leader in nurturing chartered accountants · pdf filedetermine materiality and performance...

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Corporate Governance – KING IV

King IV objectives

• Promote corporate governance as integral to running an organisation (governing body) and delivering governance outcomes such as ethical culture, good performance, effective control and legitimacy.

• Broaden the acceptance and application of the King IV Report by making it accessible and fit for implementation across a variety of sectors and organisational types - scalability.

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King IV objectives

• Reinforce corporate governance as a holistic and interrelated set of arrangements to be understood and implemented in an integrated manner.

• Encourage transparent and meaningful reporting to stakeholders.

• Present corporate governance as concerned with not only structure and process, but also with an ethical consciousness and conduct.

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King IV structure

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King IV principles:

Refer to part 4 of the code: page 40 to 41

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Common Student Pitfalls

Required Examiner’s Expectations Common Pitfalls

Identify and describe any corporate governance weaknesses with reference to the information provided. Base your discussion on the requirements of King IV code on corporate governance.

• Identify information from the scenario which provides evidence of non-compliance with King IV – trigger

• Explain which King IV principle was contravened based on the evidence from the trigger above

• Some students show a lack of understanding of king IV requirements as evidenced by their failure to pick concerns especially around the governance of risk.

• Sentence construction from some students was quite poor as evidence by the length of sentences in the solutions.


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Common Student PitfallsRequired Examiner’s Expectations Common Pitfalls

Identify and discuss concerns with regards the governance structures at DHL with reference to the requirements in King IV code on corporate governance.

▪ Identification and discussion of concerns with regards the governance structures at DHL as indicated in the scenario with reference to the requirements in King IV code on corporate governance.

▪ Some students waste time quoting king 4, without clearly stating the concerns.

▪ ▪ Some students failed to identify the need for of at least 1 additional exec

▪ ▪ Some students stated that the chair should not be a member of the remuneration committee

▪ ▪ Students stated that board evaluation should be done annually instead of every 2 years


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Tutorial Analysis

• Question 4 (b)

• Question 9 (a)


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Questions ?


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Materiality in planning and performing an audit

Sub-Topic Analysis

▪ Concept of materiality and performance materiality

▪ Types of materiality

▪ Steps to applying materiality in an audit

▪ Application of the materiality steps to an exam type question


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Why is materiality important to us?

• There is an inverse relationship between materiality & risk

• Therefore M guides how much work we need to do to support our opinion

or

ELLIOT T WONENYIKA CA(Z) 13

Steps in applying materiality

Determine materiality and performance materiality for the financial statements – ISA320

If necessary determine materiality and performance materiality for classes of transactions, account

balances or disclosures – ISA320

Evaluate the audit findings – ISA450

Plan and perform the audit procedures

ELLIOT T WONENYIKA CA(Z) 14



Failure to distinguish between overall and performance materiality


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Tutorial Analysis

• Question 1 (b)

• Question 5 (b)


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Questions ?


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Fraud, laws and Regulations

Sub-Topic Analysis

▪ Concept of fraud with the context of an audit of financial statements.

▪ Management and auditors responsibilities in respect of fraud.

▪ Actions to be taken by auditor when they have identified suspect fraud


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Sub-Topic Analysis

▪ Management and auditors responsibilities in respect of compliance with laws and regulations.

▪ Actions to be taken by auditor when they have identified suspected or actual non compliances with laws and regulations

▪ Communicating with those charged with governance


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Describe the actions to be taken by Auditors in respect of the information on the investigation by the Zimbabwe Revenue Authority in performing the 2016-year end audit

• The scenario will highlight possible noncompliance with revenue laws apply the requirements of ISA 250 in answering this question.

• Failure to apply ISA 250 to answer the question.

• Some students can identify the requirement to report to those charged with governance.


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Tutorial Analysis

• Question 10 (e)


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Questions ?


