Hogwarts’s Guide to Auditing 3B

Main Examination
Audit and Review Reports
When PI Score is less than 350 but greater than 100, Companies
regulations 4 requires a review engagement if the AFS is internally
complied
➡ When the PI Score is greater 350, or if less than 350 and AFS is
internally compiled then companies’ regulations requires a full audit.
Review engagements are expressed in negative- Nothing has come to our
attention that causes us to believe that the nancial statements do not
present fairly.
➡ Audit reports opinion expressed in the positive- AFS present fairly in
all material respects
In terms of Companies Regulations 27, the ffg criteria needs to meet for
someone to be allowed to issue an opinion:
• Registered with a professional body
• Not involved in the day to day management currently or in the
past 3 years
• Not a prescribed of cer or full time executive currently or in
the past 3 years
• No personal nancial interest in the company or its subsidiaries/
related entities
• Must be independent- Refer to CPC
ISRE 2400 details the required for an independent review report.
➡ SAAPS 3 has illustrates sample audio reports
Pervasive is when a misstatement is evident throughout the whole
nancial statements and not just isolated to one speci c element of them
Types of Opinions
Unmodi ed/ unquali ed Conclusion - The practitioner shall express an
unmodi ed conclusion in the practitioner’s report on the nancial
statements as a whole when the practitioner concludes, based on the
evidence obtained, that nothing has come to the practitioner’s
attention that anything is wrong with the nancials.
- Issue an unquali ed opinion even when there is a material
misstatement but it is not pervasive, however, disclose the matter
– Illustration 2 ISRE 2400
- Example Review Report: Illustration 1 ISRE 2400, SAAPS 3
Illustration 1-4
Modi ed/ quali ed Conclusion - The practitioner shall express a
modi ed conclusion in the practitioner’s report on the nancial
statements as a whole when the practitioner determines that the
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 nancial statements are materially misstated and the matter is
pervasive.
- Example: Loan to a subsidiary/ parent without shareholder
consent- leads to a reportable irregularity
- Inability to obtain suf cient evidence on internal controls- SAAPS
3 Illustration 20
Adverse Conclusion- The practitioner shall express an adverse
conclusion in the practitioner’s report on the nancial statements as a
whole when the practitioner determines that the nancial statements
are GROSSLY materially misstated.
- Example: Acquired a subsidiary but did not consolidate the
nancial Review Report ISRE 2400 Illustration 4, SAAPS 3
Illustration 19
- Liabilities exceed asset and there is no plans implemented to
address the going concern issue- SAAPS 3 Illustration 14
- Financial assistance given to director but liquidity/ solvency tests
nor performed/ effect S45. S129 (Business Rescue), and S22-
Refer to Companies Act Example of Points
Disclaimer Opinion - The practitioner is unable to obtain suf cient
appropriate evidence in relation to one or more speci c items in the
nancial statements that are material in relation to the nancial
statements as a whole, as the basis for a conclusion.
- Example: unable to obtain suf cient appropriate evidence about
multiple elements of the nancial statements- Review Report ISRE
2400 Illustration 5, SAAPS 3 Illustration 15
- Unable to obtain written representation- SAAPS 3 Illustration 16

Key Audit Matters

No KAM- Except for the matter described in the Basis for …Opinion section,
we have determined that there are no other key audit matters to
communicate in our report.
Examples of KAMs- Key audit matters are those matters that, in our
professional judgment, were of most signi cance in our audit of the nancial
statements of the current period. These matters were addressed in the
context of our audit of the nancial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on these
matters. In addition to the matter described in the Basis for … Opinion
section we have determined the matters described below to be the key
audit matters to be communicated in our report.
Goodwill
Under IFRSs, the Group is required to annually test the amount of goodwill for impairment.
This annual impairment test was signi cant to our audit because the balance of XX as of
December 31, 20X1 is material to the nancial statements. In addition, management’s
assessment process is complex and highly judgmental and is based on assumptions, speci cally
[describe certain assumptions], which are affected by expected future market or economic
conditions, particularly those in [name of country or geographic area].
Valuation of Financial Instruments
The Company’s investments in structured nancial instruments represent [x%] of the total
amount of its nancial instruments. Due to their unique structure and terms, the valuation of
these instruments are based on entity-developed internal models and not on quoted prices in
active markets. Therefore, there is signi cant measurement uncertainty involved in this
valuation. As a result, the valuation of these instruments was signi cant to our audit.
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Effects of New Accounting Standards
As of January 1, 2013, IFRS 10 (Consolidated Financial Statements), 11 (Joint Arrangements)
and 12 (Disclosure of Interests in Other Entities) became effective. IFRS 10 requires the
Group to assess for all entities whether it has: power over the investee; exposure, or rights,
to variable returns from its involvement with the investee; and the ability to use its power
over the investee to affect the amount of the investor's returns. The complex structure,
servicing and ownership of each vessel, requires the Group to assess and interpret the
substance of a signi cant number of contractual agreements.
Valuation of De ned Bene t Pension Assets and Liabilities
The Group has recognized a pension surplus of [monetary value] as of December 31, 20X1.
The assumptions that underpin the valuation of the de ned bene t pension assets and
liabilities are important, and also subjective, judgments as the surplus/de cit balance is
volatile and affects the Group’s distributable reserves. Management has obtained advice from
actuarial specialists in order to calculate this surplus, and uncertainty arises as a result of
estimates made based on the Group’s expectations about long-term trends and market
conditions. As a result, the actual surplus or de cit realized by the Group may be signi cantly
different to that recognized on the balance sheet since small changes to the assumptions
used in the calculation materially affect the valuation.
Revenue Recognition
The amount of revenue and pro t recognized in the year on the sale of [name of product] and
aftermarket services is dependent on the appropriate assessment of whether or not each
long-term aftermarket contract for services is linked to or separate from the contract for
sale of [name of product]. As the commercial arrangements can be complex, signi cant
judgment is applied in selecting the accounting basis in each case. In our view, revenue
recognition is signi cant to our audit as the Group might inappropriately account for sales of
[name of product] and long-term service agreements as a single arrangement for accounting
purposes and this would usually lead to revenue and pro t being recognized too early
because the margin in the long-term service agreement is usually higher than the margin in
the [name of product] sale agreement.
Going Concern Assessment
As disclosed in Note 2, the Group is subject to a number of regulatory capital requirements,
which are a key determinant of the Group’s ability to continue as a going concern. We
identi ed that the most signi cant assumption in assessing the Group’s and [signi cant
component’s] ability to continue as a going concern was the expected future pro tability of
the [signi cant component], as the key determinant of the forecasted capital position. The
calculations supporting the assessment require management to make highly subjective
judgments and also require adjustment to accounting gures to re ect regulatory
requirements stipulated by the [name of applicable regulatory framework(s)]. The calculations
are based on estimates of future performance, and are fundamental to assessing the
suitability of the basis adopted for the preparation of the nancial statements. We have
therefore spent signi cant audit effort, including the time of senior members of our audit
team, in assessing the appropriateness of this assumption.
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KING IV
examples of po ible points
Principle 1- the council should lead ethically and effectively
• In terms of principle 1 practice 1 to 3, the board should act in the best interest
of the company embodying ethical characteristics at all times. Taken all of the
above into consideration it does not seem as if the board (especially the
executive directors) are acting in the best interest of the company.
• The board should provide effective leadership based on an ethical foundation
(principle 1). Due to the non-adherence of King IV it is arguable whether the
company is managed with an ethical foundation that take into account all
stakeholders within the rm.
Principle 3- the governing body should ensure that the organisation
is and is seen to be a responsible corporate citizen
• Companies should be responsible corporate citizen. This involves not only
compliance with laws and regulation but also acting ethically and fair toward
customers and the greater community
• Companies should not knowingly contravening the laws and thus placing the
safety of customers at risk.
Principle 7- The governing body should comprise the appropriate
balance of knowledge, skills diversity and independence for it to
discharge its governance roles and responsibilities objectively and
effectively.
• In terms of principle 7 the board should comprise a balance of the skills,
experience, diversity, independence and knowledge needed to discharge its role
and responsibilities.
• It is of concern that the chair and CFO are related and as such no diversity or
independence. This may cause con ict as they could dominated the board, king
IV recommends a balance of power
• Principle 7 practice 7(b) recommends that the board should comprise an
appropriate mix of executive, non-executive and independent non- executive
members. The governing body is merely made out of female members and there
is no gender representation in line with principle 7 practice 11.
• Furthermore, principle 7 practice 8 recommends that the majority of the board
members should be non-executive directors. The company has 6 directors of
which only 3 are non-executive directors. 50% does not comprise a majority and
consequently they do not adhere to this principle.
• Principle 7 practice 8 further recommends that majority of these non-executive
directors should be independent which is not the case with the company
• P7.RP10 recommends that there must be diversity of skills, knowledge, gender,
race, etc., however, there appear to be more males than females, with 5
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 members being male and only 3 females. Furthermore, there is more white
individuals in the governing body than any other race with 7 Whites and 1
Indian.
• In terms of principle, 7 practice 12 to 13 the board should establish
arrangements for periodic, staggered rotation of its members and should
establish a succession plan for its membership.
• In terms of P7.RP13, the governing body must establish a succession plan for the
membership of the board, yet it appears that the youngest governing body
member is 58 old, which could be an indication of lack of succession planning.
• P7.RP14 recommends that the governing body as a whole must approve the
nomination of the candidates for election as members, yet this does not appear
to be the case. Prior to nomination of a candidate the governing body would
have had to consider the collective knowledge, skills, diversity and experience of
the governing body.
• In line with the appointment of new members of the governing body, P7.RP22
recommends that induction must be facilitated in order for new members to be
able to make the maximum contribution in the shorted period to the furtherance
of the board’s duties, however; the company has had no induction for the new
members
• RP24 suggests that professional development and regular brie ngs should take
place yet none of such activities has taken place at the company
• According to principle 7 practice 28 (a) & (b) a non-executive director would not
be perceived to be independent if he/she is a signi cant provider of nancial
capital (shareholder) or ongoing funding to the organisation, or is an of cer,
employee or representative of such shareholder or funder.
• A governing body member has shareholding in the organisation and will not be
seen as independent as she holds shares in the company and has the ability to
control or signi cantly in uence management or the governing body as she is the
chairperson of the board.
• There is no chairman of the board of directors. King IV Principle 7 Practice 31
requires the Board to be chaired by a non-executive independent director.
• The chairperson of the board does not appear to be an independent non-
executive director as required by principle 7 practice 31 of King IV as she was
previously a CEO.
• Furthermore, it is a concern that the chairperson of the board was appointed by
the shareholders and not by the board of directors in terms of principle 7
practice 31.
• In terms of principle 7 practice 32 a lead independent director (LID) should be
appointed. It is of concern that the board structure as stated does not indicate
that the company has appointed such an LID and did not adhere to the
recommendations of KING IV.
• In terms of principle 7 practice 32 a lead independent director (LID) should lead
the performance appraisal of the chairperson and not a member of the audit
committee as suggested.
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• It is a concern that the company did not appoint a lead independent director as
such did not perform proper appraisals of the chairperson instead they have
allowed the audit committee to evaluate a chairperson.
• The chair of the governing body should not be a member of the of audit
committee as per principle 7 practice 36(a).
• Although King IV does not address the minimum number of governing body
meetings that should take place per year, it recommends that the number of
meetings held during the reporting period should be disclosed. PRINCIPLE 6
PRACTICE 5a
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
• King IV requires that the company establish audit, risk, remuneration,
nomination, social and ethics committees.
• The chairperson of the audit committee should participate in setting and
agreeing the agenda of the committee principle 8. Due to the chairperson of
the committee not being appointed yet at the time of the meeting, it resulted
in non-compliance with this principle with someone else drafting the agenda for
the meeting.
• According to principle 8 practice 45, the board should ensure that each
committee, as a whole, has the necessary knowledge, skills, experience and
capacity to execute its duties effectively. Principle 8 practice 55 further
recommends that members of the audit committee should, as a whole, have the
necessary nancial literacy, skills and experience to execute their duties
effectively.
• The audit committee does not consist of the correct number of members, as
there is only two people making up the committee. There must be a minimum of
three members for each committee established as per P8.RP46.
• In terms of principle 8 practice 51, the board should establish an effective and
independent audit committee with all the members of the audit committee
being independent non-executive directors (principle 8 practice 56). It is of
concern that the company only have 1 independent non-executive director that
could be appointed to the audit committee and consequently adherence to the
recommendation is not possible currently as there are not enough governing
body members for the audit committee.
• Members of the committee as a whole should have necessary nancial literacy,
a member should not be appointed to the committee in the current year if he
has no nancial skills. Practice 55
• The audit committee should be chaired by an independent non-executive
director (principle 8 practice 57) not currently chaired by CFO.
• The board should elect the chairperson of the audit committee principle 8
practice 57. In this scenario, the committee itself elected the chairperson.
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 • The audit committee has not met with the internal and external auditors during
the year as per principle 8 practice 58
• The audit committee has not addressed the independence or lack thereof the
external auditor as per P8.RP59a
• The audit committee is required to review the effectiveness and quality of the
external audit process.
The audit committee has not considered the competence and whether the
auditors have the necessary resources to perform the audit of a large listed
company considering they only have 30 staff. P8.R59c
• Practice 66 the CEO should NOT be should be a member of the remuneration
committee
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.
• All members should be non-executive members. Only one member is non-
executive and the other two are executive members.
The chairman of the committee should be an independent non-executive
director. Principle 10 practice 79 states that CEO should speci cally not be a
member of the remuneration committee
• The board must evaluate the performance of the CEO and directors on an
annual basis (not remuneration committee)
Principle 13 – the governing body should govern compliance with
applicable laws…
• The board should ensure that the company complies with applicable laws and
considers adherence to non-binding rules, codes and standards (principle 13). Due to
various companies act laws not being adhered to, the companies laws are not well
managed and is concerning.
Principle 14- The governing body should ensure that the organisation
remunerates fairly…
• The remuneration committee has inappropriately reviewed the performance director
• The remuneration committee should prepare the remuneration packages/policy of
directors for approval by the board. And presentation to shareholders
• Fees for non-executive director must be approved by shareholders in the preceding
two before it is paid.
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 Code of Profe ional Conduct
Introduction
In terms of section 210 of SAICA’s code of professional conduct, an audit rm is
required to comply with the fundamental principles and identify, evaluated and
address threat before they may accept a client

