Auditing ultimate summary

PI score
- Calculation made at company level not consolidation level
- Belt, beneficiary, employees, liability of 3rd party, turnover, 1 point for every 1 Mil and for
employees take average

-Include temporary employees (worked 40 hours over 3months)

- Provisions only included if deemed to be payable and 3rd party is identified

- deferred tax excluded
- Loans within group should be included
- Trust should be counted as individual beneficiary interest (5 members of trust is 5 points)

- Exclude Liability from shareholders

- Exclude loans from directors
-Don’t round off, unless say part thereof
- All public companies must have external audit
- vesting rights is beneficial interest

- sometimes must extrapolate figures

-3rd party liability (NCL plus all current, look for additional info e.g. This amount was included is
a hint to exclude it)

-Directors and employees counted twice as beneficiaries and employees of comp

- look for any services rendered on credit as it can be added to turnover

- shareholders hide sometimes in scenario look if it is implied that someone is a shareholder
(Gary and 3 other shareholders, therefore there is 4)
-If PI score above 500, must have social ethics committee
Prelim
- IFARCI (integrity, Framework, Audit fee, Reputation, Competence, Industry)

-Integrity, RMAFLIC (Bus Reputation, Money Laundering, Attitude of Individual, Attitude to pay
fees, limitations imposed, identity, sound corporate governance)
-Ethical requirements (threats and safeguards)
-Competence, KSRPD (knowledge, Tech skills, Resources, Personnel, Deadline)
-Procedures to gather info, BADSRS (inquire with Banks, Prev auditors, discuss with directors,
status of firm, review of docs, background searches)

Application
The following considerations should be made prior to accepting engagement:
-Consider our independence and are there any threats that affect our judgement

-Consider the conflict of interest with existing client and reputation of client
- Have the previous auditors been informed of engagement and can they communicate client’s
affairs
- obtain permission to contact prev auditors and determine if any ethical reasons to reject

-Do we understand the industry in which the client operates, Is it dubious (porn or anything
with violence)

- Can the client pay audit fee (maybe he’s in financial difficulty)
-Are there any limitations imposed by client that would result in going concern problems
-Different opinions is an indication of a difficult client

- Do we have necessary resources and staff to conduct audit (be aware of how many auditors
available and how many diff locations to audit)

- Do we have experienced and skilled staff

- Is there a tight audit deadline (e.g., req statements in 2 weeks), would entity have enough
time to gather sufficient appropriate evidence.

- Does Client have audit committee (shows good corporate governance)

- Are financial Reporting standards complied with, relevant framework selected
Be aware that valuation problems can indicate company uses standards that show favorable
picture not the correct representation.

-Is it a sound corporate decision to accept.

- Is the engagement partner in charge (client continuance)

-Threats, apply safeguards
-engagement letter, address king4, responsibilities of auditor, management and other issues)

JUICY SOURCES
Solomon and Phillips
Scenario

They got offices in Pretoria, Bloem, and East London

The client is Zondi

Prev. auditors resigned as they couldn’t provide Zondi with quality audit service

The client supplies paper (industry)

They have distribution outlets in 10 major cities

The CEO is a qualified CA, highly regarded in industry

Prev ous resigned due to insufficient staff
Zondi awarded SH handsome dividends
The partner in our firm has 7.5% SH in Zondi
Solution

The industry
Not a dubious industry, manufactures paper (our year must have sufficient knowledge of the
client’s industry)
Client’s mgnt

The CEO of Zondi appears to have integrity as highly qualified CA

Communication with prev auditor
Contact the prev auditors in order to identify whether or not there is a reason why we
shouldn’t accept the engagement
It is unlikely there is a reason not to accept as prev ous resigned due to insufficient staff
The ability to pay the audit fee
They can pay since handsome dividends
The ethical consideration

The partner in charge of the engagement has 7.5% in SH company, this might create a self-
interest threat to objectivity/ independence (mind and appearance)
The threat is regarded as significant
Safeguards to be applied – declare Financial interest to superiors or dispose of it

Auditors skill competence and resources

Consider whether you have adequate skills, competence and resources while taking in to
account the prev ous resigned shortage staff
There are 10 distribution outlets

The engagement letter

When it’s comfortable to accept the engagement, consider the responsibility of mgnt, auditors
and RI if it exists
Accept as long as threat reduced to an acceptable lvl

RISK OF MATERIAL MISSTATEMENTS AT FINANCIAL STATEMENT LEVEL

-Name (Intercompany)
International (Laws)
King4(corporate governance)
Bonus (Motivate)

New client (Familiarity)

Companies Act

JSE (requirements)
Overseas (Gas)
Language(understanding)
Currency (GL)

Comp system (It risk)

Transport (lost docs)

AFS required (tight deadlines)

Downsizing(errors)

Control environment (Fraud) Consols(complex)

IFRS (errors in statement)

Liquidity (going concern)

RESPONSE TO RISKS
-STEURSSM
-If poor Internal control follow more Substantive approach.

