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FINISH THE CHAPTER 2 PROF ACC RULES STUFF & CH 3 & CH4 IN SMALL PIECES AS
YOU WORK 9 A BIT EACH TIME YOU DO SOMETHING!!!! ALSO READ THROUGH SOME
BOOK ON “INTERNAL AUDITING “ TO GET THE IDEA ABOUT IT.!
TERMS: 13
INTRODUCTION 14
Definitions:....................................................................................................................................15
WHAT is an AUDITOR?:....................................................................................................................15
Reasonable Assurance....................................................................................................................17
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Duties and responsibilities of an auditor:................................................................................................................20
SUMMARY: .............................................................................................................................................................20
definitions......................................................................................................................................21
INTRODUCTION...............................................................................................................................21
the ifac code of ethics.............................................................................................................................................21
General guidance: Ethics and Professional Conduct................................................................................................21
The Public Interest .................................................................................................................................................22
Pronouncements relating to ethics and professional conduct in South Africa ........................................................22
CH 3 STATUTORY MATTERS 30
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sec 35 LEGAL NATURE OF COMPANY SHARES & REQUIREMENT TO HAVE SHAREHOLDERS................................34
SEC 36 authorisation for shares...........................................................................................................................34
SEC 37 preferences , rights, limitations and other share items............................................................................34
Sec 38 issuing shares...........................................................................................................................................35
Sec 39 subscription of shares:..............................................................................................................................35
Sec 40 consideration for shares:..........................................................................................................................35
SEC 41 shareholders approval f0r issuing shares in certain cases :......................................................................35
SEc 43 Securities other than shares.....................................................................................................................35
SEC 44 financial assistence for subscription of securities....................................................................................35
SEC 45 loans or other financial assistance to directors.......................................................................................36
SEC 46 DISRIBUTIONS MUST BE AUTHORISED BY BOARD....................................................................................36
SEC 47 capitalization shares ................................................................................................................................36
Sec 48 company or subsidiary aquiring companies shares...................................................................................36
Sec 49 securities to be evidenced by certificates or uncertificated......................................................................36
Sec 50 Securities register and numbering............................................................................................................36
Sec 51/52/53 registration and transfer of certificated and uncertificated securities. ...........................................36
Sec 55 liability relating to uncertificated securites..............................................................................................36
SEC 57 INTERPRETATION AND RESTRICTED ApPLICATION OF THIS PART:............................................................37
sec 58 shareholders right to be present by proxy:...............................................................................................37
sec 59 record day for determining shareholders rights :.....................................................................................37
Sec 60 shareholders acting other than at meetings ............................................................................................37
SEC 61: Shareholders Meetings............................................................................................................................37
SEC 62 NOTICE OF MEETING :...............................................................................................................................37
Sec 63 conduct of meetings.................................................................................................................................37
SEC 64 Meeting quorum and Adjournment...........................................................................................................38
SEC 65 Shareholders Resolutions.........................................................................................................................38
SEC 66 BoD, Directors and Prescribed Officers....................................................................................................38
Sec 67 First Director or Directors.........................................................................................................................38
Sec 76 : Standards of Directors Conduct :...........................................................................................................38
cc act.............................................................................................................................................39
auditors act....................................................................................................................................39
45
internal control..............................................................................................................................46
Introduction............................................................................................................................................................46
Definition of Internal control...................................................................................................................................46
definition (per SAICA booklet :'guidance for directors:reporting on internal controls').........................................46
four ASPECTS of internal control from above definition.......................................................................................46
(ISA 315). 5 components of internal control (in ch 7)..........................................................................................46
internal control objectives.......................................................................................................................................46
limitations of internal control..................................................................................................................................46
the accounting system............................................................................................................................................46
who is interested in what?......................................................................................................................................46
The characteristics of good internal control............................................................................................................47
audit evidence................................................................................................................................48
Sufficient appropriate evidence..............................................................................................................................48
sufficient evidence:..............................................................................................................................................48
appropriate evidence...........................................................................................................................................48
Influenceing factors in determining whether sufficient appropriate evidence has been obtained........................48
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substantive procedures...........................................................................................................................................51
audit sampling...............................................................................................................................51
Definitions:..............................................................................................................................................................51
Intro........................................................................................................................................................................51
steps in the sampling exercise................................................................................................................................52
Stages of the audit process: (know whole chapter per lecturer ) ......................................................53
Stage 1 : Preliminary engagement activities:..........................................................................................................53
stage 2 : Planning:................................................................................................................................................53
Stage 3 : putting audit -Plan and strategy - into action.........................................................................................53
Stage 4 : Evaluate & conclude................................................................................................................................53
AUDIT RISK....................................................................................................................................61
INTRO:.....................................................................................................................................................................61
the risk Based approach to auditing........................................................................................................................61
The components of audit risk:.................................................................................................................................61
1 -Inherent Risk :..................................................................................................................................................61
2- Control Risk......................................................................................................................................................61
3- Detection Risk .................................................................................................................................................62
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Risk at financial statement level and at assertion level:.........................................................................................62
intro:.....................................................................................................................................................................62
Risk and materiality ...............................................................................................................................................62
Assessment of audit risk.........................................................................................................................................62
levels of risk............................................................................................................................................................62
COMPUTER AUDITING......................................................................................................................68
iNTRO:.....................................................................................................................................................................68
COMPUTER ENVIRONMENTS:...................................................................................................................................68
A BRIEF DESCRIPTION OF DIFFERENT COMPUTER ENVIRONMENTS:........................................................................68
INTERNAL CONTROL IN COMPUTERISED ACCOUNTING SYSTEMS............................................................................69
FACTORS PECULIAR TO COMPUTERISED SYSTEMS WHICH THE AUDITOR SHOULD BE AWARE OF..........................69
COMPUTER AUDITING......................................................................................................................70
DEFINITION OF A GENERAL CONTROL:....................................................................................................................70
CATEGORIES OF GENERAL CONTROLS....................................................................................................................70
CONTROL ENVIRONMENT AND SECURITY POLICY:...................................................................................................70
ORGANISATIONAL STRUCTURE AND PERSONNEL PRACTICES.................................................................................70
STANDARDS AND STANDARD OPERATING PROCEDURES........................................................................................71
SYSTEMS DEVELOPMENT CONTROLS (NB know very well)......................................................................................71
program change controls........................................................................................................................................72
p.............................................................................................................................................................................72
APPLICATION CONTROLS:................................................................................................................72
iNTRO:.....................................................................................................................................................................72
Definitions:..............................................................................................................................................................73
input, processing, output:.......................................................................................................................................73
PROCESSING METHODS:.........................................................................................................................................73
APPLICATION CONTROL FRAMEWORK : MASTERFILE AMENDMENTS.......................................................................73
NB..........................................................................................................................................................................73
APPLICATION CONTROL FRAMEWORK : INPUT ........................................................................................................74
APPLICATION CONTROL FRAMEWORK : PROCESSING..............................................................................................74
APPLICATION CONTROL FRAMEWORK : OUTPUT.....................................................................................................75
MENU AND DESCRIPTION OF CONTROLS above:.....................................................................................................75
summary.................................................................................................................................................................76
INTRODUCTION:..............................................................................................................................79
Trends in IT....................................................................................................................................79
Networks.......................................................................................................................................79
Definitions:....................................................................................................................................79
databases......................................................................................................................................80
Definitions...............................................................................................................................................................80
THE INTERNET................................................................................................................................81
Risks and controls:trading on the internet:.............................................................................................................81
Computer bureaux..........................................................................................................................82
Audit implications:..................................................................................................................................................82
VIRUS............................................................................................................................................82
CATEGORIES of VIRUS:............................................................................................................................................82
Kinds of ..................................................................................................................................................................83
AUdit and control implications:...............................................................................................................................83
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The accounting system and internal controls:..................................................................................93
documents in the cycle:..........................................................................................................................................93
characteristics of good internal control:..................................................................................................................93
flowchart and description of cycle...........................................................................................................................93
INTRO:.........................................................................................................................................113
COMPENSATING CONTROLS...........................................................................................................113
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FRAUD IN THE CYCLE:...................................................................................................................114
:AUDIT PLAN:................................................................................................................................125
:OBTAINING INFO ON GOING CONCERN:***********..............................................................................................125
MITGATING FACTORS evaluating...........................................................................................................................126
audit report:..........................................................................................................................................................126
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SEMESTER II
Q1- what is yellow highlight below:ie: ”client held”
Q2-ask yellow why queries from debtors not by the person who is in charge of debtors ie:debtors clark , eg: the person in charge of creditors,
debtors, etc.
8-Recording of 1-bank deposit slip 1-deposits not 1-CRJ daily by date & number from receipts (if rec. issued)
Receipts 2-CRJ recorded/or timeously 2-Queries from debtors : by person independent of
3-DL 2-recorded deposits may 1’debtors’ & 2’banking&recording of cash functions.’
4-GL (a)inaccurate 3-recon1 bank statement TO cash book mnthly +
(?remittance (b)overstated(fictitious) independentof banking&recording employee + reviewed by
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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?)
GOING CONCERN :
1-see pg 15/12 , penciled in section???whats this mean?
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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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Income Statement
Statement of Equity
-------------------------------------------------------------------------------------------------------------------------------------
DEFINITIONS:
1. #### 1) Auditor: ? ASSURANCE GIVER. : from word “audire” Latin means “to hear” from owner hear/audit to employ a auditor …. Is
an :
1.1.1.1. “independent professional accredited accountant who “
1.1.1.2. expresses a conclusion
1.1.1.3. designed to enhance the degree of confidence
1.1.1.4. of the intended users
1.1.1.5. other than the responsible party ,
1.1.1.6. about the outcome of the evaluation or measurement
1.1.1.7. of a subject matter
1.1.1.8. against the criteria (attempt to enhance credibility of a “statement; event ; figures)
2. Professional skepticism:ISA 200 : an attitude that includes
2.1. - a questioning mind,
2.2. 2being alert to conditions which could indicate possible misstatement due to fraud or error ,
2.3. and a critical assessment of audit evidence.
WHAT IS AN AUDITOR?:
1. An Auditor =Define : (SEE DEFINITION ABOVE IN ‘DEFINITIONS’) ASSURANCE GIVER. : from word “audire” Latin means “to
hear” from owner hear/audit to employ a auditor.
2. An Audit = ASSURANCE ENGAGEMENT. : it complies with all 5 aspects of an assurance engagement : subject matter, criteria,
3 way relationship, written report, sufficient appropriate evidence.
3.
1 “the independent professional accountant
2 expresses a conclusion
3 designed to enhance the degree of confidence
4 of the intended users
5 other than the responsible party ,
6 about the outcome of the evaluation or measurement
7 of a subject matter
8 against the criteria (attempt to enhance credibility of a “statement; event ; figures)
4. International Framework for Assurance Engagements : defines an assurance engagement as: “ in which the practitioner
expresses a conclusion designed to enhance the degree of confidence of the intended user…”
5. The basic premise = ‘Enhance credibility of information’ or ‘increasing degree of confidence of users’
#### 2) TYPES OF AUDITOR:
1- Independant of what
2- Enhance whos confidence
3-What do they do
4 anything else might want to add
a. EXTERNAL AUDITORS
i. 1-Independent of company audited opinion - 2- lend credibility + enhance confidence users of fin stats 3-
fin stat fairly present fin pos + results .4-for statutory purposes, more for external users needs,less ,but also,for
internal(head office confidence subsidiary)
b. INTERNAL AUDITORS
i. 1-Independent (of dept audited) assignments –2-for mngmnt confidence- 3- efficiency, economy,
effectiveness –business processes+ internal controls. ,4- for internal users not external,not for statutory purposes.
c. GOV. AUDITORS
i. 1-Independent of gov. dept. audited – 2 enhance senior Gov. confidence in lower -
d. FORENSIC AUDITORS
i. Independent of entity under investigation –2- for client eg police, court etc 3-investigate + gather evidence
fin mismanagement ,fraud, theft..
e. SPECIAL PURPOSE AUDITORS.
i. Environmental auditors(compliance enviro. Regulations) – Vat auditors(SARS) – enhance confidence SARS
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6. COMMON ESSENTIAL CHARACTERISTIC THREAD RUNNING THROUGH : 1. Characteristic of INDEPENDENCE. …….if
not independent=NOT A VALID AUDIT.
