view in spite of updates which are in progress.
e) Provides sharing : by many users eg Microsoft SQL

2) DBA : database administrator: he manages the database.Duties include:


a) Define access priviledges of database users
b) 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 applications
7) 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 ownership
b) Access controls
c) Effectiveness+reliability of DB in 1-access+2-updates assessed by
i) Use SQL language&utilities to check up
ii) 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 instruction
b) 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’ data
c) No Stopping Payments = No Manual controls to stop eg cheque- EFT is gone.
d) Reliance =on Networks+ Data Communications.
e) No audit trail = no paper
f) 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 :
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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.
i) Control = normal systems controls apply
(1) Standards (apply, not not)
(2) EDI CHAMPION (appoint one)
d) NB: Risk/Objective = Confidentiality/Unauthorised access
i) 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 controls
i) 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 Trail
i) Control =
(1) Logs
(2) Reports on transactions timely+adequate to ID + treat problems.
g) NB: Risk/Objective = Legal Liability
i) Control = Use standard EDI trading contracts for defining resposibilities & penalties.
h) NB: Risk/Objective = Use of a VAN
i) 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 TRANSFER


3) 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 violations
vi) 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 23RD 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 protocol
c) 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 CONTROLS
1 Electronic communications and Employees/consultants to monitor AND implement compliance.

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Transactions act.(ECTA)
2 Link-allows unathorised access Virus,data/program corruption,loss confidential:CONTROLS=
1. Configure system to restrict access granted to outsiders by link
2. Store +Process sensitive stuff on separate non-connected system
3. Firewalls to restrict route.
4. Use eg: Web marshall/Mail Marshal = internet+e-mail monitoring software to
1-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 Adequate input& reasonableness checks eg:
order-unhappy customer 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 Use transport layer security techniques.eg
info. or data integrity loss on 1SSL etc.
transmission 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 1-Verify company using Thawte/Verisign/
malicious code/or non-legitimacy of 2-display privacy policy
business. 3-secure web applications by specialists: ID+auth. ,input validation, reasonableness check
7 Lack of availability of 24/7/365 1-inhouse specialists –user friendly,up to date,attractive.
Lost /unhappy customers prevented 2-Redundancy&disaster recovery
by reputable service provider

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, Reputable staff to ensure: 1-reliable delivery 2-policies +procedures to avoid contravening
unless country blocked to SA only: customs/financial export/etc
10 Inadequate Audit Trail prevents 1-digital signatures
adequate defense against claims 2-time stamping
3-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 them
c) Full Outsourcing: All IT services are provided by the bureau.
3) Used by some to enhance confidentiality eg: salaries processed offsite.

AUDIT IMPLICATIONS:
1) Adds another dimension to accounting system to be controlled.
2) Auditor must evaluate bureau
3) Data must still be INPUT ,PROCESSED ,OUTPUT – with all same controls by client or bureau- one of the two!
4) Auditor MUST do the following:
a) Assess bureauxs suitability.-
i) it is relying on an expert, so their 1-competence 2-independence 3-stability 4-range of services 5-reputation for confidentiality
6-security arrangements of bureau 7-deadlines efficiency&responsibility 8-up to date and reliability+check any independent
evaluations done on them,read correspondence emails with them,professional bodies etc.
b) Evaluate bureauxs agreement/contract.(learn-very large thing in book-could ask just this)
i) Reference in dispute: must cover: 1-liason2- describe input/process/output 3-deadlines&consequences 4-clients + also 5
bureaus responsibilities 6 back-up processing arrangements. 7-auditors access to 8-training 9-fidelity&10 other insurance 11-basis
of fee etc
c) Evaluate controls of client over functions which are the clients responsibility.
i) IE: by observation,enquiry,inspection,reperformance.

VIRUS
1) DEFINITION: it is a program SPREADS from 1 computer to another, EVENTUALLY performing the ILLICIT function for which it was
intended. Each virus works INDEPENDENT of original. Common to SPREAD BY e-mails.
2) Viruses extra likely in high network environment eg internet.

CATEGORIES OF VIRUS:
a) DESTRUCTIVE:
i) Massive destr. : unrecoverable data damage
ii) Partial destr: erase portions of storage
iii) Selective destr: erase specific files
iv) Random havoc: change random data/keystrokes/input or output data.

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v) Network Saturation: overload crash
b) NON-DESTRUCTIVE:
i) Annoyance : display messages/change screen colour/change keystrokes(eg ALT/SHIFT combination)/delete chars. etc.

KINDS OF
a) Trapdoor = code causes extra illicit password/entry door
b) Worm = code spread through a network
c) Trojan Horse = code copies eg passwords as typed in
d) Logic/Time bomb – sets off at date/event does some illicit thing

AUDIT AND CONTROL IMPLICATIONS:


1) Security system which includes following controls must be instituted.
a) Regular backups
b) Anti-virus updated all PCs
c) Scan in/out e-mail
d) Reputable software suppliers
e) Examine carefully all new purchased software/ first load on separate PC.
f) Users informed of data security
g) Users: instructions not open e-mail from unknown/suspicious sites
h) Access restricted to authorized personell- also accountable for their PC’s

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CHAPTER 10 : REVENUE AND RECEIPTS CYCLE


ACCOUNTING 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) 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 stock
iii) Processing the Order -manual picking
iv) Despatch -releasing+collect/courier
v) Invoicing -
vi) Record Sales and Raise Debtors.-
vii) Receiving and Recording Payment from debtors.-
4) The MINOR Activities are:
i) Goods returned Control
ii) Credit Notes passing
iii) Discounts granting on payments
iv) Bad debts – writing off and considering.

DOCUMENTS USED IN THE (REVENUE+RECEIPTS) CYCLE


1) Customer order: customers instruction
2) Internal sales order : sales clerk for picking+records
3) Picking slip :
4) Invoice :sent(say all details in exam)
5) Delivery note: signed by customer,details to delivery list to schedule
6) 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 bureaux
8) Receipts
9) Remittance advice: from customer, advises which Precisely accounts being paid
10) LIST :Remittance register: lists all payments received by company
11) Credit note: acknowledge customers account reduced(we cr your dr) for all exept pay received
12) Deposit slip: bank document deposit …
13) LIST :Price lists: …referred to by sales clerk
14) 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.

