Audit 288

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Audit 288
Auditing 288 (Universiteit Stellenbosch)
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AUDITING
288

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Disclaimer
General
The content of these notes has been compiled by combining class slides, class examples, information
from the textbooks & personal class notes. Please note that though these summaries are very thorough
they should only be used as a study aid in conjunction with your class examples, slides, textbooks &
attending class. They should by no means be used as a substitute for any of the above.
These notes were compiled for our own studying purposes to the best of our abilities so we apologize
should you find any errors. We hope they will benefit and assist you in your academic journey this year
and we wish you everything of the best for your studies.
Audit 288
Cycles
By the end of auditing, second-year cycles will be your best friend. Find the most effective way for
yourself to understand and know the cycles off by heart. In these summaries you will find two different
ways namely - past memos (out of experience the best and simplest way to memorize them) and
theory. It’s important to practice weakness questions on cycles. If you study hard enough and practice
how to answer the questions you can do well.
Structure of the summaries regarding cycles:

• Sales & Receipts and Purchases & Payments – Theory of the cycle and then the perfect cycle
memo.
• Bank and Cash – memos are incorporated in the theory and there is a cash register overview at
the end.
• Inventory and Production – memos are incorporated in the theory and there is an extra summary
of the documents for the production cycle included at the end. Please note that the Payments &
Purchases cycle, as well as the Sales & Receipts cycle, is incorporated into this cycle and
therefore some of this cycle’s information will be a repetition of previous cycles.
• Salaries and Wages – memos are incorporated into the theory.
• Investment and Financing – was a self-study section, however, you can find typical questions
asked on this cycle at the end of the section in these summaries.
Ethics
Know this section off by heart, although it might seem impossible at first, it is manageable if you focus
on the key aspects of each section. Also, know which sections fall under which part of the act - there is
a summary of each section included.
When answering questions for Ethics:

• List the threats
• List 4 factors
• Apply these factors to the scenario
• Make a conclusion about the significance of the threat
See at the end of the section some useful memos and an overview of all the sections.
Audit risk
Use factors listed in the table as a guideline, note that there may be others and therefore it is important
to practice questions to make it easier to identify risks.
Audit materiality
Theory and memos are included at the end of the section in these summaries, you can memorise the
memo to help you answer questions.
Overall audit approach

Study memos at the end of the section.
HEBREWS 11:1

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Table of Contents
TERM 1
1. Introduction and background

2. Internal control and introduction to cycles
3. Revenue and receipts cycle
4. Purchases and payment cycle
TERM 2
5. Bank and cash cycle

6. Inventory and production cycle
7. Salaries and wages cycle
8. Investment and financing cycle
9. Ethics: Rules of improper conduct & Auditing profession act
TERM 3
10. Ethics: Code of professional conduct

11. Pre-engagement activities
TERM 4
12. Audit risk

13. Audit materiality
14. Overall audit approach
15. Audit evidence

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1. INTRODUCTION AND BACKGROUND
Auditor
• Satisfy himself to the truth of bookkeeping of others.

• Must remain independent. (NB!)
Duties and responsibilities of an auditor
• To communicate opinion;
• to investigate annual financial statements;
• to ensure that appropriate accounting records have been kept in accordance
with the Company’s requirements
• that minute books and attendance registers in respect of company, directors’
and managers’ meetings have been kept in the appropriate form as required
by the Companies Act
• to acquire all the information and explications that to his knowledge and
conviction are necessary for the purpose of the performance of duties;
• to ascertain that annual financial statements agree with his accounting
records and accounts;
• to investigate accounting records of company and to perform tests and other
audit procedures he finds necessary to ensure that annual financial
statements
• reasonably reflect the financial position of the company and

• the results of its operations - in accordance with generally accepted
accounting practice, applied on a basis that is compatible with that of the
previous year;
• directors’ report: is not in breach of or its meaning distorted with a reasonable
interpretation of the annual financial statements and accompanying notes;
• to adhere to any appropriate requirements of the Auditing Profession Act at all
times.

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What is an audit? definition of an external audit
• It is the systematic process of the

• collecting and evaluating of evidence and information objectively
• of assertions on economic operations and events made by management of
an entity.
• in accordance with laid-down criteria, quantitative and or qualitative.
• Results are communicated to users in writing.
Elements of the definition:

Systematic process
• An audit entails the auditor following an organised and logical process.
• Including: pre-engagement, planning, obtaining evidence, evaluation, conclusion and
reporting.
Obtaining and considering evidence and information

• that is: sufficient and appropriate about management’s assertions on for example: the
account balances, classes of transactions and disclosure.
It must be done objectively

• No personal interest or bias.
Evidence regarding assertions about economic events and actions

• Representation management regarding transactions and balances
Evaluate correlations of assertions with predetermined criteria (IFRS)

• Qualitatively
• Quantitatively
Communicate results
• Must be in writing
• Reflects audit opinion
To users
• E.g. Investors, financiers, shareholders, employees, government, creditors, debtors.
Objective of an audit Purpose
• To express an opinion on the financial statements

• Providing assurance that they are free of material misstatements (e.g. error
or fraud), and
• that they are a fair representation in all material aspects (reasonable
assurance)
• of the financial position and performance of the company in accordance with
the appropriate financial reporting framework.
Not:
• Guarantee existence of a company
• No objective to defeat fraud

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Explanation of the objective (discuss or comment on the objective of an audit)

The auditors’ opinion:
• Enhances the credibility of the financial statements, but
• Does not warrant the future feasibility of the business; and
• Does not warrant the capability and effectiveness with which management
manages the operations of the entity.
Reasonable assurance why can an auditor only provide reasonable assurance?
• An audit is performed in accordance with IAS’s and provides reasonable

assurance that the statements are overall free from material misstatement.
• The inherent limitations of an audit may, however, be the cause of material
misstatements not being traced.
Inherent limitations of an audit: TEST
• The nature of financial reporting where management uses judgement in

preparing financial statements when applying IFRS and making estimate.
• The nature of audit procedures performed when considering practical and
legal limitations on audit.
• The fact that documentation and explanation provided by management on
which to base conclusions may be intentionally or unintentionally
incorrect.
• Management may try to hide fraud.
• Timeliness of financial reporting and balance between benefit and cost.
• Reliability of evidence versus cost.
• Time and resources available.
• The use of sampling and not 100% testing when performing the audit.
Structure of accounting and auditing profession

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Audit profession
SAICA IRBA
(South African Institute of Chartered Accountants) (Independent Regulatory Board of Auditors)
Main purpose is to protect and promote the Main purpose is to protect and promote the
interest of CA’s in SA. interest of investors, public as well as
support auditors.
• Mastery of intellectual skill
• Acceptance of duties to society • Registration is a requirement to practice as
• Objective outlook an auditor.
• Rendering service to a high standard • Requirements for registration include
meeting the competency and professional
• Established in 1980. development requirements of IRBA.
• Non-profit and voluntary. • Established by the Auditing Professions
• Serve the interests of both CA’s and the Act of 2005.
public.
• Upholds the professional standards of Main activities of the board include:
CA(SA) nationally and globally. - Sets and applies the requirements for
registration
- Sets and maintains auditing ethics based
on global standards
- Performs inspections of audit work
- Provides procedures for disciplinary
procedures
IFAC IAASB
(International Federation of Accountants) (International Auditing and Assurance Board)
• Strive to comply with audit practices by • IFAC’s standard-setting committees.

strengthening the audit profession and • Authority to develop and issue audit
developing strong international economies. standards (ISA’s).
• Attempts to harmonise audit practices • Independent standard-setting body.
worldwide. • Promotes high-quality international
• Speaking out on public issues where the standards for auditing and assurance.
profession’s voice is most relevant. • Harmonise audit practices globally.
• Is also South African based.
Different types of services
i. Assurance
Reasonable assurance engagement, e.g.

financial statement audit.
• Management’s obligation to
shareholders:
- Reporting the company’s financial
performance, financial position and
cash flow position.
- In the form of financial statements
that comply with IFRS.

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• The external auditor’s (appointed by shareholders) duties:

- Express opinion on the fair presentation of management’s financial
statements i.t.o. compliance with IFRS.
- Provide a degree of confidence for the users of the financial statements (e.g.
audit report providing opinion over AFS)
Limited assurance engagement, e.g. independent review

• Auditor draws a conclusion and expresses an opinion in terms of suitable
criteria. (E.g. a financial reporting framework – IFRS)
• Assurance provided is more limited.
• Auditor applies a process prescribed by the International Standards on
Review Engagement (ISREs).
ii. Non-assurance
• Practitioners perform engagements where no opinion (assurance) is

provided. (E.g. compiling tax return)
• Consultation services
- Technology
- International
- financial planning
- taxation
• Compilation - preparing financial statements.
• Agreed-upon procedures.
Assurance engagements
• An engagement in which an auditor expresses a conclusion
• designed to enhance the degree of confidence of intended users
• about the outcome of the evaluation or measurement
• of the information against predetermined criteria.
Different types of audits
• Financial statement audit

• Compliance audit
• Operational or Performance audit
The different types of auditors
i. Independent auditor (external auditor)

• Not an employee of the entity - works for an external auditing firm.
• Auditors express an independent opinion.
• Provides third parties with assurance about the auditee’s financial statements.
• Increases the level of confidence and willingness to use financial statements
as a basis for making economic decisions.

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ii. Internal auditor

• An employee (or outsourced provider).
• Provides the employer independent, objective assurance and consulting
services.
• Designed to add value and improve employer’s operations.
• Creates a systematic, disciplined approach to evaluate internal controls and
governance processes.
• To ensure independence, the internal audit department reports to the audit
committee (comprises exclusively independent non-executive directors).
External Auditor Internal Auditor

• Audit (External) • Internal management function.
• Not employees of entity. • Employees of entity.
• Report to shareholders. • Report to management. (Audit
• Legislation: Companies Act & APA. committee)
• Independent • Board of directors.
• Provides assurance. • Independent (objective)
• IRBA • Provides assurance.
• IIA
iii. Government auditor – Public auditor

• Objectively performs investigations of local and national government
departments.
• Issues reports to the government.
• Aim: increase the confidence of stakeholders in government departments’
functioning and reporting.
• Government auditor of SA called the Auditor-General. (Kimi Makwetu)
iv. Forensic auditor

• Performs an independent investigation into fraud or fraudulent activities.
• Forensic auditor issues report to the party that appointed him/her – report can
be used in a court of law.
Private audits Public sector

External Audit Auditor General
• Audit of entities (Companies, CC’s, Trusts • Audit of government (National, provincial,
etc.) local)
• In terms of The Auditing Profession Act 26 • In terms of The Public Audit Act 25 of
of 2005 2004
• Audit of: • Audit of:
- Financial statements - financial statements
- compliance with laws and regulations
- performance in terms of
predetermined objectives

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Company act requirements

• Directors/Company:
- Fin year-end date
- Accounting Records
- Compile Annual Financial Statements (AFS)
- Approve and Annual General Meeting (AGM)
Section 27-30
Section 27 Financial year - Company must have a

financial year.
- Financial year must be
a company accounting
period.
Section 28 Accounting records - A company must keep
accurate and complete
accounting records in
one official language
of republic.
Section 29 Financial statements - Financial reporting
standards (IFRS)
- Fairly presented
- Show companies
assets, liabilities,
equity, expenses and
income.
- Accounting period.
Section 30 Annual financial - Prepare AFS 6
statements months after year-end.
- Public company AFS
must be audited.
- Other companies i.t.o.
PIS-score/voluntary.
• Auditor
- every public company must appoint an auditor and when PI score is more than 350.
- with inception- members or directors
- otherwise Registrar
- annual appointment
- access to records, books, documents, info & explanations
- report to members
- other responsibilities
Section 90-93
Section 90 Appointment of Auditor - At Annual General Meeting

(AGM)
- Registered Auditor (RA)
- Designated individual.
Section 91 Resignation of Auditor - Effective when notice of
resignation is filed.

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Section 92 Rotation of Auditor - Cannot be same individual/

designated auditor for more
than 5 years.
Section 93 Rights and restrictions of Auditor - Unrestricted access to all
accounting records and
required information.
Public Interest Score (PIS)
• Method to assess companies public interest.

• Act prescribes audit or review based on this.
• Calculation:
- 1 point per employee.
- 1 point per R million or part thereof of Turnover.
- 1 point per R million or part thereof 3rd party liabilities at year-end.
- 1 point per individual who has a beneficial interest in the securities in issue
by the company.
• Summary for a private company:
Auditing postulates
• To postulate: to assume or claim as true, existent, or necessary.

• These postulates provide the outline for the theory of auditing.
• Also, the basis of the IFAC International Code of Ethics for Professional
Accountants.
It can be summarised as follows:
i. Truth and fairness

• Financial statements and financial data is verifiable.
- It is possible to verify a client’s financial statements.
- Necessary to make it possible to perform an audit.
- Auditor verifies whether the financial statements are true and fair or not.

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• Financial statements and other information submitted for verification are free
from collusive and other irregularities.
- Auditor can assume that management has taken necessary steps to ensure
that there has been no deliberate attempt to misstate financial statements.
• Consistent application of generally accepted accounting principles results in

fair presentation of financial position and the results of operations.
- Assumes that if clients apply one of the financial accounting frameworks
(e.g. IFRS), fair financial presentation will occur.
• In the absence of clear evidence to the contrary, what has held true in the
past for the enterprise under examination will hold true in the future.
- If no evidence is found to the contrary, the auditor assumes that the integrity
of the management of the company will stay the same in future years.
ii. Independence
• There is no conflict of interest between the auditors and the management of
the enterprise under audit.
- Assumes that management and the auditor share the same goal, namely
that financial statements provide fair presentation.
• The professional status of the independent auditor imposes commensurate

professional obligations.
- The professional status of the auditor brings the responsibility of
professional behaviour, competence and due care, objectivity and integrity.
- Also assumes he/she is competent to perform audit.
• When examining financial data for the purpose of expressing an independent

opinion theron, the auditors act exclusively in the capacity of auditor.
- For audit opinion to be reliable, auditor must be reliable and objective.
- His focus is to express an opinion on the financial statements.
- Other services are excluded.

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Audit Process overview
Accounting vs. Auditing

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2. INTERNAL CONTROL AND INTRODUCTION TO CYCLES
A. Internal control system – Management
The process designed and effected by management to provide reasonable

assurance about achievement of entity’s objectives relating to:
• reliability of financial reporting
• effectiveness & efficiency of operations
• compliance with laws & regulations
Internal control can only provide reasonable

assurance due to following inherent limitations:
1. Cost vs. benefit
• Management can and only will implement
internal controls that are cost-effective to
the organisation.
• They will not implement all of them in the
case where some may not be feasible.
2. They are directed at routine repetitive transactions

• This is time-consuming
• Cannot be out of the ordinary transactions, as these are more susceptible to
error and fraud.
Can be asked to list limitations
or identify in a scenario
3. Human error
• Such as an employee’s misunderstanding of an internal control measure.
4. Collusion for the circumvention of internal control measures

• Where people from different departments work together in order to override
internal controls.
- Cost vs. benefit
- Routine transactions
5. Abuse of responsibilities of internal controls - Human error
• Such as fraud or management overriding the system. - Collusion
- Abuse of responsibilities
- Inadequate control
6. Control becomes inadequate
• Due to change in environment, operating procedures, policies, the system
controls may become redundant and inadequate
• Therefore, internal controls need to be changed over time.

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B. Internal control system – Auditor
Reason for understanding Internal Control

An auditor should obtain an understanding of internal control for:
• Risk evaluation
- Identify types of potential material misstatement.
- Consider factors influencing material misstatements. WHY?
- Quantifying and prioritising these risks.
• Response to controls as evaluated

React to risks in order to:
- Influence the nature, extent and timing of further audit procedures.
- Decreases the risk of material misstatement.
- The entity must consider the risk appetite, which is how much risk they are
willing to accept to achieve their objectives and,
- The level of risk tolerance the entity can handle.
- The risk that remains after treating the risk with the appropriate response is
the residual risk.
What this understanding is used for WHAT?
• Design and implementation of IC

- Controls design must be evaluated to ensure control is capable of preventing,
detecting, and correcting material misstatements.
- Ensure controls exist and are used effectively by the entity.
• Evaluate applicability or risk

- Risk assessment
- Procedures to obtain audit evidence about risk pertaining to design and
implementation of controls such as inquiry, observation, inspection and
tracing.
• Tests and measurement

- Only observation is not sufficient to obtain audit evidence.
- Tests of controls must be performed to ensure the effectiveness of the
controls.
Internal auditor must:
• Understand why IC is needed = WHY
• Apply understanding = WHAT
• Know how to gain knowledge = HOW
• Generate documents = DOC
• Internal Auditor = focus on operational goal
• External auditor = focus on financial outcomes

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HOW?
How is this understanding gained?
Sources of knowledge regarding the accounting system and internal controls can be
obtained from:
• Previous experience and knowledge from prior works papers.
• Discussions and enquiries with staff to obtain feedback about the
feasibility of IC system.
• Read manuals pertaining to internal controls regarding how each department
operates.
• Inspect documentation and records to ensure authorisation and
responsibility and that it is signed.
• Observation to view how internal control procedures executed.
• Walkthrough tests by physically following the internal control procedures
from start to end.
Documentation required by internal auditor Documentation
• Systems description
- Detailed description of the system functions and operates.
- Flow of information in a department.
• Internal control questionnaire

- IC can be preventative (E.g. credit limits) or detective (E.g. reports on failed
controls)
- Analysis of internal controls must be conducted, and questionnaire must be
filled in.
- If yes = sound internal controls exist and function properly.
- If no = there are weaknesses in the internal controls.
- Provide suggestions as to how controls can be improved and consider
compensating controls.
• System flow charts

- Charts used to describe the system using standardised symbols.
- Displays the flow of documents.
- Sequence of events.
- Staff and department duties and responsibilities within the entity.
Internal control process

Actions by management Actions by auditor
Implement Understand
Design Process
Maintain

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Internal control components
COSO Model
• Evaluation of the environment is important because an effective internal

control system is not possible if a favourable control environment was not
created.
• This helps us to access the risk of material misstatement of the financial
statements.
• Management will use a combination of the five components to design a
suitable internal control system. This can be applied to all entities, even
though the risks may differ.
• Characteristics of an internal control system:

- Integrity and ethical values
- Commitment to competence
- Board of Directors and Audit committee
- Management’s philosophy and operating style
- Organisational structure
- Assignment of authority and responsibility
• Control environment
- Human resource policies and procedures • Risk assessment process
• Information system
The five internal control components of COSO: • Control activities
• Monitoring of controls
• Control environment
- This focuses on the entity’s governance and management functions i.t,o
internal control.
- The attitude of management and awareness amongst employees plays a
big role.
- If the actions of those responsible for the governance on internal control are
not positive it will not filter through the entity’s activities, leading to risks.
• Risk assessment process

- Entity’s process for identifying risks relevant to the financial reporting
objectives and how they are addressed.
- This should be used to minimise loss and maximise opportunity.
- A systematic and documented assessment should be conducted once a year,
but it should be continuously monitored throughout the year.
• Information system
- Procedures and records established by entity to initiate, record, process
and report transactions.
- It must contain procedures and records from the accounting cycle and
business cycle.
- The reports must be communicated internally to relevant employees and
management. Communication is a requirement for sound financial reporting.

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• Control activities
- Policies and procedures ensure controls are in place to achieve internal
control objectives.
- These are later discussed as SCRAM.
• Monitoring of Controls
- Process to assess effectiveness of internal controls over time.
- The implementation and application must be measured to detect and correct
any risk.
- The internal audit function is responsible for performing assessments of the
effectiveness of a system and for providing assurance reports to the board
and audit committee

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Information system for reporting – “Audit trail”
The accounting system documents the path that each transaction follows in the entity from where
the transaction is initiated to where it is disclosed in the financial statements. It is a system
whereby the information can be collected, recorded, classified, analysed, summarised and
interpreted.
1. Initiate
• The physical activities relating to where the transaction is initiated (E.g. the
customer placing an order).
2. Execute
• The performing of activities to complete the initiated transaction (E.g.
collecting the goods to be delivered and then delivering them).
3. Record
• The information applicable to each activity is recorded.
• This can be done in hard-copy, such as completing an order form, or by
electronic means such as ‘real-time’ systems.
4. Process
• The transactions are processed, and corresponding entries are made in the
accounting records.
• The requirements of the Companies Act in respect of the accounting records
were discussed in chapter 1.
5. Reporting
• The transaction is now included in the financial statements.
• The financial statements embody the representations made by management
explicitly or otherwise regarding the entity. (Also known as assertions as
discussed in chapter 1).

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Control Activities
• Refer to those internal control measures, policies

and procedures that management designs and S Segregation of duties
implements to ensure that their objectives are
C Access Control
achieved.
• Thus, control activities prevent risks and R Independent Review
ensure that if risks take place that they are R Documentation and Records
detected and appropriately addressed.
A Authorisation
S Segregation of duties – distribution of work M Monitoring
• The segregation of incompatible duties – duties

that would put a person in a position to commit
error/fraud.
• Reduces the probability that one person can commit error/fraud and hide it -
as though it occurred in the normal course of business.
• Enforce segregation of duties by:

- Ensure that no transaction is performed by the same person from beginning
to end.
- Segregate the following functions:
▪ Authorisation of the transaction
▪ Execution of the transaction
▪ Recording of the transaction
▪ Control over the assets involved, where applicable.
▪ Safeguarding of asset (e.g. if the same person deals with the assets,
theft could occur)
• People who have completed work should sign as evidence that they have
completed the task.
• Person who is in charge of the assets should not be in charge of the financial
records.
In scenario: look at the function(s) each employee performs – can’t perform more than one.
C Access Control
• The logical and physical security in order to limit access to records and
assets.
• This can be done by:
- passwords and user ID needed to gain access
- Use of safes and locked rooms
- Security guards
- Documents can be protected through stationary registers.

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R Independent Review – double review

• The review of work to ensure accuracy.
• Second independent person checks work completed by the first person and
signs or initials as proof that this has been done.
• E.g. when calculations are performed.
Person reviewing can’t be the first preparer.
R Documentation and Records – record procedure

• Document design
- Different types of forms used in the accounting system and how they are
filled out i.e. “PAID” on the cheque after use.
- Pre-printed - minimum by hand
- Pre-numbered
- Design and layout logical
- Space for initials
- Numerous copies - sent to different divisions
• Stationary Control
- Safeguarded (e.g. in a safe)
- There should be a register; sign when collected and when brought back.
A Authorisation
• In terms of company policy.
• Specific authorisation levels must be set by the manager, for:
- type of transactions/amounts
- value of transaction
- credit sales (must be authorised by management)
• Evidence of authorisation required, e.g. signature or letter.
NB: know who can authorise what (isolation of duties).
M Monitoring
• Ensures the effectiveness of the system and detects problems.
• Comparison (e.g. actual vs. recorded) - assess the whole process at the end
to see if everything worked e.g. the inventory account compared to the stock
count.
• Reconciliations (e.g. sub-ledger vs. general ledger)
• Reasons for differences must be obtained.
Distinguish form independent review, e.g. does not include checking of calculations etc.
Last part of the process (financial statements)

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Cycles
Internal Control Objectives

VAC
Three steps for management when designing a control system

What is management responsible for?
Types of cycles
How does the business work?

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The following business cycles can be identified
• Revenue and receipts cycle

- This deals with selling the entity’s goods or rendering services to customers.
- The collection and receipt of payments for the goods or services.
• Purchases and payments cycle

- The entity orders and receives goods or services from suppliers.
- Making the required payments for these goods or services received.
• Inventory and production cycle

- Manufacturing of goods and safekeeping of inventory.
- Recording of costs associated with manufacturing.
• Human resources cycle

- The appointment and dismissal of employees.
- Keeping record of working hours.
- Keeping record of remuneration
• Investment and financing cycle

- Entity’s acquisition of non-current assets.
- Raising of funds (E.g. through owner’s equity or long-term debt), and the repayment of this.
- Accounting for related investment income and financing expenditure.

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3. REVENUE AND RECEIPTS CYCLE

A. CASH SALES
Transaction types and functions
Sales on Cash or Credit Accounts: Sales and Trade Receivables and Bank
Risks What Could Go Wrong (WCGW)
When we accept and process the order (Initiate)

RISK CONTROL OBJECTIVES
1. Fictitious order Validity
2. Orders accepted with no inventory in Bad business

store
3. Received orders not processed or Completeness

not acted up on
With the granting of credit (Initiate)

1. Credit is granted to an un- Validity
creditworthy person
2. Credit not granted, or limits Validity

amended i.t.o policy

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When the goods are dispatched (execution)

1. Dispatch the goods even though Validity
they were not ordered (no approved
order)
2. Goods ordered not dispatched at all Completeness
3. Incorrect dispatch (i.t.o amount and Accuracy

type). Compare physical goods vs
delivery note
With the invoicing and recording (process and record)

1. Goods dispatched are not invoiced Completeness
2. Goods invoiced without the proof of Validity

delivery
3. Incorrectly invoiced i.t.o details Accuracy

(Price, amount, type, debtors’
details)
4. Transaction recorded in the incorrect Completeness

financial period
5. Not all invoices are recorded Completeness
6. Recording in the wrong account or Accuracy

posted incorrectly from SJ to GL
Difference between internal control objectives and internal controls

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Controls
1. ACCEPT AND PROCESS ORDER
Must always be two people involved as everything written down must be checked. This process
occurs in the sales division.
A. When we accept and process the order

• Customer orders are either in person, via telephone, mail, fax or agent.
• An order form or requisition form is used.
• The order clerk prepares a pre-numbered order form.
• This includes details of the purchaser, description and amount.
• Copies:
- One goes to the customer as evidence of the order executed,
- One goes to the Accounting Department as evidence that the order has
been received;
- One goes to the warehouse so that the order can be prepared;
- One copy is left with the order clerk (for our own records and to draw up the
invoice).
• The order must then be sent to the credit manager

- He checks all the information entered or checks whether the client is a
member.
- Ensures that clients fill in credit from or authorises credit.
- He must then sign.
• The order form should include:

- Prices as quoted to the client.
- The prices must be according to the approved price lists.
- The previous year’s sales levels must be checked to determine whether the
person qualifies for the approved discount
• After this, the credit manager must:

- Compare the prices with the approved price lists to ensure that the clients
who were granted discounts do qualify for it.

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• The copy that remains in the department must then be:

- Filed in number sequence and there must be a number sequence check and;
- Outstanding orders must be followed up on.
B. When the granting of credit occurs

• New client
- There should be a credit application and approval
- Credit checks
- A credit limit should also be set
• Existing client
- Available credit
- Additional credit
2. DISPATCHING OF GOODS – WAREHOUSE
Delivery note - before the order is accepted it should be checked whether there are
inventories available.
• In the warehouse:
- The order is sent to the warehouse.
- The storeman then sends an email to the sales department to confirm
receipt of the order.
- The chief storeman then instructs the packers to pack the order.
• The delivery note must be:

- Pre-numbered and prepared by one of the storemen.
• The delivery note must include:

- Date of dispatch
- The purchaser
- The address
- The description and amount in fivefold

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• Copies:
- Two copies of the delivery notes accompany the goods (with which the
quality, quantity and description have been checked) that are sent to the
client.
- One copy of the delivery note must be signed by the client and returned
with the delivery staff to the warehouse.
- The order must be signed by the delivery staff to ensure that he is happy
with the condition of the goods.
• Exceptions:
- If the customer is not at home, the items must not be delivered (goods should not be left
unattended) must be returned to the store and kept in a separate area in the store.
- This must then be noted on the delivery note and the delivery staff should sign as he is
receiving the goods back and the goods should be arranged to be dropped off at a different
time.
- One copy is sent to the sales department as evidence that the order has
been executed.
- One copy remains in the warehouse as evidence that inventories have
been dispatched
- One goes to the inventory clerk so that the inventory records can be
updated and as evidence that the order has been executed.
- Sometimes the last two steps can be combined.
• The delivery note must be authorised and signed by the chief store
manager.
• Before the goods leave the warehouse the other storeman:
- Compares the physical goods with the order and the delivery note.
- Check the quality, quantity and description of the physical goods. This
ensures that the correct stock is dispatched.
- If there are any differences between the order and the goods this should
be notified to the order clerk in writing (not verbally).
• A list should also be kept of items that are not delivered (in cases where
goods are not available. As soon as they are available he needs to inform
the order clerk so that the customer can be contacted to replace the missing
goods (for when goods are not available).
• The number sequence of the delivery notes must be checked by the chief
storeman and outstanding items must be followed up.
• The delivery register must be reviewed on a regular basis to ensure that all
the orders are delivered, this must be performed by the security guard.

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3. INVOICING AND RECORDING
Dispatch division and store: Compare authorised sales order, physical stock and delivery note.
Sales journal (posted to debtors and general ledger)
• Sales invoice:
- The signed delivery note is forwarded to the Invoicing Clerk who checks
the signature on the copy and agrees the copy with the order.
- A pre-numbered sales invoice in respect of the goods is then made out in
duplicate.
• Details:
- Information of the purchaser
- Sales transaction
- Amount owing
- Payment conditions
• Copies:
- One copy is sent to the customer so that he can pay for the goods
delivered.
- One copy remains in the Accounting Department as evidence that the
goods have been invoiced.
• The number sequence of invoices must be checked by the accountant and

outstanding items must be followed up.
• The other invoicing clerk or accountant (segregation of duties) must:

- Agree to the information on the invoice with the signed delivery note and the
order form.
Every document must be pre-
- Check castings and VAT numbered, pre-printed and
- Compare the price with the authorised price list. checked with an independent
review.
• A file with orders (suspense file) for which no signed delivery notes have
yet been received must be kept and the sales invoice clerk or accountant
must regularly check this file.