7. OTHER ESSENTIAL CHARACTERISTICS: IFAC code ethics for Prof. Accountants.
1 INTEGRITY :STRAIGHTFORWARD , HONEST , moral
2 OBJECTIVITY / INDEPENDENCE :UNBIASED ,HONEST impartial, fair, not influenced by prejudice/bias
(independent) . ……. UNBIASED ,HONEST impartial, fair, not influenced by prejudice/bias . If not
independent=NOT A VALID AUDIT.
3 PROFESSIONAL COMPETENCE and DUE CARE:maintain PROFESSIONAL KNOWLEDGE/SKILL AT
REQUIRED LEVEL &PERFORMING WORK DILIGENTLY.( eg auditors must attend min 1 symposium on IFRS per
year by SAICA law to be a member)
4 CONFIDENTIALITY: respecting the confidentiality of client information.
5 PROFESSIONAL BEHAVIOUR: COMPLY LAWS ®ULATIONS , AVOID BEHAVIOR which discredits the
profession.
1.2. ISA 200 warns :It is not an assurance of the future viability of the entity
1.3. ISA 200 warns objective is NOT to DISCOVER FRAUD or ENSURE COMPLIANCE WITH THE LAW.(this is mngmnts
responsibility.) auditor only : " reasonable expectation of detecting such if they affect fair presentation ie: if fin. info.
contains material misstatement.
Know the following – from an example question on objective of audit( tell friend if objective of audit guarantees good investment in
company)
1.3.1.1. The opinion of auditor does :
1.3.1.1.1. It enhances the credibility of the fin stats
1.3.1.1.2. Does not guarantee future viability of the entity
1.3.1.1.3. Does not guarantee efficiency or effectiveness with which management has conducted the
affairs of the entity
1.3.1.2. The audit provides reasonable but not absolute assurance that the statements taken as a whole are free
from material misstatement.
1.3.1.3. The inherent limitations of an audit affect the objective of an audit to some degree
1.3.1.3.1. Use of testing
1.3.1.3.2. Inherent limitations of Accounting & internal controls
1.3.1.3.3. Persuasive rather than conclusive
1.3.1.3.4. Subjectivity of AUDITORS work
1.3.1.3.4.1. Obtaining audit evidence – planning audit in different way
1.3.1.3.4.2. Conclusions he then made (each makes own conclusion)
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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.
REASONABLE ASSURANCE.
1) Auditor DOES NOT ever CERTIFY / or CONFIRM CORRECTNESS :he only EXPRESSES AN OPINION on it's FAIR PRESENTATION.
2) Reasonable assurance THAT NO misstatement done- NOT 100% correct to be sure! A REASONED OPINION IS GIVEN.
3) Why Auditor Cannot Certify Financial Statements: due to inherent limitations of the audit as follows : per ISA 200
4) #6) THE INHERENT LIMITATIONS OF AN AUDIT : ISA 200
a) Per lecturer answer:
i) Use of testing
ii) Accounting & Internal controls limitations
iii) Auditors Subjective judgement
(1) interpretation of the results could differ
(2) different ways of obtaining audit evidence/planning audit
iv) Evidence persuasive not conclusive
v) (add subjective eg depreciation/bad debts/inventory obsolecence + mangmnt not give all info + check all laws complied not
easy + time vs cost benefits.
vi) THE NATURE OF FINANCIAL REPORTING : (subjectivity of financial statements & auditors approach to audit.- )
(1) Subjective account balances eg depreciation ,impairment, bad debts, inventory obsolescence.( Mngmnt must
apply judgement in the preparation of fin stats)
viii) TIMELINESS OF FINANCIAL REPORTING AND BALANCE BETWEEN BENEFIT AND COST
ix) The audit must be finished in a certain time after end of reporting period and benefit of doing this must not exceed the
cost to get it done in time(exhorbitant-1000auditors/hr)
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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.
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
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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)
INTRODUCTION.
1) An EXTERNAL Audit Engagement is called an ASSURANCE engagement + must be conducted by a registered auditor.
DIRECTORS
e) Running company
f) Reporting results OF THEIR STEWARDSHIP to shareholders.
AUDITOR
g) Independant opinion Fin info. fairly presents fin. Pos + fin Res.
h) Report to shareholdersl
SHAREHOLDE
DIRECTORS
RS
AUDITORS
#### 9) ASSERTIONS:
1) The REPORT to the SHAREHOLDERS from the DIRECTORS take the FORM of Fin.STATS. in form of GAAP(ifrs+isa) +CONTROLLED
by COMPANIES ACT (fin stats + 4th schedule)
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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
SUMMARY:
Scan in pg1/16 bottom
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INTRODUCTION
THE IFAC CODE OF ETHICS
1) From june 1996 saica adopted the IFAC (international federation of accountants) code of ethics for professional
accountants.So saica is using the professional accountants code now, not an auditors code.
2) Ifac places more emphasis on a conceptual framework than a rule based system: rules difficult to apply everywhere,
but concept /methodogy is for everything., otherwise basicly the same as the previous set of rules saica had.
3) Parts A,B,C are form IFAC.But member countries can add country specific sections if they wish- so saica added part D.
#### 1) NB
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(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
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.
SAFEGUARDS
NB
SAFEGUARDS
Unless the threat is clearly insignificant, the professional accountant is obliged to apply safeguards which will eliminate or
reduce the threat to an acceptable level.
1 How does the professional accountant decide whether a threat is clearly insignificant? There is no magic
formula or “hard and fast” rule. The decision
1. professional judgement as per definition of matter –firstly it will be a matter of his own professional
judgement
2. public interest -must take into account the public interest — if the public interest is threatened , it is most
likely to be significant.
3. reasonable and informed third party -should be one which a reasonable and informed third party having
knowledge of all relevant information would make.
2. Safeguards fall into two categories
2.1 By : 1-Profession or 2-Law (legislation or regulation) -safeguards created by the profession,legislation
or regulation eg:the Companies Act which presents a professional auditor in public practice from being a director
in his/her audit cient
2.2 work environment -safeguards in the work environment : eg a company has sound procedures to protect
an employee (a professional accountant in business) from intimidatory threatsfrom the employees manager
3. If no suitable safeguard can be put in place, the prof.accountant will be obliged to withdraw from the business
relationship.-employee or assurance engagement.
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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.
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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
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
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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
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
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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.
a) RESPONSIBILITY:
b) THREATS:
c) SAFEGUARDS:
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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.
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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 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
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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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(bb) the interest actually charged to the borrower, if less.
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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¬ 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.
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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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1) Rotation of auditors: 5 yrs , or if >2 yrs, then stop , then must wait further 5 years.
2) Removal of auditors:auditor appointed casually or by directors or first appointment – can be removed on 28 days notice ,before AGM
umless he suspects any reportable irregularities.,
a) BUT auditor normally appointed may not be removed exept at AGM by ¾ majority of those present
3) Right of access by auditor: at all times & may require explanations as he /she thinks necessary of directors& officers.BUT: audiror of
Holding company ONLY has access to old Financial Stat. of subsidiary , not books /records books and records or premises of company :
because he is not the auditor.But he may require explanations + REQUEST INFORMATION from the directors of the subsidiary company as
he deems necessary.
4) General Meetings of company for Auditors: auditor has right of access to ;
i) Attend all such meetings
ii) Receive all notices regarding such meetings
iii) Be heard at such meetings on any business of the meeting which CONCERNS HIM AS AUDITOR.
5) Auditors duties: report on all such matters said by act or any other acts.
a) Examine afs and gafs to be laid before AGM
b) Ensure proper acc. Records and returns received from branches not visited.
c) Minute books and attendance registers of meetings kept as requires by act
d) Register of directors interests in contracts have been kept.and entries agree with minutes of meetings.
e) Existence of securities
f) All info + explanations auditor deems necessary.
g) AFS in accordance acc. Records& returns
h) Gafs comply with act
i) Tests to Gafs &Afs fairly present
j) Directors report – conflict fair presentation / distort meaning of fin stats
k) Not carrying on business+ no intention= report to registrar
l) Comply any other duty imposed by act on him
m) Comply auditing profession act
6) ####ASSSOSIATION AGREEMENT :
a) To regulate the internal affairs of corporations
b) Voluntary
c) Binding on all new & present members
d) No constructive notice
e) Amendments & dissolutions in Writing & signed by members
f) May be amended & ddissolved
CC Act
1) Founding statement: basic document bring cc into being = memorandum of company but simpler
i) Name
ii) principle business
iii) postal + physical address
iv) full name + ID of each member
v) % of each members interest
vi) Contribution
vii) Accounting officers name& address
viii) Fin year end date.
2) Disposal deceased members interest:
a) Executor to heir if he qualifies(not mad)+ other members consent
b) If no consent in 28 days : he may sell it to
i) Corporation(cc)
ii) Any other remaining member
iii) Any other person who qualifies both ways as above.( if members disapprove then may purchase themselves)
3) Cession of membership by order of court: on application to
a) Incapable of performi9ng role eg unsound mind
b) Guilty of conduct prejudicial : eg reckless/negligence
c) Impractical to other members: eg such member never present
d) Other circumstances render just & equitable to cease to be eg acts in own interests detriment cc.
All For ‘not pull their weight’ , and also court decides on payment
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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
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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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INTERNAL CONTROL
INTRODUCTION
1) ISA 315- before an auditor can audit a thorough understanding of a clients internal control systems should be obtained –(do a walk
through)
2) Internal Contols: + acc.sys. produce balances & totals –good acc.sys. = generates good ( 1-valid,2-accurate,3-complete,4-timeous
= “FVACT”) info.
3) Auditor more interested in acc. info. less in other info : eg sales analysis,budgeting info,marketing info etc.
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INTERNAL CONTROL
FOR THE BUSINESS
AS A WHOLE
OPERATIONS:
ECONOMY INTERNAL COMPLIANCE WITH
EFFICIENCY
EFFECTIVENESS FINANCIAL LAWS AND
CONTROL REGULATIONS
ACCOUNTING CONTROL
SYSTEM PROCEDURES
1) Control Environment (strong) : Attitude and awareness of managers & directors to internal controls and their importance to entity.
1. Eg: fin accountant does not bother to check recon of creditors ledger to creditors statements made by creditors clerk
PROPERLY ,only HALF,before paying ,.So soon clerk wont bother to actually reconcile properly.
2. ISA 315: says good control environment characterised by:
i) Mngmnt Commitment/implements/employ : Integrity and Ethical values.
ii) Mngmnt Commitment/implements/employ : Competent staff
iii) Mngmnt Acts/displays : Integrity & Ethical.
iv) Mngmnt Acts/displays : Leadership , Sound judgement , (+Ethical behaviour).
v) Organisation Structure promotes this : Authority + Responsibility + Reporting : relationships
vi) Organisation Structure promotes this : Planning + Execution control + Review
vii) Good HR policies : Training & development , Compensation fair & benefits ,get competent ethical staff.
2) Competent ,Trustworthy Personnel. – esp. at internal controls.
3) Segregation of Duties. – collusion is necessary.
1. Eg: E.F.T. control, or storeman signs a gate pass delivery note+ falsify stock record+takes goods
2. A TRANSACTION PASSES THROUGH 4 STAGES:
i) Authorising
(1) Purchase order authorised by chief buyer
(2) Checking & approve supporting docs. For a payment to a creditor.
ii) Executing
(1) Order placed with supplier by the order clerk
(2) Preparing the cheque realisation and cheque (SEPARATE CUSTODY OF CHEQUE)
iii) Custody of Asset
(1) Goods rec. by receiving clerk & placed in store.