CAs
Since he is a quali ed Chartered Accountant, he is bound by SAICA’s code of
professional conduct. Section 340 requires that all professional accountants to
comply with the fundamental principles of integrity, objectivity, con dentiality,
professional behaviour, competence and due care

Con dentiality
As I am a quali ed chartered accountant I am bound by the SAICA code of
conduct and I have breached con dentiality (Sec 114 of the SAICA Code of
Conduct) as I have shared information about the clients customers which could
be seen as insider trading. I have not acted with integrity and objectivity as I
have used client sensitive information for my own personal bene t. My actions
could be regarded as unprofessional and will bring the profession into disrepute.
Con ict of interest
I also have a con ict of interest as my spouse owns 25% of the shares in a
dealing with client’s customer thus there is a self-interest threat and , I stand to
gain personally as I have an indirect nancial interest and have therefore
allowed my professional judgment to be compromised.
Applying the conceptual framework approach of the code of professional
conduct = name the threat, give an explanation of the threat and provide
safeguards to mitigate risks

Self-interest threat
By providing the client with a list of potential customers in exchange for
additional work from the client, the audit rm has created a self - interest
threat as they have purely provided this list so that they can secure additional
work from the client. This could be seen to be breaching professional behaviour,
objectivity, con dentiality and integrity
By accepting the business proposal of taking up the 20% shares in the client,
the audit rm has created a direct nancial interest in their client. This
nancial interest creates a self - interest threat as the audit rm now stands
to gain nancially. Thus their objectivity, integrity, professional competence and
due care will be impacted. The audit rm will also no longer be seen as
independent.
Self-review threat
The audit rm providing any form of accounting, tax, secretarial, internal audit
services etc to their clients creates a self – interest and self –review threat.
Thus their objectivity, integrity, professional competence and due care will be
impacted. The audit rm will also no longer be seen as independent.
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 Safeguard: Although the company is unlisted, it may be regarded as a high-risk
client, especially if going concern problems arise. In the circumstances, the
Engagement Quality Control Reviewer EQCR partner per ISQC should also
review the audit plan. Consideration having an EQCR partner reviewing the
engagement be someone independent of the engagement before the nancial
statements are signed off audit opinion issued
Familiarity threat
A director of the client’s company was a was an audit trainee at the audit rm
having left the audit rm a few years after engagement with the client.
The audit rm has being the auditors for the client since its formation
Management is close friends with the engagement partner
Safe guard : Make it clear to management via an engagement letter that it is
their responsibility to make any decisions affecting the business, irrespective of
whether or not advise is provided by the audit rm
Advocacy threat to independence
The engagement partner is currently assisting the client with resolving its
dispute with SARS which may cause him to overlook the consequences of this
matter on the client’s nancial statements should the client’s case not be
particularly strong.
Safeguard: A different audit partner should handle tax advice and the audit
engagement. Also, assign other staff members who do not have a close
relationship with management, to the audit engagement. Concerning handling
tax matters, ensure that advice is within permitted bounds and does not
constitute tax evasion advice. Involve a specialist from the rm’s tax
department tax partner , if necessary, or seek an outside tax consultant for
advice on matter to tax law and interpretation.
Intimidation threat to independence
Management being dismissive over comments or probing of the matter regarding
ensuring a low taxable income indicates an intimidation threat to objectivity,
integrity and competence and due care.
Managing director is found to be aggressive, abrupt and sometimes
uncooperative creating an intimidation threat to independence and due care
Safe guard : A possible safeguard is to emphasise the terms of engagement
which speci cally includes a paragraph on performing an audit free of
limitations, or ensuring that a highly skilled or senior team is allocated to the
engagement, so they will be able to deal with his personality.
Safeguard : respond to the increased risk at nancial statement level in an
appropriate manner, e.g. by strengthening the engagement team include
assertive/highly skilled team members for this engagement and discuss the
matter of unprofessional behaviour with those charged with governance or
those he reports to.
Threat to due care
The audit rm is a small audit rm that wants to take on an audit of a listed
company. This may create a threat to professional competence and due care
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 There has been an increase in size of the business/client’s entity and its large
widespread.
Safe guard : consider sourcing assistance from other audit rms, also,
appointing more staff members into the audit rm to mitigate or deal with the
increased workload.
Gifts- section 340
Accepting gifts from an audit client may create a self-interest and familiarity
threat. This will impair the auditor’s ability to act independently
The only safeguard would be to not accept the gift.

Misleading information
Further, section 110.2 of the CPC states that a chartered account shall not
knowingly be associated with reports, returns, communication or other
information that is believed to contain false or misleading statement. STA has
contravened the code through knowingly changing the non-deductible
expenditure invoices to deductible ones.

Public interest entity – an entity that is listed on stock exchange

Example of how to word answers for applying conceptual framework
approach of code of profession conduct to matters
Scenario: the audit rm provides Taxation services and assurance services to its
client
There is a self – review and advocacy threats to a fundamental principle, i.e.
objectivity and independence of the external auditors raised by the services
offered by the auditors
There is a self – interest threat to objectivity as will be paid additional fees
for the services above.
The taxation services and the assurance services raise a con ict of interest for
the audit rm as their objectivity will be impaired as a results
These amounts to a signi cant threat that requires a safeguard to minimise
the threat to an acceptable level.
An appropriate safeguard would be to not engage in the taxation services, or
choose between offering other services (taxation and other secretarial) over
assurance services.
Use a different team to perform the taxation and other secretarial services to
enhance and emphasise independence

Consequences
The audit partner is a CA (SA) and a Registered Auditor, therefore both the
SAICA and the IRBA code of professional conduct applies to him. The audit
partner may been involved in a number of improper behaviour as per the
BN25/20 4 Registered Auditors Disciplinary rules and may be sentenced to a
caution, ne, suspension, etc. as IRBA sees tting as follows:
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 Contravening any laws or code per 2.6, i.e. if any of the signi cant threats are
not reduced to an acceptable level.
Failing to act with reasonable care and skill as he is delegating too much
responsibility to a 3rd year trainee instead of seeking advice regarding the
new computerized accounting system at the client and therefore use of CAATs.
Possibly bringing the profession into disrepute by not suf ciently addressing the
lack of complying to the code s above.

Some important subsections to note

Subsection 110- ve fundamental principles of integrity, objectivity,
con dentiality, professional behaviour, competence and due care
Subsection 112- objectivity without being compromised by bias, con ict of
interest or undue in uence
Subsection 114- maintain con dentiality of information
Subsection 120- conceptual framework on identify and addressing threats; self-
review, self-interest, advocacy, familiarity, intimidation
Subsection 320- Professional accountants must comply with fundamental
principles and apply conceptual framework
Subsection 330- Fees, no contingent fees or commissions allowed
Subsection 511- No loans should be given to the audit client
Subsection 601- No accounting or bookkeeping services allowed to be offered to
the audit client, creates a threat
Subsection 602- Administrative services do not create a threat
Subsection 603- No valuation services allowed to be offered to the audit client,
creates a threat
Subsection 604- No taxation services allowed to be offered to the audit client,
creates a threat
Subsection 605- No internal auditing services allowed to be offered to the
audit client that is a PIE, creates a signi cant threat, for non-PIE clients,
safeguards can mitigate threat.
Subsection 606- No IT services allowed to be offered to the audit client that is
a PIE, creates a signi cant threat, for non-PIE clients, safeguards can mitigate
threat.
Subsection 607- No litigation services allowed to be offered to the audit client
that is a PIE, creates a signi cant threat, for non-PIE clients, safeguards can
mitigate threat.
Subsection 608- No legal services allowed to be offered to the audit client that
is a PIE, creates a signi cant threat, for non-PIE clients, safeguards can mitigate
threat.
Subsection 609- Recruiting service that are prohibited and create a threat,
some recruiting service are allowed as it does not create a threat
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Companies Act
List of relevant sections (Not exhaustive):
Exam Technique: an infraction of each section can usually be followed by an
explanation of 3 to 6 points (3 to 6 marks). Note linkages to different sections
NB: all examples are taken from test 1s pyp

Section 2: An individual or company and any person related to that

individual (e.g. spouse) is regarded as the same person
Section 3: A company is a subsidiary if another juristic person can directly
or indirectly exercise control.
Section 4: Solvency and liquidity tests

Section 8: Categories of companies – Pro t (State owned, private, personal

liability, public) and non-pro t
Section 13: Incorporate a company
Section 15: Memorandum of incorporation must be consistent with the act
and is void to extent that it contravenes the act. It may deal with
additional issues and may impose greater restrictions.
Section 16: Amendments to the MOI requires a special resolution unless
MOI provides otherwise. MOI must be consistent with the act and is void to
extent that it contravenes the act. It may deal with additional issues and
may impose greater restrictions.
Section 21: A Pre-incorporation contact may be entered into on behalf of a
company that does not yet exist, that must be rati ed or rejected within 3
months of incorporation
Section 22: A company must not carry out its business recklessly, with
gross negligence or intention to defraud.
Example (2022): Section 22 (1)-(2) prohibits the company and its directors from
carrying on its business recklessly and knowing that the company is nancially
insolvent (liquidity). i.e. current Liabilities exceed current assets. The directors should
have stopped operating until a proper turnaround strategy had been implemented. The
Commission (CIPC) would issue a notice to the directors to show cause as to why they
should be allowed to continue trading if the Commission has not done that yet. Section
77(3)(b) prohibits the carrying on of the company’s business despite knowing that it
was being conducted in a manner prohibited by section 22(1). The directors should not
have continued trading under the circumstances; this is a breach of their duciary
duty owed to shareholders by directors. HNAI directors are guilty of section 214 as
they have continued trading when the company is not nancially viable.