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• The accountant will then post the invoice to the sales journal and then to the
debtors and general ledger.
• The accountant must then do a monthly reconciliation at the end of the

month between the debtors' control account and the debtors' ledger and
signs as proof that this has been done.
Account or monthly statement

• This document is part of the monitoring of control objectives.
• At the end of the month, a pre-numbered monthly statement must be created
in two-fold.
• It is a summary of the transactions for a period, sent by the business to a
customer.
• Includes the following details:
- Invoices issued
- Payments made
- Discounts allowed
- Returns granted
- The end balance on the amounts owing
• Copies:
- One copy goes to the customer to inform the customer of their account
history or balance.
- One goes to the accounting department as a record of statements issued.
Payment advice slip

- This is attached to the monthly statement indicating payment
- This will be sent with the payment back to the business to match payment
to invoice.

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B. Cash receipts
Accounts: Bank and cash/debtors
When we receive money (initiate) Refer to control objectives.

1. Theft of receipts Validity
2. Receive the incorrect amount Accuracy
When we deposit the receipts (execute and record)

1. All cash receipts are not banked Completeness
Recording (process)
1. Recorded receipts never actually Validity
occurred
2. Amount was recorded incorrectly Accuracy
3. Amounts recorded in the incorrect Validity

period
4. All receipts are not recorded Completeness

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Controls
1. RECEIVE MONEY
• Cash receipt
- This is the payment by cash, cheque, and credit card, together with the
payment advice presented via mail or in person.
- To ensure good internal control, the mail must be opened by two people
and there should be a mail register.
• Copies
- Once payment is received a pre-numbered cash receipt in two-fold is
issued.
- Details include: Details of the payee, the date and amount.
- One copy goes to the customer as proof of payment.
- One copy goes to the business’ own records of the accounting
department for recording the money received. This can be done in either a
receipt book or in a cash register roll.
• The cash receipts must be kept safe and the accuracy is checked and
authorised by the manager and signed.
2. DEPOSIT RECEIPTS
Segregation of duties
- Deposit cash daily
- Cash receipts journal posted to GL and debtor’s ledger by a different person.
- Bank reconciliation
Monitoring
- Monthly reconciliations

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• Deposit slip
- This is a bank document filled in by the business to record a deposit of
payments received from customers.
• Details include:
- Date of deposit
- Details of the cheque
- Amount of the cash and cheque
- Total amount received
• Copies
- This is printed by the accountant in two-fold.
- One copy goes to the bank for depositing of money received.
- One copy remains in the own records of the accounting department so
that the business can record money deposited.
• The accuracy should be checked and authorised by management and

signed (SOD).
• The depositing of cash should be done daily (SOD).
• The deposit slip is then used to complete the cash receipts journal which is
posted to the GL and the DL (SOD).
• Monitoring
- Monthly reconciliations must be conducted by the accountant.
- Bank reconciliation (between the cash book and the bank statement)
- Debtor’s reconciliation (debtors control vs. debtor’s ledger balance)
• All these documents must be signed as evidence that they have occurred.
• The recording and reconciliations of deposit slips must be done by
separate people.

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C. RETURNS CYCLE
Accounts: Sales and discount allowed or debtors
Receiving goods or granting a discount (initiate and execute)

1. Grant credit although goods are not Validity
sent back
2. Discount not granted i.t.o policy Validity
When the credit note is issued and recorded (record and process)
1. Incorrect discount on the credit note Accuracy
2. All credit notes not accounted for Completeness
3. Credit note incorrectly recorded Accuracy
Controls
1. RETURNS AND GRANTING OF DISCOUNTS

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• Credit note
- When goods are received back from customers, the clerk checks the
returned goods (QQD) with the proof of purchase (invoice) and checks the
quality.
- A pre-numbered credit note is then issued.
- Details on the person returning the goods.
- Description of the goods and the amount. This acknowledges the reduction
in the customer’s account for non-payment reason.
• Copies:
- The credit note is issued in four-fold.
- One copy goes to customer as evidence goods were returned.
- One copy goes accounting department so that the debtor's account can
be reduced
- One copy goes to the warehouse and inventory records so that the stock
levels and figures can be updated
- One copy remains in our own records (of the goods receiving department).
• The credit note must be checked and authorised by the credit manager and
signed.
• The credit note is then used to compile the sales return journal, which is then
posted to the ledgers.
• The returned goods must then be sent to inventory department or
warehouse. The goods are checked by the storeman with the credit note
• as well as a number sequence check and then missing orders are
followed up on.
• The inventory records are then updated and include the goods returned.
D. ALLOWANCE FOR CREDIT LOSSES & WRITE-OFF OF BAD DEBTS


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Differences between provision for bad debt and bad debts

PROVISION FOR BAD DEBTS BAD DEBTS
• This is a calculation regarding • Dr bad debts Cr debtors
controls around debtors • A list is used to identify
• A policy is used appropriate debtors
• Must be approved by senior • Must be approved by senior
management management
• Performing a calculation • Writing off assets
Allowance for credit losses of debtors

1. Incorrect calculation or incorrect Accuracy
judgement used for the provision
2. Calculation not approved i.t.o the Validity
policy
3. Incorrect recording (Journal Accuracy
entries and general ledger)
Write-off of bad debts

1. Debts are not written off i.t.o the Validity
policy
2. Write off bad debts while still Validity
collectable
3. Not writing off bad debts that will Completeness
not be collected
4. Incorrect recording (journal Accuracy
entries and debtors ledger)
Controls

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Provision for bad debts

• Management must determine and calculate a figure for provision for bad debts,
by using the debtors' age analysis.
• Management must authorise the provision for bad debts amount by issuing a
signed notice.
• The amount must equal a percentage of the debtor’s balance.
• The amount may need to be adjusted at the end of the period.
• The provision must be correctly recorded in the SFP and SCI.
Authorised → Calculated → Adjustment of the provision → recorded in SFP & SCI
Write off debtor as a bad debt
• When the debtor is not paying, and we have launched an investigation into
the probability of receiving our payment a write off occurs.
• A pre-numbered bad debt authorisation form must be compiled by a
committee or the minutes of meeting and presented in two-fold.
• Details must include:
- Information on the debtor
- The date ate
- The amount written off
• The debtors recording department will decrease the debtors account by the
amount stipulated.
• Own records of the committee authorising the write-off must be adjusted in
order to have a history of debt written off.
• The writing off of bad debts must be authorised by management after an
independent staff member has checked whether the client can pay or not.
• The write off must then be recorded in the SCI where the decrease of debtors
and increase bad debts occurs.
Types of questions can be asked in cycles
• Design a system
- Design around the documents
- Study the perfect system (documents drive process)
• Weaknesses
- Compare to the perfect system (Something that is done wrong or something that is
missing).
- Consequences (Link to VAC, what is the impact if this is not done).
- Recommendations (Think of the process of designing the system)
• Control objective question

- Identify or name or formulate
- Identify what it ensures (“to ensure that…”)

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CASH SALES PERFECT CYCLE
S1.27 (SUGGESTED SOLUTION) 30 marks
PART 1: RECEIVING OF ORDERS FROM CUSTOMERS AND APPROVAL:
Receiving of orders from customers

1. When the customer calls to place an order, the order clerk must prepare a pre-
numbered sales order form. (1)
2. Sales order forms must contain complete details i.e.

▪ product codes
▪ quantity
▪ approved price, per the approved price list
▪ delivery date
▪ address and name of customer (1)
(mark were only given if you provide approved price, per approved price list and any at
least 1 of the other detail)
3. A copy of the sales order form must be faxed or emailed to the customer and
signed by the customer and returned to GWPL before the sales order is
submitted for approval as proof that he/she is satisfied with the order. (1)
4. The approved order form should be distributed in quadruplicate:

▪ one sent to customer to confirm order/evidence that the order has been
placed. (1)
▪ one filed in sales department - for the number sequence check and follow
up of outstanding orders. (1)
▪ one sent to the inventory store - to select the goods for delivery. (1)
▪ one sent to accounting department - to match to the other documents

before invoicing. (1)
(Note: If no reason is given why a copy must go to a specific destination -2 in total thus he/she
will get 2 out of 4 – no negative marking)
5. On a regular basis an independent person (for example the credit manager)

should
▪ review the number sequence of the sales order forms and investigate any
missing numbers;
(1)
▪ agree the approved delivery notes to the approved sales order forms and
follow up on long outstanding orders.
(1)
Sales approval for credit sales

1. The Credit Manager receives the completed sales order form, that has been
returned from the customer, and checks the following:
▪ the credit limits and the current outstanding balance of existing customers to
confirm that sufficient credit is available for the purchase and (1)
▪ a creditworthiness investigation of new customers and sets credit limit. (1)

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2. Before the customer approved sales order form is distributed the Credit Manager
must perform the following (2)
▪ check that there is appropriate inventory available in the store,
▪ check the accuracy of the order by re-performing all the calculations on the
order,
▪ check the prices agree to the approved price list, and
▪ sign the order as evidence of approval that client may purchase on credit
(should only 2 of the above checks be provided only 1 mark allocated)
AVAILABLE: 13
MAXIMUM: 13
PART 2: PICKING AND DISPATCH OF ORDERS BEFORE THE GOODS ARE

LOADED ONTO THE TRUCKS FOR DELIVERY BY THE DRIVER.
1. The approved sales order form is sent to an access controlled demarcated area
of the warehouse where the storemen pack boxes for dispatch and one of the
storeman then sends an email to the sales department to confirm receipt of the
order. The chief storeman then instructs the packers to pack the order
accordingly. (1)
(must refer to approved sales order)
2. Pre-numbered, pre-printed delivery note is prepared by the storeman responsible

and then attached to the packed goods. (1)
3. The delivery note includes the following information:

▪ order number
▪ quantity
▪ product code
▪ customer
▪ delivery date
▪ delivery address
▪ Storeman signed the delivery note as proof that all the inventory has indeed
been packed correctly and to assign responsibility (1)
4. The chief storeman then compares the physical goods to the delivery note as well
as the approved sales order form and checks the quality, quantity and the
description is correct thereafter he signs the delivery note as evidence of doing
so. (1)
5. The approved delivery note is then distributed as follows:

▪ Two copies of the delivery note accompany the goods to the client. One
copy of the delivery note must be signed by the client and returned with the
delivery staff to the warehouse. The signed copy is forwarded to the
accounting department so that the invoice can be prepared.(must state the
fact that a signed copy must be forwarded to accounting department to
obtain the mark) (1)
▪ One copy is sent to the sales department as evidence that the order has
been executed. (1)
▪ One copy remains in the warehouse as evidence that inventories have been
dispatched and for the number sequence check. (1)
▪ One goes to the inventory clerk so that the inventory records can be updated
and as evidence that the order has been executed. (1)

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will get 2 out of 4 – No negative marking)
6. The number sequence of the delivery notes must be checked by the chief
storeman (independent person) on a regular basis and outstanding items must be
followed up. (1)
AVAILABLE: 9
MAXIMUM: 7
DELIVERY
1. The driver then packs the goods into the delivery vehicle ensuring the goods
match the delivery note, (1)
2. he signs as evidence of doing this. (1)
3. Before the delivery vehicle leaves the premises, the gatekeeper ensures that
all the physical goods have been provided with delivery notes that agree with
the delivery note; this can be documented on a gate register or the delivery
note. (1)
ONLY ONE MARK FOR PRINCIPLE
4. The client must sign the delivery note as proof of receipt of the physical goods,
that the quality, quantity and description match what was ordered and what is
on the delivery note. (1)
5. The client keeps one copy and the other copy is returned to the invoicing
department by the delivery vehicle. (1)
6. Mr Frosting must review the number sequence of the delivery notes and
investigate any missing numbers. (1)

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PART 3: INVOICING AND SENDING OUT OF MONTHLY STATEMENTS:
1. One of the invoicing clerks prepares a pre-numbered invoice in triplicate on

account of the signed delivery note returned from the customer and the
approved sales order form. (1)
2. Invoices include the following information:

▪ Order number
▪ Date
▪ Delivery note number
▪ Quantity
▪ Product code
▪ Price according to approved order.
▪ Signature of the preparer. (1)
3. The other invoicing clerk checks the calculations on invoices and compares the
prices on invoices with the approved sales order form and quantities and
descriptions with the approved sales order form and delivery note and then
signs as evidence of doing so.
(all of the detail must be provided to obtain the mark) (1)
4. One invoice is:

▪ sent to client - so that he know what the outstanding amount is / amount
payable. (1)
▪ filed in sales department - as evidence of the transaction and the number
sequence check. (1)
▪ sent to accounting department - so that they can record the sale in sales
journal and debtor’s ledger. (1)
(Note: If no reason is given why a copy must go to a specific destination -2 in total thus
he/she will get 1 out of 3 – no negative marking)
5. On a monthly basis the accountant (someone independent) prepares

prenumbered statements for credit clients. The monthly statement contains a
starting balance, a summary of invoices purchased during the month, interest on
the outstanding balance (if applicable), payments and returns during the month
and a closing balance. (1)
6. Two copies of the monthly statement are prepared:

▪ One remains in the accounting department for future reference. (1)
▪ One is sent to the customer so that they have the remittance advice for
payment and for them to assess if the details are correct. (1)
(Note: If no reason is given why a copy must go to a specific destination -1 in total thus
he/she will get 1 out of 2 – no negative marking)
AVAILABLE: 9
MAXIMUM: 8
Communications skills: Layout, structure and formulation of internal controls (2)

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4. PURCHASES & PAYMENT CYCLE
A. PURCHASES
Purchases Accounts: Inventory/Purchases and Creditors
Placing an order
RISK CONTROL OBJECTIVE
1. Order goods for private use Validity & Authorisation
2. Order incorrect goods or goods that Validity

are not required
3. Order not placed for most favourable Business control

conditions or in a timely manner
4. Order from fictitious supplier or Validity & Authorisation

supplier that does not meet the
entities needs
5. All orders are not supported by an Validity

approved and signed purchase
requisition
6. The quality, quantity and description Accuracy

of the inventory on the purchase
order does not match the purchase
requisition

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Receiving of goods
1. All orders placed are not received Completeness
2. Receive quantities or type of goods Accuracy & Validity

not ordered
3. Receive poor quality/damaged/ Validity

defective goods
Recording
1. Recorded receipts never occurred Validity
2. Amount recorded incorrectly Accuracy

(amount, classification etc.)
3. Amount recorded in the incorrect Completeness

period
4. All receipts are not recorded in the Completeness

correct period
Controls
1. PLACE AN ORDER
Purchase requisition - informs the purchasing department what goods are needed:
• A pre-numbered purchase requisition made out by production/factory

manager (when the goods are needed) in a twofold approved and signed by
the head store manager.
• It should contain details on: description of the items, amount, date and
department.

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• Copies:
- One copy must go to the purchasing division in order to request the
goods.
- One copy must remain in the own records as a proof of goods requested.
Purchase order - completed by the purchasing department and addressed to the

supplier detailing goods requested:
• A pre-numbered purchase order must be created in fivefold and must be

prepared by the purchasing clerk when the requisition is received and has
been signed and approved by the head store manager.
• Details included:
- Supplier information
- Date
- Description of items
- Quantity ordered.
• Copies:
- One copy must go-to supplier in order to request the goods. The order may
be faxed or posted.
- One copy must go to the accounting department (payment division) in
order to match the invoice to when the payment is acquired.
- One copy must go to the store manager in order to inform that the order
has been placed and so that he can update his list of outstanding
requisitions.
- One copy must go to the receiving division in order to match against the
delivery note from the supplier and to ensure that goods ordered are
accepted.
- One copy must go to the own records of the purchasing department in
order to record the orders placed.

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• Purchasing orders must be:

- Prepared according to a list of approved suppliers (or quotations).
- A policy must be laid down and complied with (for example, place with the
cheapest supplier or order the best quality).
- These suppliers should be contacted to confirm prices and stock
availability.
• If there is not a satisfactory supplier on the approved list, the purchasing

clerk must first get a number of quotations (for example 3) before preparing
the order.
• The purchasing manager must approve the purchasing order after he has
checked the details with the approved requisition and the list of approved
suppliers (or the list of quotations) and he must sign.
• Purchasing orders exceeding a certain amount (e.g. R25 000) must also be
approved by the financial manager and signed.
• Outstanding purchase orders must be placed in a suspense file in the
purchasing division and followed up regularly in order to ensure that all
orders are finalised timely.
2. RECEIVING OF GOODS
There should be segregation of duties, as different people should receive the

goods than to those that place the order.
Receiving division:
• There should be a separate area for the receiving of the goods.
• Two goods receiving clerks should receive the goods and check the quality,
quantity and description (QQD) as well as compare with the purchase order
and the supplier’s delivery note.
• The supplier’s delivery note must be signed after the following has been
done:
- Reject incorrect deliveries and identify rejections on both delivery notes and
purchase order and note shortages.
Goods received note (GRN):

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Part where it says: “must agree to the supplier’s delivery note and physical goods” will not be
indicated in the question, so it is important to remember to compare the goods and the GRN
to the delivery note, a lot of questions are based on this.
• The two receipts clerks must make out a prenumbered goods-received

note (GRN) in sixfold of which the details must agree with the supplier’s
delivery note and the physical goods received, and they should sign.
• Both receipt clerks should initial the GRN to pin down responsibility.
• Details included:
- Supplier information
- Description of the goods
- Quality/condition of the item.
• Copies:
- One copy goes to the supplier as proof of goods received.
- One copy goes to the store manager (storeman) to check the physical
goods received.
- One copy goes to the inventory records for updating of the inventory
records to include new stock, and this must happen before the inventory is
placed on the shelves.
- One copy goes to the purchasing division in order to match to the
purchase order and as proof that it has been delivered, as well as compare
with outstanding orders.
- One copy goes to the accounting (payment) division as agreement with
the invoice and purchase order.
- One copy is kept in our own records as a record of the goods received.
• Goods received must immediately be placed in safekeeping. (Access control)

• Goods received notes must be pre-numbered and be in the periodical number
sequence that must be checked by the receipt clerks. All outstanding order
should also be followed up on.
Inventory and production cycle:

• Inventory is then transferred from the goods receiving department to the
warehouse.
• The inventory records are updated to include the new stock received.
3. RECORDING
Accounting division:
• The recording is done by the accounting department.
• The accountant or invoicing clerk will receive the supplier’s invoice/
monthly statement.

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• This supplier’s invoice must be compared with:

- purchase order
- delivery note
- the goods received note (GRN)
• The accountant should check the invoice prices against the approved price
list.
• The accountant should also check the accuracy of the calculations, discounts
and returns on invoices. In order to ensure that the quantities and descriptions
agree.
• The clerk or accountant who does the above must sign the invoice as proof
of performance.
• The monthly statements should be checked by an independent person.
Monitoring (Reconciliation): There should be segregation of duties.

• The invoice received is then used to compile the purchases journal by the
clerk/accountant.
• The journals are then posted to the creditor’s ledger and general ledger.
• There should also be a number sequence check of the goods received note,
in order to ensure that all purchases are recorded, and outstanding orders
should be followed up on.
• NB: to remember that the posting to the journals must be done by an invoicing clerk (creditor
clerk).
• However, the monthly bank reconciliations must be signed by the accountant.
• At the end of the month, the following should occur:

• Monthly reconciliations of:
- Invoices and the creditors' ledger
- Creditors control and the creditors' ledger
- Discrepancies should be followed up on
• The accountant/credit manager must check and sign the reconciliations on

a regular basis.
• Regular inventory counts must also be performed to ensure that inventory
and accounting records agree (otherwise there could be theft of goods as a
result of an incomplete inventory recording system).

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B. PAYMENTS
Payment Accounts: Creditors/ Expense and Bank
Make the payment

1. Pay more than once (duplications) Validity
2. No payment made at all Completeness
3. Pay the incorrect amount Accuracy
EFT Funds Transfer/ Cheque

1. Payment of a fictitious supplier Validity
2. Payment not authorised in terms of Validity

the policy
Recording

1. Incorrect recording (inventory, Accuracy
creditors, payments too much or too
little)
2. Payment not recorded at all Completeness

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3. Incorrect classification on recording Accuracy
4. Payment recorded that did not occur Validity
5. Not recorded in the incorrect period Completeness
Controls
1. MAKE PAYMENT
Payments are compiled with reference to the statement/invoice with payment advice and other
supporting documentation (which we receive).
When we make the payment by cheque the following occurs:
Cheque requisition - completed by the creditors' section requesting that a cheque

be made out for a particular creditor.
• When payment is required by the creditor for example within 30 days. A pre-
numbered cheque requisition must be prepared in twofold by the creditors'
clerk/ payment clerk A.
• The cheque requisition should contain details on: the cheque, the supplier,
date, amount and reason for payment.
• Copies:
- One copy should go to the cheque preparer in order to use the information
to compile the cheque
- One copy should be kept in the own records of credit section as a record
of cheques requested.
• The cheque requisition must be signed and compiled by the payment

clerk A and must be approved by senior management (signed).

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• Cheque - The bill of exchange used to pay the supplier.
• The payment clerk B must prepare a pre-numbered cheque in twofold.

• Should contain details on: the supplier, date, amount in words and figures.
• Copies:
- One copy should go to the supplier in order to make the payment.
- One copy should go to the own records of the accounting department
(payment division) as a record of cheques issued (the cheque counterfoil).
• The details of the cheque (the correct amounts in words and figures, the
correct supplier and the correct date with the documentation) must be:
- Checked against the supporting documentation (suppliers’ monthly
statement and invoice) and;
- Signed and authorised by two members of senior management, with
reference to the vouchers.
• The cheque must also be checked with reference to vouchers and cheques
marked “non-negotiable” (also called crossed).
• The supporting documentation (monthly statement or invoice,) must then be
cancelled in order to prevent duplication of payment (can be cancelled with a
PAID stamp).
• The accountant/senior management must view the list of suppliers to ensure

that the supplier actually exists.
• The cheque books should be kept safe with a register to access (access
control) and the chequebook must be locked away at all times.
• No cash cheques should be written out rather use a petty cash voucher.
• In order to ensure that the payment is made to the right creditor, the
cheque should not be returned to the person who wrote it out but should be
mailed by somebody else (e.g. secretary).
- In order to ensure that the person who wrote out the cheque cannot change
the information on the cheque.
Independent review must always be performed (segregation of duties) by the senior bookkeeper
or Payment clerk B rand must be signed.

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Payment by cash:
• Done by either cashing a cheque (as discussed above), or
• By issuing a petty cash voucher.
2. RECORDING
• The CPJ should be compiled by the cash book clerk (Clerk C) based on the
cheque counterfoil.
• This must then be posted to the general ledger and creditors ledger.
• The accountant must:
- Review that all cheques have been recorded in the relevant journals and the
ledgers.
- He must sign as evidence of doing so and he must follow up on all
differences.
• At the end of the month, the following should occur:

- Reconciliations between the bank statement and the cash book must be
conducted by the cash book clerk.
- Reconciliations between the creditor’s ledger, the creditors' control
accountant and the invoice must be done by the creditor clerk.
- The accountant must review the bank reconciliation and sign as evidence
of doing so.
- The accountant must also review the accuracy of the creditor’s
reconciliations and sign as evidence of doing so.
- Any differences should be followed up on.

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C. PUBLIC vs. PRIVATE SECTOR
Procurement (Purchases in the Public Sector)
• Section 1 of the PFMA (Public Finance Management Act) defines fruitless

and wasteful expenditure as expenditure which has been made in vain and
would have been avoided had reasonable care been exercised.
• Vain – without value or substance.
• Reasonable care – apply due diligence (caution, care full application).
• Applicable to all departments, constitutional entities and public entities
listed in Schedule 2 and 3 of PFMA.
• Accounting officer has responsibilities to discover, report, investigate and
remediate any fruitless and wasteful expenditure.
• Guidelines for all procurement activities:

1. Value for Money
2. Open and effective Communication
3. Ethics and Fair Dealings
4. Accountability and reporting
5. Equity
So what is the difference?
• Only difference for procurement for Public vs. Private Sector is in the
initiation phase (Placing of Order) of the purchases cycle.
• Meet requirements as per PFMA ACT i.e. no fruitless and wasteful
expenditure to be incurred.
• All suppliers should be registered on the applicable departments,
constitutional or public entities database.
• Procurement done predominantly via tenders (offer by registered supplier to
provide goods or services at a fixed price).
• B BBEE specific level requirements as per tender should be met.

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PURCHASES PERFECT CYCLE
Placing of orders
• A purchasing clerk must prepare purchasing orders on a prenumbered

purchasing order. (1)
• Only a purchasing clerk may prepare purchasing orders and only if he has
received a purchasing requisition, signed by the head store man. (2)
• Purchasing orders must be prepared according to a list of approved suppliers

and a policy must be laid down and complied with (for example, place with the
cheapest supplier or order the best quality). (1)
• If there is not a satisfactory supplier on the approved list, the purchasing clerk
must first get a number of quotations (for example 3) before preparing an
order. (1)
agreed the details with the approved requisition and the list of approved
suppliers (or the list of quotations) and sign. (2)
approved by the financial manager and signed. (1)
• The following 5 copies (of purchasing orders) should be generated:

[Only ½ mark is awarded if no reason is given for the generation of copies.]
- one: accounting division (for agreement with the invoice); (1)

- two: the head store man (to update list of outstanding requisitions); (1)
- three: receipts division (to ensure that only goods that have been ordered
are accepted); (1)
- four: the supplier (to place the order – may be faxed or posted); and (1)
- five: own records (as evidence that the order has been placed). (1)
• Outstanding purchasing orders must be kept in a suspense file in the

purchasing division and followed up regularly to ensure that all orders are
finalised timely. (2)
Receipts of goods (Raw materials) PAYMENTS & PURCHASES CYCLE
• There should be a separate demarcated area for receiving goods.
• Two receipts clerks must receive the delivered inventory. (1)
• The supplier’s delivery note must be signed after the following have been
done: (QQD)
(1)

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- Details (quantities and type of spice) on the delivery note from the supplier
must be compared with the delivered items and the details on the purchasing
order. (1)
- Goods that have not been ordered may not be received. (1)
- Quality aspects of the goods must be reviewed. (1)
• The two receipts clerks must make out a prenumbered goods-received note
(GRN) of which the details must agree with the supplier’s delivery note and the
physical goods received. (1)
• Both receipts clerks must initial the GRN to pin down responsibility. (1)
• The following 6 copies (of the GRN) should be generated:
- one: accounting division (for agreement with the invoice and the purchasing
order); (1)
- two: accompanies the goods to the inventory store; (1)
- three: purchasing division (for comparison with outstanding purchasing
orders); (1)
- four: inventory clerk (for updating the inventory records); (1)
- five: own records (file with purchasing order to show that order has been
received); (1)
- six: to the supplier (if the supplier has not provided a delivery note). (1)
• Goods received must be placed in safe keeping immediately.

(1)
• The receipt clerks must perform sequence checks and follow up on all
outstanding orders.
AVAILABLE: 29
MAXIMUM: 28
LANGUAGE AND PRESENTATION: 2
Recording
• Done by accounting department – apart from receiving department.

• Compare invoice from supplier with
- Signed delivery note (½)
- signed goods received note (½)
- order forms (½)
- requisition (½)
• Ensure that quantities and description agree (above-mentioned documents) with:
- agree prices with approved price lists (½)
- discounts and return on invoices.

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- check additions and cross castings on invoices. (calculations) (½)
• Ensure, by checking number sequences of goods receipt note in purchase

journal, that all purchases are recorded. And outstanding orders are followed up
on.
• Reconciliate creditor ledger with creditor monthly statements at end of month.
Follow up any differences.
• The accountant must check and sign reconciliations.
• Creditor ledger must be compared with creditor control account and accountant
must check and sign reconciliation.