-more reliance on Tests of detail l, less analytical procedures

-Use of Expert, for valuations
-incorporate element of unpredictability
-Less Reliance on management reports if lack of integrity

- Increase sample size, have enough coverage.

-Supervision, of employees, determine skill level
-set materiality level at conservative level
Audit Strategy (adapted from 2014 test 1)
SCOPE

FCIEICIELOACR
-Framework (no regulations, check if complied with JSE listing requirements)
-Coverage (overseas challenges and look at location and outlets)
- Instructions for component auditors (issue docs necessary and deadlines to ensure scope met)
-Experience (ensure you have experienced personnel to reduce errors)

- lack of independence limits scope

-Complex CAAT (consider using CAAT if system complicated)
- IFRS used in financial Reporting standards (if IFRS)
- Experts should be used (diff of opinion)

-Limitations on audit (ensure no limitation of scope to access info we need from computer
bureau)
-Opening balances (first year we are auditing client, conduct proper procedures on OB)
- Availability of internal auditors

- Currency in Group (determine appropriate currency)

- Reliance on Internal auditors’ performance

Timing
-D T M L M B C A (During the month love m B A)

- Reporting Timetable
- Management schedule (gather info that will be readily available to auditors)
-Location timetable (locations affected in scope)
-Meeting schedules (discuss Net of audit work)

-Different Branches, affect timing of visits to client

-Complex CAAT (consider extent of computers and experts to help personnel
- communication with other Auditors (communicate with the auditors about deadlines and
meetings, communicate with computer bureau to det available of docs and get assistance from
personnel with audit)

Direction
-F C C E M V S C L
- Fraud risk (extent of audit would increase)

-Poor control environment, more substantive approach

- managements lack of commitment toward strong control environment
-Less Experienced employees if downsizing occurs, Inc risk of errors
- Materiality set at conservative level

-High volume of transactions, use CAAT to simplify work

-Use more substantive approach if poor control environment
-Change in management, consider impact and effect of audit approach
-Listed company, must obtain sufficient appropriate evidence to ensure we report on time
Materiality
Step 1 determine which figures are appropriate

-Check GP% consistency of GP, is there a big difference

-Check scenario if the figures prepared by debtor’s clerk or any unqualified employee
- look for diff bet revenue, profit, finance cost(gearing) is company running losses but rep
profits to get loans

STEP2 CALCULATING MATERIALITY RANGES

-Extrapolate sometimes, get correct figures

Step 3 selecting appropriate benchmark

-If valuation problems, asset indicator is not stable

- If there’s overdraft or pandemic, incurred losses, revenue may be manipulated to reflect
higher figures for financing

-Banks and shareholder are ultimately interested in the profitability of the company as this has
a direct impact on Their investments

-Profit before tax would he most appropriate and stable

-when there is a history of steady profit making then revenue is stable indicator

Step 4 selecting appropriate materiality amount

-Materiality should be set at a conservative level as risk is high due to risk assessment
performed in planning stage

- First time we auditing client therefore don’t fully understand their accounting process
- Materiality should be set at conservative level so as to mitigate the risk of under auditing

-talk about risks of material misstatements

STEP5 calculating performance materiality

-As this is the first time, we are auditing client do not fully understand client therefore
performance should be lower than planning this determined after following considered:
- Review of prior years auditors work for evidence of significant adjustments raised
- Discussion with previous auditors regarding clients accounting process
And managements attitude towards audit

-Does Client have history of making errors

Calculation at 80%to 90%but take 80% to be safe take 80%

JUICY SOURCES
Sample Q3 (pg. 231)
Scenario

Recently appointed as auditors

Sales volume increased for the current year

Purchased machinery for production

Actual results not available
Solution
Use figures that account for changes in sales, since occurred CY
You don’t need to adjust figures, already accounted for
FRAUD RISK FACTORS
-Differentiate between fraud and error

-2 types of fraud risk factors, fraudulent financial reporting and misappropriation of assets.