Section 24: Any document, accounts etc must be in kept in written form for
7 years. Copies of the ffg must be kept
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 MOI
Record of all directors (detailed instructions included in legislation)
Reports of AGMs
AFS
Accounting records
Notice and minutes of all shareholder meetings
Written communication between company and holders

Section 28: A company must keep accurate and complete accounting records
in one of the of cial languages of the republic. Accounting records must be
accessible from the companies registered of ces. Note link to Section 214

Section 29: The published annual nancial statements of a company must:

satisfy the applicable nancial reporting standards (either IFRS or IFRS for SMEs);
fairly present the state of affairs and business of the company;
explain the transactions and nancial position of the company;
present the assets, liabilities, equity, income and expenses and any other prescribed
information;
Specify the date the nancial statements were produced and the applicable
accounting period;

Example (2021): In terms of the Companies Act Sec 29 the board should be
responsible for reliable nancial reporting and engaging in misstatements in AFS is in
breach of this section.

Section 30: Annual Financial Statements must be prepared within 6 months

of the end of the nancial year. Public company, listed company and SOC
subject to audit. Private company subject to independent review
(DEPENDING ON PIS) Private company with one share-holder or all shared
held by its directors, no audit or review.

Section 36: MOI sets out the class and number for authorization of shares
Example(2022): HNAI has insuf cient authorised ordinary shares available to allow for
the fresh issue of 25 000 shares as the available shares are insuf cient (120 000 –
115 000 = 5 000); the authorised shares will have to be increased by at least 20 000
(25 000 -5 000 = 20 000). This increase must be authorised in terms of section 36 of
the Act by an amendment to the MOI through a special resolution of shareholders
Section 36(2)(a); or the board of directors, unless the MOI provides Section 36(2)
(b).The company must le a notice of amendment of its MOI, setting out the changes
effected to the authorised share capital.
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Section 37: One class of shares min MUST have voting rights & entitled to
net assets on liquidation. Deals with distribution, preference & voting rights

Section 38: May only issue shares within bounds of MOI

Section 39: If a private company proposes to issue new shares, existing

shareholders have a right to be offered to subscribe rst
Example(2022): Because HNAI is a private company, the existing shareholders have a
pre-emptive right to be offered the shares to be issued before they are offered to
any person who is not a shareholder. The existing shareholders, therefore, have to
agree to this issue. Section 39(2).
This raises questions on CFOs involvement in the misstatements and that Siphelo and its
directors are not taking responsibility for reliable nancial reporting.
Non-compliance with section 29 by not providing AFS that are a true and fair view of
the entity’s operations, nancial performance and nancial position will also be non-
compliance with laws and regulations and results in a Reportable Irregularity.

Section 40: Consideration must be fair and adequate

Example(2012): Section 40 also gives the board the authority to issue shares
which are authorised.
Section 41: Subject to subsection (2), an issue of shares or securities
convertible , must be approved by a special resolution of the shareholders
of a company, if the shares, securities, options or rights are issued to a:
(a)director, future director, prescribed of cer;
(b)person related or inter-related to the company, or to a director; or
(c) nominee of a person contemplated in paragraph (a) or (b).
Subsection (1) does not apply if the issue of shares, securities or rights is:
(a) under an agreement underwriting the shares, securities or rights
(b) in the exercise of a pre-emptive right to be offered and to subscribe shares, as contemplated in
section 39;
(c) in proportion to existing holdings, and on the same terms and conditions as have been offered to
all the shareholders of the company or to all the shareholders of the class or classes of shares
being issued;
(d) pursuant to an employee share scheme that satis es the requirements of section 97; or
(e) pursuant to an offer to the public, as de ned in section 95(1)(h), read with section 96.

Example (2012): Section 41 requires shareholders approval by way of special

resolution if there are share options that are to be given to a director. (1) In Chagi
(Pty) Ltd the share options were approved by the board of directors instead of
shareholders, which is not allowed. (1) Since the share issue is as a result of the share
scheme, section 41(1)(d) gives exemption for the special resolution. (1) We doubt the
company will qualify for the section 41(1)(d) exemption as it does not appear that they
ful ll the other requirements. The board may issue shares which have not been
authorised therefore (9720 – 250 -5000) 4470 provided that the issue is
retrospectively authorised within 60 business days. (2) The retrospective adjustment
must be approved by special resolution.
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Section 44: By special resolution, the company may provide nancial
assistance for the purchase of its own shares as long as the MOI is
adhered to and solvency and liquidity tests are satis ed
Section 45: By special resolution, the company may provide nancial
assistance to its directors as long as the MOI is adhered to and solvency
and liquidity tests are satis ed
Example(2022): A copy of the written notice is to be sent to all shareholders to
ascertain compliance with the requirements of s45 of the Companies Act. The nancial
assistance must have been authorised by a special resolution of the shareholders,
adopted within the previous two years The board of directors must be satis ed that
after providing the nancial assistance, the company would satisfy the solvency and
liquidity test Section 44(3)(b)
Liquidity
Current assets = R 2,750,000
Current liabilities = R 8,250,000
The current assets are less than the current liability fairly valued, and thus, the
company is not liquid.
Solvency
Total assets = R 3 190 000 (R 140,000 + R 300,000+R2 750 000) Total liabilities = R
8,250,000.
The Total assets are less than the Total liability fairly valued, and thus, the company is
not solvent.
It is clear from the calculation above that had they performed the liquidity and
solvency test; they would not have approved the nancial assistance acquisition
the terms under which the nancial assistance is given are fair and reasonable to
the company. Section 44(3)(b) and
all the related conditions/restrictions set out in the MOI have been satis ed Section
45(4).
The Chairperson proposed that a resolution is adopted to ratify the decision - the
requirement that a special resolution is adopted within the previous two nancial years
has not been adhered to.
HNAI will not satisfy the solvency requirements after providing the assistance
considering all reasonably foreseeable nancial circumstances of the company, as the
assets of the company are fairly valued and exceed the liabilities of the company
fairly valued (solvency ratio of .38).
HNAI is not liquid since its current liabilities exceed its current assets and might not
be able to pay its liabilities as they become due in the ordinary course of its business
(Liquidity ratio of 0.33).
Based on the information, the nancial assistance provided is illegal/void; since it
does not meet both the liquidity & solvency requirement and a special resolution/board
resolution was not obtained, thereby constituting a breach of section 44 of the
Companies Act, 2008, as amended.
Directors could be held liable in terms of section 77 as a result of the non-
compliance with section 44.

Section 46: Distributions (dividend etc) must only happen if approved by

the board or is pursuant of a legal obligation. Distributions can only take
place if solvency and liquidity tests are met.
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Example (2019): The acquisition of 10% shareholding from Mr. Nicol and the payment
of dividends is a distribution constitute a distribution in terms of section 46 of the Act.
The board has not done an assessment of both current and future which implies
that there was no solvency and liquidity test done, this is not consistent with
section 46(1)(a) and (b) which requires the test to be done.
No consideration (solvency and liquidity test) seems to have been done after the
distribution; the board can only approve such distribution if it reasonably appears
that the solvency and liquidity test will be satis ed immediately after the
distribution.
Although, there was a resolution about the distribution nothing is documented in
the board minutes by way of a resolution, acknowledging that the solvency and
liquidity test was applied and will be met immediately after the distribution, this
contravenes the provisions of Section 46(1)
Due to the continued losses incurred by Arsenal in the current year and past
years it is unlikely that that solvency and liquidity test would have been met which
constitute breach of section 46(3)(b)

Section 48: Shares held by directors will need special resolution. A

subsidiary may acquire shares in parent company not more than 10%
issued shares and voting rights may not be exercised
Section 65: Ordinary resolutions must be approved by 50% of
shareholders, special resolutions must be approved by 75% of shareholders
Example (2022): Section 65 (9) requires that for a special resolution approved by
shareholders, it must be supported by at least 75% of the voting rights exercised on
the resolution.

Section 66: The business and affairs of a company must be managed by

its board. The board of a company must comprise, in the case of a private
company, or a personal liability company, at least one director; or in the
case of a public company, or a non-pro t company, at least three directors.
MOI may stipulate higher min no of directors. Person who is ineligible or
disquali ed from being a director cannot be appointed.
Section 69: A person who is ineligible or disquali ed, as set out in this
section, must not be appointed or elected as a director of a company, or
consent to being appointed or elected as a director; or act as a director of
a company.
Section 71: Despite anything contrary in the MOI a director may be
removed by an ordinary resolution: prior to the ordinary resolution
meeting, a notice of the meeting and resolution must be sent to the
directors and the director concerned must have an opportunity to present
his/her side. Directors can also be removed by the board in special
circumstances.
Example: Irrespective of anything contrary to the company’s MOI, a director can be
dismissed before the termination of his term of of ce Section 71(1). However, this
removal requires an ordinary resolution passed at a shareholders' meeting Section 71
(1) – the directors’ resolution is insuf cient. If, however, Mr Amod is removed because
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 of being ineligible or being disquali ed as a director, or he is incapacitated by Section
71(3)(a) or has otherwise neglected Section 71(3)(b) his duties, the board resolution
will suf ce, provided that:

due notice of the board meeting and proposed resolution is given to Mr Amod
Section 71(4)(a); and
he was provided with a reasonable opportunity to make a presentation before the
vote took place Section 71(4)(b).

Section 72: In terms of section 72 of the Companies Act (read with

Companies Regulation 43), the following companies should have appointed
a Social and Ethics Committee: state owned companies; listed public
companies; and any other company that has a public interest score of at
least 500 points.
Example(2021): As it appears that the payment was made to Mr. Mnguni in his
capacity as a director of the company, the payment thereof must be/have been
authorised by the shareholders by way of a special resolution passed within the
preceding two years Section 66(9).

Section 73: A director who is authorized by the board may call a meeting
at any time that such a person must call a meeting if required to do so by
at least 25% of directors(if there is at least 12 directors) or 2 in any other
case.
Section 75: Directors nancial interest must be disclosed in full and
approved by the board after full disclosure or rati ed by ordinary resolution
or contract will become voidable. List the procedure that must be taken if
there is an interest. If not refer to S76 2(a) then S77 then an RI
Example(2022): It appears that the chairperson of the governing body did not
disclose his nancial interests in SIVE SYSTEMS. This is a direct nancial interest since
he receives nancial compensation for referrals. Failure to declare their nancial
interest in the contract amounts to a contravention of Section 75 of the Companies
Act. According to Section 75 of the Companies Act, the chairman should have disclosed
his interest in the contract and not participated in the decision relating to the contract.
It appears that Khawula Mpilo did not excuse himself from the meeting when the
resolution to purchase the public software was voted on. This is a contravention of
Section 75 of the Companies Act, which states that the director with a nancial
interest must leave the meeting immediately after making any disclosure and must not
take part in consideration of the matter.

