Common Weaknesses and Controls

 No separate receiving area for the receipt of goods, which could result in
theft of goods due to a lack of control and an unnecessary outflow of
resources.
 There should be a designated receiving area to the warehouse.
 The quantity and quality of goods received are not checked, which may
result in the incorrect quantities and quality of goods accepted leading to
a loss of customer goodwill.
 The warehouse staff should agree the quantity of the goods
received to the purchase order and assess their quality.
 There is a lack of isolation of responsibilities, which could lead to
erroneous or fictitious purchases being made and paid for, leading to an
unnecessary outflow of economic resources.
 Each employee should be assigned a specific username and
password so that accountability can be assigned to a specific
individual when processing the accounting data.
 The supplier’s statement of reconciliation is not prepared on a monthly
basis, which could lead to under payment of creditors and a loss of
supplier goodwill.
 A supplier’s statement of reconciliation should be prepared at least
on a monthly basis for all creditors and any differences should be
followed up on.
 There is a lack of segregation of duties, and fictitious payments can be
made, leading to an unnecessary outflow of economic resources.
 (there should be segregation of duties amongst employees)
 There is no checking of any supporting documents before releasing
payment, which could result in the incorrect payment made, OR fictitious
payments not being prevented leading to an unnecessary outflow of
resources.
 All payments supporting documentation should be provided and
reviewed before the payment is released.
 Documentation is not stamped or marked as paid which could result in
payment being processed twice (either erroneously or fraudulently)
leading to an unnecessary outflow of economic resources.
 Once processed for payment, all documentation should be
stamped/marked as paid.

General and Application Controls

 Application Controls
o These are manual or automated procedures that operate at the
application level
 o These controls can be detective, preventive and corrective in nature
and they are designed to ensure the integrity of accounting records
 General Controls
o These are procedures that relate to many applications and support
the effective functioning of application controls
 The difference between the two is the level at which they operate
 General controls operate at an entity-wide level and pervasive
 Application controls operate to a business process within a functional area

Controls at the Application Level

 Access controls
 Limited Access
o Only staff of that department should have access to the MAF
o E.g. Sales department, HR department, Debtors department
 Write Access
o Write access should only be given to the clerks of that
department
o E.g. Debtors clerk, Sales clerk, HR clerk
o The clerks should access the system using their unique username
and password
o They must not share or use same passwords
o The following controls must be present on the username and
password:
 Be at least 8 characters long (or any indication of minimum
length)
 Be a mix of alphabets, symbols, and numerical values (alpha-
numeric)
 Change on a regular basis
 Contain a special character and/or Capital letter
 Password Policy should exist indicating that employees may
not share passwords
 After a password has been entered incorrectly after a number
of attempts, the system should lock the user out
o There needs to be segregation of duties between clerks in terms of
who makes changes, who can authorize, and who reviews the
changes made.
 Read Access
o Read access should be given to the respective heads of the
departments
o E.g. Head of Debtors, Head of HR, Head of Sales
o Log report of changes to the MAF should only have read access
o Head of Departments have the following duties:
 Approve MAF amendments
 Changes to MAF to be accompanied by supporting documents
All MAF amendment forms should be assigned a pre-
numbered unique sequential number when creating a new
Masterfile (either for customer or employee)
 Should follow up on any missing MAFs
 All changes to MAF must be compared to the approved
changes to confirm they agree by the Head of department
 Once a MAF has been updated by the clerk, the head of
department should compared the info captured to the MAF to
ensure it corresponds
 Recording of information
o There should be a Captcha's in place for customers to confirm they
are not robots.
o There should be a mandatory field test implemented. If the
required field is missing you cannot proceed.
o There should be a field length check to ensure the correct number
of characters is entered. E.g. ID number must have 13 digits.
o There should be a range check to ensure credit limit is not
exceeded, or to ensure the entered amount of salary is in the
expected range.
o There should be edit checks (alpha-numerics test) to ensure
alphabets and numbers are not confused.
o There should be a dependency check to ensure that info provided
corresponds, e.g. Address code.
o Screens should be formatted in the required format for a
customer/employee to be added to the MAF.
o There should be a sign test to ensure that no negative amount or
quantity is inputted.
o There should be screen prompts to ensure if there is incorrect info
given you are alerted before you can continue.
o There should be a validity test i.e. email address should contain @
sign, if not, you can not continue.

Example of online sales application control:

o All incoming sales order calls are directed to a telesales order clerk.
o Write access to the sales order module is restricted to order clerks.
o Each sales order clerk accesses the system using a unique
username and password.
o The order clerk's profile gives him only access to the debtors
Masterfile and the inventory Masterfile.
o To prevent unauthorized order placement, there should be a
designated area with computers where orders can only be taken.
 Identifying and authenticating the customer
 o On receiving a phone call, the order clerk requests the customer's
account number and keys it in. A programmed verification check
will take place ensuring that the customer number agrees to a
customer on the accounts receivable Masterfile.
o The order clerk should then request the caller to provide other
information which has appeared on the screen to authenticate the
customer.
 The order clerk should not give the information to the caller
and ask him to confirm it - the caller must provide the
information e.g.: a safety question such as customers maiden
name.
o If the customer’s account number is a match to the debtors
Masterfile, the system will automatically allocate a unique
transaction number which will identify the sales order as it
progresses through the system.
o If the customer does not have an account, he will not be on the
debtors Masterfile and will be referred to the credit management
department.
 The system will not allow the order clerk to proceed with an
order until the customer is loaded onto the system.
o At the time the account number is being validated against the
debtors Masterfile, the order clerk may receive a message on the
screen that there is a "hold" on the account which prevents the
order clerk from continuing with the taking of the order.
 On these occasions the order clerk should refer the customer
to the credit controller.
o The credit controller will be the only person who can approve any
amounts that exceed the credit balance or changes to the status of
the debtor.
o The credit controller will approve any changes that are to be made
using a unique username and password.
o The password should contain one of the following controls:
 Be at least 8 characters long (or any indication of minimum
length)
 Be alpha-numeric
 Change on a regular basis
 Contain a special character and/or Capital letter
 Password Policy should exist indicating that employees may
not share passwords
 After a password has been entered incorrectly after a number
of attempts, the system should lock the user out
o Only the credit controller (not the order clerk) should have the
power to remove the "hold" on the debtors account.
o All "hold" removals should be logged automatically by the computer
and the logs subsequently followed up by the financial manager.
o The system will not allow the order clerk to proceed with the order.
 Entering and confirming the detail of the order
o Only once the customer has been validated, the details of the order
can be taken. To facilitate the complete and accurate entry of the
order, the following automated controls should be in place.
  Screen formatting: the screen will be formatted as a sales
order
 Minimum entry: e.g., the entering of the inventory item code
will bring up the description of the item being ordered and
the price.
 Mandatory fields: e.g., to progress with the order, a number
must be entered into the quantity field.
 Field format check on the quantity fields to ensure the correct
format is entered (only numbers).
 Limit check: the system will compare the amount of the order
to the balance per the debtor's Masterfile and ensure that the
limit has not been exceeded before allowing the order to be
placed.
 Dependency check must be performed on the postal address
to ensure that the address is correct, agreeing the postcode
to the address to ensure it is the right area.
 Reasonability check must be performed to ensure that the
order is not out of line with previous orders that have been
placed with the client or to compare the discount rate applied
to the customer to the discount Masterfile to ensure that the
correct discount is provided.
 Sign test to ensure that the correct values are input into the
order.
 Field size test to ensure that all fields comply with the
minimum required length, e.g., Debtor number, order
number.
 Screen prompts will require the order clerk to confirm details
of the order and important details such as a delivery address
and email address with the customer.
 Fields on the "on screen sales order" which cannot be
changed by the order clerk, e.g., account number, delivery
address etc., are shaded and will not react if clicked on.
Mandatory fields have a red star next to the box into which
the information must be entered.
 The system allocates a customer reference to every sales
order that is given to the customer at the time of placing the
order. If the customer wishes to follow up on the order or
resolve a query, he will quote this number.
 There should be a Captcha's in place for customers to confirm
they are not robots.
 Overall application controls
o The order clerk will have read access to the inventory file and
should be able to identify if there is enough available stock at the
premises to place the order.
 The system can't allow the order to be processed if there is
no stock available and must create a back-order document
with the same information on the sales order.
o If the goods are not available, the order will be placed on the back-
order file if the customer agrees.
o All telephonic orders should be recorded.
 o All orders should automatically be numerically sequenced.

Audit Risk
 Audit Risk is the risk that the auditor will express an inappropriate opinion
on the F/S
 Audit Risk is made up of 3 components:
o Inherent Risk: is most likely to occur when transactions are
complex, or in situations that require a high degree of judgement
regarding the financial estimates
o Control Risk: is the risk that controls does not prevent, detect,
correct a misstatement from occurring
o Detection Risk: is the risk that the auditor’s procedure will not find
any material misstatement that exist in the F/S

Risks of Material Misstatements (RoMM)

 RoMM is the risk that F/S are materially misstated prior to audit
 RoMM is a product of Inherent Risk (IR) and Control Risk (CR)
o RoMM = IR x CR
 IR refers to the "susceptibility of an assertion about a class of transaction,
account balance or disclosure to a misstatement that could be material,
either individually or when aggregated with other misstatements, before
consideration of any related controls"
 CR refers to "the risk that a misstatement that could occur in an assertion
about a class of transaction, account balance or disclosure and that could
be material, either individually or when aggregated with other
misstatements, will not be prevented, or detected and corrected, on a
timely basis by the entity’s internal control.
 ROMMs must be identified and assessed at the overall financial statement
level and the assertion level
 At the overall level, RoMM refers to risk which 'relate pervasively to the
financial statements as a whole and affect many assertions'
 The assessment of RoMM at the overall level will be affected by an auditor
understanding of the organisation's system of internal control, including
the control environment and the risk of misstatement due to fraud
 Risks of misstatement which do not relate pervasively to the financial
statements as a whole are RoMMs at the assertion level