1.FRAUDULENT FINANCIAL REPORTING

INCENTIVES/PRESSURE
- (scenario based)

- competition, product obsolescence, bankruptcy, rapid growth in company profits

-Any bonus schemes implemented provides an incentive to perpetrate fraud
- Directors concerned with performance of business is incentive to perpetrate fraud
- pressure exerted on management, unless profitability improves store will close, incentive to
perpetrate fraudulent financial reporting

- pressure by management to obtain additional debt

-Ability to meet JSE requirements and pressure to meet targets

OPPORTUNITIES/NATURE OF INDUSTRY

-Significant related party transactions, which are not part of ordinary activities.
- Ability to dominate industry sector to dictate terms and conditions to customer.
- operations on international boarders
- complex transactions

-monitoring of management, poor oversight of those charged with governance, only single
person in charge
- Deficient internal controls, inadequate monitoring, high turnover suddenly in ineffective
accounting system and It System, lack of physical and logical access controls

-Nature of inventory held, high value and demand, opportunity to steal inventory and sell at
lower price
ATTITUDE AND RATIONALISE
-enforcement of ethical values
- Low morale amongst management

-If IC is poor you can rationalize fraud easier

- New financial director, therefore he’s unfamiliar with sound internal control, would not
consider incorporating IC with bonus schemes
- Given extensive pressure exerted by holding company, management will easily rationalize
Fraudulent financial reporting to become easier to survive

2.Misappropriation of assets
Incentives/Pressure

-Adverse relationships
- anticipated future unemployment lay off
- Change in employee compensation
-Family issues

-Promotions rewards
-Person experienced a divorce, need to pay large payments to ex, (personal pressures)

Opportunities

-Large amount of money on hand

- Inv small in size high value
- Easily convertible assets
-Inadequate IC controls. NO segregation of duties, no oversight of mgnt no background checks,
no record keeping of assets, no system authorization, Physical safeguards, No recon of assets,
no review of computer logs and lack of timely documentation
- Involved with arms dealer company, various designs are assets to company
-Designs are trade secrets, there is a readily available market
-Designs saved in electronic format are easier to steal
Attitudes and rationalizations
-There is a total disregard for monitoring to decrease risk
- Disregard for IC to decrease misappropriation of assets

- Change in behavior style

- Tolerance of petty theft
-Poor control environment, easier for employees to rationalize behavior
- If person is aggressive and controlling can easily rationalize

-History of allegation of fraud against a person

Reportable Irregularities
-In terms of section 45 – duty to report Irregularities, we as auditors have a statutory obligation
to report any Reportable Irregularities.

- A RI is defined in the act as an unlawful act which needs to be evaluated, to determine

whether one has arisen in the company the actions of employees must be evaluated and
determine if this satisfies the definition

- An Unlawful act is defined as one contrary to statutory law or regulations or common

principles

- explain what happens in scenario e.g., these guys converted non deductible expenses to
deductible, this is contrary to tax laws and is Unlawful

-The act must be committed by any person responsible for management of entity
-explain how directors and managers were fully aware of the unlawful activity and even were
involved, quote from scenarios to back up argument
-Definition requires the unlawful act to likely cause a financial loss to entity, members,
shareholders etc.

-No doubt that unlawful act will result in financial losses

-Does the unlawful act result in a breach in fiduciary duty
- Management, directors are expected to lead with integrity, honesty, and morality, however
due to the fact that they are involved in unlawful acts would result in a breach in fiduciary duty
to act with diligence and due care
-It is clear that the management does not have the company’s and stakeholders’ interests at
heart.

- Is there financial loss and illegal act which amounts to fraud or theft

- it is either misappropriation of assets(stealing) or fraudulent financial reporting, quote from

scenarios and elaborate.

MQUADIS JUICY SOURCES

Reportable irregularities
Abridged

You were appointed as the designated auditor

Company ous – fleet of vehicles (12) for deliveries

Reviewed files, amount of R123,456 claimed as deduction was signed off by Financial Director
(FD)
Amount for Traffic Fines, FD thought that traffic fines can be claimed as deduction

Required – Discuss RI ito AP Act

-Describe actions you should take into AP aAct

Solution – There is an issue that reacted to incorrect tac practice which could prove to be an RI
Theory (T) – It must meet the definition of RI, must first be unlawful act

T – An unlawful Act, one which is contrary to statutory obligation must have taken place
Application (A) – Provisions for tax returns unlawful completed owing to deduction of fines
T – UA / omission must be committed by a person responsible for mgnt of company

A - ………FD, was responsible and fully aware of the ded.