Section 76: Directors should not use their position for personal advantage.
they should communicate to the board swiftly on material matter.
Example: Section76(3)requires the directors of a company should act in good faith, in
the best interests of the company and with a degree of care, skill, and diligence. It is
evident that the company is not complying with the Companies Act. Failure to comply
with section 75 is guilty of section 76 and, consequently, is guilty of section 77.

Section 77: Section 77(2)(a) of the Companies Act states that a director of
a company may be held liable in accordance with the principles of common
law relating to a breach of a duciary duty, for any loss, damages or costs
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sustained by the company as a consequence of any breach by the director
of a duty in section 75 of 76 of the Companies Act. In case of breach of
duty to act with the degree of care, skill and diligence reasonably expected,
the director may be held liable in accordance with principles of the common
law relating to delict (section 77(2)(b) of the Companies Act).
Example(2021): S76 of the Companies Act requires the directors to act in good faith
and the best interest of the company and with the degree of care, skill and diligence
which does not appear to be the case as:
The actions of the CFO do not appear to be in the best interest of the company but
rather to ‘serve his own interests’ (e.g. refusing to make adjustments even when
provided with facts).
The CEO/Chairman/Board not going against the CFO’s refusal to make adjustment
could be perceived as not acting with care and diligence. The board signed off/
authorised nancial statements that appear to have contained material misstatements
as per JSE(S77).

Section 86: Every company must have a company secretary. The secretary
must have requisite knowledge of laws.
Example(2021): Appointment of company secretary: Siphelo, a public company, appears
to have not appointed a company secretary

Section 89: Resignation requires one month written notice unless board
requires less. Removal may result in in secretary requiring board to make
disclosure in AFS as part of director’s report
Section 90: Directors must be appointed at AGM. Must be registered and
independent
Section 91: Effective once notice is led with the Commission. Board must
submit name of potential auditors within 15 business days to audit
committee & the audit committee has 5 business days to reject otherwise
board can make appointment. Process cannot take longer than 40 business
days to reappoint new auditors.
Example (2020): If a vacancy arises in the of ce of auditor of a company (Section 91
of the Companies Act), the board of that company:
must appoint a new auditor within 40 business days (Section 91(2)(a);
must propose to the company’s audit committee, within 15 business days after the
vacancy occurs, the name of at least one registered auditor to be considered for
appointment as the new auditor (Section 91 (3)(a); and
may proceed to make an appointment of a person proposed in terms of paragraph
(a), if, within ve business days after delivering the proposal, the audit committee
does not give notice in writing to the board rejecting the proposed auditor. (Section
91(3)(b)
Although the auditors were appointed within 40 business days, the procedures listed
above do not seem to be adequately followed, as management of the company seem
to be the ones appointing the auditor “without delay”. The audit committee should be
consulted in this process.
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 Section 92: The same auditor cannot perform an audit for more than 5
consecutive years as independence will be compromised (CODE POINT)
Example(2022): Ms. Makaziwe Maphimpi will be auditing SIVE SYSTEMS for the
next 10 years, which is in contravention of Section 92 of the Companies Act - which
states that the audit partner may not be the auditor for more than ve consecutive
years.

Section 93: Auditors have right of access at all time

Section 94: Audit committee- A public company & state-owned company
or a company that has included in the MOI that it must have an audit
committee must have a committee with at least 3 members unless:
Company is a subsidiary of another company that has an audit committee
and Audit committee of the holding company will perform functions of the
audit committee on behalf of the subsidiary.
➡Note link to King IV
➡Duties of the audit committee (Section 94(7))
Example: Section 94(4) says that a member of the audit committee may not be
involved in day-to-day management or
may not be a full-time employee. The CEO, CFO and two partners are members of
the audit committee, which is a contravention of the act. Section 94(7)(h) requires
that the audit committee make submissions to the board on any matters concerning
the company’s accounting policies, nancial control, records, and reporting. The audit
committee has delegated its authority to sign off on newly developed nancial
controls to the CAE of the company.

Section 112: Disposal of Greater part of assets requires a special

resolution unless S115 applies.
Section 129: Business rescue
Example: In terms of Section 129 of the Companies Act, the board of a company
may resolve that the company commence business rescue proceedings if the board
has reasonable grounds to believe that the company is nancially distressed; and
there appears to be a reasonable prospect that the company can be rescued.
However, the resolution may not be adopted if liquidation proceedings have been
initiated by or against the company; and has no force or effect until it has been led
It would appear that there is an indication that HNAI is nancially distressed, and
the governing body should have initiated a business rescue process and not only
resolved to not pay bonuses to CEO and CFO.
HNAI has been making losses since 2018, and currently, the company is unable to
pay its debts; as a result, the company should have considered a business rescue
practitioner.

Section 159: Protection for Whistle Blowers- Additional Protection

Section 213: Breach of Con dence- It is an offence to breach con dence
Section 214: Breach of this section results in a ne or imprisonment (10
years) -fraud, reckless trading (Section 22) and misleading nancials
(S29(1))
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Example: HNAI directors are guilty of section 214 as they have continued trading
when the company is not nancially viable.

Regulation 27: Public interest score

1 Point for every million turnover or parts thereof:
• Parts thereof means that anything less than 1 million is one point
• Example R300 000 is one point
• Sales, services rendered, and interest received from debtors will be regarded as
turnover

1 Point for every R million debt or parts thereof to any third part
• Parts thereof concept applies
• Shareholders are related to the company, therefore any loan involving
shareholders, regardless of whether it's on
commercial terms or not, would be excluded from Pl calculation
• Inter-company loans will only be included if it is on commercial terms

1 Point for every average number of employees

• Must take into account average, therefore it is calculated considering the
number of employees in beginning plus number at end divided by 2
• Don’t take into consideration any employees only employed for a month in the
middle of the year (average = beg + end/ 2).
• Directors are considered an employee of the company and should be included in
this calculation

1 point for every individual directly or indirectly has a bene cial interest in the
company's shares
• Individual shareholders are counted individually
• Companies who hold shares are counted per company regardless of how many
shareholders that company has
• Each bene ciary of a trust
• Trustees and owners of a trust is not counted

Regulation 28 – Refer to Section 30: Categories of companies to be

audited
Regulation 29: independent review
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 Companies Act Example of Points
Issue of shares
Section 36 - Authorised shares set out in MOI
Section 38 - Share issue only to the extent of authorised
Increase must be authorised in terms of section 36 of the Act by:
• an amendment to the MOI through a special resolution of shareholders Section 36(2)
(a) or
• the board of directors, unless the MOI provides Section 36(2)(b).
The company must le a notice of amendment of its MOI, setting out the
changes effected to the authorised share capital.
Section 39 - existing shareholder have pre-emptive right to be offered shares
issued before any other person
Share issue to Director below Market price
In terms of Section 41, a share issue to a related party of the company or a
director of the company must be approved by a special resolution of the
shareholders.
In terms of Section 75, if directors have a personal nancial interest in terms
of a share issue, they need to disclose the interest and not take part in the
meeting.
In terms of Section 76 of the Companies Act, directors are not allowed to use
their position as directors to gain a personal advantage. A personal advantage
was gained as the shares were issued at less than market value which
contravenes Section 76 of the Companies Act.
In terms of Section 76 of the Companies Act, directors of a company must act
in good faith and for a proper purpose and in the best interests of the
company.
In terms of Section 77, a director may be held liable for any loss, damages or
costs sustained by the company as a consequence of any breach of duty by
the director failing to disclose a personal nancial interest (Section 75) and
failing to act in the bests interest of the company (Section 76)
Financial Assistance
Anything purchased above market price from a director, is regarded as
nancial assistance.
If shares are being sold to raise funds for this nancial assistance, section 44
applies
Special resolution is required- Section 44(3)(a)
After providing the nancial assistance, the company would satisfy the
solvency and liquidity test Section 44(3)(b)
The terms under which the nancial assistance is given are fair and
reasonable to the company Section 44(3)(b)
All the related conditions/restrictions set out in the MOI have been
satis ed Section 45(4).
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 The directors are liable in terms of sections 44(4) and 46(6) to the extent set
out in section 77(3)(e)(iv). The directors are liable because:
• They were present in the meeting when the resolution was passed.
• They failed to vote against the resolution despite knowing that the provision of
nancial assistance was inconsistent with this section.
Removal of Director
Section 71- Irrespective of MOI, a director can be removed by ordinary
resolution
Section 71(4) - Director must be given notice of meeting and an opportunity
to be heard
Any amount paid to director for loss of of ce is paid to him in his capacity as
a director and therefore must be authorised by special resolution
Any amount paid to director for loss of of ce must be disclosed in AFS
Rotation of Auditors
Section 92- auditors must be rotated every 5 years
Director’s Financial Interest
It would appear that a direct did not disclose nancial interest
Failure to declare their nancial interest amounts to a contravention of
Section 75 of the Companies Act.
According to Section 75 of the Companies Act, the director should have
disclosed his
interest and not participated in the decision relating to the nancial interest.
Failure to comply with section 75 is guilty of section 76 and, consequently, is
guilty of section
77.
Director Fiduciary Duties
S76 of the Companies Act requires the directors to act in good faith and the
best interest of the company and with the degree of care, skill and diligence
which does not appear to be the case
Reckless Trading
Section 22 (1)-(2) prohibits the company and its directors from carrying on its
business recklessly and knowing that the company is nancially insolvent
Should the business be insolvent, the directors should have stopped operating
until a proper turnaround strategy had been implemented.
The Commission (CIPC) would issue a notice to the directors to show cause as
to why they should be allowed to continue trading if the Commission has not
done that yet.
Section 77(3)(b) prohibits the carrying on of the company’s business despite
knowing that it
was being conducted in a manner prohibited by section 22(1).
The directors should not have continued trading under the circumstances; this
is a breach of
their duciary duty owed to shareholders by directors - Section 76
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 Failure to comply with section 22 requirements has now resulted into directors
being guilty of section 214 as they have continued trading when the company
is not nancially viable
Business rescue
In terms of Section 129 of the Companies Act, the board of a company should
initiate business rescue proceedings if the board has reasonable grounds to
believe that:
• the company is nancially distressed; and
• there appears to be a reasonable prospect that the company can be rescued

Audit Committee
Every public company should have an audit committee, with at least three
members, who are all independent non-executive directors as per section
94(2)
Section 94(4) says that a member of the audit committee may not be involved
in day-to-day management or may not be a full-time employee.
Section 94(7)(h) requires that the audit committee make submissions to the
board on any matters concerning the company’s accounting policies, nancial
control, records, and reporting.
Secretary
A public company, appears to have not appointed a company secretary (S86 of
the Companies Act) thus it is evident in the fact that directors are not complying
to certain laws and regulations as well as the lack of balance of power and
delegation of authority (duties of company secretary per S88)
Misstatements in the AFS
In terms of the Companies Act Sec 29 the board should be responsible for
reliable nancial reporting and engaging in misstatements in AFS is in breach
of this section.
Non-compliance with section 29 by not providing AFS that are a true and fair
view of the entity’s operations, nancial performance and nancial position will
also be non-compliance with laws and regulations and results in a Reportable
Irregularity.
Auditor as a director
A director cannot be appointed as the auditor of the company as his
appointment will contravene section 90(2(b)(i) which prohibits an auditor in
becoming a director