Examples:
 New Audit client
o There is a risk that management may manipulate the opening
balances resulting in F/S being misstated
 o There is a risk that management may change or manipulate
accounting policies as they know the auditor is new
o There is a risk that accounting policies were not consistently
applied in the previous year resulting in F/S being misstated
o The previous auditor did not have sufficient resources for audit,
there is a risk that maybe there will be errors in the opening
balances if sufficient and appropriate audit work was not
performed.
o Previous auditors were taken to court for their negligence, there
is a risk that opening balances may be incorrect.
 Listed company
o The is a risk that management may manipulate the F/S to meet
the JSE requirements, and to inflate the share price
 Government grant
o Management may manipulate financial statements to meet the
requirements of the grant to obtain the funding
o Management may manipulate F/S to hide any possible bribes
being paid to obtain the grant.
 Tight audit deadlines
o The management may manipulate F/S as the auditor may not
have enough time to thoroughly go through all accounts
o There is a risk that post-balance sheet events are not accounted
for due to the tight deadline resulting to F/S being misstated.
o There is a risk that management make errors in F/S as they are
under pressure to complete the F/S
 Rapid expansion
o There is RoMM due to errors as the controls might not be
expanding on the same rate resulting to material errors not
being detected, prevented or corrected in the F/S
o There is RoMM due to fraud as management may use this
opportunity to commit fraud
 Bonus scheme
o As bonus schemes are based on profits there is a risk that the
F/S are misstated to meet the performance targets
 Corporate governance concerns
o As per king IV
o New board in place, which may make it impossible for fraud or
error to go undetected due to the new individuals not being
familiar with all various systems and controls.
o New board/CEO in place, there is a risk that they may
manipulate F/S in order to prove a point that they are working
o Poor governance structure may result in poor control
environment on the preparation of F/S which may result in errors
and fraud in the financials.
 Laws and regulations
o Laws and regulations not correctly applied or complied with
o Entity that has multiple subsidiaries in different countries is
exposed to multiple jurisdictions. Management may not be
 competent to ensure compliance with all legislation. Leading to
errors in calculations and disclosures.
o There is the risk that management manipulates the F/S in order
to meet the requirements of all laws and regulations.
 Going concern issues
o Tax invasion may lead to severe fines and penalties being issued
to the entity which may impact on the ability to continue as a
going concern.
o (XXXX) industry is highly regulated, this may result in severe
fines and penalties being issued to the entity which may impact
their ability as a company to continue as a going concern
o The restructuring which includes cost cutting may indicate
possible going concern issues
o A slight decrease in profitability may be indicating going concern
issues
o Entity obtaining a loan to pay for its short-term obligations
questions the ability of the company to continue as a going
concern and thus creating the RoMM due to error as F/S may be
prepared on the incorrect basis
o Due to material fines from not complying with the laws and
regulations, this may lead to cashflow problems and thus bring
the going concern capabilities of the company into question,
which may result in the financials being prepared on an incorrect
basis
 Complex Group structure
o Intercompany transactions may not be eliminated
o Subsidiary use a different year end date could lead to errors in
consolidations
o Related party transactions may not be disclosed
o Foreign subsidiaries result in translation of foreign currencies
which may lead to errors if the incorrect exchange rate is used
 Management integrity
o Autocratic management style creates a RoMM due to fraud as
controls may be overridden by the management
o The CEO and CFO are connected persons which creates the risk
of collusion through the override of controls leading to a RoMM
due to fraud
o Incompetence of the CFO may lead to a RoMM due to errors as
they may not have sufficient IFRS knowledge to prepare F/S
o CEO and CFO are also shareholders, which creates a RoMM due
to the lack of fiduciary duties being clearly defined between
shareholders and directors as they are the same persons. This
could result in the lack of accountability and creating
opportunities to commit fraud
o Management lack of integrity could impact the reliability of F/S:
disagreements and firing of previous auditors, requesting that
previous auditor not contacted possibly to conceal detected
fraud or error, willingness to bribe auditors etc.
 o Management’s attitude towards the regulator's fines/penalties
brings management integrity into question which may lead to
RoMM due to fraud
o When there is a publicly exposed/government individual, this
indicates that management might have an incentive to
manipulate the F/S and conceal any possible fraudulent
transactions involved with the government (or publicly exposed
persons)
 Reliance to 3rd party
o RoMM due to fraud as management may be manipulated F/S to
obtain loan financing
o Management may be manipulating the F/S in order to hide any
possible bribes being paid in order to obtain the loan/grant
 Multinational organization
o A multinational organization has operations in various currencies
which result in a RoMM due to error that the operations results
are not converted at the correct exchange rate.
o Multinational organizations are exposed to several other laws
and regulations which lead to a RoMM that not all these foreign
laws are not complied with.

RoMM at Assertion (high risk assertions)