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Controls

Sub-Topic Analysis

1. Internal controls and business cycles;

2. General Controls;

3. Application controls;

4. Designing a system of internal controls;

5. Evaluating control weaknesses.


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Mind map


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Mind map


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Common Student PitfallsRequired Examiner’s Expectations Common Pitfalls

a. With reference to the

information in working paper

501:

i. Identify key controls to

test over the occurrence,

accuracy and

completeness of sales

revenue.

ii. Describe the test of

control procedures to test

operating effectiveness of

the controls identified in

(i) above.

▪ Students were expected to

design test of control

procedures over controls

which address occurrence,

accuracy and

completeness of sales.

▪ Incorrectly identifying a

process as a control

▪ Inability to come up with

a relevant test of control

for testing data which is

encrypted during

transmission

▪ Most students wrote

points on cash, spot cash

counts which do not

address the occurrence,

accuracy and

completeness of sales

revenue.


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Describe the controls you would expect to be in place over the revenue system and for each control identified briefly describe the control objective (risk being addressed).

▪ Identify both application and general controls over the revenue system

▪ And for the identified controls students were also expected to describe the what can go wrong (risk) being addressed by the control.

▪ Memory dumping of controls which were not relevant to the scenario.

▪ Simply stating control objective without fully explaining the what can go wrong.

▪ Repetition of controls.


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Tutorial Analysis

• Question 2 (b) and (c)

• Question 3 (f)

• Question 5 (h)

• Question 8 (c)

• Question 11 (a)


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Questions ?


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Introduction to Audit Evidence

Sub-Topic Analysis

1. Concept of audit evidence

2. Requirements for audit evidence.

3. Hierarchy of the importance of audit evidence (reliability).

4. Documentation requirement for audit evidence.

5. TOCs

6. Substantive procedures

7. Substantive procedures; Going concern assessment


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Sub-Topic Analysis

▪ Definition of TOCs.

▪ When should TOCs be performed.

▪ Difference between risk assessment procedures and TOCs.

▪ How to formulate TOCs.

▪ Direction of testing.


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Nature of tests of controls

Refers to the types of tests of controls that the auditor can perform:

▪ Inspection

▪ Observation

▪ Enquiry

▪ Re-performance


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How should a test of control be formulated?

1. “HOW”

2. “WHAT”

3. “WHY”


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Formulating Test of controls

Controls Test Of Controls

Separate goods receiving departments exists.

Enquire and observe whether a separate department exists

The goods are received by two persons who count and inspect them for quality

Enquire of the goods receipt personnel how the controls functionObserve on a secretive basis the performance of the control to confirm whether these are being complied with.

On receipt of the goods the goods receiving personnel prepare the GRN and sign it as proof of the fact that the goods were counted and inspected.

Observe the receipt of the goods and determine whether the controls are complied with.Inspect the signatures on the GRN as proof that the control is complied with.

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Direction of testing

What should the auditor consider when selecting items on which to perform TOCs?

• The control objectives that the control procedures are intended to achieve

1. Validity- accounting records to the source documents

2. Completeness - source documents to the accounting records


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Common Student PitfallsNature of questions Examiner’s expectations Common Pitfalls

a. With reference to the

information in working

paper 501:

i. Identify key controls to

test over the

occurrence, accuracy

and completeness of

sales revenue.

ii. Describe the test of

control procedures to

test operating

effectiveness of the

controls identified in (i)

above.

Students were expected to design test of control procedures over controls which address occurrence, accuracy and completeness of sales.

▪ Incorrectly identifying a

process as a control

▪ Inability to come up

with a relevant test of

control for testing data

which is encrypted

during transmission

▪ Most students wrote

points on cash, spot

cash counts which do

not address the

occurrence, accuracy

and completeness of

sales revenue.


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Discuss the controls you would expect to have been implemented before the implementation of the SAP enterprise resource management system and during the data migration to the SAP inventory management module.

