LEADER IN NURTURING CHARTERED ACCOUNTANTS

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2 Corporate Governance KING IV 2

3 King IV objectives Promote corporate governance as integral to running an organisation (governing body) and delivering governance outcomes such as ethical culture, good performance, effective control and legitimacy. Broaden the acceptance and application of the King IV Report by making it accessible and fit for implementation across a variety of sectors and organisational types - scalability. (c) Chartered Accountants Academy - 3

4 King IV objectives Reinforce corporate governance as a holistic and interrelated set of arrangements to be understood and implemented in an integrated manner. Encourage transparent and meaningful reporting to stakeholders. Present corporate governance as concerned with not only structure and process, but also with an ethical consciousness and conduct. (c) Chartered Accountants Academy - 4

5 King IV structure (c) Chartered Accountants Academy - 5

6 King IV principles: Refer to part 4 of the code: page 40 to 41 (c) Chartered Accountants Academy - 6

7 Common Student Pitfalls Required Examiner s Expectations Common Pitfalls Identify and describe any corporate governance weaknesses with reference to the information provided. Base your discussion on the requirements of King IV code on corporate governance. Identify information from the scenario which provides evidence of non-compliance with King IV trigger Explain which King IV principle was contravened based on the evidence from the trigger above Some students show a lack of understanding of king IV requirements as evidenced by their failure to pick concerns especially around the governance of risk. Sentence construction from some students was quite poor as evidence by the length of sentences in the solutions. 7

8 Common Student Pitfalls Required Examiner s Expectations Common Pitfalls Identify and discuss concerns with regards the governance structures at DHL with reference to the requirements in King IV code on corporate governance. Identification and discussion of concerns with regards the governance structures at DHL as indicated in the scenario with reference to the requirements in King IV code on corporate governance. Some students waste time quoting king 4, without clearly stating the concerns. Some students failed to identify the need for of at least 1 additional exec Some students stated that the chair should not be a member of the remuneration committee Students stated that board evaluation should be done annually instead of every 2 years 8

9 Tutorial Analysis Question 4 (b) Question 9 (a) 9

10 Questions? 10

11 Materiality in planning and performing an audit 11

12 Sub-Topic Analysis Concept of materiality and performance materiality Types of materiality Steps to applying materiality in an audit Application of the materiality steps to an exam type question 12

13 Why is materiality important to us? There is an inverse relationship between materiality & risk or Therefore M guides how much work we need to do to support our opinion ELLIOT T WONENYIKA CA(Z) 13

14 Steps in applying materiality Determine materiality and performance materiality for the financial statements ISA320 If necessary determine materiality and performance materiality for classes of transactions, account balances or disclosures ISA320 Plan and perform the audit procedures Evaluate the audit findings ISA450 ELLIOT T WONENYIKA CA(Z) 14

15 Common Student Pitfalls Required Examiner s Expectations Common Pitfalls Failure to distinguish between overall and performance materiality 15

16 Tutorial Analysis Question 1 (b) Question 5 (b) 16

17 Questions? 17

18 Fraud, laws and Regulations 18

19 Sub-Topic Analysis Concept of fraud with the context of an audit of financial statements. Management and auditors responsibilities in respect of fraud. Actions to be taken by auditor when they have identified suspect fraud 19

20 Sub-Topic Analysis Management and auditors responsibilities in respect of compliance with laws and regulations. Actions to be taken by auditor when they have identified suspected or actual non compliances with laws and regulations Communicating with those charged with governance 20

21 Common Student Pitfalls Required Examiner s Expectations Common Pitfalls Describe the actions to be taken by Auditors in respect of the information on the investigation by the Zimbabwe Revenue Authority in performing the 2016-year end audit The scenario will highlight possible noncompliance with revenue laws apply the requirements of ISA 250 in answering this question. Failure to apply ISA 250 to answer the question. Some students can identify the requirement to report to those charged with governance. 21