 For Revenue
o Occurrence: Management may overstate revenue by recognizing
fictitious sales
o Accuracy: Errors in pricing, discounts or foreign currency
conversions, or complex contracts, higher volume of transactions
o Cut-off: Revenue could be recorded in the wrong period, either too
early or too late especially for year-end transactions
 For Accounts Receivables
o Existence: There is a high chance of overstating, fictitious
balances.
o Valuation & Allocation: Might not reflect true recoverable value
as ECLA is based on estimates
o Rights & Obligations: Might be pledged without disclosure, entity
may not control the receivables
 For Purchases
o Completeness: Purchases may be understated to inflate profits
o Accuracy: Errors in pricing, quantity, taxes, or discounts
 For Accounts Payables
o Completeness: Payables may be understated or omitted
o Accuracy: Errors in invoice amounts, foreign exchange rates, or
VAT treatment can misstate payables
 For Inventory
o Existence: Inventory might be recorded but doesn’t physically
exist, duplicate entries, errors in stock count
 o Valuation & Allocation: Inventory could be misstated due to
improper cost allocation, outdated pricing, or NRV falling below cost
o Rights & Obligations: Inventory might be held on behalf of
someone else but recorded as owned
 For Payroll
o Occurrence: Fictitious employees or unauthorized payments can
sneak into the system
o Accuracy: Errors in pay rates, tax deductions, overtime
calculations, benefit allocations
o Classification: Payments may be incorrectly classified. E.g.
manufacturing overheads recorded as administration costs
o Completeness: Missing employees or incomplete data entries can
understate liabilities
 For Investing and Finance
o Occurrence: Incorrect authorization may occur, fictitious asset
acquisitions or unauthorized debt
o Valuation & Allocation: Complex instruments require judgement
and can be misvalued, fair value recognitions, management may be
bias
o Classification: Incorrect classification may occur between current
and non-current assets, intangible assets
o Presentation & Disclosures: Complex disclosures especially for
relayed party transactions
 For Bank and Cash
o Existence: Cash may be overstated, fictitious bank accounts,
inflated bank balances, fictitious deposits and withdrawals
o Valuation: Forex accounts may be misstated due to incorrect
exchange rates
o Rights & Obligations: Cash may be restricted but still be recorded
as freely available

ATTs Audit Procedures

For Revenue and Receivables
 Debtors who exceeded their credit limit
o To determine if the debtor will still be able to pay their debt or they
should be recognised as bad debts
 Debtors who exceeded their days
o To identify debtors that need to be written down
 Debtors with unverified and missing information on their MAFs
o To identify potential fictitious debtors
 Debtors who owe large amounts
o To separate active debtors and potential debtors who might not be
able to pay
 Debtors with negative balances
o To obtain reasons from management for negative balances and test
the classification of such debtors
  Analysis of breakdown of the debtors' balances
o To identify debtors on which detailed audit procedures should be
performed
o To select debtors with the higher balances for testing purposes or
those with overdue payment terms
 Debtors with duplicate information on their MAFs
o To identify potential fictitious debtors

For Purchases and Payables

 Suppliers exceeding their credit limit
o To assess whether the company is relying too heavily on specific
suppliers and to evaluate financial risk exposure.
 Suppliers with overdue payments
o To identify liabilities that might require urgent settlement or
reclassification.
 Suppliers with unverified or missing information on their MAFs
o To detect potential fictitious suppliers and ensure compliance with
procurement policies.
 Suppliers with large outstanding amounts
o To differentiate between active suppliers and those requiring further
scrutiny regarding payment terms and financial viability.
 Suppliers with negative balances
o To investigate unusual transactions, refunds, or credits, ensuring
accurate classification in financial statements.
 Analysis of breakdown of payables balances
o To identify suppliers requiring detailed audit procedures.
o To select suppliers with significant outstanding balances or payment
delays for testing purposes.
 Suppliers with duplicate information on their MAFs
o To identify potential fraudulent activity, duplicate invoicing, or
erroneous entries.

For Inventory
 Cast and cross-cast the finished goods schedule received and compare the
balance to the general ledger to identify any differences.
 Using ATTs extract a report of any negative quantity or negative price of
inventory to identify inventory that may be incorrectly valued
 Using ATTs extract a report of duplicate inventory numbers to identify
possible fictitious inventory.
 Using ATTs extract a report of blank fields to identify possible fictitious
entries.
 Using ATTs extract a report of instances where cost exceeds NRV to
identify items that may need to be written down
  Using ATTs extract a report where the date of last sale is not recent (past 6
months) to identify slow-moving items that may need to be written down.
 Using ATTs extract a report where there is a quantity on hand but no sales
to identify slow-moving items that may need to be written down.
 Using ATTs recalculate the quantity * price and compare to the amount per
the breakdown/ general ledger account to identify any differences.
 Extract a report of all line items adjusted in the month prior to the
financial year end or just after year-end to identify possible fictitious
adjustments that have been processed.
 Extract report breakdown by inventory category
o Should be used for analytical purposes to identify which categories
are material to focus audit tests appropriately
 Using ATTs stratify the inventory schedule from highest value to lowest
value to identify inventory with high stock balances to select for target
testing during stock counts.
 Extract a report reflecting aggregate value of inventory at year-end by
inventory category and in total
o To compare the total inventory value per MAF to inventory figure in
the General Ledger
 Extract a listing of all items where the date of last sale and the date of last
receipt are within 5 days of the financial year-end
o To test the cut-off and ensure they are on the correct financial year
 A sample of items from the floor should be selected and the inventory
recorded should be inspected to ensure the items appear.

