ZoMi Ltd. Analysis Assignment Sample

Subject Name : Management

BBBEE MDP Fast Track - Question 1

a) During verification engagement there is need to do an assessment on historical financial information, and when it comes to management accounts, perform audit procedures to reduce the assessed risk of material misstatement to an acceptable level. This would provide auditors with reasonable assurance about whether the financial statements are free from material misstatement. The audit opinion states that in the auditors’ opinion the financial statements give a true and fair view of (or present fairly, in all material respects) the financial position, performance, cash flows, etc., in accordance with an identified financial reporting framework such as IFRS.

Management accounts provided for verification engagements do not involve assurance. The practitioner compiles the financial information from information supplied by the client. User’s benefit from the knowledge that the practitioner has been involved. Similarities between audit and management accounts include the fact that in both cases: The financial statements, including the underlying assumptions and the significant judgments made, remain the responsibility of the client;

The financial information benefits from being associated with the practitioner, who brings expertise, and an obligation to comply with professional, ethical, regulatory and disciplinary arrangements. Agreement of engagement terms is required and practitioners are not permitted to be associated with misleading information.

Planning involves compliance with ethical requirements for independence and competence and the avoidance of conflicts of interest. Next is quality control requirements, with audits only having the assurance of being conducted in accordance with professional standards, including proper supervision and review. This is often not the case with management accounts. Compliance with the protocols for changes in professional appointment including inquiries of the previous practitioner and the agreement of engagement terms in an engagement letter. With audited financial statements there is liaison with third parties such as internal auditors, group auditors and any experts and commercial considerations such as whether the client is able to pay.

When it comes to reporting, it includes the auditors’ opinion on the truth and fairness or fair presentation of the financial statements. Auditors also report on weaknesses in internal control that have come to their attention during the course of the audit.

Financial statements are produced by the companies to provide information to various users with regard to financial position and performance of the firm. This type of information or statements are used by a large number of stakeholders to undertake effective decision making process. Company appoint auditors or external parties to thoroughly observe the financial statements to raise the degree of confidence. Examining the financial statements includes whether the relevant disclosures have been made by the management or not, to provide professional opinion on fairness considering all material respects as per the rules stated in GAAP. In several circumstances, the auditor may also require to communicate monitoring or controlling deficiencies to the organization’s management and other people who are in charge of governance. All these types of communications enhance the value of the company and quality of the business operations and processes.

The following procedures can be followed for verification engagement while using management accounts instead of audited financial statements:

Inquire the internal members and management of the company to obtain clear and better understanding of the organization including its various operations, methods used for financial reporting and known errors and frauds committed by it.
While engaged in verification through management accounts, the internal control system must be evaluated and a deep understanding of the same must be achieved.
Analytical procedures must be performed effectively and efficiently as both kind of expected and unexpected variances or differences may occur in account balances or in the various classes of transactions.
Supporting documents that acts as an evidence for recording particular transactions in account balances must be tested.
Physical count of inventory must be clearly observed and verified with the reports.
Accounts receivables and other similar type of accounts must be confirmed with the third parties before passing any opinion on the same.

Verification engagement is directed to provide certain degree of assurance that no type of material modifications is required or to be made on the financial statements in order to confirm their statements with the framework of financial reporting. Verification engagement using management accounts may provide less degree of assurance to the internal and external users of financial statements as very less audit procedures can be followed. During the execution and reporting phase, the following procedures can be used:

Conduct various types of inquiries with regard to accounting principles and practices flowed by the business organization.
Observe the procedures used for accumulating and recording the financial information by the firm.
List down all the actions that were taken at the directors’ and owners’ meetings.
From the management, written representations must be obtained with regard to accuracy of the information provides in the accounting books.
Obtain a relevant receipt of all the information provided by the management.
Obtain perfect knowledge of fraud.
Obtain required information in relation to any essential events.
Carry out analytical procedures with regard to comparisons.
Calculate ratios from recorded amounts.

This procedure is nearly different in approach for verification engagement using management accounts as audited financial statements provide high degree of assurance with regard to rationality and fairness of the financial performance and position represented in the financial statements.

b) During a BEE verification the verified entity has to submit physical proof of activity, spending and contributions in the five elements of empowerment (Goldberg, 2015). Firstly, to show ownership there need for Proof of shares in HDI hands. A share certificate for example will need to be submitted for this purpose. This is regarded as a priority element and failure to comply with the minimum target (40% of Net Value) will result in the Level as obtained above being discounted. Next is Proof of HDI's (men/women) in top/senior/middle/junior management. Interviews will be held to confirm seniority, job description, salary etc. Submission of a EE report and the involvement of PDI's in the organisation on different levels and categories.