CHARATERISTICS OF GOOD INTERNAL CONTROL


All 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 cycle
ii) 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.
ii) + Important: As goods move: check/count them +sign for receipt
iii) +Important : As Payment/cash move …..mailroom to cashier …same
iv) Creditworthiness check-per order-before process -controler signature.
5) Access/Custody control:
i) Cashier protected
ii) Cheques crossed after receipt ( if stolen cannot..)
iii) Debtors ledger (destroy/altered)
iv)
6) Source document design:all docs in cycle
7) Comparison and Reconcilliation :Frequent & timeous of
i) Orders placed TO orders Processed/invoiced
ii) Invoices TO Payments received
iii) Debtors ledger TO General ledger
iv) Bank statement TO Cash records
8) ?????

FLOW CHARTS AND DESCRIPTION OF THE CYCLE


NOTE: 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

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1-Receive No account=refer Customer order 1-non-account holder 1-only account holders


Customer to credit manager Internal sales order 2-no timeous fulfil/atall 2-sequential numbering
Orders (order for application Price Lists 3-inaccurate/no details 3-attach customer order to internal sales order-cross check
dept) details if practical
1) Receivi 4-phoneorders: get 1-acc.no; 2-customer ref.no. ;3-confirm
ng details by ‘read back’
Customer 5-order clerk sign ISO,s indicate cntrl procedures done
Orders 6-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
2-Sales Old=not exeed Credit application Not creditworthy-will Old Customer:
Authorisation limit Debtors ledger not pay 1-credit contrlr check (a) fictitious details(b)credit
(order dept) New=creditworthy status fine from balance&terms on file
Authorising 2-ISO’s(picking slip) Credit Cntrlr authorize by sign first.
the Sale New Customer:
1-must fill in bank details,trade references,+inc&exp
details
2-credit cntrlr follow up credit bureau, trade
references,assess liquidity.
3-Limit set by credit contrlr. And approved by fin.manager.
3-Warehouse Ensure only Picking Slip 1-picking slip not picked 1-picker initial each picked item, and tick items unpickable
Processing the authorized orders Delivery Note 2-pick for fictitious / out of stock
Order are acted on Back Order Note unauthorised sales 2-warehouse foreman-check all items picked supported by
3-pick incorrect item/qty signed picking slips.
4-delivery note 3-stores clerk to:
inaccurate/incomplete i)check goods picked to picking slip
5-‘out of stock’ items not ii)prepare delivery note from picking slip+cross reference
shown on picking slip. iii)prepare back order slip + cross reference
6-customer not notifed of iv)back order copy to order clerk to notify customer
“out of stock” items- v)back order copy to buying dept.
4-order clerk follow up back order, confirm send again when
arrive
5-delivery notes &picking slips filed numericly – follow up
unmatched to check for picked/sent
4-Despatch Delivery note 1-theft from 1-on receipt by dispatch clerk
Despatch List of Deliveries uncontrolled dispatch (a)check qty/item against 1picking slip 2delivery note
2-Dispatch errors (b)sign picking slip&delivery note show receipt
qty/item/customer (c)keep 2 copies of delivery note,return picking slip to
3-customers deny warehouse
receiving 2-double check against picking slip when packing,also
4-released from check address
warehouse but never 3-clerk prepare 2 part delivery list, match goods+Delivery
despatched. 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
copy
5-gate control dtae 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-invoicing Return of delivery 1-Sales invoice 1-Goods not invoiced 1-copy of ISO temporary in numerical order in invoicing
Invoicing note match to ISO 2-Price lists 2-Inaccurate invoice dept.
and produce 2-as signed delivery notes received filed sequentially &
invoice. 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 check
5-invoice clerk:
i) check details ISO vs INVOICE
ii) check prices vs price&discount lists
iii) make sequenced invoice cross-
reference to ISO & Delivery note.
6-second employee(supervisor) check & sign invoice:
discount,vat,prices,customer details,extentions,casts.
6-Recording of 1-Invoice 1-invoices are omitted 1-invoices entered in sales journal in numerical sequence
Sales 2-Sales journal from sales journal only
Record Sales 3-Debtors Ledger 2-inv. Duplicated in sales a)sequence continued from period to period
and Raise 4-General Ledger journal b)cancelled invoices to be recorded in SJ -as “cancelled”-
Debtors. 3-inv.inaccurately no missing a number
entered in eg 45 as 450 2-batch control sys- total “invoices” before entry/ then
4-inv.entered against after entry total the “sales journal” to check entries.
incorrect debtor 3-independant employee to: recon1
a)sequence check SJ entries+follow up missing
b)compare SJ customer name+amount to invoice
c)check SJ to “GL & DL”
4-other independent employee recon 2 DL to GL regular
7-Receipts 1-Remitance register 1-payments received not 1-Post opened by 2 people
Mail room/ 2-Customer banked due – 2-Post payments into remittance register by “openers”

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Cashier remittance advice (a)carelessness or 3-Prenumbered receipts for all pay received(or at least
Receiving and 3-Receipts (b)theft for cash)
Recording 4-Bank deposit slip 4-bank receipts daily
Payment from 5-Bank deposit slip by CASHIER- NOT employees opening
debtors. post.
6-cashier recon 1 remit.register vs cash&cheques & sign it.
7-independent employee remittance register& receipts
issued recon 2 to bank deposits.