For Payroll
 Extracts a report of abnormal employee adjustments to identify instances
of unusual adjustments which could indicate fictitious employees
 Extract a report of duplicate employee Bank Account number to identify
any fictious employees, if any exists the auditor must investigate to
ensure they are not fictitious
 Extracts a report of duplicate employee ID number to identify any
duplicate ID numbers or ID numbers with less than 13 digits which would
indicate fictitious employee
 Extracts a report of duplicate employee-number which would indicate a
fictitious employee as all employee numbers are unique
 Reports where tax numbers are incorrect to identify any employee whose
tax numbers does not meet the required tax number range
 Extract a report of negative salaries to identify amounts that may have
been incorrectly accounted for
 Extract a report where net salary exceeds gross salary as this may
indicate a calculation error
 Using ATTs recalculate the salaries by taking the gross salary and
deductions and compare it to managements amount to identify differences
 Obtain the annual payroll schedule cast and cross-cast the schedule for
mathematical accuracy and agree the amount to the trial balance to
identify differences
  Inspect that the medical aid and pension deductions agree to the signed
employment contract of the employee
 Recalculate the deductions e.g. SDL/ PAYE/ medical aid and compare it to
what is on the payroll schedule to confirm it is correctly calculated
 Compare the current year salaries to the prior year salaries amount to
identify if there are significant fluctuations in the expense
 Perform a monthly trend analysis to identify any months where there may
be unusual changes
 For a sample of employees perform a positive (physical) identification of
the employee where possible and confirm that the person exists

Sampling
 Non-statistical sampling/Target testing
o By amount: Specifically selecting accounts with larger amounts
that make up 80% of the population
o By risk: If there is a related party transaction, specifically test it
as there is an inherently more risk that this transaction is misstated
due to the inherent nature of this type of transaction
 Statistical testing
o Randomly test remainder of the population which is above the
clearly trivial threshold, as there may be material misstatements
within such items, so they need to be tested
o As it the larger amount of invoices, it can be assumed that these
transactions are relatively homogenous, and as a result should
all have the same probability of being selected for testing
o The remainder of the population should be tested using statistical
sampling technique

Substantive Procedures
-Substantive procedures has nothing to do with controls put in place by
management
 Must be performed for each
o Material class of transactions, account balance and disclosure
o Significant risk
 Types of substantive procedures
o Analytical review procedures
o Test of details
o ATTs
 How we approach substantive procedures:
o 1. Look at the ISA’s that cover that specific types of substantive
procedures
o 2. List general substantive procedures
o 3. Look at examples of substantive procedures for each assertion
  Step 1: ISA’s applicable to substantive procedures
o EXTERNAL CONFIRMATIONS
 ISA 505
o USING THE WORK OF EXTERNAL PARTIES
 ISA 500
 ISA 620
 ISA 610
o INITIAL AUDIT ENGAGEMENTS (opening balances)
 ISA 510
o SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS (inventory,
litigations and claims)
 ISA 501
o ANALYTICAL PROCEDURES (these are general procedures, always
include)
 ISA 520
o AUDITING ACCOUNTING ESTIMATES
 ISA 540
o WRITTEN REPRESENTATION (general procedure)
 ISA 580

EXAM TECHNIQUE

 Class of transactions
 Analytical procedures
o Complete a trend analysis per month to identify where there are
unusual increases/decreases for further follow-up.
o Compare current year balance and prior year balance to identify if
the change is reasonable and not excessively high. If the change is
excessive follow-up on the possible reasons with management.
o Compare the current year actual results with the budgets to confirm
this is aligned.
 General procedures
o Agree the closing amount in the journals to the financial statements
o Cast the journals to ensure they are mathematically accurate
o Inspect the journals for unusual items
o Obtain management representative letter addressing all the
assertions
o Obtain management representative letter regarding the
reasonability of estimates used
o Perform analytical review procedures (give examples)
 Put down the applicable assertions
o Completeness (test to ensure that all transactions have been
recorded)
 Select a sample of source documents and trace them to the
journal
 Perform sequence testing of source documents to identify
missing
 o Occurrence (test to ensure only valid transactions have been
recorded)
 Select a sample of transactions from journals and trace to
source documents
 Inspect if source documents is authorized
 Inspect that the external source document is in the name of
the entity
 Perform sequence testing of source documents to identify
any duplicates
o Accuracy (test to ensure the transaction is recorded at the correct
amount)
 Select a sample of transactions from the journals and trace
them to the source documents
 Agree the details of the rand amount to further supporting
documents
 Recalculate and cast the source documents
o Cut-off (test to ensure the transaction is recorded in the correct
period)
 Select a sample of transactions recorded in the first 2 weeks
beginning of the year and last 2 weeks at the year end, and
trace to the source documents to ensure it is recorded in the
correct period
o Classification (test to ensure the transaction is recorded in the
correct amount)
 Select a sample of transactions from the journals and
trace to the source document to see it has been
recorded correctly based on the description
o Presentation and disclosure (test to ensure the financial
statements are presented and disclosed in accordance with the
applicable accounting framework)
 Inspect that the transaction has been correctly presented and
disclosed in the financial statements according to the IFRS
requirements
 Develop procedures to test the risks

