Do you have a

problem in life?

No
Yes

Yes
Can you do
something about Then why worry
it? about it?

No
TL105: CPC,APA, FRAUD & KING IV
by:

Collen Thabo Matsimela CA (SA)

Senior Lecturer: AUE4861/2
matsict@unisa.ac.za
(012) 429 4368
 Agenda
• Study Unit 1: Code of Professional Conduct & By-laws
• Study Unit 2: Auditing Profession Act (APA)
• Study Unit 3: Auditors responsibilities relating to fraud in
an audit (ISA240)
• Study Unit 4: Corporate Governance (King IV)
• Study Unit 5: SAICA syllabus relating to Co. Act.
 Code of Professional Conduct

SAICA Student Handbook, Volume 2B:

• Section 2 : ET
• Section 3 : BN 25
Auditing Notes, Chapter 2

NB Note changes to CPC: Sections 225 and 360

>>Non-compliance committed by client/employer
 Code of Professional Conduct

• Who needs to comply with the Code?

• What is the IFAC Code?
• Why are certain words in the SAICA & IRBA Code
underlined?
• Composition of the CPC
– Part A: General application of the Code
– Part B: CAs / RAs in public practice
– Part C: CAs in business
• This part of the Code is not included in BN 89 Why?
 Code of Professional Conduct
• SAICA code (CA) vs IRBA code (R/A)

• Who needs to comply with the Code?

• Composition of the CPC

– Part A: General application of the Code (set out and discuss the
fundamental principles for ethical behaviour)
– Part B: CAs / RAs in public practice
– Part C: CAs in business
• This part of the Code is not included in BN 89 Why?
 What is the Code of Professional
Conduct?
The Code sets out five fundamental principles
for professional ethics and provide a conceptual
framework for applying the fundamental
principles. Members must apply the conceptual
framework to identify threats to compliance with
the principles, evaluate their significance and
apply appropriate safeguards to reduce or
eliminate them so that compliance is not
compromised.
 Code of Professional Conduct
Responsibility to act in the public interest
Part A – section 100.1

Exam technique
Given in section 100.2 (also refer TL105 p8)
- Identify threat to compliance with the fundamental
principles
- Evaluate significance of the threat
- Apply safeguards
 Code of Professional Conduct

Part A:General application

Fundamental Principles of professional ethics
“Shall”
– Integrity
– Objectivity
– Professional competence & due care
– Confidentiality
– Professional behaviour
 Code of Professional Conduct

Part B: Chartered accountant in public practice

Treats
– Self- interest (Section 200.4)
– Self-review (Section 200.5)
– Advocacy (Section 200.6)
– Familiarity (Section 200.7)
– Intimidation (Section 200.8)
 Code of Professional Conduct

Part B: Chartered accountant in public practice

Safeguards
Safeguards created by the profession (section100.14)
- Educational, training and experience requirements for entry
- Continued professional development (CPD)
- Corporate governance, legislation and regulations
- Professional standards
- Professional or regulatory monitoring and disciplinary
procedures
 Code of Professional Conduct

Part B: Chartered accountant in public practice

Safeguards
Safeguards created by the work environment
(Section 200.12-13)
- Firm wide safeguards (link with ISQC1)
- Engagement specific safeguards (links with
ISA220)
 Code of Professional Conduct

Part A – section 100.5

• Fundamental Principles
– Integrity
– Objectivity
– Professional competence & due care
– Confidentiality
– Professional behaviour
CPC - Quiz
General
Katleho Motsapi (KM) (CA) SA, RA is an audit
partner on the audit of Buses-R-Us Limited for
the year ended 31 January 2016. Buses-R-Us is
bus manufacturing company and is listed on the
JSE.
Threats and Safeguards
Identify the threat/s to KM’s independence and
implement the safeguard(s) to eliminate or
reduce the threat/s to an acceptable level
CPC – Quiz cont.
• KM gets contracted occasionally by Buses-R-Us to
be its stock broker.
Advocacy threat – Objectivity
There may also be self-interest threat as a result of the remuneration
KM would receive as a stock broker.
Safeguard : KM should not act as stockbroker of Buses-
R-US.
• KM holds 12% of the issued shares of Buses-R-Us.
Self-interest threat – Objectivity
Safeguard: KM should dispose off his interest in Buses-
R-Us. (Refer to s 290.104)
CPC – Quiz cont.