T – UA / omission has caused, or likely to cause material financial loss to the entity, partner,
member, SH, creditors, investors of the entity
A – Fines/penalties can be imposed by SARS will cause company to suffer loss
 • If the return goes through the way they were completed, SARS will suffer a loss,
company pays less tax

T – The UA/ omission is fraudulent or amounts to be theft

A – Submission of falsified tax returns amounts to be fraud
T – UA/omission represents a material breach of any fiduciary duties

A – The act is not in the best interests of the company, FD should be acting with integrity

2. Actions to take

2.1 As per section 45 of the AP Act, the existence of a RI must be reported to IRBA without a
delay
2.2 Mgnt of the company must be notified within 3 days of auditor sending the first report
2.3 Auditor must ASAP, no latter than 30 days from date 1st rep sent:

a. Take all reasonable steps to discuss report with company mgnt

b. Afford mgnt opportunity to make representations in respect of report
c. Send a 2nd report to IRBA stating:

• No RI has taken or is taking place or

• The suspected RI is no longer taking place, adequate steps have been taken for the
prevention of loss if relevant or
• RI is continuing
Assertions
Assertions on Accounts receivable
Existence
-Due consequences of failing to meet revenue targets, risk that directors may manipulate sales
accounts to reach targets
-introduce fictitious sales to meet targets, bonuses can affect material misstatements,
assertions and fraud risk
- Indulging in practices to inflate account receivable balance

Valuation
-Cr policy is relaxed, risk that bad debts are understated, % used not reasonable
- Accounts receivable balance will contain debtors that should have been written off

- Provision for bad debts will be understated

- Revenue will be overstated to rec bonuses

COMPLETENESS

-risk that Sales made in December is carried over to Jan for recording, if December targets were
met, to ease pressure on January targets

All Assertions
-Acc receivable material amount on the SOFP, large enough material misstatements
- Complex account balances
- Senior management has direct financial interest in statements, this would increase audit risk
associated with accounts receivable

Assertions for valuation of inventory

-Inventory is imported risk that inv not priced properly
- All costs like import duties transport, etc., may not be capitalised to cost
- Production of any product risk that WIP and FG not appropriately valued in accordance with
standards

- some costs e.g. Labour not capitalized

-Provision for obsolete inventory not valued correctly, policies may not be reasonable
- Increased competition, pressure to sell products, incorrect NRV
- Incorrect valuation of inventory due to going concern issued, Financial statements in correctly
prepared

Assertions on Revenue
-Risk of adding fictitious Sales due to JSE listing(occurrence)
- Revenue for orders close to year end incorrectly valued in current year if stock levels are
insufficient (occurrence and cut off
- Risk that discounts won’t be accounted for (Accuracy)
- Risk that revenue not completely recognized as sales captured not reviewed (Completeness
and accuracy)

- Risk of overstatement of revenue figure to meet higher budgets(occurrence)

- Risk that revenue not disclosed correctly in notes (Presentation)

-Risk that fictitious sales recorded when POs not satisfied (Occurrence)
-Sales after year end recognized in current year (cut off)

ASSERTIONS INV AND PPE

-Newly appointed manager can overstate valuation of property to impress management
(valuation, alloc)
-If constructing something, Risk that WIPS, labour, manufacturing overheads not capitalized
(valuation alloc, completeness)
- Construction materials purchased not capitalized to cost (Completeness, valuation allocation)
-Risk INV not valued at lower of cost or NRV (Valuations alloc)
-Risk that consumables are incorrectly classified as INV(Classification)
-Risk PPE does not belong to company (Rights and obligations)
- Risk that revaluation surplus is not in OCI(Completeness)
- Risk that valuer may not be competent and experienced(valuation)
-Impairment loss incorrectly calculated(valuation)

-Risk that depreciation not adjusted for effect of Revaluations(valuations)

General
-If dealing with asset always talk about Impairment that’s valuations

- recognizing something e.g. Adding fictious sales is occurrence

- Incorrectly pricing something is valuation, or capitalizing cost e.g., transport import duties,
WIPS FG for construction
- when dealing with transactions always talk about cut off, e.g. This year’s sales recog next year
to ease targets
- importing something, always talk about accuracy valuation Ito exchange rate
- When dealing with accounts receivable, always talk about how discounts, Cr allowances etc.
will have ripple effect, like Dec in rec, Dec in bad debts, Inc revenue
- If you stuck just state something Ito the assertion e.g. this thing was not completely valued or
recog

- just state something may not be disclosed

- always conclude with all Assertions, how will materiality and audit risk be impacted
- talk about incorrect classifications
Audit Plan
GENERAL CONTROLS
Control environment

C TITLE
P participation by those charged with governance (ou delegates duties to others)
I integrity and ethical values (don’t comply with king 4)
C commitment to competence (Degree is not acc, no tech skills)
S Mgnt philosophy and operating style (chilled, laidback managers, set tone for CE)

A Assignment of authority (ou in charge don’t report to board or It steering committee

H HR policies (no background searches, no formal transparent process such as interviews

System development and implementation control

Risks
T – Information transferred from old to new system invalid
R – system might not be appropriate for user requirements
I - system may not incorporate controls to ensure integrity.
C – Cost of development may go out of hand

K – system rendered useless if users have no knowledge

E – programmes may have errors or bugs

In house development

Before any system is bought or implemented, you must determine if there is need to replace,
where you must fill out a requisition form(formal, pre printed, pre numbered, sequential), if
there are any major changes the director must fill out form he used end user language.