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PAYMENTS PERFECT CYCLE
To ensure that payments are made to valid creditors only:
Make payment
1. The monthly statement from the supplier must be reconciliated monthly with the
balance in the creditor ledger to ensure that the creditor balance in the creditor
ledger is correct. This must be done in writing by the creditor clerk. (2)
2. The accountant must review the reconciliations of the individual creditors and
signs them as evidence of review done. (1)
3. When the amount is due, e.g. within 30 days after the date of the monthly
statement, a cheque requisition must be prepared by the creditor clerk indicating
which invoices are paid. (1)
4. The cheque requisition, together with the creditor reconciliation, monthly

statement and purchase invoices, must be handed to the accountant who must
write and sign a cheque for it. (2)
5. The financial manager must review the cheque and ensure that the amount in
figures and words, the date agree with the documentation. (1)
6. The financial manager must also sign the cheque with reference to the vouchers.
The cheque must be crossed” non-negotiable”. (2)
7. To ensure that invoices are not presented as payment more than once:
• The accountant must stamp the creditor reconciliation, monthly statement
and purchase invoices “paid" to ensure that invoices are not presented as
payment again. (1)
• No cash cheques must be written out. (1)
• The accountant must review the list of suppliers to ensure that the supplier
actually exists. (1)
• The cheque books must at all times be locked away if not in use (stationery
control). (1)
To ensure that payment is made to the right creditor:

• The cheque should not be returned to the person who wrote it out, but has
to be mailed by somebody else (e.g. secretary) i.e. the person who wrote
out the cheque, cannot change the cheque after it has been signed. (1)
Recording
8. Ensuring that all payments are recorded:

• The cheques must be entered by the other clerk (cash-book clerk) and
reviewed by the accountant to ensure that all cheques have definitely been
recorded. (2)

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9. At the end of the month the cash-book must be reconciliated with the bank
statement by the cash-book clerk. (1)
10. The accountant must review the bank reconciliation and sign the reconciliation
as evidence of reviewing done. (2)
11. To ensure that payments have correctly been posted to the creditor and general
ledgers.
• The accountant must review the journals that post the cash-book to the
general ledger and sign there as evidence of having reviewed for
correctness. (2)
12. The creditor clerk must reconciliate the creditor ledger with the creditor control
account in the general ledger monthly and inspect all reconciliating items. (1)
13. The accountant must review the creditor reconciliation monthly and sign there as
evidence of having found it in order. (1)
AVAILABLE: 23
MAXIMUM: 22
TOTAL: 25

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RECAP
REQUIRED
Describe the internal control measures you would recommend. Your answer must
include all control measures from the stage when the purchase transaction is initiated
to when the payments to creditors take place, including the recording and
reconciliations.
(25)
Order
• Requisition made out by production/factory manager approved and signed.
• Order form made out on the basis of requisition.
• Purchase manager approve and sign
• Purchase manager orders after search for best supplier (prices/quality).
• Requisition and order forms prenumbered.
• Requisition and order forms are filed by accounting department.
• Requisition and order forms are held by accounting department.
Receipt of goods
• Goods receipt note made out and signed for goods received.
• Goods receipt note prenumbered.
• Goods receipt note must be compared with requisition, order form and
delivery note from supplier. Sign delivery note of supplier.
• Goods counted and compared with goods received.
• Goods receipt note forwarded to accounting department.
• Person in reception area not the same as one who placed order.
• Person in receiving area should neither have access to accounting
records.
Recording
PURCHASES
• Done by accounting department – apart from receiving department.
• Compare invoice from supplier with
- Signed delivery note (½)
- signed goods received note (½)
- order forms (½)
- requisition (½)
• Ensure that quantities and description agree (above-mentioned
documents) with:
- agree prices with approved price lists (½)
- discounts and return on invoices.
- check additions and cross castings on invoices. (calculations) (½)
• Ensure, by checking number sequences of goods receipt note in purchase

journal, that all purchases are recorded. And outstanding orders are
followed up on.

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• Reconciliate creditor ledger with creditor monthly statements at end of

month. Follow up any differences.
• The accountant must check and sign reconciliations.
• Creditor ledger must be compared with creditor control account and
accountant must check and sign reconciliation.
PAYMENTS
• Cheque signed by two persons.
• Documentation must be cancelled after payment.
• Cheques must be crossed.
• Documentation must be checked and signed by cheque assignees.
• Cheque should not be handled after it has been signed by the creditor
clerk.
• Bank reconciliation done monthly and checked by accountant.
Mark allocation (1 mark per fact unless indicated differently) (28)

Presentation _(2)
Total (30)

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5. BANK & CASH CYCLE
A. CASH RECEIPTS
Accounts: Bank and cash/debtors
B. PAYMENTS
Payment Accounts: Creditors/ Expense and Bank
Cash receipts
Receive money Initiate

Theft of receipts Validity
Receive incorrect amount Accuracy

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Deposit receipts Execute

All cash received is not banked Completeness
Recording Recording
Recorded receipts never occurred Validity
Amounts are recorded incorrectly Accuracy
Amounts are recorded in the incorrect period Completeness
Process Process
All receipts are not recorded Completeness
Recap: Formulating control objectives
Which part of
1 transaction?
Cash receipts
Specific control
Not referring to people/ 2 objective? Validity, Accuracy, Completeness
documents/ actions, i.e.
controls.
Risks linked to
3 control objectives See above.
4 To ensure that…
The control objectives relating to the receipts is as follow:

To ensure that…
1. All receipts are adequately safeguarded. (V) (1)
2. All receipts are correctly calculated. (A) (1)
3. All receipts are banked. (C) (1)
4. All receipts are supported by underlying documents as evidence of actually
occurring. (V)
5. All receipts are recorded at the correct amount actually received. (A) (1)
6. All receipts of cash are recorded timely in the correct accounting period. (C) (1)
7. All receipts are recorded in the accounting records and no receipts are
misappropriated or omitted. (C) (1)
To ensure that all receipts are authorised is not an objective since the client does not
have control over receipts in its bank account.
(Available ½ per objective + ½ for formulation)

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Payments
Make payment (cheque/EFT)

Payment not in terms of policy Validity
Payment made to fictitious supplier Validity
Pay more than once Validity
Pay incorrect amount Accuracy
No payment made at all Completeness
Recording
Payment recorded did not occur Validity
Incorrect classification on recording Accuracy
Incorrect recording Accuracy
Payment not recorded at all Completeness
Payment not recorded in the correct period Completeness
The control objectives relating to the payments is as follow:

To ensure that…
1. Payments are authorised in terms of the approved payment policy. (1)
2. Payments are made to the correct suppliers. (1)
3. Payment amounts are calculated correctly. (1)
4. Payments are for transactions that actually occurred, and goods and services were
received. (1)
5. Payments are classified in the correct accounts in the financial records. (1)
6. All payments are recorded in the accounting records. (1)
Types of General Ledger Accounts
• Bank account
- for ordinary income and expenses
• Petty Cash
- For smaller specific expenses
- Controls required
- Fixed amount top-up
• Cash on hand
• Salary bank account
• Advance accounts
• Deposit/savings accounts

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Internal control measures
The Perfect Cycle
1. GENERAL CONTROLS
1. There should be notices at a cashier counter or a policy (e.g. notice on insisting

on evidence/receipts).
2. Receipt’s/slips should be kept as a proof of purchase.

- Issued in triplicate:
1. One should go to the client has evidence of execution.
2. One should remain in own records as evidence of cash received.
3. One should go to the accounting department for bookkeeping.
3. There should be regular number sequence checks of theses receipts (and the
number sequence should be automatically created by the cash register).
4. There should be reconciliations between all accounting records: cash

register roll and the physical money in the cash register.
- This should be done by an independent accounting senior person.
5. Cash should be cleared out of the cash register on a frequent basis (i.e. every
two hours) and placed in a drop safe with the one key being held on-site and the
other off the premises, until cash uptime. (1)
Moreover, whenever money is moved it must be locked up. (1)
6. The general manager should perform surprise inspections and cash counts to
determine whether the cashiers and office manager are performing their work. (1)

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7. The manager should review the following: sales register, deposit slips, bank
reconciliation, etc. and follow up on the differences. (1)
8. The staff should be well trained and should receive additional training as the
need arises. Furthermore, staff should be rotated on a frequent basis. (1)
9. Adequate segregation of duties should be implemented between the following

functions:
• Making the sale: cashier
• Recording the receipt: bookkeeper
• Making the bank deposit: general manager and security guard
• Review of bank reconciliation: accountant
• Review of registers: general manager et cetera (Max 3)
2. RECEIPTS
a. Credit card receipts
1. Online sales by credit card should be processed online to the banks (credit
card machine) or the cashier should review the credit card number against a
list of invalid or stolen credit cards (i.e. blacklisted credit cards) to ensure the
customer is creditworthy and has sufficient funds available. (1)
Alternatively, the cashier could also request the client’s identity document or
driver’s license and review the client’s signature and details from the driver’s
license/identity document to the details on the credit card and credit card slip. (1)
2. The cashier could make an imprint or photocopy of the customer’s credit

card thus maintaining records of the customer’s details and the card’s security
code. (1)

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3. The cashier should review the:

(i) customer’s signature
(ii) details such as the expiry date, customer’s name on the back of the card
to the signature and details on the credit card slip. (Max 2)
4. The credit card slips should be pre-numbered, and the manager should
perform a sequence review when the cash register is cashed up. (1)
5. The payment should be followed up with the bank until payment is received.
b. Cash receipts
1. Cash registers should be used over cash drawers with the price and (1)
amount due being displayed prominently, visible to the client. (1)
2. Prices should not be rounded amounts (e.g. R19.95 and not R20.00) to force
the cashier to open the cash register and to give the customer change. (1)
3. All sales on the cash register should be recorded on a cash register roll to
which the cashier does not have access. (1)
4. The cash register should be lockable, with the cash register being removed if
the cashier goes on a break. The till should only be opened when an amount is
entered on the till or if the manager opens the till with his key. (1)
Other cash register controls:
- Mounted fixed and securely
- Positioned at exit
- Items should be rung up in the presence of clients
- There should be copies of cash register slips
- There should be sufficient cash register rolls
- At the end of the day, the money in the drawer should be reconciled with the
cash register rolls.
5. The till role should be used to write up the accounting records, not the deposit
slips. (1)
6. The manager should review the cash register roll for unusual amounts (e.g.
R0.05), or any altered transactions. (1)
7. The following should occur with the cash that is received:

- Should be deposited into the bank daily/weekly.
- Safeguarded in the safe from the time of receipt until banking.
- There should be segregation of duties between all the functions involving
cash (same as that of general controls).

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c. Receipt of cheques by the post/mail and general receipt of cheques:
1. There should be at least 2 persons (1 of these persons should be

independent of all banking depositing and recording functions) who open the
post. They should review the details of the cheques such as:
- Cheques are made out in the company’s name (and not that of the bank's
name)
- is crossed (non-transferrable)
- the date (post-dated cheques should not be accepted until payment is due)
- Signatures on the cheque
- Clients had been pre-approved by general manager.
2. A mail register should be kept and must record the following details:
- Date of the receipt
- Debtors name
- Amount received.
3. Both staff members who open the post should sign the mail register in order to
pin down responsibility.
4. They should hand the cheques received from the mail over to the cashier and
the cashier should sign the register as a proof of receipt.
5. The cheques should be inspected by the 2 staff members for any

amendments or endorsements. Alternatively, the banks could be contacted
directly to determine whether the cheques have been stolen.
6. There should also be a company policy in place to reject amended cheques.
7. The general manager should have copies of all their clients’ identity books or
proof of incorporations, contact details and address and there should be pre-
approval before cheques are accepted as well as approval by the bank.
Deposits
a. Depositing cash receipts

1. Chief cashier completes duplicate bank deposit slip indicating total cash
received.
- One copy should be sent to the bank in order to deposit the money
received.
- One copy remains in the own records, as evidence of cash being
deposited.

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2. Cash kept securely in safe until collected.
3. Security company collects cash daily for banking (at least weekly) / banked by
guard.
4. The cashbook clerk should file the stamped deposit slip and compare it to
the carbon copy and investigate for any amendments. He should sign it after
doing so.
5. Person independent from cashing up and banking: Reconcile bank-stamped

deposit slip with company’s copy of deposit slip and cashing up sheets
(compiled by cashiers).
6. File deposit slip in date sequence and regularly review (person independent
from cash and bank function) for unbanked cash.
7. Update cash journal.
8. Reconcile bank statement with cash journal.
b. Direct deposits
1. The person responsible for funds (marketing manager) received should provide
the bookkeeper with details of the deals/ sponsorships negotiated in order to
clear direct deposits to the correct debtor account and to write up the journal.
(1)
2. A suspense account should be used for all uncleared/ unknown direct
deposits and follow up on un-cleared items. (1)
3. List of unidentified deposits must be prepared by the cash book clerk.
4. The accountant should regularly reconcile the list of unidentified deposits

with unusual (recurring items).
3. PAYMENTS

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a. Payment by direct bank transfer and electronic funds transfer (EFT)

• There should be segregation of duties between the person that prepares
the details and the authorisation and the person who checks the details
when sent.
• There should be strict access controls to the computer and its functions.
• There should be double authorisation

1. From a senior member of management
2. Passwords and pins
• The manager must check the details of the payment with the various
documents and inspect all payment terms.
• Other controls applicable to documents still remain such as cancel all

supporting documents.
• The underlying documents or the general ledger must be reconciled to the

actual amount stated on the bank statement.
b. Payments by cheque
• There should be adequate stationary control over blank, pre-printed
unused cheques.
• The cheque book should be locked away in safekeeping when not used.
• There should be an authorised cheque requisition for all cheques.
• The cheques should contain the following:

- Beneficiaries name
- Reasons should be clearly stipulated
- Crossed (non-transferrable)
• Cash cheques (except for wages) and cheques with open spaces and non-
crossed cheques should be rejected.
• The cheque should be authorised by the payments manager and there

should be segregation of duties among the following functions:
- Preparing the cheque
- Signing the check
- Cheque should not be returned to the person requesting the cheque.

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• The cheque should be signed by a senior member of management

- It should be signed only after it has been clarified whether the cheque is
authorised.
- The cheque requisition has been checked.
- The accuracy of the details of the cheque has been checked.
• All supporting documentation should be cancelled (cheque requisition).
• The payment terms should be inspected.
• There should be a review and investigation by the manager:

- Number sequence check as well as following up on all missing numbers.
- All returned cheques should be investigated:
▪ Check number sequence
▪ The amount on the cheque agrees with the amount of the counterfoil.
4. PETTY CASH 10 MARKS
1. The responsibility of controlling the petty cash must be allocated to a single,

competent, independent person. (1)
2. Petty cash should be kept secured in a lockable box.
3. The cash in the petty cash must not be mixed with other funds or activities of
the enterprise, specifically customer receipts. (1)
4. A policy must be determined regarding the maximum amount and type of

expenses which will be allowed to be compensated from petty cash. (2)
5. All cash expenses should be paid from the petty cash.
6. Petty cash receipts must be properly authorised (by referring to the amount
and the reason for the expense) and signed as proof of this. (1)
7. The person in control of the petty cash must prepare a reconciliation in

which the cash in the petty cash is reconciled with the amount of the petty
cash advance, by adding the total amount of the petty cash receipts issued
(according to the petty cash journal). This person must do the reconciliation
once a month. (2)
8. Surprise counts must be performed by the owner or independent person

who performs the reconciliation at that stage. (1)
9. Any differences/errors/irregularities found by performing above-mentioned

reconciliation must immediately be investigated. (1)
10. At the end of each month, the total amount of the petty cash receipts issued

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(per petty cash journal) must be compensated from the cash-book by means
of a cheque that is cashed. (1)
11. All petty cash slips already compensated must be cancelled to prevent
submission and compensation thereof. (1)
12. Petty cash slips must be pre-printed and pre-numbered and an independent
person should perform a number sequence check on a regular basis and
follow up missing petty cash slips. (2)
AVAILABLE: 11
MAXIMUM: 10
Communication skills – clear formulation of internal controls (1)
• Supporting documentation:
- The amount should be paid first and then the amount may be claimed from
the petty cash with a petty cash slip: or
- Money could be requested; the change is then brought back and then gives
a slip.
• Petty cash slips should be issued for each expense paid (when money is
taken from the petty cash journal a pre-numbered petty cash receipt must be
issued):
- Pre-numbered
- Date, requester, purpose, proof.
5. CASH COUNT
At the end of each shift and surprise occasions, the cashier and general
manager/supervisor (2 persons) should count the cash and the petty cash doing
the following:
• Keep the cash takings in a till bag with a lock which should be sealed until it is
counted.
• Calculate the sales for the day from the cash register roll.
• Reconcile the cash received to the total sales calculated and recorded in
the general ledger according to the cash register roll in order to identify any
shortages and surpluses.
• Enter the details on the sales return form/reconciliation.
• The cash book clerk and the general manager/supervisor should sign the
sales return form/reconciliation/count sheet/roll as evidence of:
1. Cash being taken custody of
2. Reviewed
3. Evidence of this being accurately performed.

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For calculation questions: How

do we calculate our cash
shortage?
Example: Calculation of cash shortage

Your audit senior asked you to do a surprise-cash count on 4 September 2009. The accountant
provided you with the following information in regard to the company’s cash- and equivalents.
• The monthly petty cash advance is R3, 000. (Float)

• Reconciled items in terms of the bank reconciliation as on 31 July 2009:
R
Outstanding cheques 7,590
Outstanding deposits 1,540
Bank cost 375
Interests received 51
• Amounts appearing in the cash-book and on the bank statement:
Cash book Bank statement

R R
Balance: 1 August 24,725 26,017
Deposits - August 70,243 55,725
Deposits - 1 Sept to 4 Sept 15,845 13,628
Cheque payments - August 56,832 48,304
Cheque payments - 1 Sept to 4 Sept. 8,456 2,548
• The surprise-cash count performed on 4 September 2009, provided the following results:
R
Notes and coins in the cash registers 3,761
Cheques in the cash registers 7,512
Cash in the petty cash tin 1,672
Petty cash slips in the petty cash tin 457
• CALCULATION:
Physical cash
Notes and coins in cash registers 3,761
Cheques in cash registers 7,512
Cash in petty cash 1,672
TOTAL 12,945
How much cash there should be

Outstanding deposit 16,058
(70,243 – 55,725 + 1,540 = 16,058)
Money received 15,845
Money banked (13,628)
Petty cash advance 3,000
Petty cash slips (457)
TOTAL 20,818
Cash shortage (20,818 – 12,945) 7,873

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6. BANK RECONCILIATION
• What is it?
Monitoring of differences between balances in:
- company records
- cashbook and general ledger
- balance according to bank
• Controls:
- The bank reconciliation must be drafted on a monthly basis by an
independent person/cashbook clerk.
- An independent review (e.g. by the accountant) must be performed and
the following must be tested:
▪ The logic of the reconciliation
▪ Ensure that the reconciling items match the subsequent documentation
such as the bank statements.
▪ Investigate long outstanding items
• Calculation:

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7. Other important considerations: FRAUD
• Cause
- Occurs due to time span between transaction date & date recorded.
- Purpose: to hide fraud or theft or to overstate bank.
• Examples:
- Lapping
- Kiting
- Window dressing
Fraudulent financial reporting techniques
• Kiting
- Company with > 1 bank account with different banks
- Timespan to cash cheque and carry it over from one account to another
- Manipulate transfers during y/e – to overstate the bank and cash balance in
the AFS.
Misappropriation risk
• Rolling of cash / Lapping

- Cashier takes cash paid by a debtor, covers the shortfall with a subsequent
debtor’s receipt.
- Higher risk in companies where:
▪ Cash and cheques are received from debtors;
▪ Poor SOD between cashier and recording of receipts functions;
▪ Lack of review over the abovementioned functions
• Window dressing
- Manipulate the ratio between current assets and liabilities
- Write cheque out before y/e and give it to the creditor after y/e.
• Theft of cash
• Dishonoured cheques
- A cheque is made out by a client, but there are no funds available in the
client’s bank account.
• Fictitious deposits
- Where clients can pay via direct deposit / EFT → Receive fictitious proof of
payment from the client and consequently deliver the goods/service to them.

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General controls 20 MARKS

• Cashier must be allocated to a specific cash register.
• The staff should be well trained and should receive additional
Cash register roll
training as the need arises.
• Pre-numbered
• Staff should be rotated on a frequent basis.
• Two copies: 1. Customer (evidence) 2. Accounting department
• General manager should perform surprise inspections and cash
(bookkeeping)
counts to determine whether the cashiers are performing their
work.
Parties
• Cashier
- Must ring up cash received on cash register.
- Amount received from client must be counted.
Access control • Manager (Cash Reconciliation)

• There should be a cameras monitoring the shop and a security guard - Count cash before opening.
appointed. - Cash advance (float) must be taken into account.
• Cash should be safeguarded in a safe from the time of receipt until Cash Reconciliation - Register kept pf cash drawer must be deducted.
banking. • In writing - Signed by both parties.
• Cash should be cleared out of cash register frequently and placed in • O/B (float included) - Count at the end of each day.
a drop safe – one key on sit and one key off site. • Movements (CRR + cheques)
• Key of safe must be under the control of one person. • C/B • Customer
• Cash register must be positioned at exit. • Recon signed by parties. - Must request receipt from cashier.
• Mounted fixed and securely. - Must agree or disagree to amount in window. (Fraud)

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6. INVENTORY AND PRODUCTION CYCLE
Introduction
Purpose
• Safeguard the inventory against theft and damage;
For manufacturing entities:
• Control the movement of inventory (raw material, work-in-progress and
finished goods) during the production process; and
• Control the production process itself (e.g. what and how many to
manufacture, spillage during the process and quality of the manufactured
goods.
Link with other cycles

• Close link between the purchase
and payments cycle and the
sales and receipts cycle.

INITIATE PRODUCTION
• Production must be planned and
controlled by means of production
schedules
• Raw materials must be transferred
from the store to the factory
• Dr WIP
Cr Raw materials
MOVEMENT OF GOODS
• Transfer of raw materials from the
store to the factory.
• Conversion of raw materials into
finished goods.
• Transfer of finished goods from the
factory to the finished goods store.
• Dr Finished goods
• Cr WIP
• Includes the protection of finished
goods.
RECORD PRODUCTION AND

INVENTORY TRANSACTIONS
• Determination and calculation of
production costs and cost units.
• Control over inventory balances-
quality and value.

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Aspects and Internal Controls of importance
• Store: Physical control over inventory:

- separate isolated area and restrict access.
• Transfer: documentation and records for transfer:
- Preprinted, numbered and designed, copies of documentation, must be
authorised.
- Movement: perpetual inventory records.
• Costing system: unit cost records.

1. Excessive/ incorrect production Validity
2. Unauthorised use of inventory Validity
3. Production hours not captured Completeness
4. Theft of raw materials, WIP, finished goods Validity
5. Production costs calculated incorrectly Accuracy
6. Carrying value of inventory incorrect Completeness – if too low

Accuracy – if too high
7. Quantities of stock on hand incorrect Validity, Accuracy, Control
8. Inventory deteriorates in value Validity
9. Delays in production Validity, Accuracy
The Perfect Cycle
1. Placing of orders PAYMENTS & PURCHASES CYCLE
Purchase requisition – informs the purchasing department what goods are needed:
• A pre-numbered purchase requisition made out by production/factory

manager (when the goods are needed) in a twofold approved and signed by
the head store manager.
• It should contain details on: description of the items, amount, date and
department.
• Copies:
- One copy must go to the purchasing division in order to request the
goods.
- One copy must remain in their own records as proof of goods requested.

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• A purchasing clerk must prepare purchasing orders on a prenumbered

• Only a purchasing clerk may prepare purchasing orders and only if he has
received a purchasing requisition, signed by the head storeman. (2)
• Purchasing orders must be prepared according to a list of approved

suppliers and a policy must be laid down and complied with (for example,
place with the cheapest supplier or order the best quality). (1)
• If there is not a satisfactory supplier on the approved list, the purchasing clerk
must first get a number of quotations (for example 3) before preparing an
order. (1)
agreed the details with the approved requisition and the list of approved
suppliers (or the list of quotations) and sign. (2)
approved by the financial manager and signed. (1)
• The following 5 copies (of purchasing orders) should be generated:

- one: accounting division (for agreement with the invoice); (1)

- two: the head storeman (to update list of outstanding requisitions); (1)
- three: receipts division (to ensure that only goods that have been ordered
are accepted); (1)
- four: the supplier (to place the order – may be faxed or posted); and (1)
- five: own records (as evidence that the order has been placed). (1)
• Outstanding purchasing orders must be kept in a suspense file in the

purchasing division and followed up regularly to ensure that all orders are
finalised timely. (2)
2. Receipts of goods (Raw materials) PAYMENTS & PURCHASES CYCLE
• There should be a separate demarcated area for receiving goods.
• Two receipts clerks must receive the delivered inventory. (1)
• The supplier’s delivery note must be signed after the following have been
done: (QQD) (1)
- Details (quantities and type of spice) on the delivery note from the supplier
must be compared with the delivered items and the details on the
- Goods that have not been ordered may not be received. (1)
- Quality aspects of the goods must be reviewed. (1)

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• The two receipts clerks must make out a prenumbered goods-received

note (GRN) of which the details must agree with the supplier’s delivery note
and the physical goods received. (1)
• Both receipts clerks must initial the GRN to pin down responsibility. (1)
• The following 6 copies (of the GRN) should be generated:
- one: accounting division (for agreement with the invoice and the purchasing
order); (1)
- two: accompanies the goods to the inventory store; (1)
- three: purchasing division (for comparison with outstanding purchasing
orders); (1)
- four: inventory clerk (for updating the inventory records); (1)
- five: own records (file with purchasing order to show that order has been
received); (1)
- six: to the supplier (if the supplier has not provided a delivery note). (1)
• Goods received must be placed in safekeeping immediately. (1)
• The receipt clerks must perform sequence checks and follow up on all
outstanding orders.
AVAILABLE: 29
MAXIMUM: 28
• The inventory records must then be updated to record new stock (raw
materials). Link
3. Storing of raw materials
• Raw materials must be stored and protected until required in production.
• Stock should be barcoded onto the perpetual inventory system (rather than
maintaining A4 pieces of paper).
- To ensure that the physical stock can be checked against the theoretical
stock on a frequent basis (weekly) and to ensure that there is a tracking
system.
- The system should record the following: Serial number, title, director,
description DVD etc. for smaller items (Just read)
• All raw materials purchased and received must be stored and protected
until needed in the production process, the goods should be stored as follows:
- Stored in a separate isolated area.

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- Access to the material must be limited (Only one entrance from within the
shop)
- Any doors or windows from the outside must be secured.
- The shop must have security gate at the entrance that only opens with the
press of a button located at the cashier’s counter. It must also have an alarm
system for the evenings.
- The shop (salesroom and storeroom) must be protected against fires and
there must be fire extinguishers and sprinklers on the premises.
• Authorised and signed documentation (requisition) required for the

movement of the raw materials which will be addressed below.
4. Production cycle WEAKNESSES QUESTION
a. Issuing inventory from the central inventory warehouse to the branches:
• Branch managers/ manufacturing clerk must place an order at the central

RM inventory warehouse by making use of a pre-printed standard raw material
requisition (order form). (1)
• The raw material requisition must be prepared in triplicate:

- 1 copy must be sent to the raw material warehouse for the warehouse to
prepare the correct quantity and type of product for dispatching and to
update their records regarding the movement of the inventory; (1)
- 1 copy must be sent to the accounting department to update inventory
records.
- 1 copy is held at the branch/ warehouse as evidence of quantity and type
of product requested; (1)
▪ must be pre-numbered; (½)
▪ contain the date of request; (½)
▪ contain the authorised signature of the branch manager; (½)
▪ indicate the branch name; (½)
QQD ▪ accurately explicate the quantity and description of product e.g.
code, size, colour, etc. (½)
• The warehouse assistant at the central warehouse prepares the items for
issuing to the branch/ factory on the basis of the raw material requisition
RMT
and completes a raw material transfer note (issue note) for the materials/
products that must be issued. (1)
• A raw material transfer note should be prepared in triplicate:

- 1 copy must be sent to the branch/ factory together with the items so the
branch can be sure of the quantity and type of materials/ products issued
to them; (1)

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1 copy is held at the central warehouse as evidence of quantity and type

-
of clothing issued to the branch; (1)
- 1 copy must be sent to the accounting division after delivery in order for
them to update the inventory records. The copy also serves as proof of
delivery. (1)
▪ contain the dispatching date; (½)
▪ must be pre-numbered; (½)
▪ contain the authorized signature of the warehouse reviewer of the
central warehouse after he compared it with the order form received;
▪ indicate the branch name; (½)
QQD ▪ contain the quantity and description of clothing that has been
dispatched. (½ )
• With dispatch, the security guard/head store manager must compare the
items being sent with the information according to the raw material transfer
note and must not allow that any items leave the premises that do not appear
on the documentation and sign as evidence of doing so. (1)
• On a daily basis, the warehouse reviewer of the central warehouse must

check that all raw material transfer notes refer to and are supported by a
valid authorised raw material requisition. (1)
• Branch/Production managers must compare their duplicate raw material

requisition with the raw material transfer notes received with delivery on a
daily basis. (1)
• The warehouse reviewer and the branch/production managers

respectively must review the number sequence of raw material requisition
and raw material transfer notes and follow up on missing numbers. (1)
PRESENTATION: (1)
AVAILABLE: (17)
MAXIMUM: (12)
Recording and processing

• The inventory records must be updated to reflect the transfer of inventory.
- Raw materials must be decreased.
- Work in progress must be increased.
• The inventory records must be updated by an independent accounting person

(accountant) not that of the inventory store or the production division.