(2) Signing cheque (NB person who has signing power auto has SEPARATE HAS CUSTODY OF CASH)
iv) Recording
(1) Transactions entered into acc. records by acc. clerk.
(2) Recording payment in records & posting to ledgers.
3. MOST IMPORTANT DIVISION : 3 & 4 are the most 'incompatible'. 'Defalcation' is easiest if both are same ou. Esp:
SMALL BUSINESSES.
i) NEXT BEST is 2 & 3 & 4. :For the same reasons.
ii) 1 & 2 can be combined most easily : because if the others are segregated ,defalcation is likely to be identified.
iii) GOOD SEGREGATION : starts with divide the companies CYCLES into FUNCTIONS , then further segregate duties
within FUNCTIONS. ( each Function = Segregated duty./a New person and each cycle =
authorisation/executing/custody/recording)
4) Isolation of responsibility –
1. FULLY AWARE OF THEIR RESPONSIBILITIES : Internal controlsER must be .
2. ACCOUNTABLE FOR THEIR PERFORMANCE ; Internal controlsER must be .
3. Acknowledge in writing that they have peformed control procedure :IDENTIFY & ISOLATE employee responsible.
i) SIGNITURE fulfils 2 functions :(or fingerprint login)
(1) ISOLATE+IDENTIFY which person was responsible for delivery.
(2) ACKNOWLEDGEMENT of delivery.from supplier . to purchaser.
5) Custody / Access Controls.
1. ONLY to PROTECT COMPANIES ASSETS.( policies & procedures)
i) PHYSICAL & NON PHYSICAL ASSETS.Cash in Bank(only entry in book to show), Investments (only papers to show), Debtors
(only an entry in book to show).
ii) Custody/access controls designed to;
(1) Prevent damage to
(a) NON-PHYSICAL : Debtors get legal dont pay status from too long time wait to pay,with no court action.
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(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 EVIDENCE:
1) SUFFICIENT means if QUANTITY of evidence is enough.
2) Evidence is Cumulative : eg debtors test = 1-debtors circularisation +2-test if debtors pay( very good evidence they exist!)
3) To calc. quantity of evidence needed =NO hard and fast way ,only :USE professional Judgement + statistical methods.This is done
as part of the "AUDIT PLAN" stage.
APPROPRIATE EVIDENCE.
1) APPROPRIATE means if QUALITY of evidence is enough. Further broken down into:
a) RELIABILITY (source & nature)
b) RELEVANCE (to assertion being tested)
r
2) RELIABILITY : Hierarchy of Reliability of Evidence:
a) Most Reliable =Developed by auditor : eg inspect stock.
b) Reasonably Reliable =Evidence from 3rd party(not client) if 1-Independant 2-Reputable 3-Competent eg attorney
c) Less Reliable = From 3rd party BUT passed through client. Eg: bank statement.
d) Less Reliable = Evidence from clients SYSTEM and where related controls it passed through were Effective
e) Least reliable = Evidence provided by client (lacks independance)
f) Written more reliable than oral.(easy denied)
g) Original documents More than Photocopies /facsimiles.
Also, REM these are guidelines, eg if competence +integrity of directors&employees are strong &acc.sys and internal controls are strong,
evidence from client could be very reliable.
Eg sheet to shelf = existance BUT shelf to sheet =completeness.
3) RELEVANCE :
a) Evidence MUST be MATCHED to assetion tested : eg; self stock count= 'existence'+some 'valuation' BUT not 'rights' eg could
be uncollected but sold .NOR 'completeness' yet eg must first be traced to records to determine if all were included in records.
b) Eg tests of controls as to accuracy will not prove validity or completeness.
c) A single procedure could be relevant to more than 1 assertion though.
1) THE ASSESMENT of Inherent Risk and Control Risk at the client. :if higher risk – more evidence from most reliable source
needed.
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4949 | 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.
DIAGRAM OF ASSERTIONS:
TRANSACTION PRESENTATION
ASSERTION ACCOUNT BALANCES
EVENTS DISCLOSURE
1 COMPLETENESS (ALSO ?
# # #
VALIDITY)
2 OCCURRENCE # #
3 EXISTENCE #
4 ACCURACY # #
5 CUT OFF #
6 CLASSIFICATION (and for
Pres.& Disclosure : # #
UNDERSTANDABILITY)
7 RIGHTS and
# #
OBLIGATIONS
8 VALUATION and
ALLOCATION # #
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5050 | 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.
2. Auditor self stock count= 'existence'+some 'valuation' BUT not 'rights' eg could be uncollected but sold .NOR 'completeness' yet
because must first be traced to records to determine if all were included in records.
3. sheet to shelf = existance BUT shelf to sheet =completeness.
4. Tests of controls specificaly as to accuracy will not prove validity(?occourence /existence? ) or completeness.
TESTS OF CONTROLS
1) CATEGORIES OF TESTS OF CONTROLS:
i) REPERFORMANCE : repeating 1-Wholly 2- In Part control procedures eg: reperform bank recon.
ii) INSPECTION : verify on docs. if contrl procedures did happen : eg: verify if transaction authorisation signiture is there.
iii) ENQUIRY; ask person CONCERNED with control procedure as to effective operation of.,NOT just accept mngmnts
word. Eg : find out who performs each procedure and what they do.
iv) OBSERVATION: watch process/procedure being performed eg:watch what a receiving clerk does when supplier delivers
goods.
2) Tests of Control are performed to obtain evidence of whether
i) Controls suitably Designed to
(1) PREVENT
(2) DETECT
(3) CORRECT material misstatements
ii) Operated effectively THROUGHOUT PERIOD AUDITED.
3) Good results reduce control risk and hence audit risk , then less time need spent on substantive tests.
4) LIMITATIONS OF : tests of controls:
a) Good when checked but not in the rest of the Fin. Year.
b) Inherent risk? ch7eg 1-only test some 2- subjectivity-auditor own method 3-
5) LIMITATIONS OF : internal controls:
i) Cost exceed benefit –limits capacity of int.controls.
ii) Directed at routine transactions. –miss non-routine eg sell copier.
iii) Human error. – eg: calc. discount after vat.
iv) Collusion- eg fraudulent paypacket- collude wage clerk,foreman,personell mngr.
v) Mngmnt Override /Abuse of responsibility over internal control.- eg mngr overrides stop on purchases for overdue acc.
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5151 | 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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5252 | P a g e Auditing Notes AUDI 101
2. Sample results must be EXTRAPOLATED over population(3 mistakes * xxx= 1000 mistakes total) statistical sampling will result in
more defensable results than non-statistical sampling.
3. Other evidence is used together with sampling results like a jigsaw puzzle eg: Analytical procedures on same population.
4. ISA 500 –says auditor must selecyt appropriate means of selecting samples when design audit procedures.
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5353 | P a g e Auditing Notes AUDI 101
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.
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5454 | P a g e Auditing Notes AUDI 101
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.
(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.
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5555 | P a g e Auditing Notes AUDI 101
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
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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5656 | P a g e Auditing Notes AUDI 101
ii) Auditors Toolbox : this is where he uses it, ie; 1-substantive tests 2- tests of controls, both done by:
(1) Inspection : check records /assets etc
(2) Observation : watch internal controls
(3) Inquiry and Confirmation : ask receiving clerk about controls, debtors circulation
(4) Recalculation: : eg discounts on sales invoices
(5) Analytical Procedures : check ratios+stats etc
(6) Reperformance : eg reperform year –end bank recon.
c) RESPOND TO SIGNIFICANT RISKS : By carrying out Tests Of Controls +Substantive Tests Tests (to gather
sufficient evidence to reduce risk to an acceptable level.) eg check for laws and regulations etc.j
2) Q UICKLY READ PG 6/10 , FROM NO . 3, TO 6.12 BOTTOM . VERY FAST - SOME QUICK FACTS . J
i) SUFFICIENT APPROPRIATE EVIDENCE : was obtained(to reduce audit risk to acceptable levels)(qualified opinion or
disclaimer issued if not able to obtain sufficient evidence)
iii) FIN POS + FIN PERF + CASH FLOWS FAIRLY PRESENTED. OR NOT .
(1) Accounting policies : 1-IFRS + 2-correctly done + 3-correct for business type.
(2) Estimates :by client correct
(3) Relevant +Reliable + Comparable + Understandable : acc. Info is / or Not
(4) Disclosure : whether sufficient to enable users to understand or not.
(5) Statutory Requirements & Regulations : complied or not
4) AUDIT REPORT :
a) Formulate Audit Report. : senior decides , on basis of reviews in course of audit and final outlook- what type of
opinion to give:
i) Exept for
ii) Adverse
iii) Disclaimer
iv) Other additions eg inclusion of an ‘emphasis of matter paragraph.’
(DONE IN CHAPTER ON REPORTING LATER)
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5757 | P a g e Auditing Notes AUDI 101
2) Remember though : When using auditors toolbox – substantive tests + tests of controls :same type procedures used
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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5858 | 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.
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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5959 | P a g e Auditing Notes AUDI 101
(vii) Good HR policies : Training & development , Compensation fair & benefits ,get competent ethical staff.
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6060 | P a g e Auditing Notes AUDI 101
(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
DOCUMENTATION:
Auditor MUST document his all work .
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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6161 | P a g e Auditing Notes AUDI 101
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.
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
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.
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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6262 | P a g e Auditing Notes AUDI 101
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
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.
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
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6363 | P a g e Auditing Notes AUDI 101
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
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.
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
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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6565 | 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.
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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:
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.
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.
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COMPUTER ENVIRONMENTS:
1) *Definition : Computer Environment is any particular and unique combnination of 1-hardware,s2-oftware,3-operating
systems & and 4-personnel.(larger clients may have 2 or more of these computer environments)
2) Small firms will not be able to implement all the internal controls needed eg full segregation of duties, like the larger firms, but
mngmnt is still responsible to ensure proper internal control.
3) *KEY OBJECTIVE OF CONTROLS IN A COMPUTER ENVIRONMENT: VAC : Valid Accurate Complete : although computer
environments are different ,”auditing objective” is still to establish if accounting system and related controls is VAC.
4) EDP= Electronic Data Processing (Old Term Used In Past)
5) DP= Data Processing(Old Term Used In Past)
6) IT= Information Technology (Current Term)
7) IS= Information Systems(Current)
NETWORKED SYSTEMS
(a) Definition: number of pc s linked together by data cable, each has own powerful processing – input/output/process/-
capabilities, but can share networked computers data and processing power.
(b) Characteristics:
(i) Combined processing power and storage: of each together is considerable.
(ii) Security is Demanding : far more demanding since each computer has access to all other’s data etc.eg
employee can alter his wage record.
(iii) Computer knowledge : Sophisticated software needed so a high level of knowledge is needed to run it.
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USE OF OUTSIDE SERVICE PROVIDERS
(a) “computer bureau” - Similar to a centralized IT dept. but run by another firm.Very common example is a ‘computer
bureau”
(b) Magnetic tapes / e-link : Information can be delivered /collected in hardcopy or magnetic tape or electronicly linked
.
(c) Implications of using this type –characteristics:
(i) Natural Segregation of Duties
(ii) Security is dependant on bureau – makes business vulnerable here.
(iii) : Transfer of Information. Controls : these controls must now be very strong –back and forth of magnetic
tapes etc..
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.
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(5) Potential for increased mngmnt supervision: appropriate software – eg sales reports,analyses, expense
fluctuations,stock movement reports.
(6) DISADVANTAGES OF COMPUTER ENVIRONMENT:
(a) Dependence of other controls on computer processing : eg: when account balance debtor check before sale is
made, if masterfile tampered with, it could lead to extra bad debts.