 Account balances
 Analytical procedures
o Complete a trend analysis per month to identify where there are
unusual increases/decreases for further follow-up.
o Compare current year balance and prior year balance to identify if
the change is reasonable and not excessively high. If the change is
excessive follow-up on the possible reasons with management.
o Compare the current year actual results with the budgets to confirm
this is aligned.
 General procedures
o Obtain the accounts listing
o Agree the opening balance to the prior year audited closing balance
in the financial statements
 o Agree the closing amount in the journals to the financial statements
o Cast the journals to ensure they are mathematically accurate
o Inspect the journals for unusual items
o Obtain management representative letter addressing all the
assertions
o Obtain management representative letter regarding the
reasonability of estimates used
o Compare the current year balance to the prior year balance to
identify if there are significant increases/decreases
o Perform analytical review procedures (give examples)
 Put down the applicable assertions
o Completeness (test to ensure that all balances have been
recorded)
 Select a sample of source documents and trace them to the
journal
 Perform sequence testing of source documents to identify
missing
o Existence (test to ensure all balances exist)
 Physical assets:
 Select a sample of assets from the Fixed Asset Register
and trace to physical asset
 Balance with third party:
 External confirmation
 Perform a positive confirmation on the outstanding
balance owing to the supplier at year-end to ensure
that customer exists and that it is valued correctly
 Select a sample of new
debtors/creditors/supplier/employee and send positive
confirmations
 Subsequent receipts (loans receivable/debtors):
 Select a sample of receipts from Debtors from the bank
statement post year-end
 Trace to debtors remittance advice to identify the
invoice being settled
 Trace to the invoice and DN and inspect date for which
risks and rewards transfer
 If invoice forms part of the debtors balance at year-
end, then evidence that the debtor existed
 Existence of the supplier / loan agreement
 Obtain the Board Minutes of the meeting where the
contract was approved and inspect the following:
o At least more than 50% directors was present in
the meeting to ensure compliance with the
Companies Act
o Majority of the directors present voted in favour
of the contract
o The terms and conditions agreed upon to gain
an understanding of the contract
 Obtain the contract between the supplier and the
company and inspect the following:
 o The contract has been signed by both parties to
ensure the contract is valid
o The terms per the contract agree to the terms
agreed in the minutes of the meeting
o Inspect the agreement to confirm the amount of
the loan is the approved amount per the Board
Resolution
o Inspect the contract to confirm the date on
which the loan was offered to ensure that the
loan has been accounted for in the correct
period
 Perform a positive confirmation on the outstanding
balance owing to the supplier at year-end to ensure
that customer exists and that it is valued correctly
 Perform a background check on the supplier to confirm
the company exists and the address on a sample of
invoices agrees to the address per the website
 Re-perform solvency and liquidity ratios to ensure the
company satisfies solvency and liquidity ratios
immediately after the granting of the financial
assistance to (director/subsidiary/shareholder/anyone)
o Accuracy, valuation and allocation (test to ensure all account
balances are recorded at the correct amount)
 Gross amount:
 Perform reconciliation
 Cast the reconciliation for mathematical accuracy
 For the adjustments per the reconciliation obtain the
supporting documentation to ensure adjustments
processed are valid and accurate
 Agree the balance in GL to F/S
 Follow up on reconciling items
 Contra asset:
 Refer to procedures of estimates – ISA540
 Physical item:
 For quantity: physically count and agree the quantity in
the GL
 For cost: agree the cost to invoice/contract
 Imported inventory
 Inspect the contract with supplier for the terms of the
contract
 Obtain exchange rate at this date (when risks and
rewards transferred) from a reputable financial
institution
 Inspect the supporting purchase invoice of the
inventory for the foreign currency Amount, and
 Recalculate the conversion of the foreign currency
invoice amount into Rands and agree this amount to
the amount reflected in the JE
 Inspect the supporting documentation such as shipping
costs that only non-refundable customs duties and
 import costs are included in the cost of the imported
inventory
o Rights and obligations (test to ensure have right to assets and
obligations to liabilities)
 Rights to assets:
 Inspect source document is in the name of the entity
 Obligations to liabilities
 Inspect loan contracts, bank confirmation, minutes of
directors meeting
o Presentation and disclosure (test to ensure the financial
statements are presented and disclosed in accordance with the
applicable accounting framework)
 Inspect that the balance has been correctly presented and
disclosed in the financial statements according to the IFRS
requirements
 Develop procedures to test the risks

Substantive audit procedures

When wording substantive procedures, remember to include the HOW, WHAT,
and WHY
(examples using Companies Act for loan and shares)
For Loan
 Obtain the minutes of the meeting where the granting of loan was
approved and inspect the following:
o The required quorum per MOI was present to ensure compliance
with the Companies Act
o That the majority of the Board members present approved the loan
o The terms and conditions of the loan granted to understand the
terms of the loan
o Inspect the Board Resolution to ensure that the decision was
approved by the CEO and CFO
 Obtain the loan contract agreement signed between the companies and:
o Inspect the agreement to ensure that the contract agreement has
been signed by both parties to ensure it is valid
o Inspect the agreement to confirm the amount of the loan is the
approved amount per the Board Resolution
o Inspect the agreement and ensure that the terms and conditions are
the same as the Board resolution
o Inspect the contract to confirm the date on which the loan was
offered to ensure that the loan has been accounted for in the
correct period(s)
 Obtain the Board Resolution related to the minutes of the meeting to
ensure that the Boards’ decision has been properly documented in
compliance with Companies Act
  Inspect the shareholders’ special resolution approving the financial
assistance and ensure it was adopted within previous 2 years
 Reperform the solvency and liquidity test to ensure the company satisfies
the solvency and liquidity test immediately after granting loan
 Obtain permission from management to contact the client to confirm the
balance outstanding
 To ensure that the loan amount should not be impaired, obtain the F/S of
the client and,
o Inspect the financials to determine if the F/S have been audited to
ensure that information can be relied upon
o Inspect the Cash Flow Statement to determine it is positive cash
flows to ensure they would be able to pay for the loan
o Inspect the F/S to determine if the company is making profit and
compare to previous periods to ensure it is a going concern
o Recalculate the financial leverage position of the company to
determine if the company has any financing issues that could
impact the repayment of the loan
 Inspect the loan account in the G/L to determine if any payments have
been made during the year and follow through to the bank statement to
ensure that all the payments have actually been received