22 Tutorial Analysis Question 10 (e) 22

23 Questions? 23

24 Controls 24

25 Sub-Topic Analysis 1. Internal controls and business cycles; 2. General Controls; 3. Application controls; 4. Designing a system of internal controls; 5. Evaluating control weaknesses. 25

26 Mind map 26

27 Mind map 27

28 Common Student Pitfalls Required Examiner s Expectations Common Pitfalls a. With reference to the information in working paper 501: i. Identify key controls to test over the occurrence, accuracy and completeness of sales revenue. ii. Describe the test of control procedures to test operating effectiveness of the controls identified in (i) above. Students were expected to design test of control procedures over controls which address occurrence, accuracy and completeness of sales. Incorrectly identifying a process as a control Inability to come up with a relevant test of control for testing data which is encrypted during transmission Most students wrote points on cash, spot cash counts which do not address the occurrence, accuracy and completeness of sales revenue. 28

29 Common Student Pitfalls Required Examiner s Expectations Common Pitfalls Describe the controls you would expect to be in place over the revenue system and for each control identified briefly describe the control objective (risk being addressed). Identify both application and general controls over the revenue system And for the identified controls students were also expected to describe the what can go wrong (risk) being addressed by the control. Memory dumping of controls which were not relevant to the scenario. Simply stating control objective without fully explaining the what can go wrong. Repetition of controls. 29

30 Tutorial Analysis Question 2 (b) and (c) Question 3 (f) Question 5 (h) Question 8 (c) Question 11 (a) 30

31 Questions? 31

32 Introduction to Audit Evidence 32

33 Sub-Topic Analysis 1. Concept of audit evidence 2. Requirements for audit evidence. 3. Hierarchy of the importance of audit evidence (reliability). 4. Documentation requirement for audit evidence. 5. TOCs 6. Substantive procedures 7. Substantive procedures; Going concern assessment 33

34 Sub-Topic Analysis Definition of TOCs. When should TOCs be performed. Difference between risk assessment procedures and TOCs. How to formulate TOCs. Direction of testing. 34

35 Nature of tests of controls Refers to the types of tests of controls that the auditor can perform: Inspection Observation Enquiry Re-performance 35

36 1. HOW 2. WHAT 3. WHY How should a test of control be formulated? 36

37 Formulating Test of controls Controls Separate goods receiving departments exists. The goods are received by two persons who count and inspect them for quality On receipt of the goods the goods receiving personnel prepare the GRN and sign it as proof of the fact that the goods were counted and inspected. Test Of Controls Enquire and observe whether a separate department exists Enquire of the goods receipt personnel how the controls function Observe on a secretive basis the performance of the control to confirm whether these are being complied with. Observe the receipt of the goods and determine whether the controls are complied with. Inspect the signatures on the GRN as proof that the control is complied with. Nyasha Chakuma - Makoni - Chartered Accountants Academy - 37

38 Direction of testing What should the auditor consider when selecting items on which to perform TOCs? The control objectives that the control procedures are intended to achieve 1. Validity- accounting records to the source documents 2. Completeness - source documents to the accounting records Nyasha Chakuma - Makoni - Chartered Accountants Academy - 38

39 Common Student Pitfalls Nature of questions Examiner s expectations Common Pitfalls a. With reference to the information in working paper 501: i. Identify key controls to test over the occurrence, accuracy and completeness of sales revenue. ii. Describe the test of control procedures to test operating effectiveness of the controls identified in (i) above. Students were expected to design test of control procedures over controls which address occurrence, accuracy and completeness of sales. Incorrectly identifying a process as a control Inability to come up with a relevant test of control for testing data which is encrypted during transmission Most students wrote points on cash, spot cash counts which do not address the occurrence, accuracy and completeness of sales revenue. 39

40 Common Student Pitfalls Discuss the controls you would expect to have been implemented before the implementation of the SAP enterprise resource management system and during the data migration to the SAP inventory management module. Students were expected to design controls over the data migration process Others started off with controls they would expect on acquisition or in-house development. Coming up with controls relevant to the implementation stage which was not required. Memory dumping controls which were not relevant within the context of the required. 40