SAMRSTFTC ID
Standards

All aspects should comply with the pre-defined standards, must be monitored and any
deviation must be followed up
Project Approval
Request for new system
Check if there is a need for new system first

Conduct feasibility study (In house vs off shelf) cost vs benefit

Either reject or accept
Approval from IT steering committee prior to development
IT steering committee is responsible for conducting project

Project management
Select project team (It accounting and. Users)
Plan stages

Allocate responsibility for each task to members

Deadlines that need to be met
Monitor progress of the project
Submit progress report

IT steering committee does all these duties

User Requirements
Determine and document user requirements
Meet with internal and external auditors and get comments on IC concerns

Specifications signed off by the department manager (written approval)

System specifications and programming

Specs documented in accordance with the standard programming conventions and procedures
(SPCP), No program is done on a live system
If not done correctly system cannot communicate with itself
Testing
Do before installation and before every change
3 types
Program, test individual programs using standard debugging procedures User
acceptance test, output tested by management users and auditors System
test, tests entire system to ensure all programmes integrated properly

Final approval
Review the test results and check for errors
Get final approval (from board, users and IT steering committee)

Training
Scheduled training
Assign training modules
Prepare user manuals

Conversion
Like a project, date clean up before conversion
All discrepancies must be resolved before conversion
Must test on a dummy system before conversion

3 types
Parallel processing, old and new run together (enter transaction 2 times)
Immediate shutdown upon implementation, do in 1 day it’s risky
Covert entire system at once

Phasing, phase in new into old

Post implementation and review
Few months after new system implemented
Check for any problems, is it valid accurate and complete

Documentation
Throughout program change must document
In future can look back at problems, audit trail

Off shelf
E.g. by the yoshi, off shelf would be watching you tube but In-house would be developing your
own software to play videos, you can customize it according to your user requirements

Adv of off shelf

Lower cost
Faster access (already developed and tested)
Available tech support

Ongoing upgrades

Disadv
Not meet user requirements

Not customized in SA
Can’t change software

If it’s off shelf same process but exclude 1 4 5

Access Controls
Security policies
L – lease privilege, employees given access only to programs necessary to carry out duties
F – Fail safe- If one control fails, whole system shuts down
I-In depth defense- Many protection controls (password, pattern, pin)
L-Logging – computer logs for all activities that take place on it, check for unauthorized users
(cake on vacay but he logs on)

Physical access controls

Visitors from outside, make appointments to meet IT personnel
Security should I from IT dept. And confirm appointments

Give It tags and escort into and out of building

No need to enter data center, unless in a practical manner

Physical entry

Entry and exit must be limited to one point

One door for entrance locked at all times, use a pin or biometric data to enter
Only individual that need access should be given
Entry and exit should be under surveillance should be checked regularly
Remote workstations and terminals must be locked to the desk, no windows nearby

Lock offices at night and weekends

Logical access controls

Identification, ID card, metal tag, biometric data, for least privilege individuals
Authentication, verify, must enter unique password to access network
Authorization, when authenticate users, diff levels, read only or write access
Logging, detective control, all discrepancies are logged and followed up
Passwords, unique, at least 6 characters, mixed up, regularly changed, not displayed openly, if
person is terminated password revoked

Access tables, for computer to have control of access must know object

Other, data communication, encryptions

Firewalls, combo of hardware and software between company network and external network
It is a gateway control into network, must have detection software to alert company of
unauthorized entry

Libraries, software that will protect backup

Supplementary controls
Auto account lockout in event of violation
Auto log out of system after period of time
Review of access violations

Encryption of critical information

Continuity of operations

IN event of disaster, what must do to prevent unauthorized users

Evaluation of how prone company is to risk, theft, hacking, infrastructure damage
Physical security, keep data in a secure location, no windows, must have locked doors
Fire, have fire or smoke detectors, no smoking signs, fire extinguishers

Floods, raise the flooring, and keep systems in a higher level

Disaster recovery plan

W, written documents, list the procedures to be carried out in the event of a disaster

A, available, must be widely available and easy to locate

P, address the priorities, order in which the files are reconstructed
T, must be regularly tested
A, detail alternative arrangements that were agreed upon
Back ups, grandfather father son, all date must be copied and backed up, back up until 3
generations, most recent back up must be stored offsite