• KM is responsible for the calculation of the

deferred tax (asset / liability) to be included in the
financial statements.
Self-review threat – Objectivity
Safeguard: different member should perfom tax
services.
Refer to s290.178 – 191 (tax services)
CPC – Quiz cont.
• KM’s daughter is the CFO of Buses-R-Us.
Familiarity threat – Objectivity
There may also be self-interest & intimidation threats and threat to
KM’s integrity as a result of the daughter holding an high position in
which her performance will be judged by how she manages finances for
instance. (s290.126-131)
Safeguard: KM should not be part of the audit team.
• Buses-R-Us represents 80% of the revenue KM’s
audit firm.
Self-interest & Intimidation threat – Objectivity
Safeguard: KM audit firm should reduce the dependency
on Buses-R-Us (Refer to s290.217 – 219)
CPC – Quiz cont.
KM has been on the audit on Buses-R-Us since 2000 when
he joined The Auditors Inc as a first year trainee. He became
the senior audit manager from the 28 February 2005 audit. In
2009 he was promoted to be a partner responsible for the
audit of Buses-R-Us. Buses-R-Us is a Public Interest Entity
as defined.
You are required to:
Identify and discuss the ethical concerns and considerations
between The Auditors Inc and Buses-R-Us in terms of the
Code of Professional Conduct of SAICA for the year ended
29 February 2016.
CPC – Quiz cont.
Analysis of the requirement
You are required to:
Identify and discuss the ethical concerns AND
considerations between The Auditors Inc and
Buses-R-Us in terms of the Code of Professional
Conduct of SAICA.
 CPC – Quiz cont.
Analysis of the requirement Refers to non-
You are required to: compliance.

Identify and discuss the ethical concerns and

considerations between The Auditors Inc and Buses-R-Us
in terms of the Code of Professional Conduct of SAICA.
CPC – Quiz cont.
Analysis of the requirement
You are required to:
Identify and discuss the ethical concerns and
considerations between The Auditors Inc and
Buses-R-Us in terms of the Code of Professional
Conduct of SAICA.

Refers to factors you would consider in

addressing your concerns. In this regard these
factors are safeguards.
CPC – Quiz cont.
Analysis of the requirement
You are required to:
Identify and discuss the ethical concerns and
considerations between The Auditors Inc and
Buses-R-Us in terms of the Code of Professional
Conduct of SAICA.

The requirement limits you to address your answer i.t.o

SAICA’s CPC. Please note that the requirement could also
refer to corporate governance and in your answer you
will also consider ethics i.t.o SAICA CPC as well.
CPC – Quiz cont.
Analysis of the scenario
KM has been on the audit on Buses-R-Us since
2000 when he joined The Auditors Inc as a first
year trainee. He became the senior audit manager
from the 28 February 2005 audit. In 2009 he was
promoted to be a partner responsible for the audit of
Buses-R-US.
Junior role. Not a concern in terms of
the CPC. S290.148 refers to senior
personnel.
CPC – Quiz cont.
Analysis of the scenario
KM has been on the audit on Buses-R-Us since
2000 when he joined The Auditors Inc as a first year
trainee. He became the senior audit manager
from the 28 February 2005 audit. In 2009 he was
promoted to be a partner responsible for the audit of
Buses-R-US.