41 Tutorial Analysis Question 9 (c) Question 10 (a) and (d) 41

42 Substantive Procedures Overview of SPs What are Substantive procedures. When should SPs be performed. Why perform SPs Risk assessment procedures and SPs. Designing of SPs. General audit procedures. Understand requirements around analytical procedures. 42

43 Mind Map 43

44 Design of Substantive Procedures Nature (ISA 330 par A9 to A10) Timing (ISA 330 par A11 to A14) Extent (ISA 330 par A15 to A16) 44

45 Type of substantive procedures Inspection Enquiries External confirmations Recalculations Analytical procedures General procedures Consists the examining of records or documents or a physical examination of an asset Consists of seeking information from knowledgeable persons within or outside the entity. This is audit evidence obtained by the auditor as a direct written response to the auditor from a third party in paper, electronic or other form. Can be done manually or electronically to test mathematical accuracy. Consists of a study of plausible relationships between financial and non-financial date. Also involves procedures performed to investigate identified fluctuations and relationships that are inconsistent with other information. Consists of procedures such as the review of minutes, obtaining management representation letter. Nyasha Chakuma - Makoni - Chartered Accountants Academy - 45

46 Design of Substantive procedures What should an audit procedure include? HOW, WHAT AND WHY. HOW: A verb which should describe the action. WHAT: A reference to the relevant and reliable source of evidence. WHY: The reason for the audit procedure with regards to the assertion being tested and the risk that is being responded to. Nyasha Chakuma - Makoni - Chartered Accountants Academy - 46

47 General Audit Procedures These are procedures which address more than one assertion. E.gs Recalculate castings and calculations of general ledger accounts, annual financial statements, etc. Agree opening balances with previous year s working papers and audited financial statements. Test postings from the subsidiary ledgers to the general ledger. Agree the totals of lists e.g. debtors age analysis or list of creditors with the general ledger account. Agree the balance of the general ledger account to the TB and AFS. Inspect minutes of meetings (management, board of directors, and shareholders) for decisions taken, authorisation, etc. Nyasha Chakuma - Makoni - Chartered Accountants Academy - 47

48 Common pitfalls Required Examiner s Expectations Common Pitfalls c. With reference to the information in working paper DD03 describe the substantive procedures you would perform over the Exide batteries inventory balance as at 31 March 2017 addressing the valuation and rights obligations assertions. Formulation of substantive procedures over the Exide batteries inventory balance as at 31 March 2017 based on WP DD03 addressing the valuation and rights obligations assertions only. Addressing assertions other than valuation and rights over inventory Idea on encumbered inventory but could not further explain the point or come up with procedures. Nyasha Chakuma - Makoni - Chartered Accountants Academy - 48

49 Common pitfalls Required Examiner s Expectations Common Pitfalls Failure to use appropriate terminology in wording of procedures e.g. Verify vs Inspect. Failure to explain substantive procedures on determining if inventory is held at the lower of cost and NRV. Nyasha Chakuma - Makoni - Chartered Accountants Academy - 49

50 Common pitfalls Required Examiner s Expectations Common Pitfalls Describe the substantive procedures that you would perform on the debtors on the listing received from the client by the 2nd year trainee accountant. Description of the substantive procedures to be performed on the debtors on the listing received from the client by the 2nd year trainee accountant. General audit procedures earned students more marks. Wasting time writing down instructions to be followed when performing a debtors circularization and defining positive/negative confirmation Incorrect solution points like perform a debtor s analytical review by comparing total number of debtors on the listing with those on the prior period Nyasha Chakuma - Makoni - Chartered Accountants Academy - 50

51 Tutorial Analysis Question 1 (d) Question 2 (d) and (f) Question 3 (e) Question 4 (c) Question 5 (d), (e) and (g) Question 7 (b), (c), (d) and (e) Question 12 (a) and (b) Question 13 (d) 51

52 Questions? 52