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WINDS OF CHANGE
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By Leroux van der Merwe
Since 1993, South Africa has been harmonizing its Statements of Generally Accepted Accounting Practice (GAAP) with international standards. The harmonization was recently completed, and the Accounting Practices Board (APB) has since agreed to issue International Financial Reporting Standards (IFRS) as Statements of GAAP without amendment.
The effect on the statements as we used to know them is quite substantial. Circular 7/2004 clarifies the status and effective dates of Statements of GAAP and Interpretations of Statements of GAAP and addresses them in the following five different categories:
* Improved Statements
* Revised Statements
* Aligned Statements
* New Statements
* Replacement Statements
We are also conforming to International Accounting Standards (IAS), International Standards on Auditing and International Auditing Practice Statements.
The question that automatically springs to mind is what is the impact of this on both the auditor and director of a company in South Africa?
As it stands currently in South Africa all financial statement audits are affected. Even the smallest private company (Owner-managed entity) has to comply with Statements of Generally Accepted Accounting Practice. All audit firms are affected from the sole proprietor to the multi-national firms.
The South African Institute of Chartered Accountants (SAICA) have a task team investigating the possibilities of Limited Purpose Financial Reporting but the verdict is not out yet and even if the result is positive don’t expect a miracle.
Directors of companies need to understand their responsibilities and duties. By operating as a company you opted for a legal form of entity that’s regulated and monitored and there are laws that you are obliged to comply with.
The expected impact is as follows:
* Significant increases in audit hours and audit work requirements
* Changes in methodology
* Regulator changing approach to practice reviews
* Increased learning need for the audit professionals
Results of studies performed in the US on failed audits are embedded in the new standards and more emphasis is placed on the planning of the audit, risk assessment and fraud and error. The new framework provides insight into the likely direction of the standard setters: Independence, objectivity and documentation. In certain sections like the initial risk assessment and planning of the audit certain minimum audit procedures are introduced and have to be complied with.
Audit Professionals need to be experts in International Standards on Auditing and International Financial Reporting Standards and lifelong learning should be a personal commitment of every auditor.
The fraud and error statement has been significantly revised. It aligns SAAS 240/ISA 240 with US standard SAS99.
The objective of an audit remains the same: The auditors are responsible to express an opinion on the fair presentation of financial statements in conformity with South African Auditing Standards (soon to be International Auditing Standards) that is free from material misstatement. The auditor are still not responsible to detect fraud and error but it’s reiterated that an auditor should plan and perform an audit with an attitude of professional skepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated.
In planning and performing an audit, the auditor neither assumes that management is dishonest nor assumes unquestioned honesty. Accordingly, representations from management are not a substitute for obtaining sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. The revised statement requires an increased level of fraud detection testing irrespective of your risk assessment.
With government clamping down on corruption and money laundering new legislation are passed on a regular basis. There is an increased responsibility on directors regarding the internal financial control of a company, to comply with the companies act and to apply good corporate governance in companies. The consequence for directors not taking this responsibility at heart is severe. This is applicable to directors of all companies.
Directors are facing a jail sentence if fraud was committed in their company, by an employee or any other person, where that company did not have adequate controls and procedures in place to prevent and detect fraud. Directors are forced by law to report any fraud in excess of a R100, 000 to the commercial branch of the nearest police station.
The bar has been raised. Auditors in Public Practice are subject to rigid practice review process by the Regulator and the minimum requirements have to be complied with. If you require more information regarding your responsibilities as a director of a company or assistance on internal controls please contact Leroux van der Merwe at McMurray Aldum Incorporated. We could also assist you in identifying fraud risk factors. |
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