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b. Receipt of inventory at branches
• The branch manager must be responsible for the receipt of the inventory
items from the central warehouse. (1)
•With receipt the branch manager must:

QQD - compare the quality and quantity of the items with the issue note and
order form. (1)
- initial/sign as evidence that it has been checked and corresponds. (1)
• If there are any deviations between the physical items and the documentation,
it must be recorded on the issue note and signed by both the deliverer and
the branch manager. (1)
• The branch manager must keep the issue note and file it with the order form.
(1)
AVAILABLE: (5)
MAXIMUM: (5)
c. Physical control over the inventory at the branches (half-finished goods

and half raw materials)
• The branch manager must keep records of the inventory on hand. These
records must be updated with the issue note and sales invoices. (2)
• The branch manager and sales assistant must frequently hold inventory
counts on a sample basis (rotate the specific items selected) and compare
the counted inventory per item with the quantity according to the inventory
records. (1)
• The internal auditor must perform inventory counts at the branches on a

surprise basis and he/she must compare the physical inventory with the
inventory records. The branch managers must be held liable for any
shortages. (2)
• The storeroom of each branch must only have an entrance from within the
shop. Any doors or windows on the outside must have security gates/be
closed with iron bars. (2)
• Staff must have access to the storeroom, but it is very important that staff
make sure that no delivery people or clients go into the storeroom. (1)
• The shop (sales area and storeroom) must be protected against fires and
there must be fire extinguishers and sprinklers on the premises. (1)
• The shop must have a security gate at the entrance that only opens with the
press of a button located at the cashier’s counter. It must also have an alarm
system for evenings. (1)

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• Sales assistants must count the amount of items clients want to buy to
ensure that they come out with the same amount of items. (1)
• The layout of the shop must be designed in such a way that clients must
walk past the cashier before they step outside the door. (1)
• A security guard must be appointed, and all clients’ purchases must be

compared with the cash register slip and sales invoice before they may
leave the shop. (1)
• The staff’s packages must be examined when they leave to ensure that
they do not walk out with inventory items. (1)
PRESENTATION: (1)
AVAILABLE: (15)
MAXIMUM: (13)
For the question as a whole:

APPROPRIATE FORMULATION OF INTERNAL CONTROL measurements (1)
AVAILABLE: (38)
MAXIMUM: (30)
• Production process reports must be generated for various reasons:

- Daily production: materials used, wastage and down time.
- Report of goods completed per shift, day, week, month.
- Identify any differences from the production schedule.
• Production reports must be authorised and signed.
5. Transfer to finished goods store
a. Finished goods transfer note

• Record transfer of manufactured goods from the production division to the
finished goods store. (Better to use than an email)
• A pre-numbered finished goods transfer note must be issued in 3 fold by

one of the production foremen and must be authorised and signed by the
production manager.
• Contain details on:

- The quantity and description of goods
- Date
- Department sent to.
• 3 Copies
- One copy should go to the finished goods store whilst accompanying the
goods so that they can match to the physical goods received.

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- One copy should remain in own records (factory) as proof that the goods
have been transferred.
- One copy should go to the accounting department to update inventory
records.
b. Stock records
• Inventory records should be updated to reflect the transfer by an independent
accounting personal (accountant).
- Finished goods should increase.
- WIP decreases.
c. Cost system
• Unit costs determined by a variety of methods
- Process costing
- Job costing
- Standard costing
• Each method requires different ways of accumulating costs and unit cost
calculations. (ManAcc)
d. Determination and calculation of production costs of finished goods

• Production reports (made up of the calculations within them) provide
information concerning amount of raw materials used in production, labour
required to produce goods, and allocation of overheads.
• Production cost will depend on the system in use.
• Calculation of production costs must be checked and authorised (signed)
by management.
e. Additional (for that of a perpetual system)

• The stock should be barcoded rather than maintaining A4 pieces of paper.
• The barcoded physical stock must be checked against the theoretical stock
on a frequent basis (weekly) and have a tracking system, by the sales
assistant or branch managers.
• There should be a designated accountant that should be employed to keep
record and update the perpetual system, when stock is received, sold,
destroyed, etc. This person should not have access to the stock.
• The re-order level should be put into the system so that stock can be re-
ordered when the levels are too low.
• There should be frequent stock counts, this must be done in conjunction with
an independent person and shortages and surpluses must be reported to
the general manager for further investigation. The general manager must also
perform regular surprise stock takes.

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6. Send finished goods to customers SALES & RECEIPTS CYCLE
PICKING AND DISPATCH OF ORDERS BEFORE THE GOODS ARE LOADED

ONTO THE TRUCKS FOR DELIVERY BY THE DRIVER.
1. The approved sales order form is sent to an access-controlled demarcated area

of the warehouse where the storemen pack boxes for dispatch and one of the
storeman then sends an email to the sales department to confirm receipt of the
order. The chief storeman then instructs the packers to pack the order
accordingly. (1)
(must refer to approved sales order)
2. Pre-numbered, pre-printed delivery note is prepared by the storeman responsible

and then attached to the packed goods. (1)
3. The delivery note includes the following information:

▪ order number
▪ quantity
▪ product code
▪ customer
▪ delivery date
▪ delivery address
▪ Storeman signed the delivery note as proof that all the inventory has indeed
been packed correctly and to assign responsibility (1)
4. The chief storeman then compares the physical goods to the delivery note as well
as the approved sales order form and checks the quality, quantity and the
description is correct thereafter he signs the delivery note as evidence of doing
so. (1)
5. The approved delivery note is then distributed as follows:

▪ Two copies of the delivery note accompany the goods to the client. One
copy of the delivery note must be signed by the client and returned with the
delivery staff to the warehouse. The signed copy is forwarded to the
accounting department so that the invoice can be prepared. (must state the
fact that a signed copy must be forwarded to accounting department to
obtain the mark) (1)
▪ One copy is sent to the sales department as evidence that the order has
been executed. (1)
▪ One copy remains in the warehouse as evidence that inventories have been
dispatched and for the number sequence check. (1)
▪ One goes to the inventory clerk so that the inventory records can be
updated and as evidence that the order has been executed. (1)
will get 2 out of 4 – No negative marking)
6. The number sequence of the delivery notes must be checked by the chief
storeman (independent person) on a regular basis and outstanding items must be
followed up. (1)
AVAILABLE: 9

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MAXIMUM: 7
DELIVERY
1. The driver then packs the goods into the delivery vehicle ensuring the goods
match the delivery note, (1)
2. he signs as evidence of doing this. (1)
3. Before the delivery vehicle leaves the premises, the gatekeeper ensures that
all the physical goods have been provided with delivery notes that agree with
the delivery note; this can be documented on a gate register or the delivery
note. (1)
ONLY ONE MARK FOR PRINCIPLE
4. The client must sign the delivery note as proof of receipt of the physical goods,
that the quality, quantity and description match what was ordered and what is
on the delivery note. (1)
5. The client keeps one copy and the other copy is returned to the invoicing
department by the delivery vehicle. (1)
6. Mr Frosting must review the number sequence of the delivery notes and
investigate any missing numbers. (1)

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Inventory count sheets

Inventory count
- Describe the inventory count procedures that you would recommend

Before count
• Small Cars (Pty) Ltd must inform all persons concerned of the date on which
the inventory count will take place by means of written instructions. (1)
• Inventory count has to take place as close as possible to year-end. (1)
• A planning meeting should be held with all persons concerned so that
everybody can know what their duties and responsibilities are (must take
place well in advance of inventory count date). (1)
• Based on the nature of the stock the following staff will be needed:
o 3 supervisors (one per store)
o 12 counters (two teams of two per store) or 6 counters (three teams
of two rotating)
o 1 coordinator (1)
• Staff involved in the inventory count should not be responsible for the daily
control and recording of stock items. (1)
• The three stores must be neatly packed before the inventory count so that
items can be counted easily. (1)
• Make sure that there are no open spaces on the shelves and that all items
are appropriately identifiable. (1)
• Stock should be marked in such a way that it can be identified during the
inventory count. (1)
• Access to the premises must be restricted to the counters, supervisors
and the coordinator. (1)
• If it is practically possible, there must be no movement of stock items on
the counting day. (1)
• If there is a movement of stock, it should be kept separately (for new
supplies received) and documented appropriately. (1)
• Two counting teams must be allocated per store. The counting teams that
have to follow up on differences must be appointed in advance. (1)
During count
• Pre-numbered, pre-printed counting sheets must be issued to the

counting teams by the supervisors and counters must sign for it. (1)
• Supervisors are responsible to ensure that all counting sheets (even
unused counting sheets) are handed in by the counters after the taking has
been concluded and that all counters have signed as confirmation of
delivery. (1)
• A counting sheet register can be used for the purpose of recording which
counting sheets have been issued to which counting teams. (1)
• The counting sheets should have headings so that the following information
can be recorded.
o Description of the items
o Location of the items
o Count per item
o Space for the signatures of the counters (2)

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• All counting sheets must be completed in ink. (No pencil, no tipex) (1)
• Unused lines must be crossed out. (1)
• Counters must make sure that they work through the store systematically
to ensure that all items in the store are counted. (1)
• After an item has been counted, it should be marked as counted to prevent
it from being counted twice (with a sticker). (1)
• All stock items must be counted by the second team.
Or
• It should be ascertained that the team members rotate their functions of
count and write. (1)
• Supervisors must continuously supervise the counting teams to ensure
that all procedures are appropriately followed. (1)
• If there are any changes to be effected on the counting sheets, the
supervisor must initial it after the change has been confirmed. (1)
• Counters must count in teams of two and rotate regularly (when six teams).
Or
• Counters must rotate the counting and recording (when three teams). (1)
• During the inventory, count counters must identify any obsolete or
damaged stock and stock held on behalf of third parties. (1)
• Counters must sign the counting sheets as evidence that counting has
been completed to pin down responsibility (NB!) and, according to the
counter, performed correctly according to the inventory count procedures.
(1)
After count
• The supervisors receive the counting sheets and confirm that:

o all counting sheets have been received (check number sequence),
and
o there are no errors or missing numbers
and
o that no unauthorised changes have been made on the counting
sheets.
and
o that the counters have signed as confirmation. (2)
• After the supervisors have received all counting sheets, they sign the
counting sheet register and hand the completed counting sheets over to
the coordinator. (1)
• The coordinator confirms that all stores and items have been counted. (1)
• The coordinator reconciliates the counting sheets of the two counting
teams and if there are any differences they are counted again (by the pre-
identified third counting team). (2)
AVAILABLE: 33
MAXIMUM: 28
TOTAL: 30

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• No additional unauthorised changes may be made by the coordinator on the

inventory sheets once returned. (1)
• The inventory manager should compare the figures from the first and second
count to confirm that the two figures are the same. (1)
• Teams may not leave the premises until all differences between the first and
second counts have been resolved. (1)
• The quantities on the inventory system and the physical count sheets
must be compared. (1)
• If the quantities do not correspond:
o the inventory item must be recounted; and (1)
o the necessary corrections must be made on the system for example
theft or damaged goods. (1)
• An independent person (e.g. the accountant) must review the comparison
and inventory corrections. (1)
• S/he must sign as evidence of having performed the review. (1)

lOMoARcPSD|8555855
Production Cycle Documents 12 MARKS

Raw material Requisition (RM) Raw material Transfer Note (RMT) Finished goods Transfer Note (FGT)
a. # Pre-numbered Pre-numbered Pre-numbered
b. Details • Date of request • Despatch date (transfer) • Despatch date (transfer)
• Quantity • Quantity • Quantity
• Description of raw material • Description of raw materials • Description of order
despatched
• Cost of item
c. Check • Manufacture clerk prepares and • 2 storemen pick and prepare RMT • The factory storeman must
signs. and sign. compare the RMTs quantity and
• Production manager only • Match (compare) raw material description to the FGT and then;
authorises by signing, after details requisition to raw materials transfer
• Compare it to the physical goods
on the RM have been agreed to the note and physical goods prepared.
production schedule. (Raw materials foreman) QQD and sign as evidence. QQD
• Signed by storeman and head • Signed by the factory supervisor
storeman. and the production manager.
d. Copies 1. Raw material store 1. Raw material store 1. Finished goods warehouse
Prepare right quantity and type for Evidence of quantity and type of Evidence of quantity and type of
dispatching and update records raw material issued. finished goods issued.
w.r.t. the movement. 2. Manufacturing 2. Manufacturing
2. Manufacturing To be sure of quantity and type of As eveidence of the quantity and
Evidence of quantity/type of RM. raw materials issued by raw type of finished goods issued.
3. Accounting department materials store. 3. Accounting department
Update inventory records. 3. Accounting department Update inventory records.
Update inventory records.
e. Number Production manager review number Head storeman review number sequence Production manager must do a sequence
sequence sequence of raw material requisitions of RMT (issue note) and investigate check for any outstanding or missing
and investigate missing or outstanding missing or outstanding numbers. numbers.
numbers.

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7. SALARIES AND WAGES CYCLE (HUMAN RESOURCES)
Introduction
What are salaries and wages?

• Material expense
• Wages influence stock valuation – cost allocation.
• Impacts cash: fraud / theft.
• Small amounts vs. high volume of transaction.
• Internally generated transaction without physical documentation.
Salary Wages
• Fixed, pre-determined amount, not • Paid for productive hours.
affected by hours worked (basic • Timekeeping required.
salary). • Paid weekly with cash.
• Paid monthly by cheque/ direct
deposit.
NB: NB:
• Time worked • Calculation
• Calculation • Payment
• Payment
• Control over cash
SCI: Expense accounts

• Salaries (nett, excluding fringe benefits);
• Wages (nett, excluding fringe benefits);
• Commission;
• Bonus;
• Leave pay expense;
• UIF; Fringe benefits
and deductions
• Leave pay;
• Pension;
• Medical aid
SFP accounts
• Bank
• Accrual for deductions payable
• Provision for leave pay
Dr SCI
Cr Bank
Cr Provisions and accruals

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When we accept and process the order (Initiate)

RISK
Appointments &
1. Unauthorised appointments/dismissals
authorisation
1. Unauthorised deductions /fringe benefits

Personnel
records
2. Unauthorised & wrong changes to salaries/ wages
1. Employees dismissed remain on payroll

2. Employee paid for services not rendered
preparation of
Calculation &
3. Employee paid at unauthorised scale/tariff

payroll
4. Deductions paid over incorrectly

5. Employee not paid for services rendered
6. Pay incorrect employee
7. Inaccurate calculations wrong wage scale or basic salary or hours or deductions
8. Ineffective control over unclaimed wages
1. Fictitious employees on salary & wage journals

Recording
2. Incorrect recording of information

3. Not all salary/wage transactions are recorded
Perfect system
1. Appointment and authorisation

• Specific department/head of the personnel division
requiring employees informs the personnel division of the
position needing to be filled.
• The personnel division will then do the following:
- Advertise the position (With authorisation from higher
management)
INITIATE
- Receive applications together with a CV (which should

contain their qualifications).
- Suitable candidates are then interviewed.
▪ The interview should be performed by the personnel
division.
▪ Two employees (1 from the personnel division and 1 from the division
requiring employees should conduct the interview).
▪ Aptitude tests must be performed.
• The individual shall then be offered the job.

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• A pre-numbered appointment letter/contract of employment shall be

authorised and signed by the personnel manager in two-fold:
- 1 copy shall go to the new employee
- 1 copy should be kept by the personnel division
• Appointment letter/contract of employment should contain details on the terms
and conditions of the employment.
• It must be signed by the employee accepting the job.
• The hourly wage shall be determined by the wage foreman and authorised
and signed by the personnel/wage manager.
• Or factory foreman together with the personnel department must decide on a
wage and this shall be authorised and signed by management.
2. Personnel records
a. Employee file (or permanent file)
• Information about every employee is kept in the personnel division within an
employee file
- Each employee shall have their own file.
- The file can be a physical paper file or a computerised file.
• The following information should be kept in the files:
INITIATE
- Personnel information
- Employee number
- Appointment date
- Compensations
- Fringe benefits
- Deductions
• Any amendment in wages must be recorded in the employee's personnel file
by the personnel department.
b. Deduction authorisation form (NB: signing)

• A pre-numbered deduction authorisation form should be completed by
the wage foreman giving permission to the company to deduct certain
amounts of the employee's wage and to pay those amounts to 3rd parties on
his behalf.
• This should be signed by the employee as proof.
• This form must be authorised and signed by the personnel manager and
shall be issued in 2 fold:
- One copy shall be kept by the employee.
- One copy should be kept by the personnel division.

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c. Compensation amendment form

• Any change in the following functions:
- Remuneration rate
- Working conditions
- Terms of employment
must be recorded in this document.
• A pre-numbered compensation amendment form must be issued in 2 fold
and authorised and signed by the head of the personnel division:
- One copy shall go to the employee: in order to notify the employee of the
wage changes.
- One copy should be kept by the personnel division.
• Wage scale adjustments shall also be authorised by the wage foreman.
• Made out by two persons from the personnel division in writing.
• The following parties shall be notified in writing:
INITIATE
- The payment division/wages division

- The employee (compensation amendment form)
d. Termination of service form

• When either party decides to terminate the employment contract, this must
occur in writing.
• This form can be completed by either parties:
- Employee upon resignation.
- Employer through retrenchment or firing.
• A pre-numbered termination of service form must be completed by either one
of the parties in 2 fold and must be authorised and signed by the head of the
personnel division.
- One copy should be kept by the employee
- One copy should be kept by the personnel division
- Both parties must sign.
WAGES
3. Timekeeping and checking hours worked

a. Timecard/clock card/timesheet: records the hours of which a wage earner
has worked.
• Cock cards/timesheets should be pre-numbered and prepared by the
EXECUTE
personnel department using the employee list and must be authorised and
signed by the foreman/supervisor.
- Employee number - Amount of hours worked
- Name - Overtime hours worked
- Date

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• There should be control over the issue and receiving of clock cards namely
that there should be register for cards issued and received back.
• The issuing of the time cards shall be done by Admin Clerk A and the
receiving of the time cards shall be done by Admin Clerk B of the personnel
division. (Segregation of duties over issuing and receiving)
• The blank clock cards shall be kept secure in a safe.
b. Clock card machine

• Location: Entry/Exit point (only in one location preferably).
• Protected by a turnstyle mechanism – where employees must use their time
cards to swipe in and swipe out.
• There should be adequate supervision by the supervisor/foreman:
- Only one clock card machine.
- Supervision during clocking in and out times to ensure that the employee
only swipes their own card and to ensure the validity of information
recorded.
• All clock cards/timesheets must be collected at the end of the day (and not left
for a period of time).
• Clock cards should be checked for errors and manipulation by the
supervisor/foreman which should be signed.
• Overtime hours recorded on the clock cards should be checked by an
independent person and approved in terms of the company’s policy.
4. Calculation and preparation of payroll

• The wages journal/payroll should be prepared with reference to the hours
worked through the clock cards as well as with reference to the clock card
machine.
Calculation:
RECORD
Hours (Clock card) X Tarrfif (Tariff form)

= Gross wage
(Deductions)
= Net wage
• The following details should be included in the wages journal/payroll:

- Employee number - Amount of hours worked
- Employee name - Overtime hours worked
- Date - Gross wage
- Tariff - Deductions

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• The wage journal/payroll shall be checked and authorised by an independent

person/manager of the wage department for validity (common weakness):
- Recalculation
- Checked with reference to the budget
- Checked for unusual expenses
- Check that the hours indicated match that of the clock cards
- Any differences should be investigated by the supervisor/wage foreman
5. Payments
• A cheque shall first be requested for total wages for week from the
personnel division and the wage journal/payroll should be sent as
proof/supporting documentation (which has been signed and authorised).
• The supporting documentation should be cancelled to prevent double
recording.
• A cash cheque shall then be issued by the payments division with evidence
of the money withdrawn such as a bank slip.
PROCESSING
• The cheque is then cashed immediately.

• The cash should be kept in the safe until they are placed in the pay packets.
• The wage manager must compare the total of the wage journal with the
cheques and cancel the wage journal in order to prevent double recording.
a. Wage slip/wage record

• The wages for the employees are placed in a pay packet by the wage clerk:
- Wage clerk must sign as evidence of receipt of the cash.
- The making up of the pay packets should be performed 2 wage clerks from
the payments division.
- The contents must be checked and authorised by the manager of the wage
department.
• A pre-numbered wage slip shall be issued by the payment/wage clerk in 2
fold which indicates all the transactions applicable to the employee and the
totals of their wages to date. These shall be approved and signed by the
manager of the wage department.
- One copy is sent to the employee.
- One copy remains in the payments division.
b. Wage payout
1. The payout must be attended by the accountant and the foreman (i.e. two
persons). (1)
2. Employees must identify themselves when they come to fetch their wages e.g.
by means of a personnel card of identity document. (1)
3. Employees must sign the wage journal as evidence that they received their
wages. (1)

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4. The employee must immediately check the cash in the envelope under
supervision of the accountant and foreman and any differences must be
recorded immediately. (1)
5. Wage envelopes must be handed to the employees in person only. (1)
6. Wage envelopes, not fetched, must be taken back to the secretary who will
keep it safe together with an unclaimed wage register. Wage must be recorded
unpaid in wage journal and entered in the unclaimed wage register. (2)
7. The unclaimed wage register and the wage journal must be reconciled weekly.
(1)
8. Similar procedures must be in place as in 1-4 above when the employee claims
his/her wage envelope at a later stage. Entries then in unclaimed wage register
only and not in wage journal. (1)
9. The unclaimed wages must be banked again within a reasonable period. (1)
10. Long-outstanding wages must be checked by a senior member and reasons
must be obtained. (1)
AVAILABLE 11
MAXIMUM 10
c. Unclaimed wages
• The details of all unclaimed wage envelopes (employee name and number,
date of payout and amount of wages) must immediately be recorded in a
register of unclaimed wages and it must be indicated in the wage journal that
the relevant wage was not paid out. (2)
• The wage envelope, together with the register of unclaimed wages, must be
handed over to the accountant who must sign the register as proof of receipt.
(1)
• Until it is claimed (or banked) unclaimed wages must be placed in, for
example, a safe. (1)
• If an employee comes to claim his/her wage:
- the employee must be identified property (by, for example, an employee card
or identity book); (1)
- the employee must check his/her wage and sign the register as proof of
receipt of his/her wage; and (2)
- the wage must be handed to the employee in person only. (1)
• All envelopes which are not claimed in a reasonable time (3-5 days), must be
handed to the cashiers, who must sign the register as proof of receipt of the
money. (1)
• The cash must then be deposited in the bank account of the company. (1)
• The unclaimed wage register and the wage journal must be reconciled weekly.
(1)
• The register of unclaimed wages must be reviewed by the managing director
in order to identify and follow up on any long-outstanding wages or regular
unclaimed wages. (1)
AVAILABLE 11
MAXIMUM 11

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There should be segregation of duties in the following functions:

1. Preparing of the wage
2. Authorisation of the wage cheque
3. Payment of the wages
4. Recording
SALARIES
Salaries are similar to wages but:

1. there are no clock cards.
2. No unclaimed wages.
a. Calculation and preparation of the payroll
Calculation:
Basic salary (tariff form)

+ Fringe benefits
(Deductions)
= Net salary
b. Salary journal
• A pre-numbered salary journal must be prepared by the payments division
with reference to the employee list provided by the personnel division, which
shall be authorised and signed by the head of the personnel division.
• This shall be prepared a week before payment is made.
• Details:
- Employee number - Net salary
- Employee name - Fringe benefits
- Date - Gross salary
- Salary scale - Deductions
• The Salary journal shall be checked by the head of the personnel division
and authorised and signed:
- Recalculated
- Checked with reference to the budget
- Checked for unusual expenses
- Any differences shall be investigated
c. Payslip
• A pre-numbered pay slip shall be issued in 2 fold by the payments division
in order to ensure that employees receive the correct amount.

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• Copies:
- 1 copy shall go to the employee
- 1 copy shall go the personnel division
• Details:
- Employee number - Net salary
- Employee name - Fringe benefits
- Basic salary - Gross salary
- Salary scale - Deductions
d. Payments by cheque (refer to payments and purchases cycle)

• The cheque shall be requested with the necessary supporting documentation
(cheque requisition).
• Supporting documentation shall be cancelled to prevent double recordings.
• The cheque number shall be noted in the salary journal, to note if the cheque
has already been paid.
• The cheque shall be signed and authorised by 2 persons.
• The cheque shall be made out in the employee's name and crossed (non-
transferrable).
• The cheque shall be compared with the salary journal to ensure the results
are the same before the cheque is signed.
• A salary control account or separate bank account shall be used to pay
the salaries.
e. Payments by direct bank transfer and electronic funds transfer

• This shall be performed by the responsible individual.
• Should prepare an electronic funds transfer file and details shall be recorded
in the file such as: salary, name and number of the employee and banking
details, etc.
• The manager of the payments division should review the file and compare
it to the salary journal, the file shall then be approved by a password being
entered.
• The actual paying of the salaries should occur from a separate bank account
or a salary control account.
• Proof of payment must be printed out as evidence.
• The head of the personnel division/accountant should check for fictitious
employees.
• There shall then be reconciliation between the separate salary control/bank
account and the transfer made by the accountant.

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f. Payments of deductions to third parties

I. IRP 5 FORM: deals with the income tax of the employee.
• Must be pre-numbered.
• Details on: payments received by the employee for the year and the
corresponding tax deductions.
• 2 copies:
- 1 copy goes to the employee
- 1 copy goes to their own records (Accounting department)
• Other deductions included should be checked and authorised by the head of

the payments division/accountant.
II. Monthly return: all deductions of company in total.

• Includes: tax, pension funds, medical aid fund, RAF, RSC UIF (All these
amounts must be checked against the companies own records).
• Shall be checked, authorised and signed by the accountant of the
personnel division:
- Preparation and authorisation of the cheque (supporting documentation,
supporting documentation cancelled, signed by 2 persons etc.)
• The deductions shall then be paid over the 3rd party after being authorised
and signed.
• Late payments will lead to the business being liable for fines and penalties.
6. Account
• Preparation of the wage journal entries.
• Processing of the wage journal entries to the general journal and general
ledger.
REPORT

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Additional theory to look at
List the controls that should be in place over the authorising and payout of bonuses
1. The directors’ resolution on the bonus issues (in detail per employee or per post
level) must be recorded in the minutes of the meeting. (1)
2. Minutes must be approved and kept safe in a systematic manner. (1)
3. A separate ledger account for bonuses must be opened so that the bonus payout is
easy to identify. (1)
4. The financial accountant must:
a. Agree amount in ledger account with amount in minutes. (1)
b. Select a sample of employees and ask the wage manager to provide him with
the payslips and IRP5 certificates of the relevant employees in order to check
that bonus amount per individual agrees with approved list. (1)
5. The financial accountant must check the supporting documentation before he
authorises the bonus cheques. (1)
6. The cheques must be approved by a member of management as second assignee.
(1)
Internal control objectives: Salary System
To ensure that:
• only authorised engagements of competent, qualified persons occur. (1)
• payments take place at authorised, approved scales or tariffs. (1)
• all salary calculations are accurate. (1)
• all deductions and fringe benefits/ allowances are properly authorised. (1)
• payments to employees (salary cheques) are properly authorised. (1)
• all salary changes/increases/adjustments are properly authorised. (1)
• all dismissals are duly authorised. (1)
• no fictitious employees exist in the salary system (or that payments only occur to valid
employees). (1)
• all salary transactions (salary expenses and payments) are properly (completely) recorded
in the accounting records. (1)
• all salary transactions are recorded accurately in the accounting records. (1)
salary journals are correctly cast and that all salary transactions are accurately posted to
the correct general ledger account. (1)
• all salary transactions are recorded in time and are classified correctly in the accounting
records. (2)
AVAILABLE 13
MAXIMUM 8
FORMULATION 1
Internal control objectives: Wages
To ensure that:
1. all wage pay-outs are prepared according to actual hours worked as per
authorised clock cards. (1)
2. all wages are calculated at authorised rates. (1)
3. all changes to wage rates are correct and authorised. (1)
4. all deductions and fringe benefits are authorised. (1)
5. all payments of deductions are correctly calculated. (1)
6. all deductions are paid to the correct organisation. (1)

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7. all wage payments are correctly calculated. (1)

8. all wage payments are made to actual employees of the organisation. (1)
9. all wage payments are made to the correct employee. (1)
10. all wage workers are paid for all services rendered. (1)
AVAILABLE 10
MAXIMUM 10

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8. INVESTMENT AND FINANCING CYCLE
FINANCING INVESTMENTS (Fixed assets)

Issue of shares (shares certificate) Acquisition of PPE
Dividends Disposal of PPE
Raising a long-term loan Depreciation and Net Asset Values
Finance charges and loan repayments Property – Title deed
Equipment – Invoice
Market value – registered in your name
A. Initiation
• Authorisation:
- Company policy and director’s resolution (minutes of director’s meetings).
• Adhere to any limitations set out in the MOI.
• Any requirements in the Companies Act (E.g. section 40 regarding the share
price).
• Cash flow considerations, budget preparation and cash flow statements.
• Liquidity and solvency must be considered.
B. Transactions types
i. Investment Transactions
• Acquisition and disposal of tangible non-current assets & financial instrument

investments
• Acquisition, internal generation and disposal of intangible assets
• Receipt and accrual of interest income and dividends received on investments
• Accounting for the use of and changes in value of tangible and intangible
assets through:
- Depreciation/ amortisation
- Revaluation/ other fair value adjustments
- Impairments and write-downs
- Profits/losses on disposal
ii. Financing Transactions

• Issue and repurchase of shares
• Receipt of loan funding (and payment thereof)
• Issue of debentures and subsequent repayments
• Handling of/ accounting for the obligations that arise out of financing:
- Dividends declared and paid
- Finance charges accrued and paid (on loans)
- Finance charges and accounting adjustments in relation to debentures

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Purpose of the transaction:

• Ensure that an entity invests funds in non-current assets to commence and
operate a business and generate working capital that ultimately provides profits
for the entity (direct or indirectly).
• Also invest funds in other investement assets to generate investment returns.
• Ensure that an entity obtains sufficient financing in order to be able to
commence and operate a business.
C. Characteristics of the cycle
• Magnitude of transactions in this cycle are usual material on FS