Have insurance for employees, equipment, hardware, software

Application controls
Controls to ensure revenue is valid accurate and complete

Valid
-Only authorized (Registered) customers should request a service from company
- users should register with company, provide personal details, create a unique password

-users should ensure the passwords are at least 6 characters, alphanumeric confidential etc.
- Users should verify accounts through email or SMS to ensure the account belongs to them
- There should be a log of all goods and services returned or declined in order to create an audit
trail and prevent errors

- An automatic report for all declined services should be sent to senior personnel to follow up
and ensure that the correct customer is refunded

Accurate

-when customer is initiating transaction, there should be a list generated with possible options
to ensure minimum keying of information and less errors

- There should be a mandatory field present in the format to prevent customers from
proceeding unless required information is entered this ensures accuracy

-There should be a drop-down arrow to allow the customer to choose different levels of service
(basic, standard, premium)

- Depending on the options chosen the system should calculate the revenue amount to be paid
and allocate cost of sales as well
-Revenue should be processed at real time to the sales journal which is protected by encryption
to prevent disruption

Complete
-Ensure a log of all goods and services requested by the customer is kept and senior personnel
have reviewed all logs

- To ensure that a customer does not commit fraud and get away with it, their next bill will
include the previous bills carried forward if they are outstanding on payments
- There should be a reconciliation of all goods and services performed during the month which
is recognized in the respective journals in the case of revenue, sales journal
King IV
Factors the GB should consider to determine members (RSSMDQQ)

Collective skills, knowledge, experience needed for board to meet responsibilities

Appropriate mix of executive, non-executive and independent directors
Sufficiently qualified members to serve on board committee

Secure a quorum at meeting

Regulatory requirements eg. JSE req, listed company must appoint a financial director

Diversity targets (experience, gender, age, Race)

CEO and at least one other executive director must be appointed at board
Size of entity and workload required of GB

Reasons for committees

Audit committee
Reason
Any company that issues financial statements should appoint audit committee

Audit assurance requirements would be met

Integrity of reports
Managing financial and reporting risks

Composition

At least 3 members (P8)

All members non-executive
All independent
Chairperson of board can’t be member or chairperson

Members must meet once a year (internal and external)

Nomination
Reason
Need to substantially overhaul board of directors

No evaluating succession plan for current directorship

Assist to engage the right calibre of individual to satisfy requirements of an effective board

Composition

All members should be non-executive directors

The majority of members independent
Chairperson of board can be chairperson here but must be Independent non-executive
At least 3 members(P8)

Remuneration
Reasons
Relief on cash flow issues
Reduce debt

Ensure company is able to attract more talent in market to maximize shareholder value

Composition
At least 3 members (P8)

All non-executive, majority independent

Chair of board can’t be chair here but can be member (must be Independent) (P10)

RISK committee

Reasons
Company works in volatile environment, necessary to have committed with skills to understand
risk, enhances company performance
Risks could be mitigated in a positive manner
Broaden experience and knowledge base, enhance human capital, company can recognize
opportunities

Composition
At least 3 directors
Mix of executive and non-executive, majority non-executive
Membership should overlap with audit committee
Chairperson can be member

At least 3 members (P8)

Social and ethics committee

Reason
If public company, and PI score is above 500, appoint social and ethics committee
Delegate oversight of organisational ethics, corporate citizenship, stakeholder relationship
Become good corporate citizen

Composition
Mix of executive and non-executive, majority non-executive
Chairperson of board may be member not chair

3 members (P8)

General
CEO of the company is also chairperson of board
That’s noncompliance with King IV, CEO cannot be chairman
Chairman should be non-executive independent director (P7)
Appropriate mix of skills, knowledge, experience (P7)
How was a person appointed to board (no nomination committee, person appointed due to
family connection or friendship with director) (P7)?

Check how many executives and non-executives, majority should be Independent (must say
independent), there must be a balance (P7)
How many males or females, should be diverse, race and gender (no demographics)
If non-executive director was executive in last 3 years then his integrity is compromised

If non-executive directors are entitled to remuneration then they are not independent
If non-executive director has 32 directorships with other companies, even though they may be
non-executive directorships, implies that person does not have interest in well-being of
company and won’t contribute full efforts

Secretary cannot be a member of director of any committee, she does not have necessary skills
and qualifications
If person receives remuneration that is contingent on company performance then that person
is not independent
Mention the committees that are missing, King IV requires all missing committees to ensure
good corporate governance
Process of nomination (should be formal and transparent) (P8)
Check candidate’s knowledge, background, experience (P7)
Nomination for re-election should be based on members on members performance,
attendance to meetings etc(P7)