For the shares

 Obtain the minutes of the meeting where the decision to purchase the
shares was made and,
o Inspect the minutes of the meeting to determine if the required
quorum was present at the meeting
o Inspect the minutes to ensure that the majority of directors voted
for the specified amount of shares
o Inspect the Board resolution to ensure that the decision was
approved and signed by the CEO and CFO
 Obtain the contract between Company (buyer) and Other company
(subsidiary) and inspect for the following:
o The contract has been signed by both the parent company and the
subsidiary to ensure the sale is valid
o The terms and conditions in terms of purchase price/ how payment
will be made to gain an understanding of the contract
o The date of the contract to confirm the effective date
o The amount per the contract
 Obtain and inspect the share certificate to determine if:
o The shares have been issued to confirm rights and obligations and
the existence of the shares
o Through inspection, compare the amount of shares per the share
certificate to the Board resolution to determine if the approved
amount of shares has been purchased and that the number does
not exceed the approved amount of shares
o Inspect that Company (investor) is recorded as a shareholder for the
same number of shares per the contract
  Recalculate the solvency and liquidity test and confirm that this would be
met after the purchase of shares
 Obtain and inspect the bank statement to verify that the shares have been
paid for
 Obtain and inspect the F/S of the issuer to determine the amount of issued
shares is listed on the JSE
 Inspect that the investment was recorded at the correct amount and on
the correct date
 Obtain a bank confirmation and inspect that the shares have not been
pledged
 Inspect the disclosure of the shares in the SOFP and the relevant notes to
confirm that it is in accordance with IFRS

For PPE
Test of details:
 Rights and Obligations
o Request bank confirmation detailing if any PPE is pledged as
security
o Inspect the vehicle registration certificate to confirm that there is a
valid certificate for the vehicle purchased and it is in the name of
the company
 Existence
o Obtain a sample of items per the FAR and physically inspect that
they exist
o Obtain the current and prior year insurance schedule to identify
items removed
 If items have been removed, enquire with management
 If items have been sold, inspect the FAR that the item is
removed
o Inspect if there have been significant reductions in the repairs and
maintenance accounts and enquire the reason with management
o For new additions inspect the insurance schedule that the assets
have been added to the insurance schedule and are covered
o (Buildings) Obtain the title deeds to the buildings to ensure the
assets exists
 Completeness
o Obtain a sample of PPE items currently on the site/office and agree
them to the FAR to ensure that all assets that should’ve been
captured, have been captured
 New additions: both vehicles & equipment
 Obtain a sample of additions for the year and:
o Agree the cost recorded to the purchase invoice to ensure it agrees
o Recalculate the cost to ensure it is accurate and VAT is not
capitalized
o For any other capitalized costs obtain supporting documents, and
assess the reasonability of capitalization per IFRS
 o Inspect the bank statement to ensure that a payment was made to
the dealership
o Inspect the vehicle registration certificate to confirm that there is a
valid certificate for the vehicle purchased and it is in the name of
the company
o Inspect the sale agreement between the company and the
dealership to ensure it is signed by both parties
o (Equipment) For new office equipment inspect invoices to ensure
that items have been purchased and there is a matched GRN to
ensure they have been received
o (Equipment) Inspect the bank statement for a sample of invoices to
confirm the payment has been made for the items
 Disposals:
o Agree the selling price to the sale of asset contract to confirm the
asset is recorded at the correct disposal amount
o Inspect the bank statement to verify that the amount per the sale
agreement was actually received
o If amount is receivable: send positive confirmation to the dealer
requesting that they confirm the balance due
o Inspect that the asset has been removed from the FAR
o Recalculate the depreciation for the portion of the year and the
accumulated depreciation at the date of sale
 Depreciation:
o Inspect that the accounting policy for depreciation is consistent with
prior years
o Obtain a representation letter from management, confirming that
they have reassessed the useful life and residual value of the assets
o Compare the useful lives and residual values to industry related
information to confirm that the inputs used are reasonable for the
asset
o Reperform the depreciation calculations for the year to ensure
accuracy and compliance with the depreciation policy
 Impairment:
o Obtain the budget from the prior year and agree it to the current
year actual results to assess the reasonability of managements
forecast.
o Obtain the value in use calculation and assess the reasonableness
of management’s assumptions
o Inspect the calculation to ensure that all cash flows are before tax
o Recalculate the WACC rate used and inspect it to ensure it is pre-tax
o Obtain the fair value for the asset from the expert
 Expert – ISA 500, para 8
 Evaluate the competence, capabilities and objectivity of that
expert
 Obtain the expert's CV and inspect that they have the
required skills to be a valuer
 Conduct a Google search and confirm that the valuer is
a registered valuer
  Enquire with valuer and management whether the
valuer is objective
 Obtain an understanding of the work of that expert
 Obtain the agreement between management and the
expert to understand the scope of the work and the
expert’s responsibilities
 Obtain the valuers report and inspect that the findings
from the report agree with the agreement
 Evaluate the appropriateness of that expert’s work as audit
evidence for the relevant assertion
 Recalculate the revaluation by using the independent
valuers’ assumptions
 Compare the model used and data used with
knowledge of similar entities
 Compared to the international valuators standards in
order to verify whether the model and data are
consistent with others in the industry and therefore
reasonable
o Assess the reasonableness of management’s costs to sell
calculation
o Recalculate the recoverable amount by ensuring that it is the higher
of value in use and fair value less costs to sell
o Recalculate the impairment loss and agree it to the financial
statements
o Whilst physically inspecting the assets, assess the condition of the
assets
o Inspect market listings for similar land in the same area (similar
clients) and compare to fair value included on the schedule for
reasonability
o Inspect that the disclosure of the PPE note is in accordance with IAS
16 to ensure fair presentation

