INDEPENDENT REVIEW & WORKING PAPERS CPD SEMINAR

1. INDEPENDENT REVIEW & WORKING PAPERS CPD SEMINAR

2. Legislative Requirements Companies Act – s30(2) and (2A) Provides the basis of the type of financial statement engagement based on: • Public interest score • MOI • Shareholders’ resolution Using the PI Score: • Type of financial statement engagement • Accounting framework selected • Appointment of Social & Ethics committee Independent Review - 2019

3. Calculation of PI Score Regulation 26(2) Provides the basis for the calculation of the PI score: • A number of points equal to the average number of employees of the company during the financial year • One point for every R1 million (or portion thereof) in third party liability of the company at the financial year end • One point for every R1 million (or portion thereof) in turnover during the financial year • One point for every individual who, at the end of the financial year, is known by the company to directly or indirectly have a beneficial interest in any of the company's issued securities Independent Review - 2019

4. Calculation of PI Score Independent Review - 2019

5. Application of PI Score Independent Review - 2019

6. Independent Review - 2019

7. Independent Review – Overview Quality assurance (ISQM) Review Engagement (ISRE 2400) Independent Review - 2019

8. Independent Review – Objectives Independent Review - 2019

9. Independent Review – Terminology Independent Review - 2019

10. Independent Review – Requirements Independent Review - 2019

11. Independent Review – Code of Ethics Fundamental principles of the Code Independent Review - 2019

12. Independent Review – Independence • Objectives: • Safeguard risk of being influenced in deriving and opinion • Enhance the ability to act with integrity and objectivity • Maintain an attitude of professional skepticism • Areas: • Independent of compilation: reviewer cannot be involved in the compilation of the financial statements (independence may be compromised) • Independence of mind: reviewer should not have a relationship with the client which will influence the decisions of the review • Independence in appearance: reviewer should not have a relationship with the client which give third parties the perception that independence has been violated Independent Review - 2019

13. Independent Review – Independence Independence Dilemmas Independent Review - 2019

14. Professional Judgement & Skepticism Independent Review - 2019

15. Professional Judgement • Importance during reviews: • Application and interpretation of ethical requirements • Application of relevant requirement of ISRE 2400 • Required to make informed decisions • Applied during the review: • Decisions about materiality • Decisions on the nature, timing and extent of the procedures • Evaluation of evidence and its impact on the engagement risk • Evaluating management’s judgement in applying accounting framework • Decision in formulating the review opinion based on the evidence obtained Independent Review - 2019

16. Professional Judgement • Factors affecting professional judgement: • Understanding of the business, its operations and environment • Knowledge through prior period engagements • Extent of management’s judgement in the preparation of financial statements (estimates, classifications, etc.) • Measuring professional judgement: • Reasonable professional accountant • Application of competence of assurance and accounting principles • Appropriate based on the facts and circumstances of the review • Appropriate documentation of evidence and decisions Independent Review - 2019

17. Professional Skepticism • Importance during reviews: • Critical assessment of the evidence • Questioning inconsistencies • Investigating contradictory evidence • Questioning the reliability of responses to inquiry • Determining the sufficiency and appropriateness of evidence obtained • Applied during the review: • Being alert to: • Inconsistencies in evidence obtained • Contradictory evidence and/or responses • Indications of potential fraud Independent Review - 2019

18. Professional Skepticism • Measuring professional skepticism: • Alertness to overlooking unusual circumstances • Alertness to over-generalising conclusions based on facts and evidence • Avoiding using inappropriate assumptions while performing the review • Management’s integrity and honesty Independent Review - 2019

19. Independent Review – Quality Control Independent Review - 2019

20. Independent Review – Quality Control Professional competence and assurance skills • Understanding of the professional standards and regulatory requirements • Understanding IT systems and limitations of internal controls including quality control systems • Understanding and application of materiality principles • Analytical procedures and other investigation procedures (substantive and verification) • Documentation of evidences • Report writing skills • Professional judgement and skepticism • Quality Control Management (ISQM) • Technical expertise and industry knowledge Independent Review - 2019

21. Independent Review – Acceptance Accepting the review engagement • Factors and consideration: • Rational purpose for the engagement • Using the practitioner’s name inappropriately • Limitation on scope of work • Ethical and independence requirements • Access and availability of evidence • Management’s integrity Independent Review - 2019

22. Independent Review – Acceptance Accepting the review engagement • Preconditions: • Management’s responsibility • Preparation of financial statements in compliance with accounting framework • Implement internal controls to ensure financial statements are free of material mis-statements • Allow the practitioner access to all information that is relevant to the preparation of the financial statements • Access to additional information relevant to the review engagement • Unrestricted access to staff to obtain evidence relevant to the review engagement Independent Review - 2019

23. Independent Review – Acceptance Accepting the review engagement • Post acceptance consideration: • Resolving precondition concerns • Appropriateness to continue with the engagement • If accepted, how to communicate the concerns in the engagement report Independent Review - 2019

24. Independent Review – Execution Review engagement cycle Independent Review - 2019

25. Understanding the Business Independent Review - 2019

26. Compilation of Financial Statements • Responsibility of management to present financial statements for the review engagement • Compilation of financial statements: • Internally compiled – review must obtain sufficient evidence to ensure that the financial statements agree to the accounting records • Independently compiled – review must determine the reliance that can be placed on the compiler and the financial statements Independent Review - 2019