(b) Uniform processing of transactions : if error in program, all transactions will be wrong eg: extra vat calculated etc.
COMPUTER AUDITING
DEFINITION OF A GENERAL CONTROL:
1) All controls in a computerized centre are classified as either 1-General or 2-Application controls.
2) Definition: General Controls: Span across all applications. Establish an overall framework of control for computer activities.
Must be in place before any processing of transactions takes place.
3) Definition: Application Controls :relevant to a specific application/task within the accounting system eg wage cycle,
purchases cycle,
CONTROL ENVIRONMENT
1) For Hardware +Software ONLY:A Policy ,not Procedures, must be developed, must be DOCUMENTED. Characteristics
should be :
a) Least Priveledge: clerk cannot access things he does not need to.
b) Fail Safe : if one control fails, another takes its place : eg log in software fails, system shuts down.
c) Defense in depth : combination of controls ,not just one, eg ATM , no more than balance total give out, in case it
spews out thousands.-sommer add a control.
d) Logging: NOT an EFFECTVE measure unless regular and frequent review/AND follow up action .All access,all changes
etc.
ORGANISATIONAL STRUCTURE
2) Sound ORGANISATIONAL STRUCTURE for an EDP/IT Dept :
3) The following chart illustrates following important segregations of duty: note main principles used below for chart.
a) 1- SEGREGATE I.T. AND USER DEPTS.,
i) Authorise :No transactions to be authorized by IT dept eg: wage increase rate, purchase order (to put on
system, or otherwise)
ii) Access :No IT staff have access/or custody of PHYSICAL ASSETS eg stock, or UNCONTROLLED ACCESS TO
NON-PHYSICAL ASSETS eg debtors masterfile.
iii) Resposible : ONLY responsible for correcting errors in processing+operating problems, for other
corrections (eg in books) ONLY assistance if by request from user departments.
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4)
BoD
Board of Directors
Steering Commitee
IT Manager
Application
Technical Help Desk
Development and Security
Administrators /Operations
Programming
PERSONNEL PRACTICES:
(1) Very important to have good personnel practices in IT .( nerve centre)
(a) Background check,competence checks
(b) Password,access exclusion if dismissed.
(c) Compulsory leave : crookery discovered when they are missing to cover up
(d) Training and development
(e) Terms of reference: written personnel policies and practices.
(f) Rotation of duties: boredom, learn other tasks, catch out. Do not compromise segregation of duties though.
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vii) Transfer info old to new system causes errors.
5) To avoid these risks , following controls must be implemented: know well as per lecturer:
i) STANDARDS : eg ISO 9000 , + check compliance
ii) PROJECT APPROVAL: steering committee must approve, feasibility study in-house or off-shelf +cost vs benefits.
iii) PROJECT MANAGEMENT :KNOW well lecturer : 1-project team 2-stages/milestones/deadlines 3-progress
monitoring + 4-prog. monit. reports to steering 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.
(v) POST IMPLEMEMENTATION REVIEW: :users+auditors+ IT for several months : documentation/sys
dev. success or not/bugs/
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
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(b) More Preventative , less than detective+corrective.
i. Eg: get details of a airline booking correct before its processed(for both above)
DEFINITIONS:
NB
(4) An APPLICATION : a set of procedures and programs , ,designed to satisfy users for a specific task eg payroll
cycle(cycle link)
(5) APPLICATION CONTROLS : over input,processing output of fin info , relating to a specific application ,to ensure
VAC :Valid Accurate Complete.
(6) TRANSACTION FILES: files to STORE DETAILS of individual transactions
(7) MASTER FILES: files only to store 1-standing information + 2- latest balances : need tight control
(8) MASTERFILE AMENDMENTS : changes to
(9) VAC: VALID , ACCURATE, COMPLETE (objective of controls in computerized environment is VAC)
(a) VALID: transactions&data : not 1-fraudulent/fictitious 2-in Accordance activities actually authorized by
mngmnt.
(b) ACCURATE; transactions&data: are correctly 1-captured,processed,allocated to 2-minimize errors
(c) COMPLETE: transactions&data: not omitted or incomplete
(10) PREVENTION, DETECTION ,CORRECTION : (just the stage at which controls are implemented to achieve objectives of
VAC))
(a) PREVENTION : controls to get errors BEFORE input/process/output (check before input)
(b) DETECT :controls to detect errors ALREADY IN SYSTEM + RESOLVE.
(c) CORRECT :controls to RESOLVE ERRORS&PROBLEMS already identified by detection controls
PROCESSING METHODS:
NB
(1) 3 types of controls
(a) BATCH ENTRY ,batch processing/update
(i) First on Source Docs
(ii) In batches of eg 25 : entered on computer to store at efficient/convenient time, to update masterfile immediately
(b) ONLINE ENTRY, batch processing/update
(i) First on directly on PC
(ii) Stored on transaction file, later batches of these files are updated to masterfile.
(c) ONLINE ENTRY, real time processing/update
(i) First direct on PC
(ii) Stored and also Masterfile updated in Real Time eg airline seats available
(2) Todays esp. SME ,Commercial packages incorrectly configured to not do programmed controls are a risk.
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6-Logs And Reports
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7676 | P a g e Auditing Notes AUDI 101
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.
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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.
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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)
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7979 | P a g e Auditing Notes AUDI 101
INTRODUCTION:
1) In large companies access to computer resources must be controlled:
a) For 1-tapping the Telephone line
b) 2-points of access plugs
c) Maintaining the
i) 1-integrity and
ii) 2- security of data actually transmitted
2) Auditor is not a expert BUT must call on experts if need be! For technical stuff.
TRENDS IN IT
1. Move from mainframes to personal computers-move to end user computing-processing power +storage-division of
duties&data integrity and confidentialtity under threat if correct controls not put in place (due to everybody has access now,not just 1
central mainframe)
a. Auditor benefits – uses laptop computers
2. Client-server architecture : simplest is a LAN, applications+databases scattered throughout organization,same
implications for auditor as in introduction above.
3. Open sytems: many applications all use same standards, so communicate/exchange data easy.eg word+wordplus+others.
Has implications for auditor.
4. Image processing: scan backups for audit trails
5. CD,USB,DVD : opportunity&threat= + easy to store stuff for auditor.& stealing info
6. Smartcards: contains microprocessor, not magnetic stripe.= better controls-(storage+processing)
7. Communications technology: EFT,EDI,wireless etc.
8. Web enabled: access application via the internet.
NETWORKS
1) Why we have them: Comes from people wanting to share printers,so to buy less printers, now expanded to any resource incl.
processors/database etc etc.
DEFINITIONS:
1) LAN: local area network : is a Data Communications System, links independent resources, normally by cable,in a small geographical
area/building.For 1-share resources+ 2-communicating.
2) WAN: wide area network : same as LAN, exept :
a) Wider geographical area – Eg: to Branches/trading partners(use EDI)/service providers(banks).
b) Extra resources eg: routers,gateways,bridges.
c) Additional considerations: - see cost/security/access control to use either
i) Use leased line OR
ii) Switched line OR
iii) Lines in analogue(needs modems to convert to computer digital) or digital(uses diginet connections).
3) VAN: value added networks: Business entities which provide a message transmission service: they connect you to 3rd parties/ or trading
partners for a fee so you don’t have to buy expensive equipment.
4) VPN: virtual private network: uses encryption to provide a secure ‘tunnel’ using the internet to connect companies to remote
offices/users.Cheaper than leased/owned lines.
5) Internetworks: signify linking of LANS,WANS, to many other LANS,WANS, also to mainframes,PCs etc. Risks remain same.
6) Server : Powerful microcomputer which controls the usage and makes available to the network : a particular resource eg; printer/
files/e-mail etc. and makes it available.
7) Distributed Processing: where 1-processing + 2-storage is distributed amoungst a number of different computers and processors and
could take place on various remote sites, not just on 1 easily controlled site.1-Security of link + 2-Access control is very important.
DATABASES
DEFINITIONS
1) DATABASE : pool of interrelated data stored/structured/managed in such a way that:
a) Duplication is minimized
b) Contains all: information needed for use by sharing in common programs&users
c) Quickly accessable : by all authorized users
d) Simultaneous : accessability by many users with the same view in spite of updates which are in progress.
e) Provides sharing : by many users eg Microsoft SQL
THE INTERNET
1) Started as ARPANEt- many LANS,WANS etc.
2) Virus,confidentiality,corruption of data+PROGRAMS,
3) Certain protocols for different types of service, some are more safe than others.Different services are:
a) WWW : uses http/ https (secure) ,hypertext transfer protocol. to market products/sell 24/7 /source of info./download
products=music/articles etc.
b) E-Mail : uses smtp=simple mail transfer protocol
c) File Transfer : uses FTP/ SFTP ,file transfer protocol.
d) Remote terminal access+command execution: as if you were on that terminal.
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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
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
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ACCOUNT BALANCES:
1. SCI : sales, discount in/out, bad debts , sales returns, cost of sales
2. SFP : receivables, bank, provision for bad debt, inventory, “output” Vat.
BUSINESS RISKS
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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)
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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”
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.
2) RECEIPTS: (transactions)
a) Completeless
b) Occourance
c) Accuracy
d) Cut-Off
e) Classification (proper accounts)
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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: to succeed he wants you must NOT use bank deposit slips as source docs for cash book(bank teller compares
cheque name to deposit slip, so he cannot substitute),he handles all queries from debtors, or he write up source doc receipt Or cash
book.
c) Fix by:
i) Feed back
ii) Credit notes
iii) Bad debts
iv) Destroy records
d) Risk in:
i) Poor control environment
ii) Poor segregation duties pay write receipts / debtors queries/ recording
iii) Cash&credit sales
iv) Small/medium size business
TESTS OF CONTROLS
1) You identify each control, then perform 1 of the above 4 procedures on it to test if it works .
2) Each is Limited in value: ‘inspect’ signature only says it was signed, not actually checked, ‘observe’ only says control worked While you
watched, not always.
3) Note: tests must also be done on NON-SPECIFIC (GENERAL) CONTROLS: eg ‘custody’ of blank delivery notes,invoices.
4) Eg:
a) Enquire:
i) of order clerk if 1- ALL orders go to him,
ii) 2- if he makes out an ISO for all orders, not only phone orders.
b) Inspect :
i) 1-filed copies of ISO for ‘evidence’ credit approval was obtained.
ii) 2- correspondence from ‘credit bureau’ to confirm approval was actually obtained.
c) Observe:
i) opening of mail & writing of receipts
ii) despatch clerk counting and checking goods on transfer from warehouse to dispatch.
d) Reperform
i) A bank recon
SUBSTANTIVE PROCEDURES
1) In some other textbook says it is divided in 3 Types: 1- Transactions 2-Balances 3-Analytical Procedures.(we say these 3 plus extra +
Presentat.and Disclos.)
2) MAIN focus for this cycle: BANK/CASH + DEBTORS balances, which also gives evidence for sales.
3) MOST IMPORTANT part : non-cash transactions which reductions debtor balances : do tests as in ‘eg’ no 4 below , PARTICLARLY
AUTHORITY given for each to be done.
a) Credit notes
b) Bad debts write off
c) Special discounts
4) Eg: auditor just selects a sample of Sales Invoices and Does DUAL PURPOSE TESTs on them :”VOUCHING OF TRANSACTIONS ‘ ARE
referred to as ‘dual purpose’ tests: because…..
a) DUAL PURPOSE TESTS:
i) Inspect: Match to details on supporting docs –sales order,delivery note
ii) Inspect: trace to entry in sales journal
iii) Inspect : docs for signatures showing control procedures have been carried out.