To deal with skills development, Proof of training spend on HDI’s employees or non-employees and accredited programs such as apprenticeships, learnerships and internships and mentorship programs. This is regarded as a priority element and failure to comply with the minimum target of 40% will result in the Level as obtained above being discounted. Proof of purchases from current and suppliers that are BEE compliant and Empowering Suppliers as a percentage of total procurement spend. Aiding SMME's and emerging entities owned by HDI's to trade in the mainstream economy. An example is setting up a CC and contracting such an entity to provide products. This is regarded as a priority element and failure to comply with the minimum target 40% in all categories will result in the Level as obtained above being discounted. Social contributions towards own employees, employees families and communities such as paying employees children's school fees and contributions towards black sports teams (Goldberg, 2015).

Comprehensive income is defined as the variation in equity in a particular period that results from various events and transactions other than those alterations that may occur from transaction with owners. Audit evidence is considered essential to support the view and report of an auditor. The understanding of an organization and its specific atmosphere and valuation of the potential risks of material misstatement helps in obtaining guidance on this matter. There are five major aspects for which the auditor must have clear understanding to verify the turnover of the entity:

Regulatory, industry and various external factors comprising of appropriate financial framework: The auditor must know the industry in which the company carries out its operations including the nature of relationships with customers and suppliers, competition level, technology level, etc. there are particular laws and regulations that may influence the business procedures of the company.
Entity’s nature and accounting policies: The auditor must have understanding of governance and ownership structure, legal structure of the organization and the major sources of finance that are being used by the company (Osadchy et al. 2018).
Strategies and objectives and other related business risks: The objectives of the organization must be clearly defined by the management and the strategies formulated by them a to accomplish planned goals and objectives.
Measurement and evaluation of the financial performance of the firm: The auditor must acquire understanding of the various performance measures that may be considered significant by the management and other relevant personnel (Li et al. 2018). Performance measures may generate pressure on management to undertake action to enhance financial statements of the company.
Internal control: Knowledge of internal control by the auditor is considered as a necessary element in order to check how various factors of internal control may impact the audit procedures. Internal control involves risk assessment procedures of an organization, control environment, control activities, information systems, etc.

An auditor may carry out a discussion with management to obtain understanding about the organization (Wheelen et al. 2017). Analytical procedures can also be performed at the planning stage to determine unusual events or transactions. This will help the auditor in checking whether the company ahs actually experienced a decline or growth in its turnover.

BBBEE MDP Fast Track - Question 2

Internal auditors may be able to rely on work performed by other internal or external assurance and consulting service providers, rather than duplicating efforts. Internal auditors’ ability to rely on others’ work is dependent on whether the internal auditors are satisfied that the service provider is sufficiently independent and competent and the work performed is relevant and reliable.

Managers responsible for the area or process under review may provide the best overview of the way the process was designed to operate. Process information may be documented in the form of policies, procedures, and self-assessments. Additionally, existing documentation may describe the area’s business objectives and key performance indicators (i.e., metrics that define whether objectives are being achieved), including how they support organizational objectives. Interviews with management may help internal auditors identify whether management’s understanding of the steps in each process differs from that of the personnel who perform the steps. These interviews may also help internal auditors identify the criteria to be applied when evaluating the governance, risk management, and controls of the area or process under review, as required for assurance engagements (Standard 2210.A3).

To know the influence of internal audit department on engagement planning, there are two major issues that are required to be taken into consideration, namely, the capabilities of the internal audit department to generate proper documentation and actual exactness of the documentation itself (Alles et al. 2018).

The ability of the department can be identified by ensuring that the staff members must have proper qualifications and different staff members must be appointed in internal audit department to test documentation as this will raise its accuracy (Janssen et al. 2017). Internal audit reports must be produced after taking into account all the necessary evidence.

There are various procedures that can be used to acquire understanding of the organization and its internal audit department. These are as follows:

The manager may held a meeting with the management to check out about the various aspects of the organization and the related environment in which it carries out its operations. A communication can also be held with internal auditors to know particularly about the internal controls. Analytical procedures must be performed to determine the unusual transactions and events and to acquire knowledge about the major trends that are reflected by the financial statements. The knowledge of internal audit department may not influence the engagement planning.