• Frequency of transactions are usually lower than for other cycles
• Transactions not subject to routine IC
• Many transactions are subject to management assumptions and estimates
and may involve complex calculations
• Since many transactions are done internally, often done without supporting
external documentation
• Transactions are governed by statutory and governance requirements such
as:
- Companies act 2007
- MOI
D. Functional Areas
i. Financing
Purpose Activity People
Issue of To obtain • Approval of issue of additional 1. Board of
shares cashflows by shares by board of directors directors
allowing potential (approval must be had by parent 2. Company
(or current) company and resolution be secretary
shareholders to minuted) 3. Accountant
purchase an • Above must be in accordance
interest in the with S38, s39 and s40 of
company companies act
• Shareholders agreement must
be drawn up and entered into by
new investors and the entity
• Investor pays for shares in terms
of the agreement
• Share certificate issues
• Transaction recorded in
accounting records
Payment of To provide returns • Dividend is authorised by a 1. Board of
dividends for shareholders resolution of BoD (must comply directors
for their with S46 Companies Act.) Must 2. Company
investment in the be minuted. secretary
company • Settlement of dividend takes 3. Accountant
place in accordance with
decision of BoD
• Dividend recorded in accounting
records

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Raising a To obtain cash • Directors decide on the best 1. Board of

long term flows from a bank financial decision to acquire new directors
loan or lender for PPE (specifically
funding purposes • Obtain approval from board and financial
reach agreement with lender on director)
details of loan and repayments. 2. Accountant
• Documented in a formal
agreement.
• Signing of loan agreement,
funds advanced and general
ledger accounts updated to
reflect transaction
Finance To account for 1. Interest calculated by lender and 1. Accountant
charges finance charges added to loan account.
and loan and loan Statement sent to entity on a
repayment repayments in monthly basis (reflect monthly
terms of interest charge)
agreement 2. Payment of interest takes place
automatically
3. Accounting records updated
monthly to reflect payment of
interest
4. Repayments have to be made in
terms of agreement. Take form
in monthly amount, usually
automatically paid.
5. Updates to accounts in general
ledger are made
ii. Investments
Purpose Main activity People

Acquisition of To invest funds in • Gaining approval from BoD 1. BoD
PPE non-current for significant transactions 2. Department
assets to • Conducting feasibility studies head/
commence and • Acquisition process ensues – person
operate the invoice by supplier is requesting
business & to processed asset
generate working • Acquisition requisition 3. Relevant
capital that document is completed for accounting
provides for profits less significant acquisitions personnel
for the entity • All new PPE are recorded on
the fixed asset register and
GL
Disposal of • Significant transactions 1. BoD
PPE require approval by BoD and 2. Accountant
have to be within 3. Relevant
memorandum mandate of accounting
MOI personnel
• Once BoD approves sale,
asset is advertised for sale,
buyer is identified, invoice for

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the sale price issued by the

entity. Buyer settles the
invoice and takes delivery of
the asset
• Original cost and acc dep of
asset must be removed from
GL account after sale.
Profit/loss must also be
recorded.
Accounting for To account for the • Depreciation os calculated 1. BoD
use of assets use of and according to useful life of the 2. Production
and changes changes in value category of class of PPE managers/
in asset values of PPE over time • Accordingly, entity staff directors
estimate useful lives and 3. Accountant
residual values 4. Other
• Recorded on fixed asset relevant
register and GL accounting
• Qualified member of staff personnel
consider the impairment of
assets annually
• If no one is suitably qualified
– expert in the field may be
appointed by BoD
E. Documents and Records
i. Investment activities
• Ordering and acquisition of assets
- Capital Budget
- MOI
- Minutes of the board meeting
- Asset Requisition
- Specific purchase agreements/ contracts
• Receipt and custody of assets

- Share certificate
- Detailed Fixed Asset register
- Master file amendment forms
- Schedule Calculations
ii. Financing Activities

• Receipt of debt or equity funds
-
Minutes of board meeting
-
MOI
-
Specific financing agreement/ contract
• Holding of debt or equity funds
- Securities register
- Master File amendment forms
- Schedules of financing calculations

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F. Risks (what could go wrong) in the cycle
i. Investing activities:
• Fictitious or obsolete assets no longer used recorded in SFP
• Management manipulate asset values as IFRS estimates are subjective
• Inappropriate capitalisation of (expense) costs may occur
• Entity may record an asset it does not have rights to
• Am asset may need to be impaired due to a loss in value owing to various
internal and external factors (necessary write-down may be recorded
incorrectly)
• Accounting of complex financial instrument investments may be incorrect
• Misappropriation risk may arise because of theft of tangible asset s and
personal use of assets by management
ii. Financing Activities:

• Failure to recognise financial liabilities at reporting date
• Understanding of value of loans/ debentures at reporting date
• Accounting of complex liabilities incorrectly
• Failing to account for accruals in relation to financing expenses (e.g. interest
expense and dividends declared)
G. Control
CONTROL CONSEQUENCES
OBJECTIVE
INVESTMENTS FINANCING
VALIDITY - Invalid purchases or - Unauthorised financing
capitalisation of assets. obtained.
- Overstatement of - Overstatement of
assets due to fictitious owner’s equity and
purchases. liabilities.
- Invalid development - Overstatement of
costs being capitalised. expenditure due to
invalid recording of
finances.
ACCURACY - Purchases or - Inaccurate recording of
capitalisation of assets equity and loan receipts
recorded inaccurately = or repayments.
overstatement. - Over or understatement
- Incorrect recording of of owners equity.
investment revenue - Overstatement of
and expenditure. expenditure due to
invalid recording of
finances
COMPLETENESS - Assets purchased are - Incomplete equity and
omitted from recording loan receipts or invalid
= understatement of recording of loan
assets. repayments =
- Incorrect recording of understatement of
investment revenue equity.
and expenditure. - Incomplete recording of
financing expenditure.

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QUESTION 2 (SUGGESTED SOLUTION) 15 Marks
PART 1: CONTROL OBJECTIVES FOR THE INITIAL RECEIPT OF THE LONG

TERM LOAN
To ensure that:
• The long-term loan is appropriately authorised and is allowed in terms of the
Companies Act. (1)
• The long-term loan relates to funds actually received by the business during
the current period. (1)
• The long-term loan is accounted for at the correct amount in the financial
records. (1) The long-term loan is classified correctly in the accounting
records. (1)
• The long-term loan is accounted for timeously in the accounting records. (1)
AVAILABLE: 5 MAXIMUM: 4
Communication skills: clear formulation “to ensure that” (1)
Note: No internal control objective for summarisation and posting is included as there is no
subsidiary ledger recording, no internal control objective for completeness (excluding timeliness) is
included as it is only one transaction that is recorded.
PART 2: INTERNAL CONTROLS FOR THE LOAN FROM ENTERTAINERS BANK
• The approval must be given at a directors’ meeting and noted in the minutes of
the meeting. (1)
• Before the decision is authorised, the following must be considered:
- Statutory requirements such as the Companies Act; (1)
- The company’s policy and Memorandum of Incorporation; (1)
- The estimated cash requirements of the company supported by cash flow
estimations and budgets. (1)
- Any other valid point. (1)
• Legal advice should be obtained to consider any legal implications for the
company. (1)
• Contracts with all relevant terms and conditions must be signed by an
authorised staff member of TGS (one of the directors), as well as a
representative from the party advancing the loan. (1)
AVAILABLE: 7 MAXIMUM: 6

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PART 3: AUTHORISATION VS INDEPENDENT REVIEW
Authorisation:
The approval by the board of directors of the specific property at the agreed price. (1)
Control objective(s): Validity (1)
Independent review:
The general ledger was updated with the purchase by the financial accountant (Mr
W.D. Wheeler) and this has been reviewed for accuracy and appropriateness by the
financial manager (Miss Zendaya). (1)
Control objective(s): Accuracy (1)

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9. ETHICS: RULES OF IMPROPER CONDUCT & AUDITING PROFESSION ACT
1. INTRODUCTION
Definitions
A. An Audit
• A systematic process of gathering and evaluating evidence and information
objectively to make evaluation.
• It uses assertions about economic actions and situations (made by
management of the entity), and
• Determines the correlation (of assertions) with predefined criteria, and
• The results are communicated in writing to users.
B. Ethics
• It is defined as a set of principles of right conduct and a theory or system of
moral values.
• Morality defines personal values, whereas ethics refers to a social system in
which those morals are practically applied.
• Ethics can be rule-based which uses strict guidelines and compliance, or
principle-based that uses key objectives to set out ethical values.
Risks a profession would be exposed to if there was no code of ethics:
• No communication of expectations and members would make decisions without guidelines

which would cause a variation in standards.
• It is difficult to hold someone accountable.
• The public’s trust and profession’s reputation can be damaged.

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C. Roles a CA(SA) can play
All these individuals will be registered with

SAICA.
D. Difference between SAICA and IRBA

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E. Registered auditor vs. non-registered auditor Deals with the individual
REGISTERED
• Individual s37
• Firm (partnership or company) s38
• Deregistered (firm or individual) s39
REGISTERED AUDITOR NOT A REGISTERED AUDITOR
Subject to: Applicable sections:
- RoIC
- APA - APA s41 = prohibitions if not
registered and no profit sharing.
Requirements for an RA:
- S41: Appointment, letterhead, sign
documents, perform audit, share
profits.
- S44: When RA may express
opinion, conflict of interest.
- S46: liability

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2. AUDITING PROFESSION ACT (APA)
APPLICABLE SECTIONS
S22 Limitation of liability
S37 Duties in relation to an audit
S38 Practice
S39 Termination of registration
S41 Committee for auditing standards
S44 Registration of individuals as registered auditors
S46 Registration of firms as registered auditors
Section 22: - Committee for auditing standards Composition and purpose
(1) The committee must consist of a minimum prescribed members appointed by

the Regulatory Board:
• Five registered auditors

• One person with the experience of business
• One person with the experience of teaching auditing at a university
• One person nominated by any stock exchange
• One person nominated by the Commissioner of SARS.
• One person nominated by the Registrar of Banks.
(2) The committee must assist the Regulatory Board:

• To develop, maintain, adopt, issue or prescribe auditing pronouncements;
• To consider relevant international changes; and
• To promote and ensure the relevance of auditing pronouncements.
(3) The committee may assist the Regulatory Board to influence the nature of
international auditing pronouncements.
Section 37 – Registration of individuals registered as RAs.

(1) An individual must apply on the prescribed application form to the
Regulatory Board.
(2) For successful registration the applicant must:

• Have completed the prescribed education, training and competency
requirements
• Have arranged for continuous professional development (CPD)
• Resident in the Republic
• Fit and proper person to practice the profession
• The applicant must pay a fee for the auditor’s name to be entered on the
register and he shall receive a certificate of registration.

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(3) The Board may refuse registration if: Not fit and proper
• Been removed from an office of trust on account of misconduct

• Convicted of theft, forgery, fraud, corruption and sentenced for imprisonment
• Incapable or unsound mind
• Is disqualified for registration under a sanction imposed under this act
• The applicant is an unrehabilitated insolvent if:
- He entered into a compromise with his creditors or,
- Was provisionally sequestrated.
Section 38 – Registration of firms as registered auditors

(1) The only firms that may be registered are:
(a) Partnerships of which all the partners are registered auditors
(b) Sole proprietors if the proprietor is a registered auditor
(c) Companies of which: Focus is on the individuals in the firm
• Only individuals who are registered auditors are shareholders;

• All shareholders are directors and all directors are shareholders;
• In the MOI it stated that all directors will be jointly and severally liable for
debts; and
• The articles of association state that the company may purchase any shares
from anyone who holds shares in the company.
Section 39 – Termination of registration

The Regulatory Board will cancel registration of an RA individual under the
following circumstances:
• Who, subsequent to registration becomes guilty of disqualifications in

S37(3) or,
• Whose registration was made in error or on information subsequently proved
to be false or,
• Who, prior to registration, has been guilty of improper conduct and therefore
not a fit and proper person to be an RA or,
• Whose estate is sequestrated or enters a compromise with creditors or,
• Who ceases to be a member of an accredited professional body.
• Prior to cancelling the registration, the board must give between 21 and 30
days’ notice.
• Where an RA is in a partnership, the sole proprietor or company, registration
automatically lapses when the RA contravenes S38(1).
• Registration of an RA automatically lapses when the RA fails to pay a
prescribed fee or portion thereof.

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• At written request of the RA, the Board must remove the RA’s name from the
register.
• Cancellation of registration does not exempt the RA from disciplinary
proceedings for conduct committed while registered.
• ASAP after cancellation of registration, the Board must publish a notice
specifying the RA’s name.
Section 41 – Practice
Only a registered auditor may engage in public practice or hold out as a registered auditor.
(1) A person who is not a registered auditor may not:

• Perform any audit
- An RA may provide instructions, control and supervision to non-RA’s during
the performance of an audit.
• Pretend to be a registered auditor,
• Use the title of a registered auditor,
• Make people believe that you are registered
Any person who is not a registered auditor

(3) However the above does not apply to:
is not prohibited from doing the following
• Internal Auditor as a title,
• Accountant as a title,
• A member of a club which is not carried out with the view to profit
- Provided that no fee is received (honorary auditor).
• Auditor general appoints a person to carry out an audit on his behalf (i.t.o.
Public Audit Act 20014).
(4) A Registered Auditor may not without consent of the board knowingly employ a
person to practice who:
• Was suspended from public practice, or

• Is not registered as registered auditor and was previously registered, or
• The board refused to register.
(6) A Registered auditor may not:

(a) Practice under a firm’s name or title unless on every letterhead bearing the
first name and title there appears:
• The first names or initials and surname of the registered auditor.

• In case of partnership, at least first names or initials and surname of
managing partners.
• In terms of a company, the names of the directors according to S171 of the
Companies Act.

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(b) Sign account, statement, report document unless work performed by:
• Him or herself, or
• Under his or her supervision or direction, or
• That of his or her partners.
• Must be in line with the relevant auditing standards.
(c) Perform audits unless there are sufficient risk management practices in
place.
(d) Engage in public practice if suspended from public practice, or
(e) Share in profits or practice in a partnership in respect of audit with a person
that is not registered with IRBA.
Section 44 – Duties in relation to an audit

(1) Where the RA which is firm is appointed to perform an audit:
• The firm shall assign an individual a RA who will be responsible and
accountable for the audit.
• The individual's name and surname must be made available to the firm (client)
and IRBA on request.
(2) The RA may not, without such qualifications as may be appropriate in the
circumstances, express an opinion unless (s44(3)):
(3) The following criteria is met:

a) Audit carried out free of restrictions whatsoever, in compliance with the
applicable auditing pronouncements.
b) The auditor is to satisfy him or herself of the existence of all assets and
liabilities in the financial statements.
c) Proper accounting records (complete) and have been kept in at least one of
the official languages of RSA.
d) All information, vouchers and documents necessary for the proper
performance of his duties were obtained.
e) Any reportable irregularity that existed at the date of the report, had been
properly disclosed and reported.
f) Where an undertaking is regulated by law, this must have complied with all
requirements of that law.
g) He or she has satisfied him or herself to the fairness, truth and correctness of
the financial statements.
When answering a question where the above criteria has been breached, end of the question as follows:
“As the above criteria has been breached, no audit opinion should have been issued.”

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(4) If the RA or if the RA is a member of a firm, he or she is responsible for the

bookkeeping of that firm,
• And this must be indicated on any report related to business or financial
affairs.
• As well as who prepared what.
(5) It is not regarded as keeping books if he or she only performs:

• Closing entries, or
• Assists with adjustments or
• Framing any financial statements.
(6) A RA may not conduct an audit if a conflict of interests exists.
Have awareness of this section

Section 45 – Duty to report irregularities
and know it briefly.
Definition of an irregularity
• Any unlawful act or omission committed by,
• Any person responsible for the management of an entity which,
• Has caused or is likely to cause financial loss to the following parties:
- The entity or its partner
- Members or stakeholders
- Creditors or investors.
• An irregularity is fraudulent or amounts to theft.
•
Represents a material breach of any financial duty owed to:
- The entity or its partner, member, stakeholder, creditor or investor,
- Under any law applying to the entity or the conduct of management thereof.
• Report to the IRBA otherwise there will be liability in terms of section 46.
Steps for reporting:
- First report to IRBA about the irregularity.

- Then tell the client and provide evidence within three days.
- The auditor must then discuss it with the client.
- Then send a second report to IRBA within a reasonable period.

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Section 46 – Limitation of liability

During an audit where an opinion, report or statement is made there will be no
liability unless:
• A third party relies on the opinion, report or statement and, A2S1
• Suffers a financial loss as a result of the above and,

• Can prove that opinion, report or statement is issued pursuant to a negligent
performance of the RA’s duties and the RA:
- Knew, or could reasonably have been expected to know, at the time of the
negligence,
- That the third party will rely on the opinion, report or statement and that they
will make decisions based on the reliance.
• There is a liability if there’s no reportable irregularity reported i.t.o. S45.
• May not limit or reduce liability that auditor may incur by means of an
agreement or any other way.
Q: When will an auditor have a liability under s46?
- If he is negligent in performance i.t.o standards.

- Malicious or fraudulent actions.
- Third party suffers financial loss as a result.
- Auditor knew the third party was reliant on the
opinion.
Then apply each of these to the specific scenario.

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Know details of sections but

3. RULES OF IMPROPER CONDUCT not the actual numbers
A. Introduction
B. Rules of improper conduct

i. Extent to which it applies:
• All members registered at IRBA (including IRBA trainees)
ii. A registered auditor is guilty of improper conduct if:

• Contravenes any laws or acts (APA, Any other Act in performance of
services).
• Dishonest in the performance of his duties or found guilty by court.
• Contravenes audit pronouncements or Professional Code of Conduct.
• Fails to perform services with the degree of professional competence, due
care, skill that is required.
• Tax evasion:
- Self or client
- Knowingly or recklessly
- Prepares or sign false statements (oral or writing) or false books or records.
• If the registered auditor's name is used or linked to an estimate of current
earnings based on future transactions in a way in which leads to the belief
that the registered auditor supports the accuracy of the estimate.
• Places a restraint of trade on a training accountant upon completion of his
contract.

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- Unless: It is for a period of less than a year from the date of ceasing to be
in the registered auditor's employment,
- For the act soliciting of professional services or accepting an
engagement of any kind from an existing client of that registered auditor.
• Where the registered auditor receives any payment or reward to cancel the
training contract of a new trainee accountant.
• Requests or orders are sent from IRBA and others:
- Not responding to the regulatory board within a reasonable time.
- Not comply with requests from the regulatory board within a reasonable
time.
• If the RA refuses to resign:
- From client, and transfer books or,
- Upon a Reportable Irregularity (APA)
• Failure to pay money due to IRBA
• Abandons practice without making any arrangements.
• Unprofessional behaviour that brings the auditing profession into
disrepute.
Receipt of payment is not allowed Restraint of trade is only allowed if

- For the cancellation of a training - Restraint < 1 year
contract - Soliciting
- By the trainee or other party - Professional services
- Any other engagement
- Existing client
C. Summary of contraventions (Rule 2.1-2.17)
Contravenes any Found guilty of Dishonest in

Contravenes any
act of provision of theft, fraud or performance of
other act.
the APA. forgery. duties.
2.1 2.2 2.3 2.4
Tax evasion either

Degree of
Contravenes for oneself or
Fails to comply professional
auditing others. Signs and
with Code (CPC). competency, care
pronouncements. prepares false
and skill.
2.5 2.6 2.7 records. 2.8
Contingent Restraint of trade Fails to respond to

earnings - name is on a prospective Payment for communication or
asscociated with RA for cancellation of requests from
estimate. 2.9 training contract. IRBA.
> 1 year 2.10 2.11 2.12
Fails, after
Fails to comply demand to pay Abandons public
Fails to resign on
wIth an order form money due to practice without
request of client.
from IRBA. IRBA (subcription notifying clients.
2.13 2.14
fee). 2.15 2.16
Behaviour brings
the profession into
disrepute.
2.17

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4. ADDITIONAL INFORMATION
Steps for answering a question
Tips:
State what was done right and what was done wrong – state which section it deals with and how it
was contravened.
Then do the following for both the APA and IRBA:
- List theory
- Apply it to the scenario
- Conclude
NB!
Get marks for stating what is not wrong, e.g. that the person is registered.
If section 2.1 of IRBA is contravened, then s44 of the APA act will always be contravened (2
marks).
Term 2 focus:
2.1-2.17 of RoIC and 7 sections of APA

RA’s and training contracts to be an RA

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10. ETHICS: CODE OF PROFESSIONAL CONDUCT
SAICA CONSTITUTION
DEFINITIONS
Associate • Has certain levels to complete.
• A person who has satisfied the requirements for associateship
pursuant to the By-laws and who has been granted associateship of
the Institute.
Student (Trainee • Busy with articles.

Accountant) • A person or learner who is in the permanent employment of a training
office and who is serving under a training contract.
• Trainee accountants do not have any rights to use any of the
designations reserved for the members of the Institute.
Membership, • Only a chartered accountant who is a member in good standing is

associateship & entitled to use the designations reserved for members of the Institute.
designations • Associates: Cannot do audits, they may only look at FS. They usually
take on a supervisory role.
• Trainee accountants do not have any rights to use any of the
designations reserved for the members of the Institute.
• No longer exists but there were two types of associates: College of general
accountants, College of accounting technicians.
• Completion of AAT certificate = Accounting Technician AAT (SA)
• Associate: College of General Accountants = Associate General
Accountant (South Africa) - AGA(SA)

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A. OBJECTIVES OF SAICA
• Promote the interests of the members of the Institute.
• Support the development of the South African economy
• Create a pipeline of trainee accountants who are representative of the
country’s economically active population.
• Advancement of accountancy.
• Preserve independence.
• Encourage a high standard of professional behaviour.
SAICA BY-LAWS
A. DISCIPLINARY PANEL AND PROFESSIONAL CONDUCT AND

DISCIPLINARY COMMITTEES
• Disciplinary panel consists of members of the Institute (of SAICA) to hear
disciplinary matters.
B. POWERS AND DUTIES OF PROFESSIONAL CONDUCT

• The committee shall consider any complaint which is brought against:
- A member, associate, trainee accountant or former member (accused)
- That may have committed an offence under these By-Laws.
• If the accused is registered with IRBA, the matter should be referred to IRBA.
C. POWERS AND DUTIES OF THE DISCIPLINARY COMMITTEE

• On receipt of a formal complaint:
- Give the accused notice of the intention to consider the complaint.
- The accused is given the opportunity of being heard before the Committee.
• Where investigated and found guilty through IRBA, specific terms will be
adhered to once referred to the Disciplinary Committee (see par 20.2).
D. RECORD AND PUBLICATION OF FINDINGS AND DECISIONS

• All findings and decisions of the Professional Conduct and Disciplinary
Committees shall take effect when they are made and shall be reported to the
Board (of SAICA).

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E. PUNISHABLE OFFENSES
PUNISHABLE OFFENSES Par 34

IRBA
1. Members of IRBA –
• Contravention of rules or regulations of IRBA.
• Current or former members of IRBA –
contravention of the foregoing if he or she were so to be registered with IRBA (APA 44 Duties).
CA(SA)
2. Gross negligence –
• in connection with any work performed in his or her profession or employment.
• (More reasonable than reasonable person expects)
3. Certifying or reporting without checking corrections.

• On accounts, statements, reports or other documents
• without taking reasonable steps
• to ensure the correctness of such certificate or report.
5. Commission paid
• directly or indirectly
• to any person, other than a member in public practice
• for bringing the member work.
6. Commission received
• without knowledge and consent of the client
• in respect of professional or commercial business referred to others.
7. Improperly obtaining work.
8. Advertise in a manner not permitted by the Rules or Code of Professional Conduct.
11. Failing to account for any money or property received for or on behalf of someone else.
12. Discreditable, dishonest or unworthy conduct.

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TRAINEE
14. Imposing restraints on trainee accountants

• Before or during period of training
• Impose a restraint
• Applicable after the contract.
15. Payment for of trainee accountants

• Directly or indirectly
• Money (payment) receive
• From trainee accountant or another person on his/her behalf
• For the cancellation of the trainee contract.
SAICA
4. Contravening the provisions of the Chartered Accountants’ Designation (Private) Act, No.
67 of1993
• only a CA(SA) may use the designation of CA(SA).
9. Refuse or fail to perform any of the provisions of the By-laws.
10. Breaching any Rules or Code of Professional Conduct (CPC)

• prescribed by the Board
• from time to time or
• after being previously warned, continuing to commit a breach.
13. Failing to comply with any regulation, By-law, article or Code of Conduct.
OTHER
16. Failing to resign when requested by client.
17. Failing to answer correspondence from Institute. (In reasonable time.)
18. Failing to comply within reasonable time with a requirement from the Institute.
19. Failing to pay any fees to the Institute.

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CODE OF PROFESSIONAL CONDUCT (CPC)
PART 1 – General application of Code
Accountants in business Accountants in public practice
• Professional accountants who are: • Public practice is defined in the CPC: ‘the
- employees, contractors, partners, or practice of a professional accountant who
directors and who are salaried places professional services at the disposal
employees or directors in an employing of the public for reward.’
organization and who may be involved in - Includes: professional services, including
preparing financial statements. accounting, auditing, taxation,
management consulting and financial
management services.
- Therefore, registered accountant at IRBA
as an RA will also fall within this
definition, i.e. provide auditing services.
DEFINITIONS (ET 11 – 20)

Assurance engagement Non-assurance engagement
• An engagement in which a CA in the public • Not reliable or credible

practise expresses a conclusion • E.g. Filling in a tax form or compiling
• designed to enhance the degree of Financial Statements.
confidence of the intended users
• other than the responsible party about the
outcome of the evaluation.
Direct financial interest Indirect financial interest
• Owned directly or under control of individual • No control and cannot influence investment
or entity. decision.
• Beneficially owned through collective • Can also be beneficially owned.
investment vehicle, estate or trust that can
influence investment decisions.

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Contingent fees Pre-determined fees
• Fee depending on a future event; not a fixed

fee.
• Not allowed for an audit.
• Calculated on a predetermined basis
relating to the outcome of a transaction or
the result of the services performed by the
firm.
Immediate family Close family
• Spouse or equivalent or dependant. • Parent, child (that is no longer dependent),

sibling.
• No immediate family.
Chartered accountant – business Chartered accountant – public practice
• Works anywhere other than public practice. • Provides professional services.

• E.g. bank
Professional services Professional activities
• Services requiring accountancy or related

skills performed by a CA, including:
- Tax
- Accounting
- Auditing
- Management consultancy
Audit Review
• A reasonable assurance engagement in • An assurance engagement, conducted in

which a accordance with international standards, in
• CA in the public practice expresses an which a
opinion • CA in the public practice expresses a
• whether financial statements are conclusion
prepared, in all material respects in • on whether anything has come to the CA’s
accordance with an applicable financial attention that causes the belief that the
reporting framework. financial statements are not prepared, in
all material respects in accordance with an
applicable financial reporting framework.
CPC: STEPS
STEP 1 STEP 2 STEP 3
Implement
Conceptual Evaluate level of steps to address
Framework threat threat(s)
1A: Identify Threats for 1B 1B: Fundamental Principles

• Self interest • Integrity
• Self-review • Objectivity
• Intimidation • Professional behaviour
• Familiarity • Professional competence
• Advocacy and due care
• Confidentiality

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STEP 1 – CONCEPTUAL FRAMEWORK

1A. IDENTIFY THREATS
Advocacy Self-review Intimidation

Promoting of a position of CA does not evaluate the CA is deterred from acting
a client to such an extent results of a prior decision objectively by real or
that objectivity might be or services delivered on perceived pressures,
compromised. which the CA will rely including attempts to
when forming judgement exercise undue influence
as part of a current over the CA.
FOCUS ON CLIENT service.
Familiarity
Fundamental Principles: Self-interest
Threat that CA become - Confidentiality
too sympathetic towards - Professional Financial or other interests
the interests of a client or - Competence of Chartered Accountant
too accepting of their work and Due Care can influence CA’s
due to a long or close - Professional judgement and/or
relationship with them. Behaviour behaviour improperly
- Integrity
- Objectivity
1B. FUNDAMENTAL PRINCIPLES
PROFESSIONAL COMPETENCE AND DUE INTEGRITY (S111)

CARE (S113)
• Straightforward & honest
• Requirement to (113.1): • Fair dealing & truthfulness
- Attain & maintain professional • Not associated with (111.2):
knowledge and skill - Materially false or misleading
- Act diligently in accordance with statements
applicable technical and professional - Furnished recklessly
standards - Omits or obscures which could be
• Maintenance: 113.1 A2 misleading
• Diligence to act in accordance with (113.1 - Not in breach of par 111.2 if a
A3): modified report is provided (111.2
- Requirements of an assignment A1).
- thoroughly
- careful
- on a timely basis OBJECTIVITY (S112)
• Take steps to ensure those working under
authority have (113.2): • Not compromise business judgement
- appropriate training & because of bias, conflict of interest or
- supervision undue influences.
• Make parties aware of limitations (113.3) • Avoid situations that impair objectivity.
CONFIDENTIALITY (S114)
PROFESSIONAL BEHAVIOUR (S115)

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NB! Always asked

CONFIDENTIALITY
A. Chartered Accountants are required to respect information acquired as a result

of professional and business relationships and:
• Be alert to inadvertent disclosure in social environment, business associate

and immediate family
• Maintain confidentiality of information:
- within firm or employing organisation.
- disclosed by a prospective client or employing organisation.
• The professional accountant should refrain from:

- Disclosing confidential information without specific authority
- Using confidential information for own personal advantage or for third
parties advantage. In respect of information obtained from prospective client
- Using or disclosing confidential information after relationship ended.
• Take reasonable steps to ensure that personnel in control or persons whose

advice and assistance was used respects confidentiality.
B. Exclusion paragraph: Circumstances where it may be required to disclose

confidential information:
• Permitted by law or authorised by client, for example:
- Production of documents in legal proceedings or
- Disclosure to public authorities of infringement (including reportable
irregularities – s45 APA)
• Professional duty or right to disclose if not prohibited by law:

- To comply with the quality review of the Regulatory Board or professional
body
- To respond to an inquiry or investigation by the Regulatory Board or other
regulatory body
- To protect the professional interests of a chartered accountant in legal
proceedings
- To comply with technical standards and the requirements of the Code
C. In deciding whether to disclose confidential information, consider:

• If the interest of all parties (including third parties) can be harmed if client
consents to disclosure.
• If all information is known and substantiated, and if not use professional
judgement to decide on the type of disclosure.
• Type of communication and to whom it is addressed.
• Are the recipients to whom the information is communicated to, appropriate?