8-Recording of Record debtors in 1-bank deposit slip 1-deposits not 1-CRJ daily by date & number from receipts (if rec. issued)
Receipts CRJ & credit 2-CRJ recorded/or timeously 2-Queries from debtors : by person independent of
Receiving and debtors accounts 3-DL 2-recorded deposits may 1’debtors’ & 2’banking&recording of cash functions.’
Recording promptly 4-GL (a)inaccurate 3-recon1 bank statement TO cash book mnthly +
Payment from Total received for (?remittance (b)overstated(fictitious) independentof banking&recording employee + reviewed by
debtors. period then list/receipts (c)cr to wrong debtor senior official.
posted to GL issued/customer 4-recon2 CRJ supervisor (a)CRJ vs gaps 1dates
control acc. remittance advice)? 2sequential
(b) test CRJ to DL
5-recon3 DL to GL control acc. Independent employee
regular
9-Goods 1-Goods returned 1-desc. & qty of the 1-all ONLY received by “Goods receiving Dept.”
Returned by voucher actual goods returned 2-goods receiving clerk must:
Customer 2-credit note incorrect- causes an (a)check qty+descr. +damage
see 4 minor 3-Returns&allowance incorrect credit note be (b)make goods retuned voucher+ cross reference it to
activities in journal passed customer documentation
the cycle for 4-debtors ledger 2-credit note passed for (c)sign customer docs. +keep copy+attach to GRVoucher
this one 5-general ledger goods not returned 3-transfer receiving TO warehouse: clerk
3-credit note recorded (a)check qty+desc to GRVoucher
inaccurately/or to wrong (b)sign
debtor 4-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 placeeg
check gap
6-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 All record in cycle are 1-debtors do not pay/pay 1-credit application controls same as in ‘sales authorisation’
Management relevant late 2-monthly statements to be sent promptly to all debtors
see 4 minor +monthly statements 2-debtors prematurely or 3-monthly age analysis+ follow up by phone/letter if exceed
activities in +age analysis inappropriately written 4-if not successful- credit manager contact to re-negotiate
the cycle for +credit bureau off terms or threaten hand over debtor.
this one information 3-debtors written off 5-hand over before too long period elapsed(prescription..)
without authority. 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.
(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) Completeless
b) Occourance
c) Accuracy
d) Cut-Off
e) Classification (proper accounts)
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2) RECEIPTS: (transactions)
a) Completeless
b) Occourance
c) Accuracy
d) Cut-Off
e) 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 CYCLE


As 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 invoice
b) 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
contract
b) 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 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/ratios
d) 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 ledger
ii) Hide by substitute cash stolen with debtors cheque payments-take cash put debtors cheque payment as a cash sale-then post
another debtors payment at mnth end as 1st one taken/or multiple.(Becomes very complex Web)You can say 2nd was too close to
mnth end thus not reflecting yet. (reconcile physical cash with cash receipts)
b) He needs: NOT use bank deposit slips as source docs for cash book(bank teller compares cheque name to deposit slip),he
handles all queries from debtors, or he write up source doc receipt Or cash book.
c) Fix by:
i) Feed back
ii) Credit notes
iii) Bad debts
iv) Destroy records
d) Risk in:
i) Poor control environment
ii) Poor segregation duties pay write receipts / debtors queries/ recording
iii) Cash&credit sales
iv) Small/medium size business

TESTS OF CONTROLS AND SUBSTANTIVE PROCEDURES


1) TESTS OF CONTROLS: used to determine if Control Procedures & Information System is working correctly
a) Observation

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b) Enquiry
c) Inspection
d) Re-performance
2) SUBSTANTIVE PROCEDURES : if Balances and Totals are fairly presented.
a) Enquiry & Confirmation
b) Inspection
c) Reperformance
d) Recalculation
e) Analytical Procedures : eg: if Gross profit 30%, you immediately know whether sales & purchases is correct.

TESTS OF CONTROLS
1) You identify each control, then perform 1 of the above 4 procedures on it to test if it works .
2) Each is Limited in value: ‘inspect’ signature only says it was signed, not actually checked, ‘observe’ only says control worked While you
watched, not always.
3) Note: tests must also be done on NON-SPECIFIC (GENERAL) CONTROLS: eg ‘custody’ of blank delivery notes,invoices.
4) Eg:
a) Enquire:
i) of order clerk if 1- ALL orders go to him,
ii) 2- if he makes out an ISO for all orders, not only phone orders.
b) Inspect :
i) 1-filed copies of ISO for ‘evidence’ credit approval was obtained.
ii) 2- correspondence from ‘credit bureau’ to confirm approval was actually obtained.
c) Observe:
i) opening of mail & writing of receipts
ii) despatch clerk counting and checking goods on transfer from warehouse to dispatch.
d) Reperform
i) A bank recon

SUBSTANTIVE PROCEDURES
1) In some other textbook says it is divided in 3 Types: 1- Transactions 2-Balances 3-Analytical Procedures.(we say + Presentat.and
Disclos.)
2) MAIN focus for this cycle: BANK/CASH + DEBTORS balances, which also gives evidence for sales.
3) MOST IMPORTANT part : non-cash transactions which reductions debtor balances : do tests as in ‘eg’ no 4 below , PARTICLARLY
AUTHORITY given for each to be done.
a) Credit notes
b) Bad debts write off
c) Special discounts
4) Eg: auditor just selects a sample of Sales Invoices and Does DUAL PURPOSE TESTs on them :”VOUCHING OF TRANSACTIONS ‘ ARE
referred to as ‘dual purpose’ tests: because…..
a) DUAL PURPOSE TESTS:
i) Inspect: Match to details on supporting docs –sales order,delivery note
ii) Inspect: trace to entry in sales journal
iii) Inspect : docs for signatures showing control procedures have been carried out.
iv) Reperform :pricing from price list and Enquiry&Confirmation :validity of discounts.
v) Reperform/recalculate: casts, extensions,discounts, vat.
vi) Reperform: posting to debtors ledger.
5) CATEGORIES OF ASSERTIONS: ISA 500R Categorises the Assertions as follows.:
a) Classes of Transactions and Events (for period) eg:sales, purchases, interest received
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 . .. .
:Disclosed
5.3. 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.
6.2. 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.)