I.t.o S290.148 it is of a concern that he

has been a senior person on the audit
for 11 years (long period of time).
CPC – Quiz cont.
Analysis of the scenario
KM has been on the audit on Buses-R-Us since
2000 when he joined The Auditors Inc as a first year
trainee. He became the senior audit manager from
the 28 February 2005 audit. In 2009 he was
promoted to a partner responsible for the audit
of Buses-R-US.
I.t.o S290.149 it is of a concern that KM
has been a key audit partner for more than
6 years on a listed client and 5 years i.t.o
Cos Act
APA
 Auditing Profession Act (APA)
• S1 – definitions
• S37 and 38 –entail registration procedures for individual auditors and
for firms
• S41- deals with conduct & liability of registered auditors, specifically
relating to public practice.
• S44, 45 and 46 of the APA are very topical sections.
• S44 – Duties in relation to an audit
• The s45 of the APA gives guidance on the procedures to be followed
when an RI exists
• The IRBA guide – (Irreg) gives guidance on how to identify a
reportable irregularity (RI)
• S46 –Limitation of liability
APA
What are the audit firm’s duties in relation to an audit?
(S44)
• To appoint an RA responsible and accountable for the
audit.
• Submit the details of that RA to the IRBA.
I.t.o of the APA in what instances will an RA not express
an unqualified audit report?
• When an audit had scope limitation.
• When the financial statements are kept in Spanish.
• When the auditor was unable to obtain sufficient
appropriate audit evidence.
APA
• When there is a reportable irregularity (RI).
• When the auditor was not able to comply with all
laws and regulations in conduct of the audit.
Further duties of the auditor i.t.o of the APA
• State if the auditor or member of the firm kept the
accounting records on behalf of the audited client.
– assisting with closing entries, adjusting entries or framing FS from
existing records do not constitute keeping financial records on
behalf of the client.
• May not conduct an audit, if the auditor has conflict
of interest.
APA
State if there is an RI at ABC in the following
statements
• Branch manager of ABC failed to make payments to
SARS with regards to PAYE of employees.
Management is not aware.
• Management of ABC is aware of the above none
payment and does nothing about it.
• XYZ is a subsidiary of ABC. Management of XYZ
has been paying bribes to local authorities to obtain
contracts.
APA
Interpretation of the requirement.
• You are required to discuss the reporting
responsibility of the auditor with regards to the
identified RI i.t.o the APA.
– Refer to s45 of the APA for the reporting responsibility.
• You are required to identify if there is a reportable
irregularity at Buses-R-Us.
– Refer to s1 of the APA and the IRBA Guide (IRREG)
APA
s 46 – Limitation of liability
• Applicable only to statutory audits.
• The auditor does not incur any liability to the client or
third party for the opinion express unless, it can be
proved that the auditor was:
– Malicious,
– Fraudulent or
– Negligent
• The auditor may not limit his liability to the client
and third parties when performing statutory audit
ISA 240
• What is the difference between Fraud and RI?
• Who is responsible for the prevention and
detection of Fraud?
• Which quality must the auditor display in dealing
with Fraud?
• Refer to the Appendix 1 and 3
• Fraud may be intergrated with topics such as an
RI and audit risk.
 CORPORATE GOVERNANCE

KING IV:
REPORT ON CORPORATE GOVERNANCE FOR
SOUTH AFRICA 2016
 STUDY APPROACH:

• Read through Report using TL as guidance

• Use Auditing Notes as additional reference to
explain concepts
• Attempt questions under exam conditions
 DIFFERENCE BETWEEN KING III/IV

What’s NEW??

• Principle-and-outcomes based approach vs. tick box

• Remuneration receives far great prominence
• Technology and information separated
• Social and Ethics Committee best practise for all organisations
• Emphasis on critical role of stakeholders
• Strong focus on opportunity management
• Does not specifically address audit firm rotation
• Group governance
 DIFFERENCE BETWEEN KING III/IV

What’s DIFFERENT??

• Refined the concept of combined assurance

• Concept of independence NB NB
• Board’s role in strategy development
• Integrated thinking
 UNDERPINNING PHILOSOPHIES

• Sustainable development.
• The organisation as an integral part of society.
• Stakeholder inclusivity.
• Corporate citizenship.
• Integrated thinking.
• Integrated reporting.
 KING IV APPLICATION AND
DISCLOSURE
“Apply and explain” vs. “apply or explain”

• Accommodating, non-prescriptive, outcomes-based approach

• Outcomes:
ethical culture;
good performance;
effective control; and
legitimacy
 KING IV APPLICATION AND
DISCLOSURE
Proportionality

• the size of turnover and workforce;

• resources (the organisation has available, to apply the practices);
and
• the complexity of the organisation’s strategic objectives and
operations.
 KING IV APPLICATION AND
DISCLOSURE
Disclosure requirements

King IV states that disclosures should be:

• updated annually;
• formally approved by the board; and
• publicly accessible.