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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
DIAGRAM OF ASSERTIONS:
TRANSACTION PRESENTATION
ASSERTION ACCOUNT BALANCES
EVENTS DISCLOSURE
1 OCCURRENCE (ALSO ?
# #
VALIDITY)
2 COMPLETENESS # # #
3 ACCURACY # #
4 CUT OFF #
5 CLASSIFICATION (and for
Pres.& Disclosure : # #
UNDERSTANDABILITY)
6 EXISTENCE #
7 RIGHTS and
OBLIGATIONS # #
8 VALUATION and
ALLOCATION # #
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(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: (this is very close to debtors cause it reduces debtors etc)
(1) Method &procedures enquire (eg if to students hostel room no. then provision must be more)
(2) Authorization procedure :(better if more independent of ‘credit control/er’ itself)
(3) Change in circumstances : have they change so prior year’s method is wrong eg new credit policy.
(4) ENQUIRE MNGMNT: change in circumstances : eg new credit policy/ changed trading conditions major customer.
(5) Reperform ALL calc’s.
(6) Reperform Ageing : on small sample, to check if correct periods, refer to invoice/delivery note.
(7) Long outstanding & material outstanding :discuss ALL with credit controller
(8) Legal &debtors correspondence : check to identify debtors handed over and those with disputes.
(9) Prior year vs Actual compare to check the companies ability to estimate correctly.
(10) MONTHLY REPRTS TO MNGMNT: should be reviewed eg: write offs & debtor liquidity problems.
(11) Analytical Review:
(a) % to prior year
(b) write-offs to prior year.
(c) Age analysis to prior year : is debt getting older?
(d) Ratios year on year : eg Days Outstanding Debtors.
(12) Potentially Uncollectable : debtors should be considered on a 1 by 1 basis, not as a %.Consider all aspects eg large
chain store will pay, but just overdue.
4) ASSERTION : COMPLETENESS : do following to make sure of this
a) Cut-Off Testing:
i) AFTER: first 20 (material) after year end cut off number –trace correct to delivery notes/records
ii) BEFORE: 10 before check as above.
b) Credit Sales: to see whats NOT been recorded is more difficult to check/trace than what has been recorded.
i) Missing dispatch notes (not in debtors)
ii) Dispatch notes NOT MATCHED to an invoice (not invoiced= not in debtors- TAX etc)
iii) Purchases+ inventory left MATCH to Sales (eg sold but not in debtors/or revenue)
iv) Specific Representation from Management as to Completeness of Sales
v) Analytic procedures:
(1) gross profit % fluctuations
(2) prior periods : sales&debtors to
(3) prior periods : sales by characteristic to branch/region/month/customer
(4) sales ratio: eg: commission vs sales (if commission is up, sales should be up)
5) PRESENTATION & DISCLOSURE ASSERTIONS: (not ‘balances’ but next one :ie) as it applies to debtors: as per ISA500
a) COMPLETENESS : IN TERMS OF ias INTERNATIONAL ACCOUNTING STANDARDS, 4TH SCHEDULE. Eg: debtors balance with
current assets, + disclosed encumbrances on debtors. + all dother DISLOSURES are there
b) :Occourance: Evidence :consistent with evidence gathered on audit.
c) Accurate: Amounts , facts ,details, 1-accurate 2- and=evidence
d) Classification&: Appropriate classification of information.
e) Understandablity: Wording is clear and understandable. Eg: accounting policy & explanation of encumbrances.
f) Rights&Obligations: per evidence gathered
g) Valuation&Allocation: per evidence gathered
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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,
(2) select samples for ageing(valuation)/circularization(existence).
(3) Scan ERROR : masterfile for error conditions,duplicate ACCOUNT NUMBERS (existence),NEGATIVE
balances( valuation) ,blank fields(existence)., over/abnormal/ credit limit/terms(valuation bad debts)
(4) Debtors balances vs client listing, or vs ageing,
(5) Unique characteristic/code 1-2-3: eg extract all handed over to lawyers(Valuation gross&bad debts, or code 2
correspondence(all assertions)
(6) This Year vs Last Year for
(a) New accounts ( to check eg credit applications)(existence)
(b) Major fluctuations in individual account balances(valuation)
(c) Not Listed :anymore Debtors (existence)
(7) Bad debt allowance : recalculate based on aging eg 3% 30 days + 5% 60 days etc.
(8) Casts/cross cast : (valuation)
6) Kiting: where company controls many bank accounts and uses this to inflate ceratin balances using the time taken by a bank to clear
payment n a cheque. You transfer from a bank account at another bank, by cheque to another bank account-then while one is waiting to
clear so it gets reduced (has not cleared yet so not yet reduced at 1 bank) , then other is immediately credited on deposit and youseem to
have more than you actually have ie; 50 +10+ deposit of 10 = 70., but deposit only clears after bal.sheet date so then it is 2 weeks before
40-payment of 10 + 10+deposit of 10=60
7)
8) Transfers:
a) Eft TRANSFERS scrutinize : carefully esp. payee account VALIDITY
b) YEAR END : any large transfers at year end, to subsidiary or related party or own bank accounts,CONFIRM(for KITING) (also
with reference to other auditors at related parties if needed).
i) Supporting docs
ii) In same year period : recorded in both enities books in same period
iii) Any outstanding : are included in any bank recons.
9) Cash counts:
a) Simultaneous: counting of all floats prevents cover ups
b) In Presence of cashier responsible for:
c) Alone : auditor NEVER alone with cash, or accused of stealing it
d) Cashier+auditor sign : results on workpaper together
e) Recon as follows: cash float + cash received - cash payments=cash on hand.
f) Supporting docs : all Payments& receipts should be supported by
g) Supporting docs: 1-Valid+2-Authority all to be scrutinized for both of these things.
h) Postings: cash transactions to the ledger
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1-ORDERING Initiate orders, 1-REQUISITION 1- 1-order clerk not order no authorized requisition
OF GOODS always 2-ORDER FORM Incorrect/Unnecessary (a)cross-ref requisition to order
AND SERVICES available,place =liquidity+wastage (b)confirmation by stores/production (esp. preset levels)
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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)
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11-returned paid cheques:
(a)filed numerically,
(b) review suspicious endorsements.
INTRO.
1) Important cycle –must be comprehensively audited.
2) Product= purchases&creditors also bank
3) If auditor thinks cash&creditors is fair, then purchase&payments should be fair
TESTS :
1) Tests of controls:
a) Observation
b) Inspection
c) Reperformance
d) Enquiry
2) Substantive procedures:
a) Inspection
b) Enquiry & Confirmation
c) Recalculation
d) Reperformance
e) Analytical procedures
TESTS OF CONTROLS:
1) Assess the risk that misstatement will not be identified by the system/risk of misstatement of the fin stats/not fairly presented.
2) Eg:
a) Inspect
i) a sample of purchase orders for supplier is on approved supplier list
ii) Requisitions for authorizing signature
iii) Supporting docs is it stamped so it cannot be used again
b) Enquire: procedures carried out of goods receiving clerk – to reveal missing procedures
c) Observe: procedures carried out of goods receiving
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d) Reperform: creditors reconciliation(creditors STATEMENTS to creditors ledger)
3) Test should also be conducted on GENERAL(NON-SPECIFIC) CONTROLS eg: custody of blank order forms
4) Remember limitations of these tests: observing someone performing it only means he did it then, not every time etc.
SUBSTANTIVE PROCEDURES:
1) Main= creditors balance, main=completeness, main
2) Generally seen as :liabilities understated, not overstated
3) In addition to creditors balances auditor may select sample of transactions eg: payments and purchases to perform subst.tests on, to
seek EVIDENCE on assertions :Eg on a purchase transaction:
a) Occourance:
i) Inspect supporting docs (GRN, PURCHASE ORDER, DELIVERY NOTE, INVOICE)to see if
(1) External docs are made out to Why(Pty)ltd
(2) All doc are signed by the authority eg chief buyer.
b) Accuracy: (amount)
i) Recalc name extentions invoice
ii) Confirm prices&discouts: check order or purchase contract
iii) Recalc vat , check discounts come before vat.
c) Cut-off:
i) Date on docs to date in purchase journal +fin year
d) Classification:
i) Should be on purchase order by buyer , check if in right one
ii) Check descr. To be sure correct: eg fixed asset not written off as expense.
iii) Vat correct on invoice+journal
iv) Creditors ledger posting from ..
e) Completeness
i) All that should have been recorded are recorded.
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(5) Find ANY ‘dr’ balance and discuss with credit manager if they should be taken off list- put in debtors.
(6) Check Year end Recons by creditors clerk : a sample incl. major suppliers
(a) Reperform casts
(b) Balances on recon- TO creditors list AND creditors statement
(c) Test logic of recon.
(d) Inspect supporting docs & inquiry&confirmation –all amounts/balances
(7) Foreign currency –on date of fin stats = at Spot Rate.
(8) All Accruals (year end adjustments) : 1-re-cast list 2-check all sup docs+Ledger &reperform calculations3- check if
total is the same as in TB,Ledger,Balance 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)
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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)
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b) Its Nature (foodstuffs, chemicals, fresh produce)
3) Delays & Inefficiencies in Production due to:
a) Incorrect raw materials supplied to production
b) Non-availability of raw material
c) Poor Quality of raw materials
4) Unauthorised Production : eg private jobs
5) Inadequate recording of Costs of Production. : WIP etc wrong costs carried forward.
6)
2-CONTROL PROCEDURES
1-TRANSFERS N.B. 1) Recorded: no movement without recording eg signed requisition / or barcode scanning.
2) Deliverer + Receiver Sign : both should acknowledge after check qty,descr. Eg material issue
3) Filed Numericly : transfer documents (for finding gaps/false copies/missing/)
4) Regular Review Signature : all docs. Should regular review for authorizing signature.
5) Regular review sequence check: docs regular find missing/false extra etc. +Investigate if
2-DAMAGE/LOSS/THEFT 1) Physical controls : Stores + All Production Area
N.B. a) Limited entry/exit : minimum doors possible
b) Controlled entry/exit: swipe cards / keypads /turnstiles /x-ray /security guards/gate cntrl.
c) Restricted entry/only: eg buying clerks not unaccompanied, only production employees.
d) Secure buildings: solid structure, minimum windows, locks etc
e) Environmental: pest free, temp. controlled, dry, neat , clean.
f) Surveillance: cameras over production line+receiving+despatch.(it’s often easy to steal from
production line)
2) Frequent Comparison & Reconciliation:
a) Inventory theory vs Actual: in all its forms, theoretical vs actual
b) Production schedule VS Actual :where’s the extra raw materials from lower actual gone to?
c) Budget VS Actual : why did it cost more? Dofness on duty?or why?
3) Investigate Reconciliation : material variances.
4) Regular Surprise Checks: by mngmnt+supervisory to see unauthorized production by: machine
hours/usage compare to actual production+production schedule to actual being made comparison
5) Division of Duties : Note: ONLY THIS ONE : custody + recording inventory not by same person.
3-Info. FOR PRODUCTION 1-FOR JOB ORDERS
COSTS 1) Preprinted Job Cards for ALL JOBS TO BE RECORDED ON
a) Sequenced and dated
b) List of materials to be used
c) Cross-ref : to customer order/quote
d) Cross-ref : to materials requisition
e) Cross ref : daily production schedule
f) AUTHORISED by PRODUCTION MANAGER.
2) Job cards Pending File : that are still In production go in a …and updated for labour hours as they
are incurred.(could be computerized)
3) Job cards Finished: should be removed from pending file and costed-labour hours&material prices
accumulated and overheads allocated. (see objectives above)
4)
5) Job Card Calculations Checked : all above calc. should be checked by a second clerk
6) Job Card Numericaly filed : after
7) Job Card Completed file Sequence test & Check for: Frequent & Regular for
a) Cross-ref to “transfer to finished goods note” and to a “sales invoice” ( not skelm private job)
b) Missing job Cards are still in the production stage.
8) Job Card Mngmnt Compare : to QUOTES and BUDGETS & investigate variances.