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DIAGRAM OF ASSERTIONS:

TRANSACTION PRESENTATION
ASSERTION ACCOUNT BALANCES
EVENTS DISCLOSURE
1 OCCURENCE # #
2 COMPLETENESS # # #
3 ACCURACY # #
4 CUT OFF #
5 CLASSIFICATION (and for
Pres.& Disclosure : # #
UNDERSTANDABILITY)
6 EXISTENCE #
7 RIGHTS and
jOBLIGATIONS # #

8 VALUATION and
ALLOCATION # #

SUBSTANTIVE PROCEDURES FOR THE AUDIT OF DEBTORS:


1) ASSERTION: RIGHTS :
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 management
2) 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)
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 sample
ii) 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 :
(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:
(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.
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(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) ASSERTIONS: (not ‘balances’ but next one :ie) PRESENTATION & DISCLOSURE as it applies to debtors: as per ISA500
a) IAS :COMPLETE IN TERMS OF ias INTERNATIONAL ACCOUNTING STANDARDS, 4TH SCHEDULE. Eg: debtors balance with current
assets, + disclosed encumbrances on debtors.
b) Evidence :consistent with evidence gathered on audit.
c) Amounts , facts ,details, 1-accurate 2- and=evidence
d) Appropriate classification of information.
e) Wording is clear and understandable. Eg: accounting policy & explanation of encumbrances.
6) ASSERTIONS: all /General
a) 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 DEBTORS


1) Enhance auditing of debtors by (if clients debtors are computerized)
(1) Stratify as % total: by rand amount, profile,etc, select samples for ageing(valuation)/circularization(existence).
(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) Debtors balances vs client listing, or vs ageing,
(4) Unique characteristic/code 1-2-3: eg extract all handed over to lawyers(Valuation gross&bad debts, or code 2
correspondence(all assertions)
(5) 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)
(6) Bad debt allowance : recalculate based on aging eg 3% 30 days + 5% 60 days etc.
(7) Casts/cross cast : (valuation)

SUBSTANTIVE PROCEDURES FOR AUDITING BANK/CASH


1) ASSERTION: RIGHTS & 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.
(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
(8) minutes of directors meetings checked for balances encumbered.
2) 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 accounts
c) 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 about foreign accounts if any import/export is undertaken.

3) 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.

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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.
4) 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 5=2:1 , so you pay 25 then bank=75 creditors= 25 = 3:1 –(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)

5) 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
6)
7) Transfers:
a) Eft TRANSFERS scrutinize : carefully esp. payee account VALIDITY
b) YEAR END : any large transfers at year end, to subsidiary or related party or own bank accounts,CONFIRM(for KITING) (also
with reference to other auditors at related parties if needed).
i) Supporting docs
ii) In same year period : recorded in both enities books in same period
iii) Any outstanding : are included in any bank recons.
8) Cash counts:
a) Simultaneous: counting of all floats prevents cover ups
b) In Presence of cashier responsible for:
c) Alone : auditor NEVER alone with cash, or accused of stealing it
d) Cashier+auditor sign : results on workpaper together
e) Recon as follows: cash float + cash received - cash payments=cash on hand.
f) Supporting docs : all Payments& receipts should be supported by
g) Supporting docs: 1-Valid+2-Authority all to be scrutinized for both of these things.
h) Postings: cash transactions to the ledger

9) PRESENTATION AND DISCLOSURE :


i) Same as for Debtors, eg
ii) Correctly presented on face of SOFP. –in liabilities if in overdraft, or in assets etc
iii) Disclosures
iv) Agree evidence.

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CHAPTER 11 : ACQUISITIONS AND PAYMENTS


CYCLE:
THE ACCOUNTING SYSTEM AND INTERNAL CONTROLS:
1) 2 major activities:
a) Ordering & receiving : 1-required 2- suitable quality&price
b) Payment 1-valid orders 2-authorised,accurate,timeous
2) Major balance= creditors
3) 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 & price
3) 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: mnthly
8) Cheque requisitions: by creditors section to whoever
9) Remittance advice: breakdown of what is being paid
10) Receipt: from supplier
11) 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 attention
3) 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-goods
6) 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 CYCLE


NOTE: 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-ORDERING Initiate orders, 1-REQUISITION 1- 1-order clerk not order no authorized requisition
OF GOODS always 2-ORDER FORM Incorrect/Unnecessary (a)cross-ref requisition to order
AND SERVICES available,place =liquidity+wastage (b)confirmation by stores/production (esp. preset levels)

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orders,after check 2-unauthorised=losses 2-before place order senior buyer/supervisor check
suitable deliver/ by fraud (a)accuracy&authority
/qlty /qnty /price 3-order forms misused (b)supplier suitability, price&qty reasonable, nature
eg private orders goods reasonable ie used by company
4-requisition not acted 3-approved supplier list
on OR orders not (a) confirm available+delivery dates
timeous (b)or get quotes if no supplier list
5-inferior quality (c)seniors evaluate suitability of before approve
6- unnecessarily high a supplier
prices 4-order dept file requisitions sequentially by dept +
7-orders not OR not frequent review requistions not cross-ref to an order.
timeously filled (unordered)
. 5-copy of order filed sequentially + review sequence
check +cross-ref to GRN to make sure they were
received.OR check pending file of orders in receiving bay.
6-blank order forms sound stationary controls (custody)
2-Receiving of Accept, 1-supplier delivery 1-acceptance of 1-pysically secured access controlled Goods rec. section
goods&service acknowledge, note(DN) Short deliveries as full 2-offload by goods rec. clerk who must:
s valid, record(GRN) 2-GRN Damaged/broken (a)match supplier delivery note to Purchase Order
+ check qty, qlty, Itms not ordered (b)check qty+descry. Vs both docs above
descr. Wrong type/qty (c)check goods- broken/wet etc (superficially)
2-GRN incomplete/ (d)reject incorrect + note on both docs
Inaccurate (e)note short delivered on both(+ actual QTY!)
3-no GRN made out (f)include only those accepted on GRN(??????)
4-fraud/theft +collusion (g)suppliers personel sign +sign amendment eg short
outside (h)sign supplier delivery note
3-on transfer to stores next clerk sign GRN + count +
report discrepencies to supervisor
4-Collusion in this cycle is a major problem to many
companies, so isolate responsibilities+independent physical
controls eg: tracing device on vehicles+security cameras to
be used by all in supply chain
3-RECORDING 1-purchase invoice(PI) 1-record incorrect 1-purchase invoice must be:
OF 2-credit note(CN) amounts from incorrect (a)match to1- GRN 2-delivery note+3-purchase order for:
ACQUISITIONS 3-Creditors purchase invoices Qty, descr,prices, discounts(from order or supplier
statements (a)QTY/QTY/TYPE notas price lists)
4-Purchases journal ordered or received (b)review if posted to correct account eg: stationary.
5-Purchases Returns (b)price not as quoted 2- account to be posted must be got from official list by
+allowances journal (c)calc errorsegcast/vat requisition maker outer and written on there-or clerk will not
6-Creditors ledger 2-fictitious know for which account it is.!
7-General ledger purchases /creditors 3-reperform casts,extentions,calc,s on invoice.
from invoices never 4-Specific emplyee must responsible GRN +invoice dates
receiv. or ordered check and only then timeously posted to journal+ledger.
3-delays, misallocation,
posting errors = recon
problems+ loose early
pay discounts.
4-Payment 1-remittance advice 1-pay fictitious creditors 1-creditors statement recon to support docs.+clerk
preparation (RA) 2-pay incorrect amounts check invoice accuracy controls done before recorded
(requisitioning 2-cheque requisition 3-unauthorised payments 2- creditors statements recon creditors ledger
) 4-discounts lost individual
3-creditors clerk make sure pay early discount 1-pay
early2-actually is deducted
4-cheque requisitions 1-preprinted+ 2-sequenced + 3-
custody controls over blanks
5-cheque requisitions: 4-to incl. details of 5- authorized
by preparer sign 6- maybe even authorized second person
6-cheque requisition+support docs ALL go to cheque
signatories.(+ batch controls if numerous enough)