Disclosures can be made in:

• the integrated report;
• a sustainability report;
• a social and ethics report; or
• any other printed or online report.
PART 1: Leadership, ethics and corporate citizenship

Principle 1: The governing body should lead

ethically and effectively;
Principle 2: The governing body should
govern the ethics of the organisation in a
way that supports the establishment of an
ethical culture; and
Principle 3: The governing body should
ensure that the organisation is and is seen
to be a responsible corporate citizen.
PART 1: Leadership, ethics and corporate citizenship

Characteristics of integrity, competence, responsibility,

accountability, fairness and transparency.

UNDERPINNING PHILOSOPHIES = Always evaluate as part of

your answer
PART 2: Strategy, performance and reporting

Principle 4: The governing body should appreciate

that the organisation’s core purpose, its risks and
opportunities, strategy, business model,
performance and sustainable development are all
inseparable elements of the value creation
process; and
Principle 5: The governing body should ensure that
reports issued by the organisation enable
stakeholders to make informed assessments of the
organisation’s performance, and its short, medium
and long-term prospects.
PART 2: Strategy, performance and reporting
“value creation process” = “The process that results in increases, decreases or
transformations of the capitals caused by the organization’s business activities and
outputs.”

1.FINANCIAL
2.MANUFACTURED
3.INTELLECTUAL
4.HUMAN
5.SOCIAL AND RELATIONSHIP
6.NATURAL
PART 3: Governing structures and delegation
Principle 6: The governing body should serve as the focal point and custodian of
corporate governance in the organisation;
Principle 7: The governing body should comprise the appropriate balance of
knowledge, skills, experience, diversity and independence for it to discharge its
governance role and responsibilities objectively and effectively;
Principle 8: The governing body should ensure that its arrangements for
delegation within its own structures promote independent judgement, and assist
with balance of power and the effective discharge of its duties;
Principle 9: The governing body should ensure that the evaluation of its own
performance and that of its committees, its chair and its individual members,
support continued improvement in its performance and effectiveness; and
Principle 10: The governing body should ensure that the appointment of, and
delegation to, management contribute to role clarity and the effective exercise of
authority and responsibilities.
Example - Board Composition (Continued)

Executive Non-executive
 Example - Board Composition (Continued)

Executive Non-executive

Minimum: CEO and Finance

Example - Board Composition (Continued)

Executive Non-executive
Example - Board Composition (Continued)

I am independent!!!!

Executive Non-executive
Example - Board Composition (Continued)

Chairman
Lead Ind.

Executive Non-executive
PART 3: Governing structures and delegation
Committee Members
Audit Independent, non-executive
directors
Nominations Non-executive directors,
majority should be
independent.
Chairperson of the board
should be a member.
Risk Executive and non-executive
directors, majority whom are
non- executive.
Chairperson of the board may
be a member.
Remuneration Non-executive directors,
majority should be
independent.
Social and ethics Executive and non-executive
directors, majority whom are
non- executive.
Chairperson of the board may
be a member.
Number of members Chairman
At least 3 Independent, non-executive
director
At least 3 Chairperson of the board may
be elected as chairman.
At least 3 Chairperson of the board may
be elected as chairman.
At least 3 Non-executive director
Chairperson of the board
should not be elected as
chairman.
At least 3 Chairperson of the board
should not be elected as
chairman.
 INDEPENDENT NON-EXECUTIVE DIRECTOR