Should be a professional file for each candidate at the AGM together with statement from
board to support election(P7)
New members with little to no experience should be mentored and trained (P7)

Incorporate a learning program based on legal compliance and corporate governance(P7)

Ensure that each committee is performing the correct duties e.g. Remuneration should not be
doing duties delegated to the board like steering organisation

CEO should not determine remuneration of executive directors

Did the committees meet at all during the year (P8)

In audit committee members must have financial qualifications
For a listed company, it is not sufficient to have many young, inexperienced Directors
Check what type of qualification, if engineering or cell phone manager then no appropriate
skills

There must always be succession planning (just terminating all directors for fun after 3 years is
contrary
Must be fair remuneration policy(P14) and should be designed to attract and retain human
capital(P12)

Board not acting in best interests of company(P1), illegal tender processes

GB not ensuring effective functioning of itself no accountability of members(P6)
Code of professional conduct
Fundamentals (CODIP)

Confidentiality, not permitted to disclose confidential information in a social setting unless

permitted by law, the client or professional duty
Objectivity/Independence, not compromise professional judgement because of bias, conflict of
interest or undue influence

Professional competence and due care, must maintain professional knowledge and skills, act
diligently and in line with standards, due care is ensuring your staff and yourself have adequate
training

Integrity, being honest, fair and straightforward in all business relationships

Professional behaviour, must comply with law, actions must not bring the profession into
disrepute, consider guidance on advertising, recruiting, responsibilities to colleagues, never
compare services

Threats (Faris)

Familiarity, close relationships leading to being too sympathetic to client, look for family, social
meetings, Gifts or fees

Advocacy, auditor promotes client’s position to point where their professional judgement is
compromised, look for, provision of other service resulting in conflict of interest, policies and
ideas

Self-review, Auditor does not appropriately evaluate results of previous services performed by
him or her, look for working in 2 places in one-year, other services offered, consulting or once
off work
Intimidation, can’t act with objectivity due to a perceived threat or undue influence, look for,
scared employees, aggressive workers
Self-interest, there is a financial interest that will inappropriately influence the auditor’s
professional judgement, look for, everything, fees, shares, benefits, selfish thoughts

Safeguards
Auditor must identify threat and evaluate significance, if significant must reduce to an
acceptable level by applying relevant safeguards:
1 Assign another engagement partner
2 strengthen the engagement team
3 Have the partners work independently reviewed
4 Assign partners with required skills

5 declare all financial interest with superiors

6 cancel all share options
7 Increase client base
8 Appoint additional staff to deal with increased workload

9 Raise matter with those charged with governance

10 contact a professional body for advice
11 ultimately resign
12 implementation of policies that prevent acceptance of gifts

13 obtain assistance from other audit firms

Scenario based Qs and Answers
1 company expands operations to other provinces, attracting over R250 Mil in investment,
we are a small firm

Sol, self-interest threat to professional competence and due care due to increase in size of
client entity and geographical spread
Significant threat as our firm is small and Increase degree of public interest

2 JASON Inc. Is the company’s largest client by far?

Sol, self-interest threat to Independence since they are only largest client, potential
intimidation threat, significant
3 JOHN (Engagement partner) is abrupt, aggressive
Sol, Intimidation threat to independence and professional behaviour

Significant, judging from responses of senior management, other people have same opinion

4 Mr Naidoo has been engagement partner since incorporation of company

Sol, Familiarity threat to Independence, can be argued that people don’t like him so threat is
Negated , but threat is still significant

5 Darren has problems with new computer system, don’t know CAAT, offloads the work on
trainee
Sol, Self-interest threat to professional competence and due care
Partner not comfortable with CAAT, further risk if company is small and there’s increased
degree of public interest in client

6 Mr Dorm , compiles financial information for company, he was awarded 300000

share options, he needs money since he was divorced

Sol, self-interest threat to independence and integrity

Significant, he is in a position to exert influence over financial information that will impact gain
from share options

7 Mr SKRIK is aware that his division is selling cigarettes that were illegally imported, he
doesn’t want to report the matter as his friend the CEO will lose his job and he will become a
trouble maker

Sol, Familiarity and self-interest threat to integrity

Significant, as he is allowing his close relationship with the CEO to drive him to be dishonest as
well as act selfishly and only consider the implications on his career and ultimately is not
straightforward

8 A chairman of board (another comp) offers Mr hungry a higher position as a financial

director, in exchange he should provide a list of clients of the firm where he currently works
and amounts each client is charged

Sol, self-interest threat to integrity, confidentiality and professional behaviour