5-PAYMENT 1-cheque 1-cheque incorrectly 1- two cheque signatories


&REsCORDING 2-returned paid made out(payee,amount) 2-they must agree support doc to date/amount/payee
cheque 2-invalid 3-cancel (stamp/crossing) paid used SupDocs(not use again)
3-bank statement payments(fictitious 4-anti-tampering methods for cheque
4-Cash payments creditors) (a)permanent ink
journal (CPJ) 3-payments recorded (b)no gaps
6-Creditors ledger inaccurately (error/fraud) (c)payees name in full
7-General ledger (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 away
7-signed cheques NOT returned to preparer: BUT mailed by
independent employee.
8-all recorded in NUMERICAL sequence in CPJ
9-CPJ review by mngmnt regularly for missing sequence OR
unusual pay.
10-recon cash book to bank statement : staff independent
of banking functions/creditors dept
11-returned paid cheques:

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(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 CYCLE


1) Purchase transactions: (TRANSACTIONS)
a) Completeness.-all have been
b) Occourance. -normal
c) Accuracy.
d) Cut-off.
e) Classification.-in the proper accounting records
2) Payments (TRANSACTIONS)
a) Completeness.
b) Occourance.- did actually occour,not fictitious
c) Accuracy.-
d) Cut-off.
e) Classification.
3) Creditors: (BALANCES)
a) Completeness:
b) Existence.-not fictitious
c) Valuation:
d) Rights&obligations.-are actually obligations, not anything else.
4) Assertions pertaining to (PRESENTATION AND DISCLOSURE.)
a) Completeness
b) Accurate
c) Classification & Presentation
d) Understandable

FRAUD IN THE CYCLE


1) 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) Observation
b) Inspection
c) Reperformance
d) Enquiry

2) Substantive procedures:
a) Inspection
b) Enquiry & Confirmation
c) Recalculation
d) Reperformance
e) Analytical procedures

TESTS OF CONTROLS:
1) Assess the risk that misstatement will not be identified by the system/risk of misstatement of the fin stats/not fairly presented.
2) Eg:
a) Inspect
i) a sample of purchase orders for supplier is on approved supplier list
ii) Requisitions for authorizing signature
iii) Supporting docs is it stamped so it cannot be used again
b) Enquire: procedures carried out of goods receiving clerk – to reveal missing procedures
c) Observe: procedures carried out of goods receiving
d) Reperform: creditors reconciliation(creditors STATEMENTS to creditors ledger)

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3) Test should also be conducted on GENERAL(NON-SPECIFIC) CONTROLS eg: custody of blank order forms
4) Remember limitations of these tests: observing someone performing it only means he did it then, not every time etc.

SUBSTANTIVE PROCEDURES:
1) Main= creditors balance, main=completeness, main
2) Generally seen as :liabilities understated, not overstated
3) In addition to creditors balances auditor may select sample of transactions eg: payments and purchases to perform subst.tests on, to
seek EVIDENCE on assertions :Eg on a purchase transaction:
a) Occourance:
i) Inspect supporting docs (GRN, PURCHASE ORDER, DELIVERY NOTE, INVOICE)to see if
(1) External docs are made out to Why(Pty)ltd
(2) All doc are signed by the authority eg chief buyer.
b) Accuracy: (amount)
i) Recalc name extentions invoice
ii) Confirm prices&discouts: check order or purchase contract
iii) Recalc vat , check discounts come before vat.
c) Cut-off:
i) Date on docs to date in purchase journal +fin year
d) Classification:
i) Should be on purchase order by buyer , check if in right one
ii) Check descr. To be sure correct: eg fixed asset not written off as expense.
iii) Vat correct on invoice+journal
iv) Creditors ledger posting from ..
e) Completeness
i) All that should have been recorded are recorded.

DUAL PURPOSE TESTS


These 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 supplier
iii) 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 it
b) Returned paid cheque:
i) Correct creditor
ii) Amount
iii) Crossing&dating
iv) Stamped by bank
v) Signed by authorized signatories( pref.2)
c) General:
i) All docs cancelled
ii) All docs addressed to this company
iii) All docs dates in current fin year + reasonable relation to each other
2) REPERFORMANCE
a) 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 company
ii) 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.

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(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 Sheet
4) 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.
(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


BALANCES
2) 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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CHAPTER 12 INVENTORY AND PRODUCTION


CYCLE
ACCOUNTING 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 CYCLE


1) HEART of the business : often the business is shaped around what it sells
2) 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,chickens
b) 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/finished
d) Permanence – 1-tech.obsolecence 2-expiry dates 3- fresh produce

DOCUMENTS IN THE CYCLE


1) 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 supplier
2) 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: -normal
8) Delivery notes: when/after we delivered
9) 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 CYCLE


There 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

receivin
g
RISKS OF THE CYCLE
1-RISKS
1) Inventory is Lost or Stolen due to.
(1) Physical Controls – inadequate
(2) Transfer Controls -of inventory, inadequate ,unathorised issues
(3) Isolation of Responsiblility – inadequate establish who is accountable for at any stage
(4) Division of Duties- inadequate- eg storeman custody+recording=conceal theft
2) Inventory Deteriorates due to
a) Inadequate Physical controls (eg: gets wet)
b) Its Nature (foodstuffs, chemicals, fresh produce)

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3) Delays & Inefficiencies in Production due to:
a) Incorrect raw materials supplied to production
b) Non-availability of raw material
c) Poor Quality of raw materials
4) Unauthorised Production : eg private jobs
5) Inadequate recording of Costs of Production. : WIP etc wrong costs carried forward.