• NB Substance over form  Independence of MIND

• Link with Companies Act  Section 75
• Guidelines:
Financial capital
Share-based incentive scheme
Shareholder
Employed as executive manager
Auditor
Professional advisor
Executive – customer, supplier
Executive – related party
Remuneration based on performance
PART 4: Governance functional areas
Principle 11: The governing body should govern risk in a way that supports the
organisation in setting and achieving its strategic objectives;
Principle 12: The governing body should govern technology AND information in a way
that supports the organisation setting and achieving its strategic objectives;
Principle 13: The governing body should govern compliance with applic­able laws and
adopted, non-binding rules, codes and standards in a way that supports the
organisation being ethical and a good corporate citizen;
Principle 14: The governing body should ensure that the organisation remunerates
fairly, responsibly and transparently so as to promote the achievement of strategic
objectives and positive outcomes in the short, medium and long term; and
Principle 15: The governing body should ensure that assurance services and functions
enable an effective control environment, and that these support the integrity of
information for internal decision-making and of the organisation’s external reports.
PART 4: Governance functional areas

Principle 11: RISK Governance

Opportunity vs Risk

It is recommended that the governing body should:

• set the approach for risk governance with a specific focus on opportunities
and risk when developing strategy;
• approve risk policy;
• evaluate and agree the risks it is prepared to take;
• delegate the implementation of risk management to management;
• oversee the risk management process;
• consider to receive independent assurance on the effectiveness of risk
management; and
• make the necessary disclosures regarding risk and opportunities.
PART 4: Governance functional areas

Principle 12: TECHNOLOGY AND INFORMATION

Governance

It is recommended that the governing body:

• set the approach for technology and information governance and that it approve
the policy;
• delegate to management effective technology and information implementation;
• oversee the results of the implementation by management;
• oversee management of information and technology;
• consider to receive independent assurance on the effectiveness of technology
and information; and
• make the necessary disclosures regarding technology and information.
PART 4: Governance functional areas

Principle 13: COMPLIANCE Governance

It is recommended that the governing body:

• direct compliance;
• approve policy;
• delegate to management the implementation of compliance management;
• oversee compliance management; and
• make the necessary disclosures.
PART 4: Governance functional areas

Principle 14: REMUNERATION Governance

It is recommended that:
• the governing body sets an organisation-wide remuneration policy that articu­lates
and gives effect to its direction on fair, responsible and transparent remuneration;
• disclosure takes place via a remuneration report containing a background
statement, an overview of the main provisions of the remuneration policy, and an
implementation report;
• shareholders be given the opportunity to vote on remuneration policy and
implementation.
PART 4: Governance functional areas

Principle 15: ASSURANCE

• COMBINED ASSURANCE
• ASSURANCE OF EXTERNAL REPORTS
• INTERNAL AUDIT
 COMBINED ASSURANCE
OVERSEEN BY AUDIT COMMITTEE

Line functions Regulatory

inspectors

Specialist functions Other

external
assurance
providers
Internal auditors etc.
External
auditors
PART 5: Stakeholder relationships
Principle 16: In the execution of its governance role and responsibilities
the governing body should adopt a stakeholder-inclusive approach that
balances the needs, interests and expectations of material stakeholders
in the best interests of the organisation over time; and
Principle 17: The governing body of an institutional investor
organisation should ensure that responsible investment is practiced by
the organisation to promote the good governance and the creation of
value by the companies in which it invests.
GOVERNING STAKEHOLDER RELATIONSHIPS
Main categories:
– Suppliers
– Creditors
– Employees
– Government
– External Auditors
– Consumers/Customers See also ADR
– Industry =
Alternative
– Local communities Dispute
– Media Resolution
– Regulators
– Potential investors
 LINK BETWEEN CO. ACT AND KING

IMPORTANT AREAS:
 Functions and conduct of directors (section 76 of Co.Act)
 Remuneration of directors
 Audit committee (Section 90 to 94 of Co.Act)
 Social and ethics committee (JSE Regulation)

READ WHAT IS REQUIRED OF

YOU…KING AND/OR CO. ACT!!!
 EXAM TECHNIQUE

• Study theory…
• Use open book to your advantage…
• Be on the look out for integration…
• REQUIRED REQUIRED REQUIRED…
• Do not make assumptions…
• QUESTIONS QUESTIONS QUESTIONS!!!!!

THEORY

APPLICATION

CONCLUSION (IF REQUIRED)

Questions?