Distributions
The payment of dividends is a distribution constitute a distribution in terms of
section 46 of the Act
The board should do an assessment of both solvency and liquidity test as
consistent with section 46(1)(a) and (b) which requires the test to be done.
Distributions can only take place by way of resolution and this needs to be
documented in the board minutes, acknowledging that the solvency and
liquidity test was applied and will be met immediately after the distribution
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Appointment of Auditors
A company, which is required to have its annual nancial statements audited,
must appoint an auditor.
In terms of sec 90(1) of the Cos Act, the auditor of the company must be
appointed at the AGM.
In terms of sec 91(3) (a) of the Cos Act the board must propose to the audit
committee the name of the prospective auditor.
The appointment can only be made if there is no objection from the audit
committee within 5 business days of sending the proposal.
In terms of section 90(2)(a) of the Cos Act, to be appointed as auditor a
person must be a registered auditor.
In terms of section 90(2)(b)(iii), any such person who performs this work/
services is not allowed to act as auditor
The auditor must satisfy the audit committee of his independence.
If a vacancy arises in the of ce of auditor of a company (Section 91 of the
Companies Act), the board of that company:
6. must appoint a new auditor within 40 business days (Section 91(2)(a);
7. must propose to the company’s audit committee, within 15 business days after the
vacancy occurs, the name of at least one registered auditor to be considered for
appointment as the new auditor (Section 91 (3)(a); and
8. may proceed to make an appointment of a person proposed in terms of paragraph (a),
if, within ve business days after delivering the proposal, the audit committee does
not give notice in writing to the board rejecting the proposed auditor. (Section 91(3)(b)
9. The audit committee is responsible for recommending the appointment of the external
auditor and overseeing the external audit process (section 94(7) (a)).
Removal of Audit Firm
For removal of auditor to be valid, there must be a notice led
Auditors could be removed at the next AGM by a majority shareholder vote.
(Section (90)(6).

Auditing Profe ions Act

Section 32 – Application for accreditation
➡ A professional body must apply to the Regulatory Board (IRBA) for accreditation.
➡ Requirements are set out in Section 3
➡ South African Institute of Chartered Accountants (SAICA) is the leading accountancy
body in South Africa
➡ Other bodies include:
· South African Institute of Professional Accountants (SAIPA)
· Association of Chartered Certi ed Accountants (ACCA)
· Chartered Institute of Management Accountants (CIMA)
· South African Institute of Business Accountants (SAIBA)

Section 37 – Registration of individuals as regulated auditors

➡ An individual must apply to the to the Regulatory Board (IRBA) for registration as
an auditor
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➡ Such an individual must be a member of a professional body as per Section 32
above (SAICA, SAIPA, CIMA etc).
➡ Four requirements [Section 37(2)(a-e)]
· Prescribed education, training and competency
· Resident within the Republic
· Fit and proper person
· Payment of prescribed fees
· Additional requirements as per Section 6 of AP
➡ The Regulatory Board (IRBA) may not register an individual as a registered auditor
if [Section 37(3)(a-d)]:
· Removed from the of ce of trust – due to misconduct
· Unsound mind
· Disquali ed for registration by sanction
· Have been convicted for theft, fraud, forgery, perjury or corruption.
➡ The Regulatory Board (IRBA) may decline registration as a registered auditor if an
individual who is an unrehabilitated insolvent has entered into a compromise with
creditors or has applied for debt review [Section 37(5)]

Section 38 – Registration of rms as regulated auditors

➡ Only 3 types of rms may become registered auditors [Section 38(1)(a-c)]:
· Partnerships in which all partners are registered auditors
· Sole proprietorship where the proprietor is an registered auditor
· Companies which pay the prescribed fee as well as [Section 38(3)]:
- Share capital
- Personal liability company
- All directors must be shareholders and vis versa
- All directors and Shareholder must be RA’s
- No external proxies
➡ In its application to a company which is a registered auditor, section 8 if the
company act has effect

Section 39 – Termination of registration

➡ The Regulatory Board (IRBA) must cancel registration if [Section 39(1)(a-c)]:
· Subsequently does not meet section 37 requirements
· Registration made in error or due to false information
· Prior to registration has been guilty if improper conduct due to which s/he
is not t and proper
· Fails to pay fees within the prescribed time – automatically lapses [Section
39(5)]
· Estate is sequestered [Section 39(2)(a)]
· Ceases to be a member of a professional body [Section 39(2)(b)]
· No longer complies with section 38 [Section 39(4)]
➡ Before to cancelation of registration the regulatory body (IRBA) must give written
notice and allow the candidate not less than 21 day and not more than 30 days
to appeal the cancellation. [Section 39(3)]
➡ At written request of a registered auditor they may be deregistered but this does
not effect any liability incurred before the deregistration. [Section 39(6)]
➡ The fact that a candidate is removed does not prevent the regulatory body (IRBA)
from conduction disciplinary action for conduct before removal [Section 39(7)].
➡ The Regulatory Board (IRBA) must as soon as possible after cancellation publish a
notice of cancellation [Section 39(8)].

Section 41 – Practice
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 ➡ Only a registered auditor may engage in public practice or hold out as an registered
auditor in public practice [Section 41(1)]
➡ A person who is not registered in terms of this Act may not [Section 41(2)]:
· perform any audit
· pretend to be a person registered in terms of this Act
· use the name of any registered auditor
· perform any act which may lead persons to believe that he or she is
registered in terms of this Act.
➡ A non-registered may:
· be an internal auditor or accountant [Section 41(3)(a)].
· any member of a not-for-pro t club if he or she receives no fee or other
consideration for such audit [Section 41(3)(b)].
· Act on behalf of the Auditor General [Section 41(3)(c)].
· Be an employee and can assist with an audit [Section 41(5)]

Section 44 – Duties in relation to an audit

➡ An individual registered auditor or registered auditors within the rm must be
appointed that is responsible and accountable for that audit [Section 44(1)(a)]
➡ A RA may not express an unquali ed opinion unless [Section 44(3)]:
· the audit is free from any restrictions
· the existence of all assets and liabilities is veri ed as shown on the
nancial statements;
· proper accounting records in at least one of the of cial languages of the
Republic have been kept and explain all its transactions and record all its
assets and liabilities correctly and adequately;
· all information, vouchers and other documents which in the registered
auditor's opinion were necessary for the proper performance of the
registered auditor's duties have been obtained
· No RI r port was sent to the Regulatory Board under section 45 relating
or if such a report was so sent, the registered auditor has been able, prior
to expressing the opinion, to send to the Regulatory Board a noti cation
under section 45 that the registered auditor has become sa is ed that no
reportable irregularity has taken place or is taking place
· all laws relating to the audit of that entity have been complied with
· The RA is satis ed as far as reasonable possible that the nancial
statements are far and correct

Section 45 – Reportable irregularity (Semester 1)

➡ Analyze accounting treatment / Reporting responsibilities = hint at RI
➡ An issue exists that could possibly prove to be a reportable irregularity:
(10)It must be in the capacity of the auditor of the company
(11)An unlawful act or omission must have taken place.
(12)The unlawful act or omission must have been committed by a person
responsible for the management of the company.
(13)The unlawful act or omission must have caused, or be likely to cause, material
nancial loss to the entity or to a partner, member, shareholder, creditor,
investor of the entity in respect of his/her/its dealing with that entity.
(14)The unlawful act or omission must have been fraudulent or amounted to theft.
OR The unlawful act or omission must represent a material breach of any
duciary duties.
➡ As per section 45 of the Auditing Profession Act 26 of 2005, the existence of a
reportable irregularity must be reported to the Independent Regulatory Board
for Auditors (IRBA) without delay.
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➡ The management must be noti ed (in writing) of the report within three days of the
auditor having sent the rst report to the IRBA
➡ The auditor must then as soon as reasonably possible, but not later than 30 days
from the date on which the rst report was sent to the IRBA:
· take all reasonable steps to discuss the report with the management
· afford the members of the management board an opportunity to make
representations in respect of the report
· send a second report to the IRBA stating that no reportable
irregularity had taken or is taking place or the suspected reportable
irregularity is no longer taking place, and that adequate steps have been
taken for the prevention or recovery of any loss as a result thereof, if
relevant or the irregularity is continuing

Report on Other Legal and Regulatory Requirements

In accordance with our responsibilities in terms of sections 44(2) and 44(3) of
the Auditing Profession Act, we report that we have identi ed a reportable
irregularity in terms of the Auditing Profession Act. We have reported such
matter to the Independent Regulatory Board for Auditors. [The matter
pertaining to the reportable irregularity has been described in note x to
the nancial statements48.]

Section 46 – Limitation of Liability

➡ The RA does not incur any liability to a client or any third party, unless it is proved
that the opinion was expressed, or the report or statement made, maliciously,
fraudulently or pursuant to a negligent performance [Section46(2)]
➡ If an opinion is expressed negligently the auditor will be liable to third parties if it
can be proven that the registered auditor knew or could have reasonably been
expected to know [Section46(3)(a)].
➡ A registered auditor may incur liability to any partner, member, shareholder, cred tor
or investor of an entity if the registered auditor fails to report a reportable
irregularity in accordance with section 45 [Section46(7)].

Section 47 -50 –Improper conduct

➡ Section 47 – The regulatory body may at any time inspect the practice of a RA
➡ Section 48 – The regulatory body must r fer a matter brought against a RA to the
investigating committee
➡ Section 48A – The investigating committee may for the purpose of investigating
alleged improper conduct enter any premises
➡ Section 48B – A judge or magistrate may issue a warrant for purpose of Section 48
➡ Section 49 – The Regulatory Board must charge a registered auditor with improper
conduct if the investigating committee recommends that suf cient grounds exist
for a charge
➡ Section 50 – A disciplinary hearing must be conducted by the disc plinary committee
constituted

Section 52 – False statement in relation to an audit

➡ A RA will be guilty of offense if he or she either:
· fails to report a reportable irregularity in accordance with section 45
[Section 52(1)(a)].
· for the purposes of or in connection with, the audit of any nancial
statement knowingly or recklessly expresses an opinion or makes a report or
other stat ment which is false in a material respect.

Section 57A – Protection of information

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 ➡ This section requires the ffg to protect personal information [Section 57A (2)]:
· Any member of the Regulatory Board
· Any member of any committee envisaged in this Act
· Any employee of the Regulatory Board
· Any authorised person referred to in section 48A
➡ Personal information may not disclose unless:
· for the purpose of enforcing compliance with this Act
· when required to do so by a court;
· at the written request of, and to, any appropriate regulator which;
· at the written request of, and to, any appropriate international
regulator
· or purposes of referring a non-audit matter in terms of section 48(1A)

Example of points
Non payment of prescribed fee and continuation as RA
An individuals registration as a registered auditor has lapsed because of
the nonpayment of membership fees within the prescribed period. The
nonpayment of membership fees within a prescribed period contravenes
section 39(5) of the act; as a result of this the individual cannot be a
director of an audit company.