Students were expected to design controls over the data migration process

▪ Others started off with

controls they would

expect on acquisition

or in-house

development.

▪ Coming up with

controls relevant to the

implementation stage

which was not

required.

▪ Memory dumping controls which were not relevant within the context of the required.


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Tutorial Analysis

• Question 9 (c)

• Question 10 (a) and (d)


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Substantive Procedures

▪ Overview of SPs

▪ What are Substantive procedures.

▪ When should SPs be performed.

▪ Why perform SPs

▪ Risk assessment procedures and SPs.

▪ Designing of SPs.

▪ General audit procedures.

▪ Understand requirements around analytical procedures.


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Mind Map


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Design of Substantive Procedures

Nature (ISA 330 par A9 to A10)

Timing (ISA 330 par A11 to A14)

Extent (ISA 330 par A15 to A16)


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Type of substantive proceduresInspection Consists the examining of records or documents or a physical

examination of an asset

Enquiries Consists of seeking information from knowledgeable persons within or outside the entity.

External confirmations

This is audit evidence obtained by the auditor as a direct written response to the auditor from a third party in paper, electronic or other form.

Recalculations Can be done manually or electronically to test mathematical accuracy.

Analytical procedures

Consists of a study of plausible relationships between financial and non-financial date. Also involves procedures performed to investigate identified fluctuations and relationships that are inconsistent with other information.

General procedures Consists of procedures such as the review of minutes, obtaining management representation letter.


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Design of Substantive procedures

What should an audit procedure include?

• HOW, WHAT AND WHY.

– HOW: A verb which should describe the action.

– WHAT: A reference to the relevant and reliable source of evidence.

– WHY: The reason for the audit procedure with regards to the assertion being tested and the risk that is being responded to.


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General Audit Procedures


These are procedures which address more than one assertion. E.gs

• Recalculate castings and calculations of general ledger accounts, annual financial statements, etc.

• Agree opening balances with previous year’s working papers and audited financial statements.

• Test postings from the subsidiary ledgers to the general ledger.• Agree the totals of lists e.g. debtors age analysis or list of creditors

with the general ledger account.• Agree the balance of the general ledger account to the TB and AFS.• Inspect minutes of meetings (management, board of directors, and

shareholders) for decisions taken, authorisation, etc.

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Common pitfalls


c. With reference to the

information in working

paper DD03 describe

the substantive

procedures you would

perform over the Exide

batteries inventory

balance as at 31 March

2017 addressing the

valuation and rights

obligations assertions.

▪ Formulation of

substantive procedures

over the Exide batteries

inventory balance as at

31 March 2017 based

on WP DD03

addressing the

valuation and rights

obligations assertions

only.

▪ Addressing assertions

other than valuation

and rights over

inventory

▪ Idea on encumbered

inventory but could not

further explain the

point or come up with

procedures.


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Common pitfalls


• Failure to use appropriate terminology in wording of procedures e.g. Verify vs Inspect.

▪ Failure to explain

substantive procedures

on determining if

inventory is held at the

lower of cost and NRV.


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Common pitfalls


Describe the substantive procedures that you would perform on the debtors on the listing received from the client by the 2nd year trainee accountant.

Description of the substantive procedures to be performed on the debtors on the listing received from the client by the 2nd year trainee accountant.

▪ General audit procedures

earned students more

marks.

▪ Wasting time writing

down instructions to be

followed when performing

a debtors’ circularization

and defining

positive/negative

confirmation

▪ Incorrect solution points like “perform a debtor’s analytical review by comparing total number of debtors on the listing with those on the prior period


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Tutorial Analysis

• Question 1 (d)

• Question 2 (d) and (f)

• Question 3 (e)

• Question 4 (c)

• Question 5 (d), (e) and (g)

• Question 7 (b), (c), (d) and (e)

• Question 12 (a) and (b)

• Question 13 (d)LEADER IN NURTURING CHARTERED ACCOUNTANTS

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Questions ?

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