2-CONTROL PROCEDURES
1-TRANSFERS N.B. 1) Recorded: no movement without recording eg signed requisition / or barcode scanning.
2) Deliverer + Receiver Sign : both should acknowledge after check qty,descr. Eg material issue
3) Filed Numericly : transfer documents (for finding gaps/false copies/missing/)
4) Regular Review Signature : all docs. Should regular review for authorizing signature.
5) Regular review sequence check: docs regular find missing/false extra etc. +Investigate if
2-DAMAGE/LOSS/THEFT 1) Physical controls : Stores + All Production Area
N.B. a) Limited entry/exit : minimum doors possible
b) Controlled entry/exit: swipe cards / keypads /turnstiles /x-ray /security guards/gate cntrl.
c) Restricted entry/only: eg buying clerks not unaccompanied, only production employees.
d) Secure buildings: solid structure, minimum windows, locks etc
e) Environmental: pest free, temp. controlled, dry, neat , clean.
f) Surveillance: cameras over production line+receiving+despatch.(it’s often easy to steal from
production line)
2) Frequent Comparison & Reconciliation:
a) Inventory theory vs Actual: in all its forms, theoretical vs actual
b) Production schedule VS Actual :where’s the extra raw materials from lower actual gone to?
c) Budget VS Actual : why did it cost more? Dofness on duty?or why?
3) Investigate Reconciliation : material variances.
4) Regular Surprise Checks: by mngmnt+supervisory to see unauthorized production by: machine
hours/usage compare to actual production+production schedule to actual being made comparison
5) Division of Duties : Note: ONLY THIS ONE : custody + recording inventory not by same person.
3-Info. FOR PRODUCTION 1-FOR JOB ORDERS
COSTS 1) Preprinted Job Cards for ALL JOBS TO BE RECORDED ON
a) Sequenced and dated
b) List of materials to be used
c) Cross-ref : to customer order/quote
d) Cross-ref : to materials requisition
e) Cross ref : daily production schedule
f) AUTHORISED by PRODUCTION MANAGER.
2) Job cards Pending File : that are still In production go in a …and updated for labour hours as they
are incurred.(could be computerized)
3) Job cards Finished: should be removed from pending file and costed-labour hours&material prices
accumulated and overheads allocated. (see objectives above)
4)
5) Job Card Calculations Checked : all above calc. should be checked by a second clerk
6) Job Card Numericaly filed : after
7) Job Card Completed file Sequence test & Check for: Frequent & Regular for
a) Cross-ref to “transfer to finished goods note” and to a “sales invoice” ( not skelm private job)
b) Missing job Cards are still in the production stage.
8) Job Card Mngmnt Compare : to QUOTES and BUDGETS & investigate variances.
9) “transfer to finished goods form” : On Completion : make out a
a) Accompany goods to finished goods store
b) Cross-ref to job card
c) Be used to write up perpetual inventory of finished goods (one record-the other is job card
accumulation, so you have 2 to stop skelm change 1,as well as other reasons)

2-FOR PROCESS COSTING


1) Production Schedules : ALL ‘process runs’ MUST go on these, which are:
a) Sequenced & Dated
b) Cross-ref : to Production Plans
c) Cross-ref : to Material Requisitions
d) Authorised by: production manager
2) Each Day / or eg per 1000 : “Transfer to Finished Goods Form” should be made out
a) Accompany goods to finished goods store
b) Cross-ref to Production Schedule
c) 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 check
a) 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.

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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.
3) Identify items to be counted:
a) Random samples (from the records -list to shelf)
b) Items susceptible to theft
c) High value items
d) Divided List in sections: do just 1 at each count
e) Divided Warehouse in sections. : do 1 at the count
4) Use a Standard method & count controls
5) 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 &review
c) Numerically filed
d) 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 & preparation
2. 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 for
3. 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
system
5. 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 twice
ii) Check inventory sheets if 1st & second counts qty same and same as records of perpetual

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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-
must research and work this out)
11. Receipts from deliverys : store separate in receiving bay-don’t add to stock until after
count.These late deliveries MUST then be counted and added to inventory count after count is
complete.
12. Counters to:
i) Draw Lines through Blank spaces on sheets
ii) Sign each sheet and every alteration.
13. Inventory Controller to:
i) Check above 2 procedures done
ii) Sequence test sheets to make sure all are accounted for.
14. Count Teams Formally Dismissed : only when count is complete AND all queries have been
attended to.

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 recorded
d) 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 IFRS
b) Classified : correctly
c) Accurately: presented
d) 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 of
i) 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 inventory
b) Eg obsolete inventory
c) Eg:selling price has declined to below cost price
4) Cost of inventories:
a) Should consist of
i) Costs of purchase: transport + import duties
ii) Costs of conversion :production overheads & direct labour
iii) 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 costs
Auditor 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 capacity
iii) Be allocated on a systematic basis which is reasonable
iv) 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 Identifiction
b) Weighted Average
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c) FIFO
d) 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:
a) 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 inventory
ii) 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 theft
b) How to get the goods will depend on:
i) Nature of goods: small valuable vs large immovable
ii) Physical control ; limited exits, cameras,etc
iii) Division of duties: custody & recording by same person
iv) Frequency of physical & theoretical reconciliations.the more often the more difficult to steal
v) Controls in other cycles: eg receiving goods(aquisition cycle) , despatching goods(revenue cycle)
vi) How to hide the theft will depend on :
(1) Division of duties-custody & record keeping – presents the BEST opportunity.
(2) Control environment weak.