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EXCLUSION PARAGRAPH
• With permission of the client
EXCLUSIONS • Legal obligation to disclose
• Professional duty
• Any parties interest harmed
DISCLOSURE CONSIDERATIONS • If information is known and substantiated
• Type of communication expected
• Recipient deems it appropriate
PROFESSIONAL BEHAVIOUR
A. Comply with relevant laws and regulations

• The professional accountant should avoid:
- Bringing the profession into disrepute by knowingly engaging in such
practices.
- Actions that bring that a reasonable informed third party would be likely to
conclude as having adverse effects on the reputation of the profession.
- How would a reasonable and informed third party have reacted weighing all
the specific facts and circumstances available?
Examples
Recruiting → May not directly or indirectly offer employment to an employee of another charted
accountant without informing the latter.
Responsibility to Colleagues → Promote good relations with other CA’s, help others to comply
with the code.
B. Publicity, advertising and solicitation

• Marketing and promoting themselves and their work
• They must not bring the profession in discredit or disrepute but must be
honest and truthful.
• Not make exaggerated claims for services able to offer, qualifications or
experience.
• Not disparaging references or unsubstantiated comparisons to the work of
others.
Examples
Material’s content and presentation:
• Objective
• Good taste
• Medium consistent with profession
Advertisements may refer to the basis on which professional fees are calculated, but hourly rates
are not allowed to be published.

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C. Multiple Firms
• Chartered Accountants may be associated with more
than one auditing or professional service firm, but there If not an RA, may not:
must be a clear distinction of the firms. • Perform audits
• May practice under different firms’ names for different • Present themself as RA
• Not use RA to describe
offices – as long as it is not misleading. themselves
• Must be distinction between firms and members who are • Lead people to believe
not registered, auditors. registered as RA
• Must comply with S 41(1) and/or S 41(2) of APA.
D. Signing convention of reports

• An accountant shall not delegate the power to sign an audit, review or other
assurance reports to any person who is not a partner or fellow director.
• Exceptions: If an emergency arises, in such a case the full circumstances for
the need to delegate must be reported to the client and IRBA.
• Any audit, review or report must contain:
- The accountant's full name
- The capacity in which the person is signing
- CA(SA) or other designation under the person’s full name
- Firms name of accountant if it is not set out on letterhead
E. Recruiting
• May not directly or indirectly offer employment to an employee of another
charted accountant without informing the latter.
F. Responsibility to colleagues
• Conduct in a manner which will promote co-operation and good relations.
• Help others to comply with the code.
• Co-operate with appropriate disciplinary authorities in applying the code.
STEP 2 – EVALUATE THE LEVEL OF THE THREAT

Identify the threat and assess the factors causing the threat

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STEP 3 – IMPLEMENT STEPS TO ADDRESS THE THREAT

Address threats by eliminating or reducing them to an acceptable level:
• Eliminate the circumstances creating the threat.
• Apply safeguards.
• Decline or end the specific professional activity.
If threat is too significant for safeguards to reduce threat to an acceptable

level:
• A chartered accountant in pubic practice must resign from the engagement.
• A chartered accountant in business must resign from the organisation.
THREATS FUNDAMENTAL PRINCIPLES
• Self-interest • Objectivity
• Self-review • Professional behaviour
• Familiarity threat • Competence and due care
• Advocacy threat • Integrity
• Intimidation threat • Confidentiality
Threats to
fundamental
principles
EVALUATE THREATS
• Qualitative and quantitative ADDRESS THREATS

factors
• Eliminating or reducing them
• Current policies and
• Eliminate circumstances,
conditions interests and relationships
• Corporate governance • Apply safeguards to reduce
• Education and training threats
• Complaint systems • Decline or end activity
• Reporting breaches
• Disciplinary systems
The professional accountant must:

• Exercise professional judgement
• Remain alert to new information and changes
• Use reasonable and informed third party test
Professional judgement Reasonable and informed third party test
• Application of relevant training, • Would the same conclusions be reached by

professional knowledge, skill and reasonable and informed third party?
experience.

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• Considerations: • Weighs all relevant facts and

- Concern that information is missing circumstances available at the time.
- Inconsistencies between facts and • Does not have to be professional
circumstances, and expectations accountant but relevant knowledge and
- If professional accountant’s expertise experience.
and experience is sufficient • Evaluates appropriateness of conclusions in
- Further consultation required an impartial manner.
- Information provides reasonable basis • Doesn’t need to be a professional but must
for conclusion be well informed.
- Preconceptions or bias
- Other possible reasonable conclusions
• Must have practical and theoretical

knowledge – must be trained or educated in
the field of work.
PART 2: Chartered accountants in business
Examples of threats
Advocacy Self-review Intimidation Familiarity Self-interest
• Opportunity to • Determining • Threat of • Responsible for • Financial

manipulate appropriate dismissal or financial interests, loans
prospective accounting replacement reporting when or guarantees.
information to treatment for over a family member • Incentive
obtain business disagreement makes compensation
favourable combination about decisions that arrangements.
financing. after performing application of an affect the • Inappropriate
feasibility study. accounting entity’s personal use of
(e.g. performing principle or the financial corporate
the feasibility way in which reporting. assets.
study on a new reporting on • Long • Gift or special
joint venture financial association with treatment
and then information is business offered from
deciding on the conducted. contacts supplier.
accounting • Dominant influencing • Holding shares
treatment of the personality business in the employing
joint venture.) attempting to decisions. company.
influence
decision-
making
processes.

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Evaluation of threats Family member refers to close or immediate family.
A. Conflict of interest
CONFLICT OF INTEREST – s210

THREAT • Conflict of interest creates a threat to objectivity and possibly
other fundamental principles.
EXPLANATION • The CA undertakes a professional activity related to a particular

matter for two or more parties whose interests regarding the
matter are in conflict.
• The interests of the CA regarding a particular matter and the
interests of a party for whom the CA undertakes a professional
activity related to that matter are in conflict.
DISCLOSURE • How threats were addressed to relevant parties.

AND • Consent from relevant parties (also implied).
DOCUMENTATION • Nature of conflict of interest.
FACTORS • The nature of relevant interests and relationships between

involved parties.
• The activity and its implication for involved parties.
• In general: more direct connections cause threats to be more
likely not at an acceptable level.
SAFEGUARDS • Withdrawing from decision-making process.

• Restructuring/segregating responsibilities and duties.
• Obtaining appropriate oversight.

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B. Preparation and Presentation of Information
PREPARATION AND PRESENTATION OF INFORMATION – s220

THREAT • Preparing misleading information creates self-interest and
intimidation threats to objectivity, integrity and professional
competence and due care.
EXPLANATION • Preparing misleading information creates self-interest and

intimidation threats to objectivity, integrity and professional
competence and due care.
• Prepare or present the information in accordance with a relevant
reporting framework, where applicable.
• Prepare or present the information in a manner that is intended
neither to mislead nor influence contractual or regulatory outcomes
inappropriately.
FACTORS • Not omit anything with the intention of rendering the information
misleading or of influencing contractual or regulatory outcomes
inappropriately.
• Exercise professional judgment to:
- Represent facts accurately and completely in all material
respects,
- Describe clearly the true nature of business transactions or
activities, and
• Classify and record information in a timely and proper manner.
SAFEGUARDS • Discuss concerns with superiors, management or those charged

with governance.
• Discuss the policies and procedures of the employing organisation
on how to address the matter internally (especially whistle-
blowing policies).
• Consulting with SAICA (a relevant professional body), the internal
or external auditor of the employing organisation and/or legal
counsel.
• Determining whether any requirements exist to communicate to
third parties, including users of the information and regulatory and
oversight authorities.
• If these safeguards cannot be implemented, the professional
accountant shall refuse to be or to remain associated with the
information.
• In such circumstances, it might be appropriate for a professional
accountant to resign from the employing organisation.

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C. Acting with sufficient expertise
ACTING WITHOUT SUFFICIENT EXPERTISE – s230

THREAT • Acting without sufficient expertise creates a self-interest threat to
compliance and due care.
FACTORS • The extent to which the professional accountant is working with

others.
• The relative seniority of the professional accountant in the business.
• The level of supervision and review applied to work.
SAFEGUARDS • Obtaining assistance from someone with the necessary expertise,

and
• Ensuring that there is adequate time available for performing the
relevant duties.
D. Inducements, including gifts and hospitality
INDUCEMENTS – GIFTS AND HOSPITALITY – s250

THREAT • Offering or accepting inducements might create a self-interest,
familiarity or intimidation threat, particularly to integrity,
objectivity and professional behaviour.
FACTORS • The nature, frequency, value and cumulative effect of the

inducement.
• Timing of when the inducement is offered relative to any action
or decision that it might influence.
• Whether the inducement is customary or cultural practice in
the circumstance.
• Whether the inducement is an ancillary part of a professional
service.
SAFEGUARDS • Inform senior management or those charged with governance

of the employing organisation.
• Amend or terminating the business relationship with the
offeror.

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PART 3: Chartered accountants in public practice
Examples of threats
Advocacy Self-review Intimidation Familiarity Self-interest
• Threatened with • Direct financial
• Promoting the • Issuing an dismissal or Member of the interest in
interests or assurance replacement engagement team assurance
shares of a report on the from client has: client.
client. effectiveness of engagement. • Quoting such a
• Acting as an the operation of • Feeling • Close/immediat low
advocate on financial pressured to e family who is engagement fee
behalf of an systems after agree with director/officer that it might be
audit client in designing or client’s at client. difficult to
litigation/dispute implementing judgement as • Director/officer/ perform
s with third the systems. client has more employee with according to
parties. • Preparing the expertise. significant requirements.
• Lobbying in original data • Threat by influence • Significant close
favour of used to partner that recently served business
legislation on generate planned as engagement relationship with
behalf of client. records that are promotion will partner. assurance
the subject not occur. • Long client.
matter of the • Accepted a association with • Having access
assurance significant gift assurance to confidential
engagement. from a client, client. information
and now which can be
threatening to used for
make personal gain.
acceptance • CA discovering
public. significant error
when evaluating
results of
previous
professional
service
performed by
member of CA’s
firm.

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Examples of safeguards
A. Conflict of interest
CONFLICT OF INTEREST – s310

THREAT • Threat to objectivity may be created when a CA competes
directly with a client or has a joint venture or similar
arrangement with a major competitor of a client.
• A threat to objectivity or confidentiality may also be created
when a CA performs services for clients whose interests are in
conflict or the clients are in dispute with each other in relation to
the matter or transaction in question.
FACTORS • Before accepting a new client, engagement or business

relationship the professional accountant shall:
- Take reasonable steps to identify conflict of interest.
- Identify the nature of interests and relationships as well as the
service and its implications for relevant parties.
• The existence of separate practice areas for speciality functions
within the firm – which may act as a barrier for passing
confidential information.
• Policies and procedures to limit access to client files.
• Confidentiality agreements signed by personnel and partners.
• Separation of confidential information physically and
electronically.
• Specific and dedicated training and communication.
DISCLOSURE • Disclosure and consent may take different forms:

AND - General disclosure to clients that a professional accountant
DOCUMENTATION cannot provide professional services exclusively for one client.
- Specific disclosure to affected clients of the conflict of interest
and how threats will be addressed – enabling the client to
make an informed decision.

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- Implied consent by the client’s conduct after a detailed

presentation of the circumstances has been made to the client
and if they do not raise an objection to the existence of the
conflict.
SAFEGUARDS • Having separate engagement teams who are provided with

clear policies and procedures for maintaining confidentiality.
• Having an appropriate reviewer who is not involved in
providing the service or affected by the conflict of interest that
can review the work and assess key judgements.
• Notifying the client of the firm’s business interest or activities
that may represent a conflict of interest and obtaining their
consent in writing to act in such circumstances.
• Notifying all known relevant parties that the CA is acting for
two or more parties in respect of a matter where their respective
interests are in conflict and obtaining their consent to so act
• Where a conflict of interest creates a threat cannot be
eliminated or reduced the CA shall not accept a specific
engagement or shall resign from one or more conflicting
engagements.
B. Professional appointments
CLIENT ACCEPTANCE s320.3
THREAT • Client may be involved in illegal activities, dishonesty, questionable
financial reporting practices or unethical behaviour.
• Creates a self-interest threat to integrity or professional
behaviour.
• If the engagement team does not process or cannot acquire
competencies to perform professional services:
- Creates a self-interest threat to professional competence
and due care.
FACTORS • Knowledge and understanding of the client, the industry, the

owners, management and those charged with governance and
business activities.
• The client’s commitment to addressing the questionable issue, for
example through improving corporate governance practices and
internal control.
• Experience with relevant regulatory and reporting requirements.
• There must be an appropriate understanding of:
- The nature of the client’s business
- The complexity of its operations
- The requirements of the engagements, and
- The purpose, nature and scope of the work.
- Knowledge of relevant industries.
- Experiences with relevant regulatory or reporting requirements.

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SAFEGUARDS • Assigning enough engagement personnel with the required

competencies.
• Agreeing on a realistic time frame for performance.
• Using experts where needed.
CHANGES IN PROFESSIONAL APPOINTMENT s320.4-8

THREAT • If a threat created by facts and circumstances cannot be corrected
by applying a safeguard.
• Self-interest threat to compliance with the principle of professional
competence and due care if:
- An account accepts the engagement before knowing all the
facts.
- Acts on incomplete information.
-
FACTORS • Whether the client states before accepting the engagement contract
that contact with the previous accountant must be requested in order
to obtain relevant information.
SAFEGUARDS • Asking the current or previous account to provide any known

information that the proposed accountant should be aware of before
accepting the engagement.
• Obtaining information through other sources such as inquiries of
other parties or background investigations of senior management
and governance of the client.
• The proposed accountant shall treat information in confidence and
give weight to any information provided by the existing accountant.
ADDITIONAL • Confidentiality should be respected during changes in

appointment.
• The new accountant needs the client’s permission to initiate
discussions with the previous auditor.
• The old accountant must ensure the client’s permission is obtained
and also whether the legal and ethical requirements are met.
• If the client refuses permission, the new auditor should decline the
position, unless there are exceptional circumstances.
• Other means of enquiry include: Third parties and performing
background checks.
• If it is a recurring client engagement – must continuously review
whether to continue with the engagement.
• If the work of an expert is used:
- Determine whether the use is warranted.
- The skills, resources and experience of the expert.
- Their ethical standards and reputation.

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C. Second Opinions
SECOND OPINIONS – s321

THREAT • A self-interest threat to the compliance with the principle of
professional competence and due care can be created if the
second opinion is based on inadequate information.
FACTORS • The circumstances of the request and all the other available facts
and assumptions relevant to the expression of a professional
judgement.
SAFEGUARDS • With permission from the client, obtaining information from the
existing or predecessor accountant.
• Describing the limitations surrounding any opinion in
communications with the client.
• Providing the existing or predecessor accountant with a copy of the
opinion.
D. Fees and other types of remuneration

LEVEL OF FEES s330.3
THREAT • The level of fees creates a self-interest threat to compliance with
the principle of professional competence and due care if the fee
quoted is so low that it might affect the ability to perform the
engagement up to the expected standards.
FACTORS • Whether the client is aware of the terms of the engagement and the
basis on which the fees are charged.
• Whether the level of the fee is set by an independent third party
such as a regulatory body.
SAFEGUARDS • Adjusting the level of fees or the scope of the engagement.

• Having an appropriate reviewer to assess the work performed.
CONTINGENCY FEES – s330.4

THREAT • These are fees charged for certain non-assurance services which
create a self-interest threat to objectivity.
FACTORS • The nature of the engagement and the range of possible fee
amounts.
• The basis for determining the fee.
• Disclosure to the intended users of the work performed.
• Quality control policies.
• Whether an independent third party is used to review the outcome
and set the level of fee.

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SAFEGUARDS • Having an appropriate reviewer who is not involved in performing

the non-assurance service review.
• Obtaining an advance written agreement with the client on the basis
of remuneration.
REFERRAL FEE OR COMMISSION – s330.5

EXPLANATION • A fee is paid to another accountant for the purposes of obtaining
new client work if the accountant requires specialist services not
offered.
• A fee received for referring a continuing client to another accountant
or expert if the existing accountant cannot provide the services
required.
• Commission received from a third party in connection with the sale
of goods or services of the client.
• NB! An accountant shall not charge contingent fees for the preparation of
or amendment to any tax returns as contingent fees for these services
create a self-interest threat to objectivity that cannot be eliminated and
safeguards are not capable of reducing the threat.
THREAT • A self-interest threat to compliance with the principles of

objectivity and professional competence and due care is
created if the accountant:
- Pays or receives a referral fee or,
- Receives commission relating to a client.
FACTORS • Whether the client is aware of the terms of the engagement and the
basis on which the fees are charged.
• Whether the level of the fee is set by an independent third party
such as a regulatory body.
SAFEGUARDS • Obtaining an advanced agreement upfront and in writing from the

client for commission agreements.
• Disclosing to clients upfront and in writing any referral fees or
commission agreements paid to or received from other accountants.
E. Inducements, including Gifts and Hospitality

INDUCEMENTS INCLUDING GIFTS AND HOSPITALITY – s340
INDUCEMENTS WITH INTENT TO IMPROPERLY INFLUENCE BEHAVIOUR
THREAT • Self-interest or familiarity threat is created to integrity,
objectivity and professional behaviour when an auditor or their
immediate family is offered gifts by a client.
• An intimidation threat to objectivity is created when the client
threatens to make these offers public.

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FACTORS • The intention behind the gift.

• The nature, frequency and value
• The timing of when it is given
• Whether it is customary or cultural or an ancillary part of the service
• The degree of transparency
• Whether it is limited to the recipient or available to the broader
group
• Apply the reasonable third-party test
SAFEGUARDS •
Informing senior management who are charged with governance of
the client regarding the offer.
• Amending or terminating the business relationship with the client.
INDUCEMENTS WITH NO INTENT TO IMPROPERLY INFLUENCE BEHAVIOUR
THREAT • Self-interest or familiarity threat is created to integrity,
objectivity and professional behaviour when an auditor or their
immediate family is offered gifts by a client.
• An intimidation threat to objectivity is created when the client
threatens to make these offers public.
EXPLANATION • Self-interest: The auditor is offered hospitality from a client while

providing services.
• Familiarity: Regularly takes the client to sporting events.
• Intimidation: Accepts hospitality – the nature of which could seem
inappropriate if publicly disclosed (RTP).
• Whether it is limited to the recipient or available to the broader
group
• Apply the reasonable third-party test
SAFEGUARDS • Declining the offer (eliminates)

• Transferring the service to another auditor whose connection with
the client would not be deemed to be inappropriate (eliminates).
• Being transparent with senior management (reduces).
• Registering the inducement in a log monitored by senior
management (reduces).

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F. Custody of client assets

CUSTODY OF CLIENT ASSETS – s350
BEFORE TAKING CUSTODY
THREAT • A self-interest threat to professional behaviour and objectivity can
arise from holding client’s assets while providing services to them.
SAFEGUARDS • Make enquiries about the source of the assets and

• Consider legal requirements such as the client’s proof of residence
and identification as set out by FICA.
AFTER TAKING CUSTODY

THREAT • A self-interest threat to professional behaviour and objectivity can
arise from holding client’s assets while providing services to them.
EXPLANATION • A professional accountant is required to:

- Comply with the relevant laws and regulations
- Keep the assets separate from personal and firm’s assets
- Use the assets only for their intended use
- Be ready at any time to account for the assets
• For all client’s monies for which the accountant is liable:
- The monies cannot be referred to as being in a ‘trust account’ =
misleading.
- Separate bank accounts must be registered
- The accounts must be separately named
- The money must be deposited into an appropriate bank account
without any delay
- All records must be maintained and readily available
- Reconciliations between the designated bank account and the
client’s monies ledger accounts.
- The money should not be held indefinitely
• For property other than money for which the accountant is
liable:
- The monies cannot be referred to as being in a ‘trust account’ =
misleading.
- All records must be maintained and readily available
- All documentation should be safeguarded against unauthorised
use.
SAFEGUARDS • Utilise umbrella accounts with sub-accounts for each client.

• Open separate accounts with power of attorney if the money is kept
for long periods.
• Ensure the firm’s indemnity and fidelity insurance is sufficient, and
• The risks and responsibilities should be addressed in an
engagement letter if there is one.

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PART 4A – Independence for audit and review arrangements

• Assurance engagement (Audit or Review)
• Mainly deals with management decisions
• During the engagement period and financial period being audited
EXAMPLES OF THREATS TO INDEPENDENCE

410 Fees, compensation and evaluation policies
420 Gifts and hospitality
510 Financial interest
511 Loans and guarantees
520 Business relationships
521 Family and personal relationships
522 Recent services with audit client
523 Serving as director or officer of an audit client
524 Employment with an audit client
525 Temporary personnel assignments
540 Long association of senior personnel
600 Provision of non-assurance services to audit clients
DEFINITIONS
• Independence (Individual or firm)
INDEPENDENCE OF MIND INDEPENDENCE IN APPEARANCE
The state of mind that permits the The avoidance of facts and circumstances
expression of a conclusion without being that are so significant that a reasonable
affected by influences that compromise informed third party (RTP) would be likely to
professional judgement, thereby allowing conclude that a firm or an audit or
an individual to act with integrity and to assurance team member’s integrity,
exercise objectivity and professional objectivity or professional scepticism
scepticism. has been compromised.
Independence = objectivity + integrity

Audit = positive assurance + reliable information
Review = negative assurance + feasible information
A. Fees
FEES – RELATIVE SIZE – s410
THREAT • Self-interest or intimidation threat might be created for
independence (objectivity) when the total audit fees of a client
represent a large part of the firm’s total income.
FACTORS • Operating structure of the firm

• Whether the firm is well established or new
• Significance of the client qualitatively and or quantitatively to the
firm.
SAFEGUARDS • Increase the client base

• Have an appropriate reviewer

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OVERDUE FEES– s410.7

THREAT • Self-interest threat might be created for independence if the fees
are due by the client and not settled before the auditor’s report for
the following year is issued.
FACTORS • Whether the overdue fees are regarded as a loan to the client
SAFEGUARDS • Obtaining partial payment of overdue fees
• Having an additional professional accountant who was not on the
audit team who reviewed the work.
B. Gifts and Hospitality

GIFTS AND HOSPITALITY – s420
THREAT • Self-interest, familiarity or intimidation threat to the compliance
with the fundamental principles of integrity, objectivity and
professional behaviour.

• Whether it is limited to the recipient or available to the broader group
SAFEGUARDS • Do not accept gift

• Policy to prevent accepting gifts
• Any gifts accepted must be approved by firm’s quality review panel
and senior management must be informed.
• Amending or terminating the business relationship with the client.
C. Financial interest
SHARES – s510
EXPLANATION • Financial interests may include direct and material indirect financial
interest in the client held by an audit team member, immediate
family members of the team or the audit firm.
• Includes owning shares and collective investments.
THREAT • Creates a self-interest threat to independence.
FACTORS • The role of the person holding the interest

• Whether it is a direct or indirect interest
• The materiality of the interest
SAFEGUARDS • Selling the direct financial interest or selling a sufficient portion of

the material indirect financial interest in order to make it immaterial
to the accountant and their close or immediate family.

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• Having another professional accountant review the work done by

the accountant with the interest.
• Removing the individual who is faced with self-interest threats.
D. Loans and guarantees

LOANS AND GUARANTEES – s511
EXPLANATION • This applies to the firm, individuals on the audit team and their
immediate family members.
• If the audit client is a bank or similar institution:
- The firm may only have a loan or deposits or a brokerage
account unless it is made under normal lending conditions and
procedures.
- However, if it is material to the client it may still create a self-
interest threat.
• If the audit client is not a bank or similar institution:
- The firm shall not have a loan from the client or any director or
officer of the client unless the loan is immaterial to the firm and
client.
THREAT • Creates a self-interest threat to independence.
FACTORS • The materiality of the loan or guarantee to the individual and their
immediate family members.
SAFEGUARDS • Having the work reviewed by an appropriate reviewer who is not an

audit team member and is not a beneficiary to the loan.
E. Business relationships
BUSINESS RELATIONSHIPS – s520
EXPLANATION • Examples include:
- Financial interest in a joint venture
- Arrangements to combine one or more products or services
- Distributing or marketing arrangements for the client or firm
THREAT • Creates a self-interest or intimidation threat to independence if

there is a close business relationship between the client,
management or the immediate family of the audit team member.
FACTORS • The materiality of the financial interest and,

• The significance of the business relationship.
SAFEGUARDS • Having the work reviewed by an appropriate reviewer who is not an

audit team member and is not a beneficiary to the loan.
• Eliminating or reducing the magnitude of the transaction.
• Removing the individual from the audit team.

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F. Family and personal relationships

FAMILY AND PERSONAL RELATIONSHIPS – s521
THREAT • Self-interest, familiarity or intimidation threat might be created
by family and personal relationships threat to independence
(objectivity).
FACTORS • The nature of the relationship between the audit team member and
close family member.
• The position held by the close family member.
• The role of the audit team member.
SAFEGUARDS • Remove the individuals from the audit team

• Structuring the responsibilities of the audit team so that the team
member does not deal with matters relating to close family
members.
ADDITIONAL • Close or immediate family members of an audit team member is:

- A director or officer of the audit client
- An employee in a position to exert significant influence over the
preparation of client’s accounting records or the financial
statements.
G. Recent services with an audit client

RECENT SERVICE WITH AN AUDIT CLIENT – s522
THREAT • Creates a self-interest, self-review and familiarity threat if an
audit team member has recently served as a director, officer or
employee of the audit client.
FACTORS • The position of the individual held with the client

• The length of time since the individual left the client
• The role of the audit team member
SAFEGUARDS • The audit team should not include an individual who at any time
during or before the audit report served as a director, officer or
employee to the client where they would have been able to exert
significant influence on the decisions.
• Have an appropriate reviewer review the work performed by the
audit team member.

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H. Serving as a director or officer of an audit client

SERVING AS A DIRECTOR OR OFFICER OF AN AUDIT CLIENT – s523
EXPLANATION • The Code forbids an employee or partner of an audit firm to act as
an officer or director of an audit client.
• They shall also not serve as a company secretary for an audit
client of the firm. (See exceptions)
THREAT • Director or officer: Self-review and self-interest threats for

objectivity are created.
• Secretary: Self-review and advocacy threats.
• Therefore, it is too significant for a safeguard to bring the threat to
an acceptable level.
EXCEPTIONS • Specifically allowed by local laws and professional rules and,

• Management makes all the decisions and
• Company secretary’s responsibilities are limited to routine and
administrative tasks.
I. Employment with an audit client

EMPLOYMENT WITH AN AUDIT CLIENT – s524
EXPLANATION • A significant connection remains between the firm and the
individual, unless:
- The individual is not entitled to any benefits or payments
- Any amount owed to the individual is not material.
- The individual no longer participates in any related business
activities.
THREAT • Creates a self-interest, self-review and familiarity threat if the

member was a director, officer or an employee with significant
influence.
FACTORS • The position of the individual held with the client

• The involvement of the individual in the audit team
• The length of time since being a member of the team
• The former position of the individual within the team or firm.
SAFEGUARDS • Modifying the audit plan

• Having an appropriate reviewer to check the former team’s work
• Assigning to the audit team to individuals who have sufficient
experience relative to the individual who joined the client

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J. Temporary personnel assignments

TEMPORARY PERSONNEL ASSIGNMENTS – s525
EXPLANATION • A firm shall not loan personnel to an audit client unless
- It is for a short period of time
- The personnel are involved in providing non-assurance services
- The personnel do not assume management responsibility
THREAT • The loan of personnel to an audit client creates a self-review,

advocacy or familiarity threat.
FACTORS • It may be acceptable if the secondment is only for a short time or,
• If the staff member is not involved in management or non-assurance
activities
• In certain secondments, the firm becomes too closely linked to the
audit client – in which case it should not take place.
SAFEGUARDS • Conducting an additional review of the work performed by the

loaned person to address a self-review threat.
• Not including the loaned personnel as an audit team member to
address a familiarity or advocacy threat.
K. Long association with audit client

LONG ASSOCIATION OF SENIOR PERSONNEL WITH CLIENT – s540
THREAT • Familiarity and self-interest threats for objectivity will be created
if person is on audit for a long period of time.
FACTORS • The length of time that the individual has been on the team
• The role of the individual on the team
• The extent work is directed, reviewed and supervised by senior
personnel
• ability to influence outcome of audit
• closeness of relationship
• nature, frequency and extent of interaction
• Whether the nature and complexity of the client’s accounting and
reporting issues have changed
• Whether the client’s management team has changed
• structural changes in client’s organisation impacting nature,
frequency and extent of interaction
SAFEGUARDS • Changing role of individual on audit team or nature and extent of

tasks
• Rotate senior staff off the engagement team
• Appropriate reviewer
• Regular independent internal or external quality reviews

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L. Provision of non-assurance services to an audit client

PROVISION ON NON-ASSURANCE SERVICES – s600
THREAT • Creates a self-review, self-interest and advocacy threat for
objectivity and independence.
• Remember if it is so significant that safeguards cannot reduce the
threat, the engagement must be rejected.
FACTORS • Type of client (audit client, public interest etc.)