27. Compilation of Statements – Framework Financial Reporting Framework • Used as the criteria for conducting the review engagement • Appropriateness of the framework for the business • Appropriateness for the purpose and users of the financial statements • Factors and considerations: • Nature of business • Regulatory requirements • Purpose of financial statements Independent Review - 2019

28. Independent Review – Reliance on 3rd Parties • Responsibility of management to present financial statements for the review engagement • Compilation is performed independently: • Consider the professional competence of the compiler (memberships of PAO) • Perform procedures to ensure that the work performed is adequate • Consider the independence requirements • Co-operation with compiler in respect of access to evidence and working papers • Procedures performed during the compilation • Evaluate the findings of the compiler and its impact on the review engagement Independent Review - 2019

29. Determining Materiality • Materiality is a financial report concept rather than an engagement concept – but is used in engagements to determine the nature and timing of the procedures applied during the engagement • The materiality principle states that an accounting standard can be ignored if the net impact of doing so has such a small impact on the financial statements that a reader of the financial statements would not be misled • A matter is considered to be material if its omission or mis-statement would reasonably mislead or influence the decisions of the users of the financial statements Independent Review - 2019

30. Determining Materiality • Materiality is determined based on the nature of the business and the reporting framework • Considerations of materiality factors: • Mis-statement of information that influence economic decisions • Magnitude of the mis-statement (individually or collectively) in the context of the business environment • General purpose financial statements and users • Assumptions for determining materiality: • Knowledge of the business, its activities and accounting systems • Inherent risk of information (estimates, judgement and probable occurrence of future events) • Purpose of the financial statements and review engagement Independent Review - 2019

31. Determining Materiality Independent Review - 2019

32. Establishing Materiality Threshold Planning phase Evaluation of results Independent Review - 2019

33. Determining Materiality Thresholds Independent Review - 2019

34. Determining Materiality Threshold • Threshold represents the maximum amount by which the practitioner believes that financial statements could be mis-stated and still not affect the decisions of reasonable users. • Factors that can be used to determine the level of materiality: • Quantitative basis - total revenue or expenses, gross profit, profit before tax, total/net assets, or three-year average income; • Qualitative amount - may be adjusted lower for the qualitative factors such as risk of violating contractual agreements, misclassification of transactions, high internal and external pressure, high risk of fraud, or high risk of bankruptcy. Independent Review - 2019

35. Determining Overall Materiality Independent Review - 2019

36. Determining Performance Materiality • Performance materiality is designed to ensure that on completion of the engagement, aggregate identified and corrected and undetected mis-statements will be less than the overall materiality threshold for the financial statements • Performance materiality guides the professional accountant to do enough work to support the review opinion – minimise the risk that material mis-statements were not detected by the review procedures performed • Performance materiality depends the risks associated the accounting system and the business environment Independent Review - 2019

37. Determining Performance Materiality Independent Review - 2019

38. Evaluating Materiality Independent Review - 2019

39. Categories of Mis-statements Independent Review - 2019

40. Assessing Materiality Independent Review - 2019

41. Assessing of Mis-statements Independent Review - 2019

42. Analytical Procedures • Analytical procedures are risk assessment techniques - evaluating the risks of material mis-statements • Analytical procedures will assist the practitioner in identifying unusual transactions or events, amounts, ratios and trends that may indicate that a potential risk of material mis-statement of the financial statements that will impact on the opinion expressed • Analytical procedures consist of evaluations of financial information through analysis of reasonable relationships among both financial and non-financial data Independent Review - 2019

43. Analytical Procedures Independent Review - 2019

44. Analytical Procedures Independent Review - 2019

45. Analytical Procedures Independent Review - 2019

46. Analytical Procedures – Trend Analysis Independent Review - 2019

47. Analytical Procedures – Ratio Analysis Independent Review - 2019

48. Analytical Procedures – Inquiry • Basis of making accounting estimates • Related party transactions • Complex transactions that affect financial statements • Changes in nature of operations • Changes in conditions of major contracts that affects the business • Significant journal entries • Suspicion of fraud • Issues in terms of NOCLAR • Post reporting date events • Basis and concerns for business continuing as going concern • Material commitments and contingent liabilities • Material non-monetary transactions Independent Review - 2019

49. Going Concern – Inquiry • Discuss the basis and concerns with managements that business will continue as a going concerns • Areas to consider: • Financial viability (liquidity, solvency and cash flow) • Technical viability (resources, operations, contracts and its sustainability) • Market viability (market share, product life cycle and competition) • Business viability (strategic goals, core competences and competitive advantage) • For independent compilations – obtain and evaluate the working papers of the compiler Independent Review - 2019

50. Events after report date • If the practitioner discovers any event occurring between the reporting date an the date the financial statements are signed-off: • Discuss the matter with management • Determine the impact on the financial statements – apply the accounting standards (amend financial statements or disclosed by way of a note) • Request management to amend the financial statements • If management refuses to amend the financial statements: • Notify management not to issue financial statements to third parties • If issued, take appropriate action to prevent reliance being placed on the review report Independent Review - 2019