9) “transfer to finished goods form” : On Completion : make out a
a) Accompany goods to finished goods store
b) Cross-ref to job card
c) Be used to write up perpetual inventory of finished goods (one record-the other is job card
accumulation, so you have 2 to stop skelm change 1,as well as other reasons)
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9) CHECK: all casts, extentions,calc. before posting though.
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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
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.
2) Misappropriation of assets
a) How to get the goods and how to hide the theft
b) How to get the goods will depend on:
i) Nature of goods: small valuable vs large immovable
ii) Physical control ; limited exits, cameras,etc
iii) Division of duties: custody & recording by same person
iv) Frequency of physical & theoretical reconciliations.the more often the more difficult to steal
v) Controls in other cycles: eg receiving goods(aquisition cycle) , despatching goods(revenue cycle)
vi) How to hide the theft will depend on :
(1) Division of duties-custody & record keeping – presents the BEST opportunity.
(2) Control environment weak.
SUBSTANTIVE PROCEDURES
1) Many of the tests of controls are dual purpose tests
2) Auditors Objective: (all done by substantive procedures)
a) Quantities correct
b) Cost formula correct
c) Reasonableness of write-downs
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.
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i) Get a sample of HIGH VALUE items
(1) Get suppliers invoices,shipping contracts,costing schedule and reperform unit cost calc. to verify:
(a) Exchange rate on day of transaction, not payment(check with bank -rates)
(b) Customs&import duties incl. –from Shipping agents invoices
(c) Allocation to each item of these costs is reasonable & accurate.
(d) NOTE: companies which import inventory usually have a ”COSTING SCHEDULE” with details of how costof imported
goods was arrived at – eg customs,shipping etc. (auditor traces back to source docs)
(e) NOTE: there may be more than 1 supplier invoice at different prices× 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
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(2) Scan ERROR : masterfile for error conditions,1-duplicate ACCOUNT NUMBERS (existence),2-NEGATIVE qty or unit cost
3-negative qty AND negative unit costs( valuation) ,3-blank fields(existence)., 4-QTY field is 0 but date last purchase is > date
of last sale 5-qty = 0 but ‘value’ is above zero 6-date last purchase/sale in after year end
(3) Select samples for 1- pricing 2- inventory count
(4) Reperform : 1-qty VS unit cost 2- cast totals field
(5) ANALYSE by:-ALL to get evidence for WRITE-DOWNS
(a) Unit cost EXCEEDS selling price
(b) Date last sale is 9 mnths before year end,date of last purchase is within 2 mnths of year end
(c) Date last sale+purchase is over 9 mnths from year end
(d) Where qty on hand is say over 5 times qty sold to date.
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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.
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
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.
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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.
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(a) Name,number, address, grade, section/branch/region, leave entitlement, date employed, date dismissed/resign,
earnings&deductions for current week/month, same for current year .
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TRANSACTION PRESENTATION
ASSERTION ACCOUNT BALANCES
EVENTS DISCLOSURE
1 COMPLETENESS (ALSO ?
# # #
VALIDITY)
2 OCCURRENCE # #
3 EXISTENCE #
4 ACCURACY # #
5 CUT OFF #
6 CLASSIFICATION (and for
Pres.& Disclosure : # #
UNDERSTANDABILITY)
7 RIGHTS and
# #
OBLIGATIONS
8 VALUATION and
ALLOCATION # #
INTRO:
1. Consists of 3 parts :
a. Raising finance & repayment of principle : eg debentures / equity shares issued/ loans etc.
b. Obligations therefrom : Interest & dividends abligations
c. Usage of these funds : application thereof.
2. Finance Cycle : = audit of capital emplyed section of SFP (equity&liability section).
3. Investment Cycle: = audit of Non-Current Assets in Asset section of SFP.
COMPENSATING CONTROLS
1. PLANNING :
i. Planned by senior, experienced mngmnt.
ii. By Fixed committees eg investment committee -(eg best rates, + decide on investment of surpus funds- not a
skelm, progress report
iii. Use Budgets & cash flows
iv. Exhaustive Consider alternatives – eg best method of raising finance., not hit and run – high interest rate.
v. Actual to Budget compare regularly
2. AUTHORISING :
a. At Highest level ONLY (very few transactions!) – eg BOD or steering committee.
3. IMPLEMENTING “
a. Qualified competent staff only:
b. Large installation eg production line: Treat as a Project & use Project Controls –see ch 8-
c. Share issue: use merchant bankers & lawyers etc.
4. REVIEW & APPROVAL:
a. All transactions MUST BE subject to:
i. Progress Reporting
ii. Compare Actual to Budget / Plan (like recon.)
iii. Internal audit must check it out – for legal/laws/rules etc.
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FRAUD IN THE CYCLE:
1. There are 2 main headings here , as usual it is either :
a. FRAUDULENT FINANCIAL REPORTING:
i. Presents directors with numerous account headings which can be manipulated. Ie : many opportunities to improve
fin stats by working fraudulently.
ii. ALLOWANCES, PROVISIONS , IMPAIRMENTS and FAIR VALUES are of particular concern.
iii. PPE : Equity Reserves VS Add Assets : VALUATION : eg : inflated land property valuation from estate agent.
iv. PPE : EXISTENCE & RIGHTS : fictitious assets
v. PPE : VALUATION : understate depreciation & impairment.
vi. INVESTMENTS IN SHARES : VALUATION : fail to write down where value has dropped , saying no market
valuation is available.
vii. Long term Liabilities : omit them : COMPLETENESS : eg ; record a loan as income , or not capitalizing finance
leases.
viii. Long Term liabilities : undervalue : VALUATION : fail to amortise debentures redeemable at a premium.
ix. PROVISIONS /ALLOWANCES : COMPLETENESS : eg environmental damage must be fixed – not providing
x. CONTINGENT LIABILITIES : COMPLETENESS : same, fail to recognize eg pending lawsuit per lawyers estimate of
outcome
xi. SCI : ALL : manipulating SCI remember will cause SFP to be affected.
b. FRAUDULENT MISAPPROPRIATION OF ASSETS:
i. Not much opportunity here except :
1. MAKING UNAUTHORISED USE OF COMPANY ASSETS : EG: COMPUTERS TO RUN PRIVATE ACCOUNTING
JOBS, use assets as security for private loans, directors making unauthorized loans to directors.
2. CASH : fraudulent payments by employees to themselves , made for fictitious stuff by this cycle. – eg
dividends, interest, or assets buy.
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iv. Evaluate if measurement method is Consistently applied
v. See ISA 620 if you engaged an expert
vi. Where ‘meaurement’ incl. forecasts/assumptions (eg private company valuation) then:
1. Assumptions reasonable
2. Appropriate valuation model used
3. Underlying data relevant & reliable
vii. Check data used to do fair value “measure & disclose” is VAC -perform audit procedures to check VAC on this data-
viii. Consider effect of “Subsequent events “on fair values
ix. Written mngmnt representations as to fair values used eg: reasonableness of significant assumptions
x. If needed discuss fair values with those charged with governance ( eg if significant use is made of fair values – lots
of)
SIGNIFICANT BALANCES
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RISKS
SHARE CAPITAL:
1. Read regulations new companies act 2008 -35-44
2. Statutory&JSE listing requirements for public companies & JSE are onerous and not covered by this syllabus/textbook
3. PRIVATE COMPANIES ISSUE: (not JSE /Public) YOU ARE CHECKING “TRANSACTIONS” HERE – not “ACCOUNT BAL.”!!!!!!
a. OPENING BALANCE: inspect if :prior yrs closing bal= this yrs opening bal.
b. COMPLETENESS:
i. No other share issues not know ; INQUIRE directors if any other shares were issued in the year.
c. OCCOURENCE:
i. Inspect : MOI for : conditions must comply with 2- enough unissued authorized share capital
ii. Special resolution directors issue needed for issue to directors/related/ or nominee UNLESS : 1-pre-emptive right 2-
rights issue-same proportion/terms to all shareholders
iii. Pre-emptive rights ; if all requirements were satisfied –1-inquire directors 2 minutes shareholders meeting
3shareholder communication.
iv. Minutes BOD: 1-resolution approved 2-price appropriate (S40) 3-quorum+special/ordinary resolutions done right per
act
v. Register of shareholders VS GL VS SFP VS minutes
vi. Registrar : lodged with registrar in 1 mnth ?, + fee paid – inspect Notification from minister
vii. Was Payment received ? : check cash book VS bank statement OR other assets recieved for
d. ACCURACY,
i. RECALC : if authorized Issue price = consideration received.
ii. CAST : capital account in GL
e. CUT-OFF :
i. INSPECT documentation correct dates
f. CLASSIFICATION: check ord/pref
g. CLOSING BALANCE: fin stats StChEq amount = stated capital account close. bal.
h. PRESENTATION & DISCLOSURE:
i. INSPECT AFS for
1. : COMPLETENESS Correctly done :
a. Show No. shares issued & authorized
b. Show rights& preferences& restrictions per class
c. Directors issued to
2. OCCOURANCE :Consistent with evidence gained on audit
3. ACCURACY :Amounts,facts,dates,accurate
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4. CLASSIFICATION & UNDERSTANDABILITY : correct + wording is clear & understandable
RESERVES:
1. MOSTLY JUST BOOK ENTRIES- SO mostly just : 1- authority obtained? 2-regulations complied?
2. 1 type is very important: PPE –fair value adj. –using revaluation model- direct to equity, not through SCI -!!!
3. Skim:
a. O/B : last yr closing = this yr O/B (check work papers & fin stats)
b. COMPLETENESS
i. MOI INSPECT: rules adhered to eg: N-D reserve for all revaluations etc.
ii. Minutes: authority yes/no for transfers between reserves?
iii. IAS ‘s : accounting treatment of ‘direct to equity ‘ transactions like reval. are appropriate (allowed? – for occourance?)
c. OCCOURANCE:
d. ACCURACY
i. Reasonable : valuations seem reasonable to YOU – estate agents + industry journals
ii. Valuer: qualifications + independence + suitability
iii. Same asset : is it the same one as referred to in valuation
iv. Sale of fixed Property : if reserve comes from here, inpect documents & terms & authorizing signatures & price etc.
v. RECALCULATE : all amounts to ensure amounts transferred to reserve are correct .
vi. SCI to SFP : confirm correct figures moved to SFP from profit – ie not choeked both ways as profit+reval reserve at
same time.
e. CUT OFF : ? skim up
f. CLASSIFICATION : ? skim up
g. PRESENTATION & DISCLOSURE
i. inspect AFS for
1. COMPLETENESS: per GAAP all movements in reserves disclosed etc.
2. OCCOURANCE: consistent with evidence obtained on audit
3. ACCURACY: amnts , facts details accurate ,per evidence gathered
4. CLASSIFACTION & UNDERSTANDABILITY: appropriate wording & understandable
5. VAL. & ALLOC.: skim
6. RIGHTS & OBLIGATIONS: skim
h. C/B closing balance: trace it from General ledger all reserves to fin stats(in StCHEq for reserves)
DEBENTURE
1. Only for private entities below, for listed entities it is almost like a share issue, requires a prospectus etc etc. all below similar to share
issues.