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 count
2) Inspection:
a) Cycle count amendment forms&recons. For frequency&materiality & how were resolved of discrepencies
b) 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.

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SUBSTANTIVE PROCEDURES
1) Many of the tests of controls are dual purpose tests
2) Auditors Objective: (all done by substantive procedures)
a) Quantities correct
b) Cost formula correct
c) Reasonableness of write-downs
d) Cut-off procedures(physical vs records)
e) List of GRN no.s not matched to suppliers invoices by year end drawn up for later use.
3) Year-End procedures:
a) Attendance at inventory count (existence ,completeness,valuation)
b) Post – count procedures :subsequent audit of carrying value (valuation, rights, presentation & disclosure)
4) Inventory Count Attendance: (generally)
a) it is both a test of controls & substantive test.
b) Test of controls: of actual controls for the count itself
c) Substantive tests:
i) Existence : of qty by sheet to shelf tests.
ii) Valuation : condition-damaged/obsolete/slow moving.
iii) Completeness: by shelf to sheet
d) Cut-off procedures(physical vs records)
e) List of GRN no.s not matched to suppliers invoices by year end drawn up for later use.
5) INVENTORY COUNT ATTENDANCE: (METHOD) NB
a) PRIOR:
i) dates & times Liase with client about of count
ii) locations: confirm by enquiry, prior audit papers,visit
iii) admin.planning eg organize staff to attend
iv) written instructions: get a copy of clients instructions to his teams
v) not to be counted: get list of eg: consignment,invoiced but not delivered/collected.(&ask how it is identified physically)
vi) brief audit staff: as to their responsibilities.

b) DURING:
i) Written instructions: observe to check clients instruction are adhered to.
ii) Obsolete/damaged/dusty old packets record item no,details etc to check if it was noted on count sheets as it should have.
iii) Sheet to shelf: make sure all categories all sections & categories are tested.
iv) Shelf to sheet: make sure all categories all sections & categories are tested.
v) Resolve discrepencies & amendment: before end, to be sure amendments entered on sheet after recounted with staff.
vi) Numerical Sequence test: check before & after count to be sure all sheets are accounted for
vii) Exclusions: confirm by enquiry (of counters) &inspection (of sheets) whether consignment/undelivered/uncollected/etc
have not been included.
viii) Pronounce ‘sixtiey’ etc not sixtie for 60, same for 70, 80, etc. to avoid confusion.

c) CONCLUSION:
i) Inspect Inventory Sheets To Confirm That:
(a) Lines drawn through blank spaces. (so items cannot be added)
(b) Alterations/corrections have been signed.
(c) Sheets signed by counters responsible.
(2) Audit Records (create some by)
(a) Copies: of all inventory sheets.(hardcopy or digital)
(b) Observations: as to clients count procedures.
(c) Test Counts Results :of Test Counts by Audit team
(d) Recording damaged/slow-moving/obsolete : inventory.
(3) Record cut-off numbers: for all docs used in inventory & production cycle.
(4) Record GRN unmatched to Supplier Invoices. List of.

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 parties
b) 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 confirmations
iii) Review directors minutes
iv) 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:

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(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.
(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 count
c) Analytical review

4) EXISTENCE:
a) Cut-off proves all that was purchased was included and all that was sold, was excluded.
b) Attend inventory count
c) Analytical review

5) GENERAL: ALL ASSERTIONS:


a) Analytical review : current to last years eg:
i) Total
ii) Total by category, source(local/import), location
iii) 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 policies
iii) Cost formulae
b) Consistent with evidence gathered on audit
c) Amounts,facts,details accurate and consistent and agree with evidence gathered.
d) Classification is appropriate : eg WIP
e) 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

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(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 PERSONELL CYCLE


ACCOUNTING SYSTEM AND INTERNAL CONTROLS

INTRODUCTION:
1. UniqueCharacteristics:
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/steal
ii. 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
willoccour.
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)
FUNCTION Descr. DOCUMENTS RISKS CONTROL PROCEDURES

1-PERSONNEL Obtain max 1-Payroll Amendment 1- Unnecessary or 1-Requests: for new retain or old dismiss must be from
(Human efficiency from Form.(PAF) unsatisfactory 1-DEPT making request, IN WRITING
Resources) workforce by 2-Employees File. :recruit/retain such 2-Signed by section head , countersigned
control: employees. by sect.
1-Dismissals 2- Dismissal : Incorrect manager,after reference to the budget.
2-Recruitments procedures. 2-Pay Rate / promotions /other service conditions :
3-Wage 3-Unauthorised 1- Decided by Wage Committee/ or Personnel
negotiations amendments to Dept. after
4-Labour employee records. 2-Consultation with interested parties eg
disputes -fictitious add UNION
5 Keep Records - wage rate change representative
for 3-Consider Laws & Regulation : eg min. pay
employees(Accu rate/overtime etc.

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rate Complete) 4-Documented + Authorised by body
produce authorizing eg: Wage
clockcards from Committee/ Personell
these. 3-Payroll Amendment Form(PAF) : all above to here +
1-Cross Ref to supporting docs +
2-Signed by senior Personnell Dept.
3-Regular Review Gaps in file of PAFS :
sequence&validity.
4-Competent trustworthy Personel :
1-use sound Personell Practices
(interview/background
checks.)
5-File Of Each Employee : to be kept incl :
1-copies of relevant PAF’s
2-employment contract
3-performance appraisals & disciplinary
warnings
4-personal details including qualifications
,background info.
2- 1-KEEP VAC record 1-Clock cards 1-invalid Hrs recorded.by 1-Entry & Exit points of Work area:
TIMEKEEPING of valid hrs 2-Batch control sheet eg: 1-limited (preferably just 1)
worked 3-batch register. Fictitious employee 2-protect by turnstile mechanism(counts in/out)
2-Clockmachine Clock for absent friend 3-supervised during clocking periods(watch that no
commonly used Clock in + leave double clock etc.)
3-daily hrs added premises. 2-Clockcard : prepare by Personell Dept only,strictly per
for week & sent to 2-hrs incorrectly added “authorized
payroll for normal / overtime employee list.”
preparation. 3-At end of WEEK : (usual Wednesday Afternoon)
1-agree no. of cards VS list of employees in
section.
2- calculate ordinary time
3- calc. overtime
4- divide into workable batches(25)
5- Do batch control sheet:
a-ID section&week
b-control totals(tot.hrs,no.of cards etc)
c-signature
4-Batches: a- Before batch transferred to payroll section
head must:
1-check calculations
2-authorise overtime( need for overtime to be
confirmed
before it is worked)
3- check & sign batch control sheet\
b- Batch Register : details of batch to register
& then securely
transferred to Payroll Preparation

3-PAYROLL Calc. 1-Clock cards 1-Include fictitious 1-Wage clerk check details of batch & sign register on
PREPARATION: wages&deductions 2-Deduction tables employee receipt from timekeeping.
. From hrs. and 3-Updated List of 2-Use Incorrect/ 2-Wage clerk prepare:
record on payroll. employees Unauthorized pay 1-payroll
(wages journal) 4-Payroll (Journal) rates/hrs/deduction 2-coinage schedule
tables. 3-Recon : this week VS last week
3-Cast & Calculation (no.employees+amounts net)
errors. 4-A RECORD: control totals for overtime & hrs worked
etc.
3-Supervisor or 2nd wage clerk :
1-verify hrs&rates used VS clockcards & employee
lists.
2-verify deductions VS relevant table
3-Reperform calculations & wage recon.
4-Sign
4-Head of Payroll Prep : SIGN 1-payroll 2-recon (week to
week one) after careful review.
5-Cheque for wages: give with 1-payroll 2- recon to 2
cheque signatories who :
1-review for unusual eg large amounts , excessive
overtime.
2-check signatures :for control signatures
3-sign payroll & recon
4- PAYMENT 1-Prepare Pay- 1-Payroll 1-Errors or theft of 1- 2 people to make up wage packets (where there is
PREPARATION packets 2-Payslips & cash during cash allways 2+) (and also “physical” security over cash
&PAYOUT 2-Distribute 3-Paypackets 1-drawing of cash handling tight)
VERY NB: Wages 4-Unclaimed wages 2-making up 2- Delivery of Wages to payout: section head must
3-Unclaimed register paypackets 1- agree no. paypackets to payroll.
wages recording. 3-payment of 2-agree control totals : batch register ot.hrs , no.
employees cards.
2-Theft of Unclaimed 3-sign payroll to show receipt & control procedure
Wages done.

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3- Lock away paypackets till payout
4- 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
payroll
9- Collect Unclaimed Wages : show ID + Sign unclaimed
wage
register(not payroll) (it could be a fictitious employee!)
10-After 2 weeks: unclaimed to be a-Banked + b-Copy
deposit slip
attached to register + c-Cross-Ref to entries
11- Reconciliation : unclaimed wage packets to unclaimed
wage
register +CHECK FOR UNUSUAL OCCOURANCES eg
more
unclaimed in one section than another.

POINTS BY LECTURER:
-physical security : high windows + no disturbance allowed
during
the paypacket filling with cash.
-people who will count out cash must declare how much
cash they
have when they walk into the room- if short wages they
must be
searched. & use other people eg creditors or debtors clerk,
not
same ones who prepared the wages. Also someone must
observe
them to make sure they put nothing in their pockets.
-unclaimed: recon to blank spaces on register

5- 1-To record 1-General Ledger 1-penalties due to non- 1-One Single Person to raise & pay deductions :isolate
DEDUCTIONS: liabilities in 2-Payroll (wage payment or late payment responsibility
PAYMENT & respect of journal) or underpayment. so no confusions develop
RECORDING. deductions 3-Cash Payment 2-criminal/civil 2-a strict monthly schedule for :
& settle them in Journal charges due to non- 1-post entries to raise liabilities for deductions
time 4-Return form payment (this is theft) 2-make payments timeously
3-Overpayments : 3-supervisory checks on above activities
losses due to 3- Signing cheques: Payroll Journal & Return forms should
be presented for scrutiny before signing .
4- independent monthly scrutiny of general ledger accounts
for deductions (liability/ creditor account) by the financial
accountant , to be sure they are being cleared

AUDITING THE CYCLE

INTRODUCTION
1) Risk of misappropriation is high so direct lots of resources to this one
2) 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 hours
b) Confirm employees do exist
c) Test week to week changes to PAF
d) Accuracy of calculations & deductions
e) Confirm deductions are paid over
f) 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.

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ASSERTIONS:
1) OCCOURANCE : most important one because The Highest risk = overstatement of expense by incl. fictitious payments
2) ACCURACY:
3) CUT- OFF:
4) CLASSIFICATION: in the proper accounts
5) COMPLETENESS : not normally a risk exept make sure no illegal immigrants and not record wages/ or illegally low wages to those
who need a job.= reportable irregularity + contingent liabilities (fines/penalties/ illegal)
6) DEDUCTIONS: the Liabilities part does not form part of this and is done when “creditors” are audited , not here.

FRAUD IN THE CYCLE


1) FRAUDULENT FINANCIAL REPORTING
a) Not really a lot of scope for this, exept profit by manipulating the expense account
b) Illegal immegrants: by not reporting their wages a form of fraudulent financial reporting is taking place.
i) Wages not reported
ii) 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 changes
iii) OCCOURANCE :Employee paid for Fictitious hours eg foreman authorizes overtime never worked & split proceeds , or clock in
for absent friend
iv) 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 know
iv) 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 file
viii) 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.
2) ACCURACY , CUT-OFF , CLASSIFICATION
a) Inspect : Salaries register Gross salary VS personnel section listing
b) 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&employee
d) 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 payments
4) 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
benefits
ii) Consistent with Evidence gathered on the audit
iii) Amounts, facts details accurate & agree with evidence
iv) 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 payments
c) 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.

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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 payout
ii) 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 employees
ii) 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 confirm
i) 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
a) If suspect wages paid not recorded(eg illegal immigrants)
i) Reverse ID check (shelf to sheet)
ii) Enquire senior mngmnt illegal workers
iii) Alert to unsupported payments –esp.cash amounts
iv) 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 payments
5) 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:

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109109 | P a g e Auditing Notes AUDI 101
(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 .

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!!!!

109