Significant, Mr hungry sees this as a once in a lifetime opportunity, he would breach his ethical
conduct and provide confidential information to a competitive company hence Integrity and
confidentiality compromised, his actions will bring the profession into disrepute

9 Mr Fast asked you to finish the audit quickly with minimal errors
Sol, Intimidation threat to professional competence and due care
Significant, he is already dictating manner in which audit should be done, as the auditor you will
not perform adequately as you will perform the audit to suit him and make errors

10 Mr sneaky offers to take team on a weekend away to hotel

Sol, Self-interest to objectivity
Significant, he is attempting to become popular amongst employees hence will have influence
over lives, potential Familiarity and Intimidation threat in future

11 Mr Unseen bought 5% shares at Wipe LTD, speculates share price will grow and is aware
the company he works for seeks to attract more investors

Sol, Self-interest threat to integrity and objectivity

Significant, audit partner not allowed to hold interest in the client’s company, he uses
confidential information from client to purchase shares

12 The managing director asked Gary to attend a meeting with potential investors to help
potentially request further investment

Sol, Advocacy threat to objectivity

Significant, partner is advocating the client’s interest to the extent that his own professional
judgement has been compromised
13 Darren an auditor realises that in completion of the audit he will receive a 10% bonus
Sol, Self-interest threat to integrity
Significant, the auditor is aware of the financial gain of the bonus and will spend more time
than required on that audit and the quality of his work will be significantly reduced

14 An audit fee is still payable to the firm

Sol, Self-interest threat to objectivity

Significant, an overdue audit fee could be construed as a loan to the audit client, firms should
not grant loans to clients or receive as well, contrary to CPC

15 one owner named shravs insists that the auditors provide both audit and advisory
services for his company, partner also helps out with tax and personal matters
Sol, Self-review threat to independence
Significant, outcome of advisory services needs to be re-evaluated in reaching conclusion for
audit

Partner handles tax matters, may be perceived to be making business decisions

16 Cameron , partner, who’s in charge of firm, advises company in PAYE dispute with SARS, he
normally assists with accounting services
Sol, Advocacy threat to independence

Significant, he normally assists with tax matters if client’s case is not strong, he might overlook
consequences of matter on financial statements
Normally SAICA does not permit offering tax services but if there’s a Familiarity there’s tax as
well then threat is significant

17 Poker Ltd is a client, SUVEER the director has approached you to enter a joint venture,
partners of your firm must invest R1 Mil start-up capital and provide services on accounting
system and carry out audit on joint company
Sol, Self-interest threat (potential familiarity and Intimidation) to Independence

Significant, firm will have a close relationship with the client

R1 MIL represents financial holding in client firm, no independence in mind or appearance
Cannot take up directorship

18 SAWRIV offered you to perform Tax calculations for a generous fee

Sol, Self-review threat to independence (seen to be auditing own calculation)

Professional competence and due care (Do firm have necessary resources and personnel to
perform services

Generous fee creates a self-interest threat to objectivity, integrity and professional behaviour

19 JOVAN has offered your firm an opportunity to travel to Flapville as cost of 60000 as
his expense he wants to thank the partners
Sol, CA in public practice can accept gifts provided they are insignificant
This holiday would be a significant gift
Possible self-interest, Familiarity, Intimidation threat to objectivity
Significant, this trip will cause Familiarity threat and develop close relationships, objectivity will
be compromised, ou will use trip as leverage for firm to meet client demands

20 Shivaan, is an audit client part of Marie Ltd Nd has been client for 3 years he offers job to
senior management from your firm
Sol, manager might not act in best interest of company (potential self-interest to objectivity)
Familiarity threat to objectivity and professional behaviour, know ou for 3 years manager may
be too casual with audit since he will work for that firm soon
Evaluation of position manager will take will be needed as well as his involvement in the audit

Juicy spicy examples

21 If Charles issues a loan to
you
Sol, Self-interest threat and Intimidation to objectivity and professional behaviour

22 You prepared a valuation for a company your boss Mr idiot wants to buy
Sol, you may desire that your employer saves money and may amend your valuations to reflect
a lower value, hence Familiarity threat, being too sympathetic to boss, extends to self-interest
threat to integrity objectivity and professional competence and due care

23 Henry is involved in negotiations to purchase new company, has to decide on IFRS 3

treatment
Sol, Self-review threat, NY is reviewing his own work, creates self-interest threat, may record it
in a way that makes you as negotiator perceive competent
Advocacy threat to objectivity, you may have an idea of what you expected to come out of
negotiation, affects the manner in which your account for IFRS 3

All threats affect integrity, objectivity and professional competence and due care