2. Debenture must be shaown at amortised cost. Thus For a redeemeable at premium one, it works by you say the potion of premium
for this year is part of interest for the year- and also the capital principle amnt increases every year per amortization of premium , so
every year it is worth more!!!(or you owe more !!!). don’t know how this method works see IAS 39
a. O/B : last yr closing = this yr O/B (check work papers & fin stats)
b. COMPLETENESS: inquire directors no other debenture issues that year? y/n
c. OCCOURANCE:
a. MOI :
i. Allowed : Entity Authorised to issue debentures per MOI?
ii. Authority person : Contravened borrowing powers ?y/N – for authority requirements
b. Minutes of BoD : check terms, to whom, number, amount, interest rate – make sure it happened like said by BoD, not
different.
c. Register of debentures: check it is all written in ‘occourance’ as authorized
d. Payment: check deposit slips etc for receipt of correct amount (legally must be paid before an issue can be recorded)
d. ACCURACY:
a. Reperform calcs : make sure payment received is correct
b. SUBSEQUENT MEASUREMENT :
i. Check Interest Calc. : ‘effective interest rate’ is right , used correctly each year to incr. premium part.
ii. Check journals for interest & principle incr. are right
e. CUT OFF: dates : confirm recorded in correct period
f. CLASSIFICATION : debenture liability account :confirm cash posted to only this one
g. PRESENTATION & DISCLOSURE:
i. inspect AFS for
1. COMPLETENESS: per GAAP complete eg : disclose security granted , redemption/conversion conditions.
2. OCCOURANCE: consistent with evidence gathered on audit
3. ACCURACY: amounts facts etc
4. CLASSIFACTION & UNDERSTANDABILITY: appropriate & clear + understandable wording.
5. VAL. & ALLOC.:
6. RIGHTS & OBLIGATIONS:
h. C/B closing balance: trace it from General ledger all reserves to fin stats(in StCHEq for reserves)
i. EXTRA: 3rd party confirmation from debenture holders: interest rate /premium/amount etc. relates to all assertions
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ii. Inspect evidence Unrecorded: minutes, records,steering committee minutes – evidence of unrecorded loans
iii. 3rd party confirmations : from old creditors whose balance is significantly lower or zero /gone
iv. Source of funding assets: enquire where money came from
v. Interest payments : INSPECT : that loan relating to each interest payment has been recorded.
vi. Analytical reiew: current balances VS last yr & interest paid etc.
FINANCE LEASES
1. These have a asset and liability part to them, as well as interest. So audit aspects for assets + liabilites + transactions all apply here,
overlapping each other.
2. Accounting aspects: the condition for a lease to be recognized eg take ownership/at low price at end/ only lessee can use it
specialized – as well as requiremtns after it is recognized : eg interest /principle , lower of fair value or intertest rates implicit value etc
must all be very carefully studied and taken into account. Probably 1 by 1 ie substantive.
a. O/B : last yr closing = this yr O/B (check work papers & fin stats)
b. COMPLETENESS :
i. mngmnt written representations : that all have been included.
ii. Inspect evidence Unrecorded: minutes, records,steering committee minutes – evidence of unrecorded
leases/ wrong classify
iii. Schedule leased assets: enquiry inspect: confirm that operating VS finance types are correctly recorded.
iv. Source of funding assets: enquire where money came from
v. Lease payments : INSPECT : that leases relating to each lease payment has been recorded.
vi. Analytical reiew: current balances VS last yr & lease paid etc.
c. OCCOURANCE:(transactions) + OBLIGATION(acc bal) + EXISTENCE(acc bal) :
a. Finance lease IAS definition: check if it is really a finance lease per IAS
b. INSPECT : contract for details eg, interest ,penalties, terms etc
c. Minutes ; BoD authorize lease
d. MOI : allowed per MOI
e. OLD finance conditions NEW : ask mngmnt if any old lease conditions exist for leases where ‘new finance’ not
allowed /any more leases until old one paid.-
d. ACCURACY:
a. Initial Recognition : 3 rd party confirmation : that fair value correct recorded
b. Lease payments : RECALC: interest rates, apportionment of principle/interest , current portion of outstanding.
c. Depreciation , leased asset : check correct choice made of lower of usefull life or terms of lease period + residual
value + if component depreciation is applicable or not.+ depreciation method + if impairment may be needed etc.
d. General : cast liability account +
e. CUT OFF: docs : check leases paymenst & interest relate to current period.
f. CLASSIFICATION : any lease costs capitalized confirm correct classify
g. PRESENTATION & DISCLOSURE :
i. inspect AFS for
1. COMPLETENESS: per GAAP complete eg : disclose terms, accounting policies, terms, encumbrances,
reconciliations.
2. OCCOURANCE: consistent with evidence gathered on audit
3. ACCURACY: amounts facts etc
4. CLASSIFACTION & UNDERSTANDABILITY: appropriate & clear + understandable wording.
5. VAL. & ALLOC.:
6. RIGHTS & OBLIGATIONS
i. EXTRA : disclosures for n-c assets are very extensive, and special procedures to check them will probably also be necessary.
h. C/B : closing balance: trace it from General ledger all reserves to fin stats(in StCHEq for reserves)
a. THE PROCEDURES FOR PROVISIONS AND CONTINGENTS ARE VERY SIMILAR , SO THEY ARE THE SAME FOR THE BELOW,
although they are in different categories : ie 1-Contin.=Presentation & Disclosure AND 2-Prov.=Account Balances
b. COMPLETENESS: it is less likely that overstatement will happen than understatement , and it is more difficult to prove
overstatement than understatement. Any of the 2 by directors are fraudulent financial reporting. To check for these;
a. PROCESSES & PROCEDURES for IDENTIFYING :EVALUATE the processes & procedures used by entity to ID these
things
b. Provisions: Compare lat YR to This Yr: find any major reductions /changes and confirm
c. Contingent liabilities: Compare lat YR to This Yr:
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d. Ask Lawyers about disputes: enquire of them if there are any and the possible outcomes(maybe they missed a
provision here)
e. Minutes : of I meetings etc : eg warranty claims/refund policies/guarantees/closure of divisions etc.
f. SARS Tax correspondence: inspect this to see if there are any here to SARS
g. Bank Guarantee certificate: obtain one for guarantees for loans or discounted bills etc.
h. Written representation: of mngmnt that there are no more.
i. Cash paid from last yrs: see if any big payments this year were made that should have been included last year in
these provisions.(bad record of correct treatment)
c. OCCOURANCE: / EXISTENCE : normally company does not want to misstate this, but could to inflate these account
balances for something (ratios or something)
i. Procedures: evaluate procedures used to identify these by the company concerned
ii. Documents: INSPECT : supporting docs for EACH provision
1. Check if it is a legal/contructive obligation or not (as per definition)
2. Evaluate probability that outflow of resources will be required or NOT or MAYBE
3. Evaluate basis of reliable estimate to see if it is a reliable estimate.
iii. Documents: same as above for each contingent liability ( “possible” obligation)
iv. Process of Authorising Provision/Cont.Liab. : it could count as a good internal control eg BoD must
approve etc.
v. Discuss with directors; any uncertainties they might have about any so far
vi. Legal council or expert advice ; seek if needed eg: industry expert etc.
d. ACCURACY : skim it uit
e. CUT OFF: skim
f. OBLIGATIONS : enquire mngmnt & inspect docs, that the provisions ETC are of the entity and not someone else like
directors/owners etc
g. VALUATIONS: since these are estimates , the accountant should use “ISA540: accounting estimates”.
a. ISA540 requires:
i. ID risk of material misstatement
1. Check GAAP
2. Mngmnt ID’ing of transactions etc that give rise to Acc Estimates.
3. Mngmnt method of estimation
ii. Review Prior yr acc. Estimates outcomes.
iii. Test & review mngmnt procedures
iv. Test the data used
v. Assess reasonableness – VS last years’ results OR similar estimates elsewhere
vi. Compare to industry standards for these estimates
vii. Get an expert if needed
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IAS’S INVOLVED
SIGNIFICANT BALANCES
RISKS
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MAIN ACTIVITIES
PPE
1. Use “assets register” + Schedule of “asset accounts. and Acc. Depr. “ to do your audit.
2. There is the 1- cost model ( carried at cost less Acc depr & Acc. Impair in separate accounts) and 2- reval model (carried at reval
amount) the reval must be done regularly and must be applied to entire class.
3. Depreciation has severe problems too, like each part depreciated separate or not, determine residual value, useful life etc.,
redetermine useful life 7 residual every fin year end at least.
4. USE OF AUDIT SOFTWARE FOR PPE :
a. If computereised fixed assets register:
i. Sample select – by stratification/location/price etc.
ii. Disposals/additions list - list them and compare to clients list he gave you
iii. Scan for Error - conditions:
1. Missing
2. Duplicated
3. Blank fields
4. Negative book value
5. Anomalies: eg Depr. Exceeds Acc depr
iv. Recalc - all casts & extensions
v. Sorted & summarized for comparisons -by class/location/year etc for comparisons
vi. The more info on register- the more to work with.
5. AUDIT PROCEDURES:
a. These are PPE : SFP ACCOUNT BALANCE TYPE ASSERTIONS:
i. EXISTENCE:
1. Extract a Sample of fixed assets register, incl. some additions this year.
2. Physically inspect assets , matching them
3. Corroborating evidence : if very far- drivers wages/documents,licence numbers
4. Conduct a search of unrecorded disposals (mainly PPE)
a. Cash receipts for disposals – make sure they are on the list of disposals
b. Equipment Removed : fixed items obviously removed (leave a gap on floor),make sure they were
not disposed of quietly
c. Enquire New equip replace Old: if so check if old was disposed or not
d. Insurance company : enquire for items removed from list of insured items : check if they were
disposed /
e. Evidence PPE Expenses Reduced: eg licence /other expenses fees not paid anymore etc. – check if
disposed
5. Reconcile: capital budget VS disposals list.
ii. COMPLETENESS
1. Repair s & maintenance accounts : check asset aquisitions not put by error in here , should be
caoitalisatruon etc
2. Physically verify : when checking for EXISTENCE , also do assets VS assets register check all item serial
numbers, decr. Etc are COMPLETE.
3. Cash payments & creditors : check any payments for assets ,they are all recorded as assets , not
otherwise.
4. Inspect lease agreements & enquire of mngmnt : all leases have been recorded as leases &
capitalised
iii. RIGHTS:
1. O/B assets change: for assets on O/B check no change has happened 1-enquire mngmnt & 2-BoD
minutes.
2. Additions: check DOC’S that they are in entity’s own name, not another persons.
a. Vehicles : licence & registration docs.
b. Land : title deed & mortgage bonds /sale agreements etc
c. Other assets: sales agreements & invoices.
3. Jeoperdising rights: check not behind with payments ; statements & payment records & supplier contact
4. Leases : inspect lease agreements to be sure capitalized leases are supposed to be capitalized – ie risks
and rewards of ownership have been effectively passed on to your company.
5. Encumbrances : evidence of asset as security : from banks/ minutes/old working papers/loan
agreements/3rd party confirmations.
iv. VALUATION:
1. O/B : open bal. : agree Fin Stat O/B to prior year work schedules/General ledger
2. REPERFORM : casts & extensions in : fixed asset register, summary lists, disposals & acquisitions list
3. REPERFORM : reperform recon of fixed asset register VS General Ledger Deprec. & Acc. Depr. & Assets
accounts
4. C/B : agree Fin Stat to prior year work papers, general ledger
5. Why Nothing said about revaluations / deprec. Methods / etc???
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6. DEPRECIATION VALUATION:
a. Policy consistent : written representation from directors – done regularly per IFRS
b. Component method: written representation from directors – done regularly per IFRS
c. Residual values/useful life re-asses: written representation from directors – done regularly per IFRS
d. Res.val & use.lif. re-asses correct: check any reval. Was reasonable
e. Damage write down: when doing physical inspection, check no not in use/damaged assets, should
be written down.
f. Special Circumstances : check if not double shifts all the time- other reasons deprec. may have to
be increased.
g. Physical condition. VS depreciation : check to see if it looks right , sample, eg 4 yrs old
h. Disposals: check if deprec. Method /Useful life/ etc is reasonable
i. Reperform : deprec.: Calc. to be sure accurate, compliance with policy etc.
j. Discuss Procedures with Directors: does fin director review policies etc, reasonableness etc
k. Perform Analytical review: to prior yrs, by grouping, per disposals/additions etc.
7. IMPAIRMENT VALUATION:
a. Should be done each reporting date, all assets, if not revoverable by use or sale – then lower.