• Type of non-assurance services to be provided (e.g. tax services)
• Who provides the non-assurance service
• The extent to which the non-assurance service impacts the financial
statements and internal controls
• The level of expertise of the client’s employees with respect to the
service provided
SAFEGUARDS • The person performing the services may not be on the audit team
• Procedures and policies prohibit participation in management
decisions
• Source documents must be prepared by client
• Audit committee must approve appointment members of the team
• A senior staff member with experience and who is not on the audit
team must review the work of that person.

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Ethics: Useful memos to study
Confidentiality
The disclosure of confidential information creates a self-interest threat for

confidentiality and professional behaviour. (3)
Sec 114.1 of the CPC requires of a professional accountant to comply with the
principle of confidentiality, which requires a professional accountant to respect the
confidentiality of information acquired as a result of professional and business
relationships, and (1)
Not use or disclose any confidential information, either acquired or received as a result
of a professional or business relationship, after that relationship has ended. (1)
The disclosure of information is only permitted in the following circumstances:

• Disclosure is required by law; (1)
• Disclosure is permitted by law and is authorised by the client or the employing
organisation; or (1)
• There is a professional duty or right to disclose, when not prohibited by law. (1)
In the consideration of whether confidential information should be disclosed, the

following factors must be considered:
• Whether the interest of parties will be harmed if the information is disclosed. (1)
• Whether the information is known and substantiated. (1)
• The type of communication expected. (1)
• Whether the person is an appropriate recipient. (1)
Miki should apply the confidentiality principle in M&M and consequently not share
information with Mini because she is his partner. (1)
The information Miki disclosed relates to a former client. The obligation of
confidentiality is of long duration even after conclusion of the audit. (1)
In this scenario, the disclosure of the information is not appropriate, since:

▪ Pluto Ogies Limited (Pluto) did not give Miki permission to disclose the information;
(1)
▪ The disclosure of the information relating to Pluto’s future growth, was not
requested by legislation, and (1)
▪ There isn’t a professional obligation on Miki to disclose the information. (1)
Miki did not consider the following before disclosing the information:
• The client, Pluto’s, interest were harmed when information regarding the potential
growth of his business was disclosed. (1)
• The information in respect of the possible growth of Pluto is not known and not
substantiated. (1)
• The information was disclosed in the cafeteria of the firm, while Miki and Mini were
drinking coffee, which is not an appropriate means of communication. (1)
• Miki’s partner, Mini, is not suitable receiver of information. (1)

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Therefore the level of the threat will be significant. (1)
No safeguards will decrease the threat to an acceptable level and consequently the
information must not be disclosed. (1)
AVAILABLE: 23
MAXIMUM: 20
Communication skills: layout and structure (1)
Marketing of professional services
This situation could create a self-interest threat to professional behaviour. (2)
The CPC S115 requires Professional Behaviour of professional accountants, also

when undertaking marketing or promotional activities:
• to conduct it in a way that does not bring the profession in discredit (1)
• to be honest and truthful (1)
• not to make exaggerated claims in relation to services, qualifications or
experience, (1)
• not to make any disparaging references or unsubstantiated comparisons to
the work of others. (1)
In this scenario:
• Chrome Partners’ marketing campaign includes a statement that brings the
profession into disrepute by their actions, (1)
• Chrome Partners makes an exaggerated claim and (1)
• a disparaging reference by making the statement that they “provide the best
services at the best prices, by the best specialists”. (1)
Therefore the level of this threat is significant. (1)

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Pressure to breach the fundamental principles S270
The pressure put on Zaid creates an intimidation threat to professional competence

and due care (CPC 270.2). (2)
A professional accountant shall not allow pressure from others to result in a breach of
compliance with the fundamental principles (CPC R270.3). (1)
Factors that are relevant in evaluating the level of threats created by pressure include:
• The intent of the individual who is exerting the pressure and the nature and extent
of the pressure. (1)
• The application of laws, regulations, and professional standards to the
circumstances. (1)
• The culture and leadership of the employing organisation including the extent to
which they reflect or emphasise the importance of ethical behaviour and the
expectation that employees will act ethically. (1)
• Policies and procedures, if any, that the employing organisation has established,
such as ethics or human resources policies that address pressure. (270.3 A4)
(1)
Furthermore, discussing the circumstances might assist the professional accountant

to evaluate the level of the threat. These discussions include:
• Discussing the matter with the individual who is exerting the pressure to seek to
resolve it. (1)
• Escalating the matter within the employing organisation, including when
appropriate, explaining any consequential risks to the organisation, for example
the internal or external auditors or those charged with governance. (1)
• Disclosing the matter in line with the employing organisation’s policies, including
ethics and whistleblowing policies. (1)
• Consulting with a colleague, superior, human resources personnel, or another
professional accountant; relevant professional or regulatory bodies or industry
associations; or legal counsel. (1)
In this scenario:
• The intent of Mr Julius is to pressure Zaid in order to breach the fundamental
principles. (1)
• The CPC contains specific requirements for professional accountants for acting
with sufficient expertise, and in preparing and presenting financial information. (1)
• The leadership style of Julius does not promote ethical behaviour. (1)
• There is no indication or policies or procedures which address the pressures. (1)
Therefore the level of the threat is significant. (1)

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Custody of client’s assets
In terms of SAICA’s Code of Professional Conduct:

Holding client assets can create a self-interest threat to professional behaviour and
objectivity (CPC 350.2). (3)
Money for clients held should be accepted only if the law permits and able to comply
with legal duties (R350.3). (1)
As part of client and engagement acceptance procedures related to assuming custody

of client money or assets, a professional accountant shall:
Make inquiries about the source of the assets, and (1)
Consider related legal and regulatory obligations. (1)
The CPC also requires of the professional accountant to (R350.4):

• comply with laws and regulations relevant to holding and accounting for the
assets; (1)
• keep assets separate from the firm or personal money; (1)
• only be used for the purpose for which it was intended; and (1)
• must be ready at all times to account for the assets and any income,
dividends or gains generated (1)
In this scenario:
• The source of the money is from the sale of Annie’s business. (1)
• Comply with laws and regulations relevant to holding and accounting for the
assets (1)
• The money was deposited into Adrian’s personal account. (1)
• Adrian did not follow the instruction of only using the Australian supplier. (1)
• Adrian could not provide the records for his transactions. (1)
Therefore the level of the threat is significant. (1)
No steps can be taken to bring the level of the threat to an acceptable level. (1)
In terms of IRBA’s Rules of Improper Conduct:

Adrian is guilty of unprofessional conduct and brought the auditing profession into
disrepute with his actions. (1)
Therefore he is in violation of IRBA’s Rules of Improper Conduct. (1)
Furthermore, by contravening the requirements of SAICA’s Code of Professional

Conduct, he also violated the Rules for Improper Conduct. (1)
AVAILABLE: 18
MAXIMUM: 15
Communication skills: Layout and structure (1)

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ETHICS: Code of Professional Conduct Section Overview

PART 2: Chartered Accountants in business
210 Conflict of interest

- Objectivity
220 Preparation and Presentation information

- Self-interest - Objectivity
- Intimidation - Integrity
- Professional competence & due
care
230 Acting with sufficient expertise

- Self-interest - Compliance and due care
240 Financial interests
250 Inducements, including gifts and hospitality

- Self-interest - Integrity
- Familiarity - Objectivity
- Intimidation - Professional behaviour
270 Pressure to breach fundamental principles
PART 3: Chartered Accountant in public practice
310 Conflict of interest

- Objectivity
- Confidentiality
320 Professional appointments

• Client acceptance
• Changes in professional appointments
- Professional behaviour
- Professional competence and
due care
321 Second Opinion

- Self-interest - Principle of Professional
competence and due care
330 Fees
• Levels of fess
• Contingency fees
• Referral fee or commission

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- Self-interest - Principle of Professional

competence and due care
- Objectivity
- Principles of Objectivity and

Professional competence and
due care
340 Inducements, including Gifts and Hospitality

350 Custody of client assets

• Before taking custody
• After taking custody
- Self-interest - Professional behaviour
- Objectivity
Part 4A: Independence for audit and review arrangements
410 Fees
• Relative size
• Overdue fees
- Self-interest - Independence (objectivity)
- Intimidation
420 Gifts and Hospitality

510 Financial interest

• Shares
- Self-interest - Independence
511 Loans and guarantees

520 Business relationships

- Intimidation
521 Family and personal relationships

- Self-interest - Independence (objectivity)
- Familiarity
- Intimidation

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522 Recent services with an audit client

- Self-interest
- Self-review
- Familiarity
523 Serving as a director or officer of an audit client

- Self-review - Objectivity
- Self-interest
524 Employment with audit client

- Self-interest
- Self-review
- Familiarity
525 Temporary personnel assignments

- Self-review
- Advocacy
- Familiarity threat
540 Long association with audit client

- Self-interest
600 Provision of non-assurance services to an audit client

- Self-review - Objectivity
- Advocacy

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11. PRE-ENGAGEMENT ACTIVITIES
Learning outcomes
• Provide an overview of the audit process – not in detail
• List & practically discuss the considerations before accepting an engagement (20 marks)
• Explain the purpose of an engagement letter – not in detail (tutorial in question pack)
• List the content of an engagement letter – not in detail (tutorial in question pack)
Objectives of an audit
• To obtain reasonable assurance whether the

• Financial statements
• As a whole are free from material misstatements, whether due to fraud or error
• Enabling the auditor to express a (professional) opinion whether the
• AFS as prepared in all material aspects
• In accordance with an applicable financial reporting framework (IFRS)
Materiality: can influence economic decisions of users.
Professional opinion
• The opinion has to be supported by evidence.

• The opinion carries weight because of the profession of the auditor
- Professional bodies (SAICA, IRBA)
- Academic knowledge (PGDA, ITC, APC)
- Practical application of knowledge
• Users “trust” auditor’s opinion

- Why? Professionalism, independence.
- Code of Ethics: live by fundamental principles.
What the auditor needs to know
• Accounting knowledge (IFRS)

- Client prepares the AFS using IFRS, thus auditor need to know IFRS, i.e. know what you
are checking.
• Auditing Standards (ISA’s)
- ISA’s provide steps auditor must follow throughout the audit process.
• Ethical Requirements (CPC)
- All actions and decisions made by the auditor to uphold the principles of SAICA and the
CPC.
Principles
• Audit strategy – establishes and documents in broad and general terms (big picture): scope,
timing, direction.
• Audit plan – establishes the nature (what), timing (when) and the extent (how much) of the
audit procedures necessary to perform risk assessment procedures, respond to risk and
comply with other requirements of the ISA. (Detailed execution of the strategy)
• Audit process – see below.

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Overview of the Audit Process
Activities: • Knowledge & Audit approach Evaluate, conclude &

understanding of (Combination depends report
1. Investigate client
the business (ISA on audit approach) • Overall review
(new and existing)
2. Requirements for
315) • Test of Control (audit
skills and ability • Understanding of (ToC) differences)
3. Terms of the the accounting & • Substantive • Conclusion
engagement and internal control Procedures (SP) • Reporting
the engagement system
letter (ISA 210) • Risk evaluation Results of procedures Audit report and
- Inherent risk (IR) and plan for further management letter –
(ISA 330) work if needed. opinion.
- Control risk (CR)
- Auditor’s
reaction on risk
assessment (ISA Audit risk = IR + CR x DR
330)
• Planning
materiality (ISA
320)
• Formulate
- Audit strategy
(Scope, timing,
direction → Big
picture)
- Audit approach
(Substantive or
Combined
Approach)
- Audit plan (List
of audit
procedures) Audit 378 Audit 378
International Standards on Auditing

• Terms of the audit • Knowledge of the • Auditor’s response • Evaluation and
engagement (ISA business (ISA 315) to risks (ISA 330) reporting (ISA 450)
210) • Risk assessment • Audit evidence
• Quality control of (ISA 315) (ISA 500) (Control
the audit of F/S • Materiality (ISA tests and/or
(ISA 220 & ISQC 1) 320) substantive tests)
• Formulate audit • Audit Sampling
approach (ISA 530)
Results of procedures
Audit approach & audit and plan for further work Audit report &
Terms of engagement plan if needed management letter
PRE-ENGAGEMENT ACTIVITIES
STEP 1: Client investigation (Client)
STEP 2: Knowledge and competence assessment (Auditor)
STEP 3: Terms of engagement and engagement letter (Ethics)

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PRE-ENGAGEMENT ACTIVITIES
Questions: Discuss the aspects you would consider before deciding to accept the
appointment as auditor of XXX.
FORMAT IN WHICH QUESTIONS SHOULD BE ANSWERED
1. Does the auditor want to do the audit?
• Prohibitions on performing the audit

- Must be aware of any pre-conditions not met or scope of the limitations
- Preconditions for an audit (ISA 210:6)
• Financial reporting framework (IRFS) must be applied in preparation of the financial
statements to ensure they are acceptable (IFRS).
• Obtain an agreement from management regarding their responsibilities

- Preparation of AFS i.t.o the applicable financial reporting framework.
- Responsible for internal control to enable preparation of financial statements that are free
from material misstatements.
- To provide the auditor with the required information, such as:
▪ Access to all information
▪ All additional information needed
▪ Unrestricted access
• Association with the industry

- Nature of the industry
• Association with the owners and management

- “Consider whether the directors and managers have the competency to
manage the company, e.g. industry experience vs. qualifications”
- Reputation, attitude towards good governance and indicators
• Nature of client-auditor relationship

- Consider relationship with previous auditor • Internal control
- Reasons for change of previous auditor • Financial reporting system and audibility
• Import transactions
• Complex calculations
• Significant risks of material misstatement • Manipulate financial statements
- Identify any indicators

- “Since the company uses an internal audit, proper internal controls will
most likely be in place.”
- “Evaluate the entity’s financial reporting system and auditability – if
business previously audited, it is likely that the reporting system is
acceptable and that a sufficient audit trail exists.”
- Exposure to exchange rates causes complex accounting treatment –
errors.

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- Indication of profit manipulation (indicates risk): MAX 2

▪ Low inventory turnover speed
▪ Speed of inventory becoming obsolete & loss of income
▪ Going concern problems
• Sound business decision Auditor’s perspective

- Potential users of the reports and the implications on them (JSE, loan
providers)
- Stability and cashflow pressure of the client, e.g. high inventory levels.
- Client able to settle the audit fees on a timely basis
- Change in suppliers creates concern regarding the quality of the goods
- Any associated costs in taking on the engagement, e.g. additional training.
- Going concern
2. Can the auditor perform the audit?
• Evaluate necessary expertise to perform the audit

- “Identify services required by the client”, e.g. recommending and
implementing a new computer system.
- Consider whether the audit team has the necessary knowledge to render the
service.
- Client industry, e.g. similar clients.
- Separate teams: services and audit.
• Identify the audit team (staff members)

- Ensure that sufficient qualified staff members are available
• Resources other than staff

- Whether any specialists need to be appointed
- Hardware, software
- Audit deadline (enough time)
3. Are there any ethical reasons why the auditor should not accept the
engagement?
• Evaluate Independence (Any threats)

- “Check that there is no family or ties between the shareholders and any of
the partners.”
- Are you independent of the potential client?
- If relationship: scope & risks of the service or any other relationship
(safeguards & significant of risk)

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• Conflict of interest
- CPC: Any conflict of interest to consider (Identify possible Conflict of
Interest)
- Audit and accounting services – cannot recommend & implement and also
express an opinion (audit).
• Information from previous auditors (CoPC) or third parties

- Communicate with the previous auditor
- Is the available information positive or negative
- Always investigate why certain events happened
4. Are there any statutory reasons why the auditor should not accept the
engagement?
• Eligibility to conduct audits

- In terms of APA and Companies Act, i.e. an auditor should be registered with
IRBA.
- “Mr ____ is registered with the IRBA, and is therefore allowed to conduct
audits.”
• Companies Act requirements regarding the removal of the outgoing

auditor and appointment of new auditor (N/A) – normally excluded in the
question.

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Procedures to obtain knowledge
Explain briefly how you as an independent auditor will obtain knowledge of the
business as well as the industry in which it operates. (4)
• Enquiry from persons in the entity (1)

- e.g. management, internal audit staff
• Enquiry from experts outside the entity (1)

- e.g. industry economists, legal advisers
• Analytical procedures (1)

- assist the auditor in obtaining knowledge about fluctuations or trends in the
figure, and identifying extraordinary fluctuations
• Observation (1)
- e.g. visit the client’s premises, observation of operating activities
• Inspection of documents and records (1)

- e.g. minutes of meetings, procedure manuals, marketing documentation,
previous years’ financial statements etc.
• Other information sources (1)

- Previous auditor’s working papers
- Publications and media (e.g. industry-related magazines, financial press)
- Legislation
AVAILABLE: 6
MAXIMUM: 4
Compliance with standards
ISQC 1 and ISA 220: Quality control for firms that perform audits and reviews of
financial statements require that the firm complies with the following:
C • Consider the integrity of:

- The client’s principal owners, key management and those charged with
governance of the entity.
- Reputation and attitude of these individuals should be evaluated.
A • Determine whether the firm is competent to perform the engagement

- Assess their knowledge of the industry and
ISA 220 further suggests that significant
- Their technical competence matters that have arisen during current or
- Consider whether audit deadlines are in reach past engagements should further be
considered in accepting or continue with the
A • Comply with ethical requirements engagement
- Possible conflict of interest

- Threats to independence

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Provide three aspects that Mr de Witt had to obtain reasonable assurance of, by the
performance of the quality control procedures before he could accept the audit engagement.
(3)
QUALITY CONTROL (see ISQC 1.28)
The audit firm’s quality control procedures must be designed to provide reasonable
assurance that the firm will only accept engagements where:
- The client’s integrity has been considered and no information has been found that
could lead to the conclusion that the client lacks integrity. (1)
- The auditor/firm is competent to perform the audit and has the necessary skill, time
and resources; and (1)
- The auditor/firm can comply with all ethical requirements. (1)
AVAILABLE: 3
MAXIMUM: 3
MAKE A DECISION WHETHER TO ACCEPT THE CLIENT OR NOT
Engagement letter requirements Question 3.5
• The following content is required by ISA 210:

- The objective and scope of the audit of the financial statements
- The responsibilities of management
- The responsibilities of the auditor
- The identification of the applicable financial reporting framework
- The expected form and contents of any reports issued by the auditor
ENGAGEMENT LETTERS (ISA 210)

Issues for all audit or • Letterhead of the auditor
related services • Addressed to
• Confirm acceptance of the engagement
Objective and scope of • Purpose and type of audit opinion

audit • Arrangements w.r.t planning and execution of audit
• Deadlines
• Basis of calculation of the audit fee.
• Distinction between management and auditor’s responsibilities
Management • Confirmation of auditor’s independence

responsibilities • Material weaknesses in controls will be brought under
management’s attention
• Involvement of other parties/specialists
• Other services which will be provided
• Designated auditor if applicable
Auditor responsibilities • Complied to audit standards & statutory requirements

(scope of the audit) • Definition of audit & conducting audit procedures

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• Only provide reasonable assurance

• Appropriate framework: IFRS & Co act: management
Expected form and • Form of the report or result of the audit
contents of report • Inherent limitations of the audit and internal controls
Additional information • Report to management

• Representations by management
• Documents issued with financial statements
• Fees
• Invoice arrangements
Closure • Dated and signed

• Request return

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12. AUDIT RISK
What can be asked?

• Describe audit risk
• Name and describe components of
audit risk
• Identify the factors that influence the
components of audit risk and apply
practically
• Describe the relationship between
audit risk and audit evidence
A. BUSINESS RISKS (ISA 315)
• Business risks can arise from:

- Objectives – e.g. profit targets
- Strategies – e.g. Credit sales (collectability and valuation of debtors)
- Nature of business activities e.g. Technology obsolescence of products
 Influences the company’s power negatively.
 Includes risk of material misstatements = IR and CR and the impact on
AFS and the auditor.
• Management’s responsibility = identify & address
B. AUDIT RISKS (ISA 200) Risk that the auditor gets something wrong
• Definition: Risk that auditor expresses an inappropriate opinion when

financial statements are materially misstated.
• Plan the audit and conduct to bring Audit Risk (AR) to an acceptable level
- AR = As low as possible (determines how much work must be done)
- Must be appropriate & sufficient audit evidence
• Audit risk and assurance level have an inverse relationship.
• Audit risk model
Audit Risk = IR x CR x DR
• Components
- Inherent risk(IR)
- Control risk (CR)
- Detection risk (DR) = only element that the auditor can control

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• Audit risk consists of

- Risk of material misstatement (IRxCR) in financial statements and
- Material misstatement is not found by auditor (DR)
C. INHERENT RISK (ISA 200)
• Definition: Susceptibility of an assertion for misstatement (possibly material)

on the assumption that there are no internal controls
• Inherent to the type of business
• Assertions that management has made about the financial statements
• Consider factors which could lead to misstatement

- Foreign exchange trans = complex calculations;
- Inventory valuation = figures based on estimates;
- Cash flow challenges = going concern,
• Auditor no control over IR
• See ISA 315 Appendix 2 (risk table summary)
D. CONTROL RISK (ISA 200)
• Definition: Risk that misstatement was not prevented or detected and

corrected timeously by internal controls, which could be material.
- This is split into control environments (e.g. cash business) and cycle level
(e.g. bank once a week)
• Dependant on internal control design and functioning
• Evaluate circumstances by using judgement
• CR = High, except if controls exist and tested by ToC, thus control is working
• CR can never be ‘nil’ = controls can never be full proof
• Auditor has no control over it
E. LINK AND RELATIONSHIP BETWEEN IR AND CR
• Link between IR and CR

- Both entity’s risks relate to the risk of misstatement as the ISA’s do not refer to
separately.
- Auditor may evaluate together as RMM or separate.
• If evaluating separately
- First IR identify and evaluate
- If there are any controls addressing risk, must evaluate controls
• Evaluation
- Can be done quantitatively (%) or qualitatively(H/M/L)

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F. RISK EVALUATION (ISA 315)
Risk-based audit approach
• Identify IR and CR risk’s that may lead to material misstatements in the

financial statements. E.g. products are stolen = IR vs. products are valued
incorrectly = CR
• Motivate how this impacts (can have more than one motivation):
- Financial statements as a whole or
- Link to specific account balances and assertions (3rd year)
• Evaluate the likelihood of the misstatement (3rd year)
• Basis for audit approach (nature, extent & timing)
EVALUATE THE TWO LEVELS
Financial statement level Accounting balances and transactions
• Effects financial statements as a • For each assertion or each account
whole balance
• Continuous- can cause misstatements • E.g. Imports value of inventory and
w.r.t numerous accounts & assertions purchases
• E.g. listed company = aggressive
management
G. DETECTION RISK
•
Definition: Risk that auditor does not detect a material misstatement that
exists (new client, time pressure, specialists)
• Function of effectivity
- Relates directly to amount of work
- DR can’t be 0% = there are limitations on the system and don’t test 100% of
transactions. Results are analysed and are subjective.
• Balancing factor
- Risk evaluation to evaluate IR & CR with professional judgement,
- To reduce Audit Risk to an acceptable level by using DR,
- To determine how many substantive procedures must be conducted
F. RISK OF MATERIAL MISSTATEMENT (ROMM)
• Audit risk(AR) = IR x CR x DR
• Want AR = L, where any combination of H/M/L to keep audit risk low
• IR and CR are not controllable
• DR is controllable by the auditor as the balancing figure

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ANSWERING AN AUDIT QUESTION
Identify a risk factor with a reason or motivation

• Discuss or evaluate:
- ID Factors & Impact(s) of Risk
- NB: Factors that increase and decrease risk
- No consequence
• And evaluate:
- Discuss factors above and draw a conclusion per component of audit risk
• Identify and describe or describe:
- Only factors that increase risk
Important points to include:

• Distinction between individual components or not
• Indicate: Factors that increase or decrease risk
• Conclusion:
- IR = H/M/L, CR = H/M/L, AR = LOW
- “For acceptable level of audit risk, DR should be H/M/L”

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Factors that will cause cash flow issues in the future

INHERENT RISKS (Absence of internal control)
RISK FACTORS IMPACT (WHY?) LINK TO AFS
Staff competence Staff are not competent Increase risk of errors in the
AFS
Staff or management Lack integrity and are thus Increase risk to manipulate
integrity likely to make unethical AFS
- Non-compliance with decisions which may
laws indicate manipulation of
AFS
Staff experience If they have the relevant Decrease risk of errors in
experiences to apply to the AFS
business decisions
Complexity of
transactions or unusual or
difficult transactions
Examples:
- Foreign exchange Complex calculations or Increase risk of errors in the
transactions calculations for which staff is AFS
- Large assets not qualified
- Provisions for
guarantees
- Contingent liabilities
Management or staff
incentives or
aggressive financial
targets
Example:
- Management Overstated income or Increase risk to manipulate
cannot reach assets and understated AFS
budgeted figures liabilities and expenses
- Business has
suffered a loss
New client Client - may not be well Increase going concern risk
established and may have a and increase errors in AFS
small market share
There is no proven track
record of profits.
Auditors - spend additional Increase errors in AFS

time gaining knowledge on
the business
Established client Well established with Decrease going concern risk
(Rule of thumb 24m) proven track record = high and decrease errors in AFS
probability of certainty about
future cash flows

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New industry Staff does not have Increase errors in AFS

knowledge of the business
system or know the risk
profile = team will make
errors and will not identify
Types of products and
services
- Luxury Limited market share Increase going concern risk
- Seasonal (demands Impact on cash flow and Increase going concern risk
drops) profits as demand drops
High demand for product Decrease going concern risk
- Unique and have competitive
- Obsolete due to advantage
technology Write down inventory to
NRV (complex
calculations) = overvalued
and thus errors in AFS
Loss due to the inability to
sell products
Location and
geographical distribution
Examples:
- Products imported Forex exchange risks and Increase going concern risk
from overseas delays due to an increase in and increase errors in AFS
suppliers complex calculations
Decrease their market share Increase going concern risk
- Products are sold to and affect cash flow
poorer countries
Competitive advantage Decrease going concern risk
- Located in all main
centres within SA
Difficult to implement and Increase errors in AFS and
- Widely distributed monitor IC = leads to poor increase control risk
IC
Related party transactions Bias judgement calls and Increase risk to manipulate
familiarity of the parties may AFS
result in manipulation of
figures
Cashflow challenges or
financial position
Example:
- Business makes a Cash flow issues Increase going concern risk
loss
- Poor quality of Loss of market share Increase going concern risk
equipment (reputation) and thus cash Increase errors in AFS
purchased flow issues. Complex
▪ Less popular

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▪ Clients submit claims calculations and valuations

▪ Leading to may be over or undervalued
contingent liabilities
▪ Inventory valuations
Level of sophistication of High degree of Increase errors in AFS and
information system computerisation and increase the risk of fraud in
transactions via the internet AFS
Age of the information New systems may be new Increase errors in AFS
system to staff and errors may
occur or loss of data
History of misstatements Impact the current year’s Increase errors in AFS
AFS if there are prior
misstatements
Management integrity Legal actions may be taken Increase going concern risk
against the entity and they
may lose their market share
causing cash flow issues
Transactions that require
judgement or estimates
Examples:
- Inventory valuations If there are poor quality Increase errors in AFS
goods, the NRV may be
estimated to be too high or
too low
Loans being obtained Accumulating interest Increase going concern risk

resulting in cash flow issues
False marketing Contravene the CPA and Increase the risk of fraud in
management integrity is AFS
questioned = indicates the
possibility of the
manipulation of AFS
Non-compliance with laws Must be compliance with Increase going concern risk
- Environmental laws regulations otherwise =
legal liability, losses and
cash outflow.
Prevent, detect and correct – “systems or operations”

CONTROL RISK (Absence of internal control)
New accounting system or Complexity of Increase errors in AFS
internal control implementation of new
systems (for the users of
technicality of system)
New accounting Staff doesn’t know how to Increase errors in AFS
personnel operate the system

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Degree to which duties Lack of SOD results in one Increase risk of errors in
are segregated person performing AFS and increases the risk
incompatible functions and of theft or fraud
higher chance of ROMM
and incomplete accounting
records.
Improvement in IC due to
positive attitude of
management
Good internal control Good control activities will Decrease risk of errors in
activities prevent, detect and correct AFS
misstatements from
reaching AFS
Weak internal control
activities
Example: Weak internal control or lack Increase risk of errors in
- New company = of monitoring means there is AFS
internal controls not never any improvement Increase going concern risk
well established leading to many
- New accounting misstatements not being
system prevented and the business
may not succeed
Good internal control Management places Decrease risk of errors in
environment emphasis on sound internal AFS
control and staff members Decrease risk of fraud of
are aware and thus fewer AFS
misstatements
Weak internal control Management doesn’t place Increase risk of errors in
environment emphasis on sound internal AFS
control and misstatements Increase risk of fraud of AFS
are generally overlooked by
staff and likely to occur
Many mistakes May indicate similar Increase risk of errors in
mistakes in the AFS AFS
Few mistakes Indicates that there will likely Decrease errors in AFS
be limited mistakes in the
AFS
Imports (NB!) – See below
Types of payments
- Only cash sales There are no receivables = Decreases going concern
permitted simplified administration and risk
thus no risk of bad debts
- Large amounts of Large amounts are held on Increases the risk of fraud or
cash the premises theft
Increases the risk of fraud or
theft

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- How is cash kept Easy access to the safe and

safe? staff could, therefore, steal Increase the risk of errors in
easily AFS
- How are Cash receipts only
transactions accounted for upon request Increase the risk of errors in
accounted for? of staff = incomplete AFS. AFS
May indicate a bad attitude
of management towards IC
Only discuss factors that will increase DR

DETECTION RISKS (Absence of internal control)
New industry Don’t have enough Increase the detection risk
New system knowledge of the business-
New client relevant experience and
don’t know the risk profile
No experience with similar Risks not being identified

audits and increase ROMM in FS
remain undetected
Time pressure Risk that there won’t be Increase the detection risk
enough time to perform a
proper audit
Contact with previous Could obtain needed Decrease the detection risk
auditor information which will
decrease the ROMM in the
FS will remain detected
Pressure on auditor May influence objectivity Increase the detection risk
and independence
RISK FACTORS SUMMARY

INHERENT RISK CONTROL RISK DETECTION RISK
- Business integrity, - New accounting - New client, industry or
reputation and nature system/internal system
- New or established controls - Pressure on auditor
business - New accounting staff (time and integrity)
- Type of product/service - Good/weak internal - Contact with previous
- Location control auditor
- Related party - Many/few mistakes
transactions made
- Complex transactions
- Transactions requiring
judgement
- Financial position

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Imports
• Reliability of supplier to
• Quality of product
• Impact on CF
• Complexity of calculations
• Question may only test one or two = only risk at assertion level and not overall
FS level
• Reliability of foreign suppliers to provide products on time and of correct

quantity and to render proper after-sales services which may result in delay of
productions and sales (which leads to loss in market share) which will
increase going concern risk
• Quality of imported parts and equipment may be poor since it's imported from
overseas which may lead to manufacturing defects and a loss in the market
shares that will increase the going concern risk.
• Impact on CF – Imports are exposed to ER fluctuations that can influence
prices and profits negatively which will impact profits negatively which will
increase going concern risk.
• Complexity of transactions - Foreign exchange transactions = complex
which may increase the probability of errors in AFS
Lawsuit IAS37 (One of two scenarios)
• Lawsuit against the company can negatively influence the future financial
results (cash flows) should a significant claim be awarded which will increase
going concern risk due to an outflow of CF.
• Lawsuit may result in contingent liabilities that need to be recorded in the
FS which are complex in nature which could lead to errors in AFS
Non-compliance with law (CPC)
• Lawsuit
• Management integrity
• Product may be withdrawn = no sales = cash flow impacted
• Provisions (contingent liabilities) = cash flow and complex accounting
treatment which will lead to errors in the AFS
- Outflow = losses = Accounting treatment
- Accounting treatment = complex = errors in AFS
- Contingent liabilities = disclosure wrong = errors in AFS

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13. AUDT MATERIALITY
• Discuss the concept of materiality and apply in practical situations.