He is guilty of Section 41(2)(ii) as he pretended/ allowed himself to be

held out as a registered auditor, whereas he is no longer an auditor as
she has been removed from the register of auditor

Is also guilty of section 54 as they have contravened section 41

All shareholder's and directors of an audit rm must be

RAs
Section 38 (3) (b) &(c) requires that all the directors must be shareholders
be registered auditors of the audit company

Pro t sharing
AP Act (S41(6)(e)), provides that the RA may not share any pro t derived
from performing an audit with a person that is not the RA.

Guilty of section 54 as they have contravened section 41

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 Unquali ed opinion
Unless a registered auditor, who is conducting the audit of an entity, is
satis ed that in the course of the audit or during the period under
review, no reportable irregularity has taken place or is no longer taking
place taking place, an unquali ed audit opinion cannot be expressed.
(Section 44 (3) e)

Unless the reportable irregularity is no longer taking place (and seeing

that there is no indication that it is indeed no longer taking place), the
audit rm will also have to issue a quali ed audit opinion.

Con ict of interest

A registered auditor may not conduct the audit of any nancial statements
of an entity, whether as an individual registered auditor or as a member
of a rm, if the registered auditor has or had a con ict of interest in
respect of that entity, as prescribed by the Regulatory Board. (Section
44(6)

Independence
Although section 44(5) of the APA act allows an auditor to assist with the
preparation of nancial statements and year-end entries, the fact that the
rm is assisting with monthly work will de nitely impair independence and is
not permissible.

Restrictions
According to the AP Act, an auditor must not express an opinion when he
faced restrictions while performing an audit

Reportable irregularity
It does not appear that a reportable irregularity has reported when there
appears to be one as per section 45(1) and failure to report this may
result in an auditor incurring liability as per section 46(7) (1) and guilty
of section 52(3)
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 Revenue
Risks
Cycle
Validity
• Deliveries are not invoiced timeously resulting in sales possibly being recorded in an
incorrect accounting period (validity).
• Order may be accepted from a non-account holder / risky client leading to possible
uncollectable debt in future and nancial losses for the entity (validity).
• A sale will be made to a customer who will exceed his credit limit should the sale be
accepted, which may give rise to irrecoverable debts (validity).
• Unauthorised picking slips are created, goods being removed from the warehouse for
despatch to a customer who will not be able o settle his / her debt (validity).
• Customers may deny having received goods leading to a sale inappropriately recorded for a
transaction that may not have occurred (validity).
• Invoices are created when no goods were in fact delivered to the customer leading to
ctitious sales revenue if recorded in the sales journal (validity).
• Invoices are duplicated in the sales journal (validity).
Accuracy
• Product prices included on internal sales orders (ISOs) are not those agreed with
customer and approved by management, leading to customers being under / over charged
resulting in incorrect accounting records until the error is corrected (accuracy).
• Invoices may be inaccurately prepared / misstated (prices, quantities, description, discounts,
VAT) (accuracy).
• Invoices are inaccurately entered in the sales journal (accuracy).
• Invoice entered against incorrect debtor when posting to the debtors ledger account
(accuracy).
Completness
• Goods leaving premises are not recorded on a supporting document, leading to delivery
without charge to the customer or to theft of the goods before reaching the customer
(completeness).
• Good dispatched may not be invoiced (completeness).
• Invoices are omitted from sales journal (completeness).

Operational Control
• Orders may not be acted timeously, resulting in a loss of sales and goodwill (operational
control).
• Order is accepted without there being suf cient inventory in stock leading to delays in
delivery and possible negative customer relations (operational control).
• Picking slip details (e.g. item code, quantity) are incorrect (operational control).
• Valid ISO / picking slips may not be timeously acted upon / not acted upon at all resulting
in negative customer relations (operational control).
• Incorrect items and quantities (i.e. are not in terms of an approved ISO) may be picked
leading to short / over deliveries and resultant negative customer relations (operational
control).
• Quantities on authorised picking slips are not those transferred to the despatch bay which
could result in possible misappropriation of inventory before it is despatched to the
customer (operational control)
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Revenue
Occurrence
Procedures
Trace a sample of recorded sales transactions back to the source and inspect the
supporting documentation for the sale to con rm:
- Order was received from approved customer
- Picking slip and dispatch note for the goods invoiced, duly signed by the picker,
dispatcher and customer
- Goods invoiced to the customer were of a type sold by the company
Trace sale through to the bank statement and customer remittance. If not payment
received, trace to the debtor analysis

Accuracy
Select a sample of invoices, and for each invoice:
- Con rm the mathematical accuracy of the invoice by recalculating all extensions, casts,
discounts and VAT calculations
- Con rm prices and discounts charged and granted to of cial price lists or other
sources
- Con rm that the invoice is a valid tax invoice
- Agree the invoice to the delivery note

Cut off
At year end obtain the document numbers of the last documents used in the nancial
year
Perform a sequence test of the last 2 weeks invoices
Inspect the subsequent month’s sales journal for any invoice numbers lower than the cut-
off
number
Select a sample of invoices after year end and trace them to delivery notes to ensure
they
were delivered after year end
Perform the same for a sample of invoice before year end

Classi cation
Test transfers of amounts from the monthly sales journal to the sales and VAT accounts
in the general ledger to con rm that the amounts were posted to the correct account
Inspect the sales account for the inclusion of any amounts which are revenue, but do not
constitute sales – eg: dividends or interest

Completeness
Trace a sample of delivery notes to the sales journal
Perform analytical procedures:
- Analysis of gross pro t uctuations and recorded sales by product to the prior year
- Comparisons of sales, debtors and sales ratio to prior periods
Disclosure
Inspect the nancial statements to ensure that the disclosures are complete, the
classi cation is correct, the amounts included are accurate and the accounting policies are
clearly expressed and understandable.

Use o
f Caats
Occurrence
in Internet sales (2021 Test 3)
Generate a report from the Master le of:
- Accounts with a customer number, but with no customer reference.
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 - Accounts where the customer name, customer address or customer contact details
elds
are blank.
Generate a report from sales transaction le of:
- Duplicate order numbers.
- Sales transactions where the item quantity and item price are both negative (which
will yield an invalid positive sales total).
Using CAATs, generate a random sample of sales transactions and:
- Trace to the bank statement to con rm the funds were received.
- Trace to the signed delivery note obtained from the courier company.

Accuracy
Generate a report of the instances where the amount calculated does not equal the
amount in the sales total eld.
Reperform the casting of sales total eld in the sales transaction le and generate a
report of the total value calculated.
Generate a report from the sales transaction le re ecting transaction details of any
transaction with negative or NIL value sales total.
Using CAATs, generate a random sample of sales transactions and:
- Agree the price of the product re ected on the Master le to the approved price list
and he quantity of goods to the order form and picking slip
- Inspect a sample of invoices to con rm that they are valid VAT invoices by tracing
PharmCare VAT number.

Cut-off
Identify, with reference to the sales transaction le, the very rst as well as the very
last invoice number for the year and generate a report containing this information.
Select a sample of invoices e.g. 20 invoices for the new nancial year and 20 for the end
of the nancial year and trace them to the signed delivery note con rming the date on
which the goods were delivered.
Generate a report using sales transaction le, of sales dates that fall outside 2020
nancial year.
Generate a report of any gaps in the sequence of invoice numbers.
Through enquiry of management and inspection of supporting documents, obtain evidence
for any missing invoice numbers.
Recalculate the sales total eld for a sample of sales transactions in the sales transaction
le by multiplying the amount in the item quantity eld with the amount in the item price
eld and add VAT.

General
Agree the total sales recorded to the account in the general ledger to the trial balance
and nancial statements.

Accounts
Rights
Receivable Procedures
Inspect prior year work papers, minutes of director’s meetings, loan agreements, bank
con rmations and enquiry of management to determine whether receivables have been
factored, ceded or encumbered in any way
Existence
Debtors circularisation with the permission of the client
Subsequent receipt testing -Matching of amounts owed at year end to payments from
debtors received after year end
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 Valuation and allocation- Gross amount
Review debtors ledger for unusual entries
List of debtors to be matched to the debtors control account/trial balance and AFS
If there are reconciling items from the test above, test the reconciliation, cast it and
follow
up on reconciling items
Debtors list should be reviewed for credit balances and these should be reclassi ed to
creditors
Debtors list and control accounts should be cast
Debtors invoiced in a foreign currency – recalculate the conversion and trace any
translation
differences at year end to the forex PL account

Bad debt allowance

Enquire from management, the policies and procedures followed to identify and write off
irrecoverable debtors.
Enquire from management as to the authorization procedure for the allowance for credit
losses.
Obtain the list of individual bad debts identi ed by the client and cast the list.
Identify additional bad debts from the Debtors Age Analysis and perform the following
procedures:
Review correspondence with the debtor to identify valid disputes.
Review the legal le for evidence as to the recoverability prospects of debtors handed
over.
Review debtors’ con rmations received back for indications of disputes.
Agree the individual balances on the list of bad debts to the relevant balances on the
Debtors Age Analysis.
Any long outstanding balances on the Debtors Age Analysis not provided for must be
investigated.
Query balances provided as bad debts which are current (30-60 days).
Discuss the recoverability of bad debts with the credit controller and with management.
Select a sample of debtors and test the correctness of the ageing of the balances as
re ected on
the Debtors Age Analysis by vouching to the sales invoices and receipts to determine
whether
they have been allocated to the correct period.
Inspect receipts from trade receivables subsequent to the nancial year end. Inspect that
these
amounts are excluded from the list of bad debts.
Add additional bad debts identi ed to the list after performing the above procedures.
Agree the nal allowance to the journal entry and general ledger balance.
Discuss the collectability with management.
Obtain a management representation letter con rming the estimation of bad debts. (1
mark)
Analytical reviews should be performed:
- Comparison of allowance percentage and age analysis to prior year
- Comparison of bad debts written off during the year to the prior year
- Calculation of ratios such as debtors’ days in comparison to the prior year
- Compare the actual bad debts written off in the current year to the prior year
allowance to obtain an indication of company’s ability to set a reasonable allowance.
Inspect the Annual Financial Statements and con rm that the disclosure in the Trade and
Other Receivables Note re ects trade receivables before and after impairment allowances
in accordance with the nancial reporting standards.
Enquire from management as to the method of grouping of debtors (i.e. what criteria was
used, geographical region, product type etc.) and consider the reasonableness thereof in
terms of IFRS 9.
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 Re-calculate the historical default rate of debtors used in the calculation of expected
credit losses which has been calculated by management to con rm the accuracy thereof.
Consider the reasonableness of the forward-looking factors (e.g.: unemployment rates,
CPI etc.) that management used to estimate the “expected credit loss” for the current
nancial year.

Presentation and disclosure

Inspect and consider whether they are complete in terms of the applicable framework,
the balance has been disclosed as current and any encumbrances are disclosed
They are consistent with evidence gathered on the audit
Amounts, facts, details et car accurate and agree with the evidence gathered
Any classi cation of the information disclosed is appropriate
The wording of the disclosures is clear and understandable

General
Analytical by comparison of debtors to prior year, debtors in relation to credit sales
compared to the prior year etc.

Debtor Confirmation response(2017 Main exam)

Inspect the credit agreement with Techno stores to con rm that:
- They do qualify for a 2% discount; and
- If they settled their account within the rst 15 days of the new month.
Obtain the debtors ledger account for Techno Stores and con rm through inspection:
- That all the sales invoices for May total R2 000 000; and the date on the invoices all
pertain to the month of May and that the invoices is made out to Techno Stores
Inspect the June bank statements to con rm that an amount of R1 960 000 has been
received before the 15th of the month. (R2 million less the 2% discount).
Recalculate the amount of the discount by multiplying the total purchases in May of R2
000 000 by the discount rate of 2%, which should equal R40 000.
Inspect the June debtors ledger account for Techno Stores and con rm through
inspection
- That all sales invoices for June total R 800 000; an
- The date on the invoices all pertain to the month of June; and
- The invoices is made out to Techno Stores
Inspect the subsequent bank statements in July for receipt of payment for the June
invoices.
Consider the effect of the difference on the debtor’s con rmation to the sample size.
Enquire from management to obtain an understanding as to the reason why the 2%
discount has not
been applied to Techno Stores account.
Inspect the debtor correspondence le for any evidence of disputes which may exist for
this debtor.
Inspect the May remittance advice from the debtor detailing invoices paid.

Use of Caats in Accounts Receivable

Analytical procedures
Use CAATs to compare the balance of Accounts Receivable for the current year to the
balance of Accounts Receivable for the preceding year and follow-up any unusual variance
identi ed.
Use CAATs to summarise the Accounts Receivable master le by the age of the debtors’ ie
30
days, 60 days etc. Calculate the percentage of debtors in each age category and compare
this information with the same information from the previous year. Follow-up any unusual
variances identi ed.
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Valuation
Use CAATs to recalculate the total of Accounts Receivable at year end as per the
Accounts
Receivable master le.
Use CAATs to scan the master le for any debtors having a credit balance ie a negative
balance. Discuss the need to reclassify these debtors as creditors at year-end with
management. (Also
Completeness assertion)
Use CAATs to scan the master le for any debtors having a zero balance. (Also
Completeness
assertion)
Use CAATs to select a random sample of debtors from the Accounts Receivable master le.
Test the ageing of these debtors by tracing the amounts owed to the relevant invoices to
ensure whether they have been allocated to the correct time period.
Use CAATs to extract a list of debtors who have exceed their credit terms, for example:
- Those debtors whose total balance outstanding at year-end exceeds their credit limit;
and/or
- Those debtors whose accounts have been placed on hold/handed over for collection.
Discuss the recoverability of each such debtor identi ed above with management.
Use CAATs to re-perform the calculation of the ‘allowance for credit losses.
Use CAATS to compare the total of the ‘allowance for credit losses’ with the balance per
both the general ledger and the trial balance.
Use CAATs to perform analytical review procedures on the ‘allowance for credit losses’ by,
for example, comparing the total to that of previous years.
Use CAATs to extract the details of the rst 10 sales invoices immediately after year-
end. Inspect the corresponding delivery notes to ensure that these sales had been
accounted for correctly at year-end ie not included in Debtors at year-end.
Existence (and often Rights)
Use CAATs to select a random sample of debtors for the Debtors circularisation.
Use CAATs to generate and print circularisation letters, follow-up letters, and to analyse
the results of the circularisation.
Use CAATs to select a random sample of debtors for subsequent receipts testing by
con rming
that amounts owing at year-end were indeed received subsequent to year-end. (Also
Valuation
assertion)
Use CAATS to scan the entire master le for any ‘error’ conditions such as:
- Duplicate account numbers, debtors’ names, postal addresses etc.; and
- Blank elds. (Also Completeness assertion)
Use CAATs to extract the details of the last 10 sales invoices immediately preceding
year-end.
Inspect the corresponding delivery notes to ensure that these sales had been accounted
for correctly at year-end ie that the debtors did in fact exist at year-end. (Also
Completeness assertion)
Use CAATs to compare the debtors’ listing for the current year to that of the preceding
year and to extract a list of any new debtors. Trace these debtors back to their original
credit application forms to substantiate their existence.

Debtor's Circularisation Procedures

Using general audit software:
Extract a list of accounts receivable from the master le and match the total on the
list to the accounts receivable control account/trial balance year end
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 extrapolate the accounts receivable listing (e.g. from the highest to the lowest, long
outstanding etc.)
select a sample of con rmations to be sent out (with the consent of the client) to
debtors.
Send out a positive debtors circularisation and ensure that they are returned by
enclosing a self-addressed, postage-paid envelope.
Evaluate the ndings of your debtors circularisation and by using general audit
software, extrapolate any possible differences to the entire population if a sample
was used.
Subsequent receipt testing
Select a sample of receipts from the bank statement for year end
identify payment received after year end and trace to debtors remittance advices to
identify which invoice the payment is in respect of
Inspect these invoices and matching delivery notes to con rm that they are dated
prior to year end and they were included in the year end sales and debtors journal
If the invoice/delivery notes indicate that the debts arose during the interim period
under review trace the payments for that debtor in order to ensure that they were
recorded as debtors at year end in the nancial year under review.

Inventory Cycle
Risks
Inventory could be damaged (thus deteriorating in value) due to poor physical conditions
or due to the nature of the inventory.
Inventory could be stolen
The entity may manufacture too much inventory for which there is no demand, resulting
in unsaleable inventory.
The entity may not manufacture sufficient inventory to meet the demands of
customers.
The factory may run out of raw materials during the production process, which will
lead to delays in production.
The factory may request too much raw material which will lead to wastage and/or
theft. The incorrect raw material may be requested. Unauthorised production can take
place (e.g. entity’s resources (labour and materials) are misused).
The factory personnel could request raw materials for their own use and not for
official manufacturing purposes.
Incorrect raw materials may be transferred to the factory.
Raw materials might be damaged and/or stolen during the transfer process.
The transfer of the raw materials to production may not be recorded at all.
The transfer of the raw materials to production may be recorded inaccurately in terms
of quantities and item codes.
Invalid transfers of inventory are recorded (i.e. no actual transfer took place, but a
transfer is recorded)
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 Unfinished goods may be transferred to the finished goods warehouse. Finished goods
may be damaged and/or stolen during the transfer process.
Finished goods may be damaged and/or stolen during the transfer process.
Finished goods not actually transferred to the finished goods warehouse may be
recorded as transfers
Goods could be damaged (thus deteriorating in value) due to poor physical conditions
Goods could be stolen Goods could be misplaced
The costs allocated to inventory could be incorrectly calculated. The costs allocated to
inventory could be invalid
The costs allocated to inventory could be incomplete
The costs allocated to inventory could be incorrectly recorded.
Inventory items could be incorrectly added and/or deleted
The quantities of inventory items on hand are adjusted incorrectly (e.g. to cover up
theft)

Inventory valuation procedures

· Trace information obtained at the inventory count on damaged, slow moving Discuss slow moving items with management
and obsolete inventories to records of inventory write-downs
· Judge the reasonableness of inventory write downs
· Inspect current invoices to determine whether selling prices of inventories are in excess of cost
· Judge appropriateness of realisable values used in calculations and the completion and selling costs by inspecting sales
invoices at year end
· Ensure that where NRV is lower than cost that the inventory has been written down
· Recalculate the NRV of a sample of inventories from the inventory listing
· Reconcile the cost of purchased inventory with the authorised price list
· Decide whether inventories are fairly valued in accordance with IFRS and consistent with company policy
· Obtain a management representation letter stating that inventory valuation and measurement is appropriate
· Reconcile the inventory listing balance to the general ledger and the financial statements
· Agree the recorded cost prices to suppliers invoices
· Examining the more recent invoices and compare to the cost of the inventory to ensure the client is maintaining inventory
cost amounts on basis
· Reconcile the quantity of raw materials used for each product to product specifications and authorised component
requisitions
· Agree the cost of raw materials transferred to WIP with the costs as per the supplier invoices
· Reconcile the hours worked to the time sheets and the labour rates to the wage records
· Compare unit labour costs with those used in the costing of inventories in the previous year and obtain explanations for
any unexpected changes
· Reconcile to costing records and supporting documentation, to establish that costs relate to the manufacturing process
· Compare unit costs with those used for costing of inventories in prior years and obtain explanations for any unexpected
changes
· Inspect the overhead absorption policy and ensure it is consistent with the previous year
· Consider the appropriateness of the determination of normal capacity
· Enquire of management how they determine the stage of completion and assess its reasonableness
· Obtain the stage of completion from the inventory count sheets and reperform the calculation of cost
· Ensure that all amounts are net of VAT if the client is a VAT vendor
· Recalculate the totals in the time sheets and other documents to ensure accuracy
· Select a sample from the stock sheets and trace it to the accounting records
· Inspect AFS to ensure different categories are disclosed and accounting policy is disclosed
· ARP on
➡ Inventory turnover rates
➡ Gross profit percentage

Inventory Count Procedures

· Physically inspect a sample of inventories and note any slow moving and / or obsolete inventories. Follow up
items noted at inventory count to final stock obsolescence workings.
· Follow last cut-off numbers through to the inventory lists; ensure subsequent receipts / issues accounted for
in the records after the stock count.
· Prior to the inventory count the auditor should:
- Liaise with the client about the date and times of the inventory count.
- Confirm all locations at which the client holds inventory (by enquiry, by reference to prior year working
papers etc.) and if necessary visit the locations.
- Perform administrative planning e.g. organise audit staff to attend.
- Obtain a review a copy of the written instructions given to the client’s count tea ms.Fixing responsibility to
identified individuals ensuring that each supervisor is assigned teams of two counters each
- Presence of pre-numbered count sheets and tag register.
- Preparation of inventory for the count i.e. shelves and bins numbered with prelisting of numbers.
- Plan / procedures to be followed during the count including the controlling of records.
- Instructions on control over inventory movement.
- Enquire as to whether the client has any inventory which should not be included in the count e.g.
consignment inventory, inventory already invoiced but not yet delivered or collected.
- Brief the audit staff allocated to the count on their responsibilities.
· During the inventory count
- Observe inventory taking procedures to ensure that the client’s written instructions are adhered to.
- Walk through the warehouse and identify inventory which is obsolete or damaged or appears to be slow
moving e.g. dusty / old packaging etc. The inventory number, description, location and quantity should be
recorded on a work paper and traced to the inventory sheets to confirm that these items have been
marked as damaged / obsolete.
- Obtain a rough plan of the premises and identify high value items and difficult to count items. Conduct test
counts on the inventory in the warehouse in both directions, making sure all selections and categories are
tested:
➡ From inventory sheets to physical inventory (existence)
➡ From physical inventory to inventory sheets (completeness)
- Resolve discrepancies in test counts before conclusion of the count by recounting with the client staff and
confirming that amendments are made to the inventory sheets where necessary.
- Test the numerical sequence of the inventory sheets both before and at the conclusion of the count to
ensure that all inventory sheets are accounted for.
- Confirm by enquiry of inventory counters and inspection of the inventory sheets that inventory which should
not be included in the client’s inventory, has been excluded.
· At the conclusion of the count
- Walk through the warehouse making sure that all inventories were counted.
- Inspect inventory sheets to confirm that:
➡ Lines have been drawn through blank spaces (so that items cannot be added)
➡ Alterations / corrections have been signed by the counters responsible.
➡ Inventory sheets have been signed by the counters responsible.
- Create audit records in respect of the inventory count attendance by:
➡ Taking copies of all inventory sheets (hardcopy or digital)
➡ Recording observations as to the client’s count procedures
➡ Recording results of all test counts performed by the audit team
➡ Recording any damaged, obsolete or slow moving inventory
➡ Record cut-off numbers for all documents used in the inventory and production cycle.
- Compile a list of goods received notes which have not been matched to supplier invoices.
- Report weaknesses to management.

Payroll
Risks
Unauthorised appointments could occur.
Fictitious employees may be included in the salary or wage journal.
Unauthorised deductions or benefits.
Unauthorised or incorrect changes to salaries and wages.
Not all changes to salaries, wages and deductions are recorded
Unauthorised dismissals.
Employees who are dismissed or who resigned remain on the wage or salary journal.
Employees may be paid for hours not worked.
Clock cards could exist for fictitious employees.
The normal and overtime hours could be calculated incorrectly.
Employees may not be paid for hours worked
Employees dismissed continue to be paid.
Fictitious employees are included in the salary and wage journals.
Employees paid for services not rendered.
Employees not paid for services rendered.
Employees paid at unauthorised scale or tariff.
Unauthorised deductions or benefits for employees.
Inaccurate deductions made from and benefits added to salaries and wages.
Inaccurate calculation of salaries and wages (hours and wages).
Incorrect or unauthorised wage amount requested.
Cash could be stolen.
Incorrect payslip prepared.
Cash placed in the wage envelopes is the incorrect amount
Not all employees who should be paid are paid.
Wages are paid to non-employees of the compan
Unpaid wages are stolen
Unclaimed wages are paid to the wrong person
Incorrect salary amounts requested. ( Accurac
 Unauthorised salary amounts requested. ( Validity)
Not all employees that should be paid are paid.
Salaries are not paid to the correct employees.
Deductions and liabilities are calculated and paid over incorrectly.
All liabilities that should have been raised are not raised
All deductions that should have been paid over are not paid over, or not paid over
timeously
Recording of items relating to human resources cycle in the general ledger may be in the
wrong accounting period.
Recording of items relating to human resources cycle may be inaccurate.
Recording of items relating to human resources cycle in the general ledger may be
incomplete.
Recording of items relating to human resources cycle in the general ledger may be
classified incorrectly

Audit procedures
· Select a sample of employees extracted from the salaries account
· Inspect the documentation located in the employee's personnel file in the personnel section.
· Enquire of senior personnel (e.g. the human resources officer) whom you trust to vouch for the validity of any staff whom
you do not know personally and where some doubt remains.
· Perform identification of the salary earners when performing your audit work at the company.
· Through discussion with staff human resources depart and examination of the employment and dismissal documentation,
inspect whether or not performers are introduced to, and removed from, the salaries register at the correct time.
· Inspect all employment and dismissal docs to determine if they have been properly authorised by the designated staff.
· Inspect the employee's gross salary in the payroll masterfile account and compare it to the authorised payroll
documentation (including remuneration, signed payment notification and HR policies) in the performers file stored in the
human resources department and vice versa
· Reperform the deduction calculations and perform cross casts on the salaries account.
· Inspect the electronic funds transfer instruction (supporting documents) sent to the bank and compare the total amount
paid per the salaries account.
- Inspection the EFT requestion for approval by the financial manager or something with the required authority.
➡ Reperform all calculations
➡ Confirm payment is valid by inspecting the company policy.
· Reperform the postings from the salaries book to the relevant accounts in the general ledger to determine that they have
been correctly accounted for (net salaries and all deductions).
· Analytical Procedures: Compare salaries on a month to month basis in total and by cost centre or department, and
investigate any large fluctuations
· Compare all third party deductions (e.g. SARS, pension fund, medical aid contributions) to the appropriate tables and
contribution instructions and to the authorised deduction form located in employees file that is stored in the human
resources department and enquire into any discrepancies with personnel and, if necessary, the employee.
· Using audit software to scan the employee master file for error conditions which may indicate ficititious employees
duplicated or missing:
- ID numbers
- Tax reference numbers
- Bank accounts
- Staff numbers
·
Inspect returns to outside entities for the inclusion of the selected employees i.e. PAYE, SARS or medical aid and
pension contributions
· Trace the rates paid to the performers to their employee file and confirm that the rate has been approved at the
appropriation level (Financial manager or Operations manager)
· For any overtime, inspect that the overtime reports were signed by the theatre manager prior the work being performed,
confirm the rates used for the overtime agreed to the company policy
· Re-perform all casts and cross casts on the payroll and agree to the appropriate GL account
· Inspect the presentation and disclosure made in the financial statements confirm that the disclosure is consistent with
audit evidence, meets the requirements of Sec 30 of Companies Act 2008, JSE listing requirements, King IV et
· Obtain and reperform the month to month reconciliation of the salaries enquire of management should any month not
reconcile, investigate reconciling items.

I&F Cycle Audit Procedures

Share Capital
· Re-perform calculations to ensure accuracy
· Obtain a schedule containing the opening balance, movements and closing balance
· Trace the opening balance to prior year working papers and AFS
· Trace and agree the closing balance to the general ledger and trial balance
· Inspect MOI to determine whether they have shares to issue
· Inspect minutes of meetings to determine whether share issue was authorized
· Agree register of shareholders to share capital account in the general ledger
· Trace receipts of cash to bank statement
· Enquire from management whether all equity transactions have been recorded Inspect documents for dates within year
end
· Re-perform calculations as per authorised issue price
· Inspect minutes to meeting to ensure dividends authorised
· Obtain schedule of dividend payments
· Agree total to share register and control account in general ledger
· Re-perform calculations to ensure accuracy in total cash payments records and individual accounts
· Examine paid cheques or transfers for date, payee, crossing and amount
Acquisition of subsidiary
· The once-off transaction does not lend itself to analytical review procedures in the form of ratios and trend analysis.

· Obtain a schedule of all assets and liabilities acquired (including contingent liabilities).
· Enquire with the management (of both businesses, but especially the subsidiary) as to the existence of any contingent
liabilities or non-capitalised assets such as brands.
· Inspect the latest audited annual financial statements of the subsisdiary to determine the net assets acquired.
· Obtain the underlying legal contracts of sale and inspect that they are signed by both parties, using the contract for the
following:
‣ Determine whether the nature of the agreement constitutes a business combination as per IFRS 3.
‣ Determine the acquisition date.
‣ Determine (also through enquiry with the subsidiary) whether there is any contingent consideration in the acquisition.
‣ Determine (also through enquiry with the subsidiary) any special terms and conditions of purchase and the transaction
value/price.
· Agree the purchase price to payment in the parent company’s bank statement.
· Obtain external confirmation for the market values of assets and liabilities acquired (at acquisition date).
· If an expert is required for the valuation of an asset or liability, consider the skills, experience, assumptions used and
nature of work performed (as per ISA 500 or ISA 620).
· Assess the reasonability and consistency of methodology in determining the market values.
· Recalculate the goodwill recognised

Cash and cash balance

· Obtain a schedule of cash balances
‣ Re-perform calculations to ensure arithmetical accuracy
‣ Re-perform the cash count and agree it to the schedule

· Obtain a bank confirmation confirming bank account balance

· Obtain the bank reconciliation and ensure all outstanding cheques are reflected

Bank reconciliation
- With the client consent obtain directly from the bank , cut-off bank statements recording all movements on the account
between cut-off date and year end, and a bank confirmation/certificate confirming the year-end bank balance
Long outstanding cheque
- Trace cheque to prior months bank reconciliations to confirm it was reflected as outstanding.
- Agree the cheque amount to invoices/statements and confirm by enquiry of Leonardo that the amount represents a bona
fide payment.
- Enquire as to whether, the creditor has been contacted, the cheque has been stopped and a new cheque has been issued.
- Request that the cheque be written back in the cash book (it is stale). (The amount should be reflected as owing at the
year-end.
Hight amount Cheque
- Obtain the supporting documentation for this payment and confirm that it was for a valid expense for the company and
that it was authorised.
- Obtain and evaluate the explanation from the company as to why this payment was not made by EFT (consider whether
it could be fraudulent in anyway, as cheque payments may be subject to less stringent controls)
Other cheques
- Agree the other cheques outstanding to the cut-off bank statement. If not yet presented, agree to invoices/statements
and confirm that the amounts represent a bona fide payment.
· Consider using an independent valuation model/ a Broker’s Quote/ a Pricing Service or an expert to assess the model
and its assumptions. When using an expert, consider his/her/their;
➡ Independence / objectivity;
➡ Qualifications, reputation and experience;
➡ Assumptions used; and
➡ Results of the work.
· Where a contract is “in the money”, consider impairment of the financial instruments in the light of credit risk and the
issuer of the instruments’ ability to honour the contract

Going concern
· If management has not performed a going concern assessment request them to do so
- Obtain a cash flow forecast for the year
- Evaluate the validity of the assumptions (commercial, economic and financial) under which the forecasts have been
prepared
- Compare previous forecasts to actual results to determine whether previous forecasts have been reliable
- Re-perform the arithmetical accuracy of the cash flow forecast
- Consider the competence/reliability of the person that prepared the forecast e. Perform analytical reviews on the
forecasts
· Obtain the latest financial information
- Inspect the accounts in order to determine whether there have been any significant changes
- Review the operating results to establish whether or not the company has returned to profitability
- Consider the correlation between the forecasts for the new year and the actual performance to date
· Review financial statements and consider the company’s ability to honour their commitments
· Review subsequent events
· Inspect minutes and correspondence with legal advisors for any adverse events after the accounting date
· Obtain a management representation letter concerning the going concern assumption and whether or not the company is
able to achieve its forecasts
· Confirm the availability of banking facilities with the company’s bankers and loan creditors i.e. Inspect correspondence
with the bank to assess the likelihood of continued bank support
· By enquiry and review of supplier accounts, form an opinion as to whether the company’s suppliers will continue to
provide financial support
· Evaluate management plans
- Is it a genuine plan
‣ Authorised
‣ Going to be implemented
- Will it work
‣ Good idea
‣ Legal
· Obtain written confirmation from financiers
· Assess financial stability of financiers
· Review market research results
· Inspect orders received from customers
· Inspect internal budgets and production schedules
· Inspect minutes of meetings for directors approval
· Reperform computations concerning profitability of the new products
· Inspect the written subordination agreement for date, signature on behalf of the creditor and on behalf of the debtor
· Review the wording of the agreement to determine that value was received by the holding company
· Inspect document to ensure all legal formalities have been complied with
· Consider the ability and intention of the creditor to comply with the agreement
· Review the amount in the subordination agreement and agree it to the amount in the FS
· Consider whether the agreement relates to a debt of sufficient size

Long term loans

Repayment of loan
· Inspect cheque that was made to repay the loan
‣ Was it crossed
‣ Was it made to the correct payee
· With the clients permission write to the lender asking him to confirm that i. That the amount was paid
· Trace payments made to the bank statement
· Ensure repayments have been recorded in the correct period
New loan
· Examine the memorandum and articles of association for the company’s capacity to take out loans
· Are there limits on boards borrowing powers .Was this limit exceeded
· Examine the directors minutes
· Obtain a copy of the loan agreement
· Agree amount of the loan
· Inspect the agreement for the directors signatures
· Inspect the agreement for the lenders signature
· Agree the details in the agreement to the financial statements note
· Inspect the date to ensure that the liability was incurred in the current period
· Establish details of any security
· With the clients permission write to the bank and ask them to confirm the amount outstanding
· Inspect bank stamped deposit slip for the receipt of the loan
· Agree balances to the general ledger and trial balance
Old loans
· Obtain a listing of prior year’s liabilities
· Follow up on any amounts that are not on the new listing
General
· Enquire of management if there are any unrecorded liabilities
· Obtain a management representation letter
· Perform analytical review procedures
· Presentation and disclosure
· Inspect financial statements to ensure that long term liabilities are presented fairly