For Bank and Cash (refer to SAAPS 6 in Volume 2B)

Misstatements
 First prove that there is a misstatement for each finding
 (There is a difference between the misstatement and the error)
  For Misstatement:
o Must discuss if the misstatement is either:
 Factual
 Judgemental
 Projected
 For Material:
o Must discuss two things:
o Quantitative
 If the misstatement is above the overall materiality, it is
quantitatively material
 If the amount is below overall materiality level, it is not
quantitatively material
 If the amount is above the clearly trivial level, it could be
quantitatively material in aggregate and should therefore be
assessed with other misstatements to determine the effect
on the whole of the financial statements
 The misstatements are above clearly trivial and so should be
aggregated with others to assess whether they are material
in aggregate
o Qualitative
 Yes, if it is non-compliance with IFRS or Companies Act
 Yes, if it affects key ratios
 Yes, if it may have an impact on the going concern ability of
the company
 Yes, if it would be important to disclose to users of F/S
 Yes, if it affects the opening balance, affecting comparative
figures and the total movements disclosed in the notes in the
current year
 No, if the difference shows no indicators of misapplication of
IFRS
 No, if there is no issue regarding the recording of the amount
 No, If the misstatement does not appear to be an intentional
misstatement to misstate F/S, it is not qualitatively material
 If the amount is not quantitatively or qualitatively material and no
adjustment is required as it is below the clearly trivial threshold
 The amount is excluded from summary of overs and unders
 Is it pervasive or not pervasive
 If a Modified opinion is issued:
o A basis for modification of opinion would also be issued to explain
the reason for the modified opinion
o In the basis for modification of opinion the auditor will include a
statement noting that the auditor has obtained sufficient and
appropriate evidence to provide a basis for the auditor’s qualified
opinion

Nature, Timing, and Extent

 Nature
o Necessity – This is the assessment of the need to test controls
 Volume of transactions (High volume)
 Automation of the system (Highly automated system)
 Audit trail (Triggered by source documents and manual
controls)
 Audit deadline (3 months post YE is tight deadline)
o Possibility
 Are we able to test controls?
 Large audit firm (Have resources)
 Audit firm and client systems are comparable
 How is the control environment of the client?
 Weakness in the general control of a client
 Do all the relevant assertions have controls in place that
can provide us with sufficient and appropriate audit
evidence?
 Is it possible to test each and every assertion?
o Desirability
 Control testing saves the auditor’s time.
 Therefore, there is a desire to test controls for almost
all F/S line items
 Tight audit deadline
 Value Add.
 To be seen as adding value to the client as we will be
making recommendations.
 Test of controls would be cost-effective and beneficial as it is
generally quicker to perform, decreasing pressure on the
audit team
o Type of audit approach
 Once the auditor has concluded whether it is necessary,
possible, and desirable to test controls or not, the approach is
concluded.
 This needs to be done per assertion
 For some assertions (like cut-off and presentation &
disclosure) the approach would be a substantive-based
approach as it is not possible to test controls in relation to
these assertions
 (ISA 500: substantive procedures must be done either way)
 Significant Risks
 If there is a significant risk, test of detail must be
performed
 Per ISA 240: Revenue always has significant risk
 Timing
o 2 drivers: audit deadline & complexity of the operations
o A tight audit deadline and complex operations will require the audit
to be performed at an interim period and after financial year-end
end
o If there is risk (like fraud) must be performed at year-end
o Assertion like (cut-off and Rights & obligations) must be tested after
financial year-end
  Extent
o How much evidence is required?

Reportable Irregularity
 Any unlawful act or omission…
 Committed by a person responsible for management…
 Which has:
o Material financial loss… (To the
entity/shareholder/creditor/partner/member/investor)
o Fraudulent or amounts to theft…
o Fiduciary of duty… (Breach of fiduciary duty)

Code of Professional Conduct (CPC)

5 Steps Approach:
1. What is the issue?
2. What are the fundamental principles that are being affected, or what type
of threat is it?
o Overlook issues…
o Be biased…
o No longer independent…
 Not being independent in appearance
 Not being independent in mind
3. Which fundamental principle is breached?
4. Is the threat at an acceptable level or not?
o Example: Does it affect the objectivity…
o Amount is significant…
5. What are the safeguards to deal with that threat?