Reliant on directors estimate.
b. Evaluate process/method used: by company to do this
c. Supporting docs: check any docs which support estimates for: 1-assumptions made 2-
bases/methods used 3- % rates used.
d. Discuss mngmnt:
i. Declined too much : any assets which declined faster than normal for some reason – why?
ii. Significant Events affecting eg tech : sudden tech advancement in marketplace could
devalue their assets
iii. Performance bad: if “economic value from use” is very impaired -
iv. Discontinue operations: if “economic value from use” is very impaired
v. Lying idle etc; if “economic value from use” is very impaired
8. REVALUATIONS VALUATION:
a. Calc. of deprec. at reval date, all calc.s and changes here to be checked for correctness (complex)
b. Checkall assets in same class revalued together – per IAS rule
c. Check if cost model/reval model correct policy used – revalue one revalue all
d. Check if done regularly – yearly.
e. INSPECT :
i. Methods /bases used for reval
ii. Qualifactions of valuer
iii. Reasonableness of reval.
iv. Own check – industry journals / estate agent etc / numerous sources for certain classes eg
front end loaders/cars etc value books
b. PRESENTATION & DISCLOSURE : (this one has its own set of ASSERTIONS remember)
i. inspect AFS for
1. COMPLETENESS: per GAAP complete eg : disclose terms, accounting policies, terms, encumbrances,
reconciliations.
2. OCCOURANCE: consistent with evidence gathered on audit
3. ACCURACY: amounts facts etc
4. CLASSIFACTION & UNDERSTANDABILITY: appropriate & clear + understandable wording.
5. VAL. & ALLOC.:
6. RIGHTS & OBLIGATIONS
c. PPE ADDITIONS : “transactions” ASSERTIONS ONLY (very short , “accuracy ,cut off,classification” in just 1
paragraph)
i. OCCOURANCE :
1. Sample authority : check authority for buying in mintes, capital budget, purchase requisitions.
2. Inspect Asset serial no: and description etc , cross-ref / trace to purchase requisition – to see if it is the same
asset
3. To entity/ signed / right asset: check purchase docs : invoice & contract – confirm made out to YOU , is
SIGNED , RIGHT ASSET.
4. Payment made or not : check payment records to see if payment was made or not-( did transaction
occour/valid not cancellable etc)
ii. ACCURACY:
1. Purchase Docs : INSPECT to check correct : price +shipping charges,insurance,import duties
+installation,commissioning cost
2. Imported Assets: REPERFORMANCE: should be raised at spot rate transaction date + shipping/import etc
costs coverted at same spot rate
3. Installation Costs: ucheck capitalized costs are correct: eg not repairs incl. by accident, and correct wages,
reasonableness discuss with fin. director. etc.
4. VAT : check not incl. in cost price unless NOT a vat vendor.
5.
iii. CUT-OFF: INSPECT DATES on all docs for correct period
iv. CLASSIFICATION:
1. “Significant Parts deprec.” Where asset is divded in parts for depreciation etc, check this is correct –
directors/supplier docs
2. Trace source docs to GL : confirm correct posting done classified in correct accounts.
3. Impairment loss VS loss on sale : check that it was not recorded wrong – if impaired it should be impairment
loss, else loss on sale.
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d. PPE DISPOSALS “ transactions ASSERTIONS ONLY (very short , “accuracy ,cut off,classification” in just 1
paragraph)
i. OCCOURANCE :
1. Sample authority : check authority for selling in mintes, capital budget, supporting docs
2. Inspect Asset serial no: and description etc , cross-ref / trace to purchase requisition – to see if it is the same
asset
3. Signed /authorized : check selling docs : is SIGNED and authorised
4. Payment made or not : check payment records to see if receipt of payment was or not-( did transaction
occour/valid not cancellable etc)
ii. ACCURACY
1. Fixed asset register calcs. : check these figures for : deprec. Reval , profit/loss on sale ,
2. Accurately transferred : check if correct figures from all Acc DEpr.accounts & other account removed /
amended on disposal
iii. CUT-OFF: check dates in correct periods
iv. CLASSIFICATION: check disposal correctly classified when recorded /(removed) in acc.dep., depr, asset accounts,
etc.
INVESTMENT IN SHARES
1) Investments in bonds, debentures,derivatives - auditing these can almost be regarded as specialist audit knowledge – beyond scope of this
text.
2) The audit takes place in 2 sections: “account balances” – O/B and C/B and their assertions (4 of) and any transactions for the year, and their
assertions(5 of)
3) MAJOR RISK : overstatement by incl. fictitious amounts or overstating
4) .As With Ppe Client Should Supply A List Of investments with info on details of decr,name,numbercost,fair value etc.
5) AUDIT PROCEDURES : ACCOUNT BALANCE : these assertions only
a) COMPLETENESS
i) Compare C/B vs C/B : for any changes from last years C/B there must be a movement for year on the list provided
ii) Written representation mngmnt : that list is complete
iii) Dividends match: match to investments, to make sure all investments recorded
iv) Brokers: get a listing of years dealings from brokers to check inpect no investments are missing.
b) EXISTENCE: goes with “RIGHTS & OBLIGATIONS ” below – same stuff ,put this as one of the headings for it., just
separate here to see.
c) RIGHTS AND OBLIGATIONS :
i) Share certificates:
(1) Count & inspect in presence of client official :1-nominee signed blank transfer docs 2- descr,name,amount,number 3-appear
authentic
(2) OR if electronicly held not paper- permission obtain confirmation from clients brokers
(3) OR if held by BANK or 3rd party- get confirmation letter with details of each share held. + if whether “pledged as security”
ii) Private company DOUbt exists: get confirm with CIPRO or phone company.
iii) Discuss Intention : if mngmnt wants to speculate: classify as trading asset, else as investment.
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2. MAIN RISK : fictitious loans, or failure to write down a loan that is a ‘doubtful debt’ / and security is inadequate
3. Customer should supply a schedule of loans , same as asset register etc.– auditor will in effect audit this schedule.
4. ACCOUNTING SPECIAL PROBLEMS : loans with a ‘premium” on repayment must have this premium amortised , same as for debentures
. this is complex and must be double checked, without the premium it is straightforward
5. AUDIT PROCEDURES :
a. O/B : opening balance : by inspection prior yrs working papers, agree open balance with last yrs closing balance
b. ACCOUNT BALANCES : (only use acc.bal. assertions )
i. COMPLETENESS:
1. payment records/ minutes/correspondence for misclassified loans , esp. staff&directors
2. directors written request in writing – all loans received by them or related to them person / company , in
past year,even if repaid.
3. Written mngmnt representation – on all completeness of loans advanced
ii. EXISTENCE: nothing said in book -
iii. RIGHTS: nothing said in book
iv. VALUATION : see closing balance below for this one.
c. TRANSACTIONS:
i. NEW ADVANCES:
1. COMPLETENESS:
a.
2. OCCOURANCE:
a. MINUTES INSPECT :: authority to make loans made
b. MOI : powers to make loans made (inlc to directors)
c. directors loans: solvency/liquity test, special resolution. – sec 45 Comp.Act , see
minutes,contract, correspondence.
d. related party loans: fair & arms length transaction? y/n
e. Payment : INSPECT payment records / bank statement, that loan was actually made.
f.
3. ACCURACY:
a. INSPECT : loan agreement : descr, name, amount, terms etc are same as per GL and records.
b. INSPECT : amount correct raised in ledger
4. CUT-OFF: dates on bank payment records etc, to see in correct period.
5. CLASSIFICATION: skim it uit
ii. REPAYMENTS:
1. COMPLETENESS:
a.
2. OCCOURANCE:
a. Receipt records for eveidence it was recived
b.
3. ACCURACY: REPERFORM : allocation of repayments into interest / principle accounts
4. CUT-OFF: dates on receipt- correct acc period?
5. CLASSIFICATION: REPERFORM posting to confirm correct allocation.
INTANGIBLE ASSETS
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:AUDIT PLAN:
1. Nature:
a. 1-enquiry mngmnt/personnel 2-analytical review 3-confirmation of mngmnt evidence provided .auditor should still enquire if
anything beyond next 12 mnths that could affect, though next 12 mnths is generally the timeframe to consider
b. Auditor can consider certain conditions that indicate a problem as name dbelow AND ALSO vs for each condition any
mitigating factors at the same time. Botyh types are listed below
i. FINANCIAL:
1. Key financial ratios
2. net liability or Net current liability
3. cannot pay loans due soon
4. suppliers&creditors withdraw financial support
5. dividends arreas /discontinuance
6. cannot pay creditors
7. change to cash from credit at suppliers
8. more in textbook
ii. OPERATING:
1. Mngmnt intend to cease / liquidate etc
2. loss key mngmnt without replacement
3. Tech obsolescence of products
4. Emrgence higjly successful competition
5. Cheap imports threat
6. Shortage supplies raw materials
7. Loss major market/franchise/patent etc
iii. OTHER:
1. Non-comliance capital/other statutory requirements
2. Pending Legal proceedings with possible too large penalties
3. Change in tax concessions/banning of product /other legislative etc
4. BEE problems too bad
5. More in textbook
iv. MITIGATING FACTORS
1. Plans eg planned sale of redundant assets/ positive cash flow budget of some sort
2. Support form holding comapnay etc
3. Record of mngmnt resolving similar crisies effectively
4. Subordination / backranking agreements –(credtor refinancing deals)
2. Extent:
a. Depends on risk- if large safe company – very lttle , if small problematic company – much more.
3. Timing:
a. More around fin yr end time – ie conditions then.
AUDIT REPORT:
1. AUDIT CONCLUSIONS:
a. Decide if Material uncertainty exists of going concern overall
b. If it exists it must be Disclose in fin stats
c. Proper disclosure:
i. ADEQUATELY DESCRIBES situation in notes.
1. State clealy there is GOING CONCERN PROBLEM
2. State clearly MNGMNT PLANS TO RESOLVE
2. AUDIT REPORT:
i. STANDARD AUDIT REPORT : UNMODIFIED
1. NO PROBLEM WITH going concern
ii. UNQUALIFIED AUDIT REPORT : UNMODIFED -WITH EMPHASIS OF MATTER-
1. Going concern assumption IS appropriate but
2. Material uncertainty exists
3. It is properly disclosed
4. EMPHASIS OF MATTER : 1-must highlight existence of material uncertainly AND 2-raw attention to it in the
notes.
iii. QUALIFIED AUDIT REPORT
1. Going concern basis IS appropriate
2. Material uncertainly exists
3. HAS NOT been properly disclosed in notes
4. OPINION : here an opinion is given , not an emphasis of matter
a. “EXCEPT FOR “ opinion : this is given if the material uncertainly is not so pervasive that it requires
an OPINION to state what exactly is not considered cool by the auditor.
b. “ADVERSE OPINION ” where material uncertainlty is too pervasive, then this opinion is given – if
then fin stats will be utterly misleading , you must give this opinion (there are 2 situations for this
one either this or if they may NOT be prepared on going concern basis but have been , see 2 below)
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8. IINTERNAL AUDIT:
a. Communication – 1-free 2- regular 3-access to his docs etc
b. Due prof care : 1- manuals, docs, programs, policies etc 2- planned , supervised,reviewed,documented
c. Technical competence : 1- supervisor 2- others skills etc
d. Objectivity : 1- report to ceo or just a accountant 2- status- objective & seriously taken 3- not do normal accounting work 4-
how musch mngmnt acts on their work - listens
Expert:
1-needed to use one y/n
2-qualifcations & body
3-undersatnding of field by auditor – learn
4-Written agreement 1- work to be done 2- communication needs to audiotor 3- whao does what/ team involved or not etc 4-need to
observe confidentiality requiremnts
5-Evaluate adequacy : 1- reasonable 2-data used 3- consistent orher audit eveidence 4- relevance of methods & assumptions used
by
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