BBBEE MDP Fast Track - Question 3

Financial statements are prepared on an accrual basis and on assumption that the entity is a going concern and will continue to operate for the foreseeable future (which is at least 12 months from the end of the reporting period). Their objective is to provide information about the financial position, cash flows, and performance of an entity that is useful to users in making economic decisions. The principal characteristics that make the information provided in the financial statements useful to users are understandability, materiality, relevance, comparability, prudence, timeliness, completeness and achieving a balance between benefit and cost (Price Waterhouse Coopers, 2009).

There are basically four underlying assumptions that characterizes International Financial Reporting Standards (IFRS), namely, accrual basis, going concern, units of cost purchasing power and stable measuring unit assumption (Safkaur et al. 2019). Accrual basis assumption is concerned with assumption that the financial effects of events and transactions must be recognized when they occur and not at the time when the cash is actually paid or received. Accrual accounting provides an appropriate view of overall cash inflows generated by the business enterprise. The business enterprises that uses accrual accounting are often considered more established and permanent as compared to the businesses that apply cash basis accounting methods (Dichev 2017).

IFRS for SMEs can be used by any company that publishes general purpose financial statements for external users which do not have public accountability. Price Waterhouse Coopers (2009), states that insurance entities, bankers, security brokers, dealers and pension funds are examples of entities that hold assets in a fiduciary capacity for a broad group of third parties hence cannot apply the IFRS for SMEs. Therefore, accrual accounting would not be having any implications for a team verifying the status of BBBEE for the client.

Economic decision making and stewardship are two fundamental objectives of financial statements which are prepared using IFRS. Equity investors, debt holders and other creditors are considered to be the main users of financial statements while the primary characteristics are faithful representation and relevance.

Relevance – relevant information is capable of making a difference in decisions made by users. Information may be capable of making a difference in making a decision even if some users may choose not to take advantage of it or are already aware of it from other sources.
Faithful representation – In order for financial information to be useful it must not only represent a relevant phenomenon but must also faithfully represent the phenomena that it purports to represent. Faithfully represented information must be complete, free from errors and complete (Conceptual Framework for Financial Reporting, 2010).

References for ZoMi Ltd. Analysis

Alles, M., Brennan, G., Kogan, A. and Vasarhelyi, M.A., 2018. Continuous Monitoring of Business Process Controls: A Pilot Implementation of a Continuous Auditing System at Siemens1. In Continuous Auditing. Emerald Publishing Limited.

Dichev, I.D., 2017. On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), pp.617-632.

Dreyer, J.A., 2019. Broad-based black economic empowerment: the holy grail for financial health? A study of companies listed on the Johannesburg Stock Exchange (Doctoral dissertation, Stellenbosch: Stellenbosch University).

Goldberg, J., 2015. B-BBEE codes-what you need to know: business & economy. Professional Accountant, 2015(24), pp.10-11.

Janssen, M., van der Voort, H. and Wahyudi, A., 2017. Factors influencing big data decision-making quality. Journal of Business Research, 70, pp.338-345.

Li, H., Dai, J., Gershberg, T. and Vasarhelyi, M.A., 2018. Understanding usage and value of audit analytics for internal auditors: An organizational approach. International Journal of Accounting Information Systems, 28, pp.59-76.

Mpanza, J., 2016. B-BBEE and its impact on the South African construction industry (Doctoral dissertation, University of Cape Town).

Nyandeni, R., 2018. The state of black business since the democratisation of South Africa in 1994. Skills at Work: Theory and Practice Journal, 9(1), pp.19-33.

Osadchy, E.A., Akhmetshin, E.M., Amirova, E.F., Bochkareva, T.N., Gazizyanova, Y. and Yumashev, A.V., 2018. Financial statements of a company as an information base for decision-making in a transforming economy.

Safkaur, O., Afiah, N.N., Poulus, S. and Dahlan, M., 2019. The Effect of Quality Financial Reporting on Good Governance. International Journal of Economics and Financial Issues, 9(3), p.277.

Wheelen, T.L., Hunger, J.D., Hoffman, A.N. and Bamford, C.E., 2017. Strategic management and business policy (p. 55). Boston, MA: pearson.

Wilson-Max, A., 2020. The skills development scorecard evolves. TFM Magazine, 3(19), pp.22-23.

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