• Describe the role that materiality plays in the different stages of the audit.
• Calculate the materiality figure (with discussion of the factors which were evaluated).
• Describe the relationship of materiality with audit risk and apply practically.
Underlying principles
What is materiality?
A. General definition
• Information in the financial statements must not be aggregated or
disaggregated in a manner that obscures useful information.
• Materiality requirements apply to the statements of: Definition
- Profit or loss and other comprehensive income,
- Statement of financial position Important & needing to be
considered
- Statement of cash flows and
- Statements of changes in equity and to the notes. Information affects plans or
• When an IFRS requires a specific disclosure, the decisions in a noticeable
way (e.g. She omitted
resulting information must be assessed to determine
information that was material
whether it is material and consequently whether to the case)
presentation or disclosure of that information is
warranted.
B. Definition in an audit context
• Information is material if:

- Omission thereof or the misstatement thereof can influence the economic
decisions of users made on financial statements.
• The materiality depends on:

- The size (rand value) of item or of the mistake (quantitative) or
- Nature (qualitative) E.g. Payments to directors or fraud committed by
management or if cannot continue to operate your business or profession.
- Judged in surrounding circumstances
- Professional judgment

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Why is materiality necessary?
A. Why is it needed?
• An auditor does not provide 100% guarantee, only performs sample-based
testing to determine which items will affect the decision of users.
• Auditors only provide reasonable assurance that the financial statements are
free from material misstatements.
B. Planning: determine acceptable materiality level

• For the detection of quantitative material misstatements
• Determining factor = Extent of audit tests
- What will cause the AFS to be materially misstated?
- Help determine which financial items to inspect and which audit procedures
to follow.
- Detection risk effects testing: The lower materiality = more testing will be
done vs higher materiality = less testing
When is materiality calculated?
• When the overall FS are affected the materiality should be calculated.
Planning Reviewing Completion

(ISA 320) (ISA 315) (ISA 320)
• Materiality during • A review is done •Materiality during
planning of the audit during the audit to finalisation of the audit.
(preliminary re-evaluate. •Audited figures
examination) •Have more knowledge
• Helps identify which and circumstances can
financial statements change.
items to investigate. •Evaluate audit
differences
• Determine which
•Audited
audit procedures
• Not audited
How is materiality calculated?
Apply professional judgement – SCI vs SFP

• Quantitative indicator: Calculate figure
- Follow the framework
- Provide cut-off point or threshold = to determine the nature, timing and
extent of audit work on the specific balance (Audit approach)

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• Qualitative considerations:
- Consider nature of item or mistake, for example:
 Inadequate/ improper disclosures;
 Related party transactions, etc.
• ‘Material account balance’
- Contains risk of material misstatement and is
- Based on size (quantitative) or qualitative characteristics
Influence on the audit
Inverse relationship between materiality figure and audit evidence needed.

Influence the nature, extent & timing of audit procedures

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Framework – Five-step approach
2. Which 3. Choose 4. Calculate

1. Which set 5. Decide
bases the most figures
of financial on the
financial suitable based on
inofrmation materiality
information base the chosen
to use figure
to use (users) base
Step 1: Financial information for calculation purposes

• Basic principle: Use financial information which best reflects business
activities for the current financial year.
• The following choices are available:
- Current year – not yet audited (Apportionment)

▪ Current year (actual) – Whole year or portion of the year.
▪ Current year (preliminary figures)
▪ Current year (budgeted must always be compared to prior year) and must
then decide to adjusted or original.
- Previous year – audited

▪ Only previous year
▪ Average 3-5 previous years
Step 2: Which bases financial information should be used?

• Firm policy (Will be provided)
- Use bases
- for margin (top & bottom)
- Will differ for different types of companies (indicator as to which statement
to use, then determined which % to use)
Base Percentage interval

Turnover 0,5-1%
Profit before tax 5-10%
Gross profit 0,5-1%
Total assets 1-2%
Equity 2-5%
Step 3: Which base is the most suitable?

• Basic principle: Which component represents the company and which
component would the users be the most interested in?

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• Determine whether all bases are applicable:

Problem with the base What to do with the base
Negative figures Indicates a net loss
Noticeable errors Ignore the base
Expected future problems Do not adjust – be more conservative
Actual errors and quantify Adjust or not adjust
E.g. Classifying current asset as a fixed
asset vs. classifying an asset as a
liability
More volatile figures Less likely to use it as a base (process
of elimination)
Important questions:
• Whether to use the Statement of Comprehensive Income (SCI) vs
Statement of Financial Position (SFP).
• Users:
- Users of financial statements = will focus on the profitability of SH and
investors (look at ST and LT debt, solvency and liquidity, capital growth)
- Shareholders: Expect dividend, profitability and capital growth (SCI)
- Bank: Loan obligations and the profitability and stability thereof (SCI & SFP)
• Size of the business

- Rand value of statements
• Nature of business
- Income-driven = sales = SCI
- Manufacturing company = PPE = SFP
- Value of items on SFP vs SCI
• Funding: (Considered under users)

- How is the company funded and what are the financiers interested in?
- New loans granted. For what purpose are loans granted?
▪ Extensions (SFP) or
▪ Provide employment i.e. salaries (SCI)
▪ Always for loans: SCI = repayments and interest and SFP = assets
• Stability of basis:
- Negative figures = Ignore
- Reflects grown or fluctuations

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• Apply professional judgment

- Decide on a single basis
- Is it a volatile company = Usually use PBT only if the company is a going
concern. Using PBT indicates that it is a profit-driven company.
- If the combination of the users, nature of the business and funding indicate
that SCI is important and turnover, profit before tax and gross profit are all
stable and there are no negative figures then refer to ISA 320
ISA 30 - “When profit before tax from continuing operations is volatile, other
benchmarks may be more appropriate, such as gross profit or total revenues”
Step 4: Calculate possible figures based on suitable bases

- Calculate the most suitable basis
- Top & bottom margin
- Remember to round figures to the nearest rand at all stages
Step 5: Decide on the materiality figure

• Consider the level of Detection Risk (DR) the auditor is willing to accept
based on IR & CR evaluation:
- DR low = bottom limit
- DR medium = average figure
- DR high = top limit
• One figure - for AFS as a whole (Except for exceptional cases)

- Round to nearest rand / R’00
- Minimum value of error = material misstatement

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• Users of the financial statements are very important – already taken into
account
How to answer a question on the five steps
Discussion question
• Question can combine audit risks and materiality

• If asked to discuss – only do step 1 and 2; do not to step 3, 4 and 5.
• Do a basic financial statement analysis – Check whether ratios have been adjusted for the
current year
STEP ONE
• General:
- State if the information if available
- State and identify whether there are any changes
- State whether the information is appropriate to use or not
- Compare the actual and budgeted figures (if they are not equal = always
use actual)
- Do this process separately for the current year, budgeted and audited
figures.
• Current year information:

- Is it available?
- Significant changes (eg. Info given that assets increased, or unusual sale
made).
• Current year budget:

- Is it available?
- However actual figures are a better representation, too much variance.
• Audited Annual Financial Statements:

- Available or not?
- Not appropriate if there has been movement either an increase or a decrease
= means it is not a stable base.
- If it is a continuous business = must use net profit
• Conclude: Whether the current information should be used.
STEP 2:
• Bases are generally given
STEP 3: Which base to use? (Always state what they are interested in and why)
• Users: Shareholders
- The shareholders are interested in future profitability and the SCI is
important. (1 mark for both)

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- They will also consider dividends and capital growth as shown in the
statement of P/L and OCI.
• Users: Debt providers

- Whether assets exceed liabilities.
- Whether you will be able to repay the capital payments and interests.
- The debt providers are one of the principal users that will be interested in:
▪ The assets (SFP): That may be assessed or reposed when the
company experience financial difficulties (SFP).
▪ The firm's profitability: That might have an impact on the company’s
repayment ability (interest and capital repayments) in terms of the
statement of P/L or OCI.
• Nature of the business

- State what the company’s main source of business is (type of company).
- Manufacturer – High asset base and capital intensive = interested in SFP.
- Retailer (Main business if the sale of products) – Revenue or turnover
will be very significant = interested in SCI
• Size
- “The figures in the SCI are more significant in relation to the figures in the
SFP.”
- Decide which statements are more significant.
- This is supported by the fact that the value of the amounts on the SCI
exceed the amounts on SFP.
• Stability of bases
If both the assets SFP and the SCI increased then:
- The GP is not stable
- The income is not stable
- The asset is not stable
- And therefore should use Net P.BT as the base (Will always be an outlier
to indicate which base you should use.)
- Turnover: Has a consistent growth pattern and therefore is suitable and
will be the chosen base.
- All users are interested in the SCI, as value of the company lies in the
turnover
- Net income before tax = suffered a loss then it is not a suitable base (loss)
• Conclude:
- The majority of the indicators show that the value of the company lies in
the SFP and SCI. Therefore the Net P.BT will be used to calculate
planning materiality.
- All users are interested in the SCI, as value of the company lies in the
turnover.

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STEP 4: Calculation
Turnover: 0,5% to 1% of R6167000 = R30,835 (LOW margin) to R61,670 (HIGH
margin) then average the answer in order to get to the Medium level
STEP 5: Decide on the materiality figure

• Detection risk goal = medium
• Medium lies halfway between margins
• Therefore R46,253

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MATERIALITY MEMO
Step 1: What financial information is used?
Current year: The current year’s figures are available and there is no indication that
these figures will change significantly, except for the classification errors which can be
adjusted. (1)
Current year budget: The current year budgeted figure are available and budgeted
sales have been exceeded and consequently the budgeted figures are not
appropriate. (1)
Previous year: Figures of the previous financial year are available and have been
audited, but cannot be used as the company’s financial situation has changed
significantly from the previous year as a result of the record sales in the promotion
month. (1)
Conclusion: The actual figures for 2014 are the most accurate indication of the
company’s substance, because it reflects the change in the company’s operations best
and will be used, once the classification errors have been adjusted***. (1)
Step 2: Bases as set out in the question
o ½% to 1% of revenue;
o 1% to 2% of gross profit;
o 5% to 10% of profit before tax; and
o 1% to 2% of total assets
Step 3: Which base to use
Users of the financial statements – Shareholders: The company is listed therefore

the shareholders will be interested in the statement of comprehensive income and the
firm's profitability and dividends paid out to them, as well as the capital growth of the
company. (1)
Users of the financial statements – Debt suppliers:

The debt providers (bank who provided loans), as one of the principal users will be
interested in particularly two factors:
i. assets, that may be assessed when the company experiences financial
problems (statement of financial position); and (1)
ii. the firm's profitability that might have an impact on the company's repayment
ability (statement of profit and loss and other comprehensive income). (1)
Therefore, the statement of profit and loss and other comprehensive income and the
statement of financial position will be of interest to them, but not the equity figure.

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Nature of the business: The company’s main business is the manufacture and sale
of inventory, as such the non-current assets and the inventory are what drive the
business. This is supported by the significant investment made in non-current assets
in the current year.* (statement of financial position) (1)
However, the size of the revenue in relation to the other elements of the financial
statements is significant and the company is income driven, placing emphasis on the
statement of comprehensive income. (1)
Stability: The income were stable in the previous two years, however in the current
year there was a sharp increase as a result of the sale. (1)
The gross profit figures were stable in the previous two years, however in the
discounted sales prices have decreased the gross profit percentage in the current
year. (1)
There has been a significant investment in the assets during the current year, thus the
asset figures are not stable and suitable to be used (1)
The profit before tax figures is fairly stable, the net profit before tax would be an
acceptable basis. Users are interested in the statement of comprehensive income,
NPBT would be used. (1)
Errors:
Reclassification error: The R 1 million classification error has no impact on the
selection of the basis, as it does not affect any of the bases used by the audit firm.(1)
Conclusion: Since all users are interested in the statement of comprehensive

income, we will use the statement of comprehensive income.
Profit Before Tax will therefore be the preferred basis.*** (1)
Step 4: Calculations
5% to 10% of Profit before Tax (R 12 600 000 * 5% and 10%)

R 630 000 – R1 260 000 *** (1)
Step 5: Decision on materiality figure
Inherent risk was already evaluated as high.

and control risk provisionally evaluated as medium. (provided)
You will therefore be willing to accept a low level of detection risk*** to reduce audit
risk to an acceptable level. The figure at the lower end of the range will therefore be
selected. (1)
Conclusion: Therefore, the planning materiality figure for the 2014 audit is:
R 630 000 (1)

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14. OVERALL AUDIT APPROACH

• What is audit approach
Background
• Reasons for Audit Approach
Why formulate
- co-ordinate audit
- limit audit risk
- audit evidence in cost-effective way
- determine nature/extent/timing of audit procedures
Using what?
- knowledge of business, industry & IC
- planning materiality
- risk evaluation
• Overall audit approach

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Nature – most important consideration WHAT?
• Based on risk evaluation.

• Test of Controls
- Purpose: Test the operating effectiveness
- If CR < HIGH must gather evidence.
- Intend to rely on Internal Control Systems.
• Substantive procedures
- Purpose: To detect material misstatements
- Types:
▪ Substantive analytical review
▪ Test of detail (balances & transactions)
- MUST be performed for all material items.
- Two possible approaches:
Overall audit approach

A. Combined audit approach/ System-based B. Substantive audit approach
approach
• Consider reliance on system, thus mainly • Consider little or no reliance on internal
ToC. controls.
• Results of ToC will determine substantive • Detailed substantive procedures.
procedures.
• BUT substantive procedures must still be
performed for all material balances.
Rebuttable presumption: Revenue = fraud present.
PLANNING 1. Design: Prevent, detect,

correct
Understanding of Accounting
system & internal control
2. Implementation: control
working throughout period
EXECUTION
WTA – Auditor willing to accept:

Extensive substantive testing Test of details
HIGH CR NATURE: Substantive
Substantive procedures
can not rely on controls approach
Start with CR Analytic procedures
Does this control work? Test of Controls (ToC)
LOW CR NATURE: Combined
Test of details
can rely on controls approach
Substantive procedures
Limited substantive testing Analytic procedures

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Timing WHEN?
• General rule
- interim date (before y/e) – if can rely on controls – or year-end.
• Exceptions
- Higher risk for material misstatement → closer to or at year-end.
• If Interim → evidence for remainder.
Extent HOW MUCH?
• Planning materiality
• E.g. sample sizes
• Determined by professional judgment.
• I.e. substantive vs. extensive testing.
Class example:
The audit team is busy with the planning for the audit for the year ending 31 March 2015.
The partner in charge of the audit made the following known to the audit team:
 Preliminary risk evaluation is as follows:
- Inherent risk as high
- Control risk for all cycles is low
 Stock with a book value of R182 000 was included in Finished Goods, which should have
been shown as Work in Progress.
Required:
Briefly formulate the overall audit approach.
Risk Audit Inherent risk (IR) Control risk (CR) Detection risk (DR)
Auditor Company & Market Controls & ToC Substantive
Determined by…
procedures
Class example H L M/H
Combined approach Perform more ToC Less substantive
Nature procedures, more
analytic procedures.
Extent Extensive Limited/ reduced
During year At or after year-end
Timing (interim) & after
year-end

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Questions
1. Formulate and motivate the audit approach you would follow for the current year's audit of
Freeze-Free Proprietary Limited, based on the assumption that both the control and
inherent risks have been evaluated as high. (4)
Communication skills- formulation (1)
Solution
1. Control risk for the audit has provisionally been evaluated as high, which means that a
good system of internal controls is not in place. (1)
2. Therefore, no reliance will be placed on the system of internal control and no test of
controls will be performed. (1)
3. Since the inherent risk has been evaluated as high it means that the detection risk must
be reduced to a low level in order to reduce audit risk to an acceptable level. (1)
4. It is attained by following a substantive approach, therefore, performing substantive
procedures. (1)
5. Extensive substantive procedures will be performed. (1)
6. The testing will be done after year-end. (1)
AVAILABLE: 6
MAXIMUM: 4
Communication skills - structure of argument (all elements of audit approach is addressed) (1)
2. Describe and motivate the audit approach you would follow for the current year's audit of
Suzette DIY Limited, based on the assumption that both the control and inherent risks
are evaluated as high. (5)
Communication skills - structure of argument (1)
Solution
• Control risk was provisionally evaluated as high, which means that there is no proper
system of internal control in place. (1)
• No reliance can, therefore, be placed on the system of internal, consequently (1)
no tests of control will be performed. (1)
• Since inherent risk and control risk are both evaluated as high, it means that the detection
risk the auditor will be willing to accept to bring the audit risk to an acceptable level will be
low. (1)
• This will be achieved by following substantive based audit approach. (1)
• Extensive substantive procedures will be performed. (1)
• All audit procedures will be performed after year-end. (1)
AVAILABLE: 7
MAXIMUM: 5

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3. Describe and motivate the audit approach you would follow for the current year's audit of
Tim & Pumba Limited, based on the preliminary risk assessment. (6)
Inherent risk was already evaluated as low and control risk provisionally evaluated as low.
Solution
1. Control risk for the audit has provisionally been evaluated as low, which means that a good
system of internal controls appears to be in place. (1)
2. A combined or control based audit approach will be followed (1)
3. and therefore, reliance will be placed on the system of internal control. (1)
4. Extensive test of controls will be performed. (1)
5. The test of controls will be performed before year-end. (1)
6. As the inherent risk has also been evaluated as low, it means that you will be willing to
accept a higher level of detection risk in order to maintain audit risk to an acceptably low
level. (1)
7. Therefore, limited substantive procedures will be performed. (1)
8. Some of the substantive testing can be done before year-end with early verification and
the rest will be done at or after year-end. (2)
AVAILABLE: 9
MAXIMUM: 6

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15. AUDIT EVIDENCE
Understand and define the management assertions
- Representations by management, explicit or otherwise,

- that are embodied in the financial statements,
- as used by the auditor to consider the different types of potential misstatements that may
occur.
In representing that the FS are in accordance with applicable financial reporting framework,
management makes assertions regarding the recognition, measurement, presentation and
disclosure of various elements of the FS and related disclosure.
Assertions relating to classes of transactions Assertions about account balances, and

and events and related disclosures for the related disclosures at the period end
period
• Occurrence: Transactions and events that • Existence: Assets, liabilities and equity
have been recorded or disclosed have interest exists;
occurred and such transactions and • Rights and obligations: The entity
events pertain to the entity; holds/controls the right to assets, and
• Completeness: All transactions and liabilities are the obligation of the entity;
events that should have been recorded • Completeness: All assets, liabilities and
and all related disclosures that should equity interest that should have been
have been included in the financial recorded are recorded and all related
statements have been included; disclosures that should have been
• Accuracy: Amounts and other data have included in the financial statements have
been recorded appropriately and related been included;
disclosures have been appropriately • Accuracy, valuation and allocation:
measured and described; Assets, liabilities and equity interests are
• Cut-off: Transactions and events have included in the financial statements at
been recorded in the correct accounting appropriate amounts and any resulting
period; valuation or allocation adjustments have
• Classification: Transactions and events been appropriately recorded, and related
have been recorded in the proper disclosures have been appropriately
accounts. measured and described.
• Presentation: Transactions and events • Classification: assets, liabilities and
are appropriately aggregated or equity interests have been recorded in
disaggregated and clearly described, and the proper accounts.
related disclosures are relevant and • Presentation: Assets, liabilities and equity
understandable in the context of interests are appropriately aggregated or
requirements of the applicable financial disaggregated and clearly described, and
reporting framework. related disclosures are relevant and
understandable in the context of
requirements of the applicable financial
reporting framework.

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Link management assertions to audit objectives
Audit Management assertions

• Systematic process • assertions about economic
• Gather & evaluate evidence actions and situations (made
and information objectively by management of the
to make evaluation. entity)
• determine correlation (of
assertions) with predefined
criteria
How to gather audit evidence? Refer to Audit Approach
 Through the performance of audit procedures to achieve audit objectives
Audit procedures: Obtaining audit evidence
1. Risk assessment procedures

• Knowledge of environment and internal controls
2. Tests of Internal Control “TOC”

• Purpose: to test working of controls
- want to place reliance on controls based on preliminary assessment → collect evidence to
substantiate
- In cases were substantive procedures alone does not provide the sufficient evidence
required.
3. Substantive Procedures (SP)

• Purpose: to detect material misstatements.
• Perform based on risk assessment of misstatement and results of TOC.
• Types of substantive procedures:
- Analytical procedures
- Test detail of transactions
- Test detail of balances
- Disclosure

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Example: Management assertions, audit objectives and nature of audit procedures
Audit evidence
• What is it?
- All information used by the auditor
- To make conclusions
- On which the audit opinion is based
• Why?
- Fundamental to audit function
- Necessary to support audit opinion regarding assertions management makes in the
financial statements
• Conducting audit procedures by using the following techniques:
Test of Controls Substantive procedures

Techniques: 1. Substantive analytical procedures
• Inspection 2. Substantive procedures:
• Enquiry Test of detail: Techniques
• Re-performance • Inspection
• Observation • Enquiry
• Re-performance
• External confirmation
• Recalculating

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Audit evidence: Requirements
Sufficient Appropriate
How much? Quality (how good?)
 Professional judgment is involved  Reliability (Source?)
 Based on the Audit approach’s required  Relevance of audit evidence obtained in
level of evidence required. terms of the assertions that are required
to be tested.
Level of audit evidence required is influenced by:
• Risk evaluation (IR & CR)

• Materiality of an item
• Previous experience
• Results of other audit procedures
• Reliability & source
- Reliability influenced by:
▪ Source (Internal or external)
▪ Nature
▪ Written vs. Verbal / Original vs Photocopy
• Cost vs benefit
Various types of audit evidence:
• Physical evidence vs Electronic evidence

• Cashbook, General Ledger
• Reconciliations
• Minutes of meetings
• Written declarations vs Oral evidence
• Confirmations from 3rd parties
• Reports of analysts
Audit working papers
• Purpose: To support audit opinion

• Why Compile? → to obtain audit
evidence that:
- Supports the audit opinion
- Complies with audit standards
• Contents & Format:

- Heading/Subject
- Date
- Clearly identify the
information/subject matter
- Prepared by
- Reviewed by
- Cross-references

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Questions
Example 1
You are busy with the planning of the current audit of Argus Limited. You have formulated the
following audit objectives based on the assertion’s management make on the financial
statements.
1. All salary and wage transactions are included in the Statement of profit and loss
and other comprehensive income. Completeness
2. Salary and wage transactions included in the Statement of profit and loss and
other comprehensive income took place and relate to Argus Limited.
Occurrence
3. Salary and wage transactions were recorded in the correct accounting period.
Cut off
4. All salary and wage transactions were carried over correctly from the source
documents. (NB!) Accuracy
5. Only salary and wage transactions were recorded in the account.

Classification – Proper account
6. All corrections made to salary and wage transactions in the period were
recorded. Completeness
7. Appropriate disclosures have been made concerning directors’ salaries.

Presentation
8. Debtors represent amounts receivable from valid customers on the Statement

of financial position date. Existence
9. Creditors at the Statement of financial position date represent legal claims of

the entity on customers for payment. Rights/ Obligations
10. All payments made to creditors during the period were recorded.
Completeness
REQUIRED
Identify the specific management assertion from which each of the specific audit objectives
were derived. (10)

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Example 2
Suzette recently found a YouTube video clip of an audit manager preparing the owners of a
new business, who are not familiar with accounting concepts, internal controls and audit
objectives, for a visit from their external auditors by providing them with examples of audit
objectives. Suzette asked you to link the following audit objectives with the relevant
assertions.
• To test that all sales transactions (all workshop and ‘do-it-yourself’ kits) were recorded
in the correct financial period.
• To test that all sales transactions (all workshop and ‘do-it-yourself’ kits) were recorded
at the correct quantities and amounts.
• To test that all operating expenses incurred in the financial year, were actually
recorded.
• To test whether all clients who attended the workshops were included in the sales
figure and that all transactions were recorded accordingly.
• To test that sales relating to amounts still outstanding at year-end, were only made to
debtors who were approved as being able to settle their debts.
REQUIRED
Comply with Suzette’s request by linking each of the audit objectives to the most relevant
assertion. (5)
Solution
Management assertions
a. Cut-off (1)
b. Accuracy (1)
c. Completeness (1)
d. Completeness (1)
e. Accuracy, valuation and allocation (1)
AVAILABLE: 5
MAXIMUM: 5

Audit 288

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Auditing 288 (Universiteit Stellenbosch)

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Structure of the summaries regarding cycles:

When answering questions for Ethics:

Overall audit approach

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1. Introduction and background

5. Bank and cash cycle

10. Ethics: Code of professional conduct

12. Audit risk

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1. INTRODUCTION AND BACKGROUND

• Satisfy himself to the truth of bookkeeping of others.

Duties and responsibilities of an auditor

• reasonably reflect the financial position of the company and

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What is an audit? definition of an external audit

• It is the systematic process of the

Elements of the definition:

Obtaining and considering evidence and information

It must be done objectively

Evidence regarding assertions about economic events and actions

Evaluate correlations of assertions with predetermined criteria (IFRS)

Objective of an audit Purpose

• To express an opinion on the financial statements

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Explanation of the objective (discuss or comment on the objective of an audit)

Reasonable assurance why can an auditor only provide reasonable assurance?

• An audit is performed in accordance with IAS’s and provides reasonable

Inherent limitations of an audit: TEST

• The nature of financial reporting where management uses judgement in

Structure of accounting and auditing profession

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• Strive to comply with audit practices by • IFAC’s standard-setting committees.

Different types of services

Reasonable assurance engagement, e.g.

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• The external auditor’s (appointed by shareholders) duties:

Limited assurance engagement, e.g. independent review

• Practitioners perform engagements where no opinion (assurance) is

Different types of audits

• Financial statement audit

The different types of auditors

i. Independent auditor (external auditor)

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ii. Internal auditor

External Auditor Internal Auditor

iii. Government auditor – Public auditor

iv. Forensic auditor

Private audits Public sector

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Company act requirements

Section 27 Financial year - Company must have a

Section 90 Appointment of Auditor - At Annual General Meeting

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Section 92 Rotation of Auditor - Cannot be same individual/

Public Interest Score (PIS)

• Method to assess companies public interest.

• Summary for a private company: