School of Accountancy
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Item Open Access Audit reports of the Free State provincial departments: an audit and corporate governance perspective(University of the Free State, 2012-07) Crous, Cornelie; Lubbe, D. S.English: This study has been undertaken against the background of public concern regarding the administration and financial management of public finances. Specific attention has been given to the 12 provincial departments in the Free State province. The purpose of this study was to determine whether or not there are trends in the aspects which have led to qualification, disclaimer and emphasis of matter paragraphs in the audit reports of these departments. This study aims to contribute towards the debate on the causes of the financial decline of government financial management and to offer some solutions to these problematic aspects. The literature review in this study focused mainly on the historic development of auditing. This historical overview covered areas in both the public and the private audit sectors and included the following aspects: 1) the development of auditing itself in England, the United States of America and South Africa; 2) the development of the audit report; 3) the development of the audit expectation gap; 4) the development of different forms of business as a key link in developments regarding the need for audits; 5) international harmonisation; and 6) the development of corporate governance as an integral part of auditing. The literature review was followed by a detailed analysis of the audit reports of the 12 provincial departments in the Free State. The aspects mentioned in each of the audit reports, from 2000/2001 to 2009/2010, were summarised and analysed to identify possible aspects that occurred, in each department separately, more than once over this 10-year period. A further comparison was made between the different departments to identify provincial trends. A basic scorecard system was also developed to rate and compare the various departments on their performance as far as audit reports are concerned. Based on the results of the comparison of audit aspects, a questionnaire was developed and distributed to the Members of the Executive Council (MECs), the Chief Financial Officers (CFOs), senior officials, the Auditor-General and private audit firms who also perform audits of public departments. The results of the empirical study, the questionnaire and the interviews indicated that the aspects identified in the document analysis of the audit reports correspond with the views of the interviewees. Aspects such as non-compliance to laws and regulations, insufficient supporting documentation, irregular, fruitless, wasteful and unauthorised expenditure and poor asset management were identified as the main causes of qualified and disclaimer audit reports. The same aspects have also proven to be challenges that the provincial departments need to address within the next three years. In addition to this conclusion, basic recommendations are made for improvement of these aspects in future. This study contributes towards the national debate on the causes for concern in public finance management and possible improvement to the public service in South Africa. This study further contributes towards possibly similar situations in the remaining eight provinces in South Africa in that the provinces may benefit from the aspects identified and the recommendations made to improve their own financial management.Item Open Access Business ethics in the accountancy profession: a South African perspective(University of the Free State, 2013-01) Lubbe, Nandi; Lubbe, D. S.English: For thousands of years, man has been searching for the meaning of life, especially through philosophy and religion. One of the most important aspects in this search is probably the distinction between what constitutes right (good) and wrong (bad). This has not been confined to the personal/philosophical/religious aspects of life, but has also spread to the business sphere and eventually developed into the academic field today known as business ethics. Probably not a single day passes without the media reporting on unethical behaviour in its various forms in South Africa. The recent Lonmin/Marikana strike and its aftermath has dominated the South African media during 2012 and has already largely been described as the most tragic episode in the history of post-apartheid South Africa. The Lonmin incident is a “classic case study” of unethical conduct which included, amongst others, participation in unlawful and unprotected strikes, excessive police brutality, intimidation of and violent action against workers who reported for duty, malicious damage to property, clashes between labour unions fighting for membership and control of the industry, and poor leadership. Of all the corporate collapses that shocked the business world, Enron and its then auditors, Arthur Andersen, was problably the most infamous and significant due to its widespread international spillover effect. Enron and other unethical economic scandals provide an indication of the gravity and extensive reach of business ethics in the world today. The accounting profession plays such an important role in the global economy that the prevelance of unethical business practices often leads to appeals for an investigation into the competence and ethical behaviour of these professionals, accompanied by a notion that the main cause of the wrongdoings may be traced back to inadequate prominence given to ethics education within the profession. One of the main challenges in presenting business ethics courses is to keep the subject pragmatic and practically applicable – which may be difficult, possibly due to the discipline’s development from philosophy. If the pragmatic and practical focus is not maintained, business ethics may result in a mere philosophical and theoretical course that has little to do with ethical challenges encountered in the real business world. This study consists of a literature compopnent and an empirical component. The fourfold aim of the literature study was to provide 1) an overview of the development of business ethics as a discipline; 2) the viewpoints and requirements of professional accountancy bodies regarding business ethics and business ethics education; 3) an overview of business ethics modules presented by certain South African universities; and 4) the broad theoretical background to the discipline. The empirical research component was conducted by means of a questionnaire. The aim was primarily to determine the insight of four groups of students in business ethics at the beginning of the course as compared to that at the end of the course to establish the possible impact of the course on the ethical reasoning abilitites and perceptions of students. The questionnaire was also developed to also take into account the major requirements of SAICA regarding business ethics courses. The opinions and perceptions of the four groups of students enabled the researcher to reach conclusions and make recommendations regarding the suitability of the current content of business ethics courses. The study is set out in 5 chapters. Chapter 1 provides the introduction to the study, sketching a few of the ethical dilemmas that the world is currently faced with as a means to illustrate the importance of business ethics as a discipline. This is followed by an overview and discussion of the viewpoints and requirements of professional accountancy bodies regarding business ethics and business ethics education as well as an overview of business ethics modules presented by certain South African universities. Chapter 3 provides an overview of the development of business ethics as a discipline followed by an analysis of the findings gathered from the questionnaire (chapter 4). The final chapter consists of the conclusions and recommendations for improvement of business ethics courses and further research possibilities.Item Open Access The development and evaluation of risk-based audit approaches(University of the Free State, 2011-11-22) Prinsloo, Jeffrina; Lubbe, D. S.English: The purpose of the study is to trace the development of risk-based audit approaches, in order to understand the complexities and difficulties of these approaches, as well as to evaluate these risk-based audit approaches, with the objective of assisting in the process of improving the risk-based audit approach followed by the audit profession. The only defence auditors have against the anger (or frustration) of stakeholders in instances of corporate failures is sufficient, appropriate audit evidence that proves their innocence. This audit evidence will be the result of a well-planned and performed audit. An audit approach, currently a risk-based audit approach, is therefore a crucial component in the performance of an audit. Changing the risk-based audit approach is a normal consequence of the striving for the improvement and development of the services that the auditing profession provides. In developing the risk-based audit approach, there are certain complexities surrounding an audit that should be considered. The major complexities in the performance of an audit are: first, the expectation gap; second, the uncertainties surrounding the responsibilities of the auditor; third, the provision of reasonable assurance, and fourth, the practical implementation of audit standards. The auditing profession should, during this continuous process of changing the auditing standards and guidance, consider and evaluate changes against the theoretical foundations of auditing to support the credibility of the audit process. The theoretical framework that formed the background of this study is discussed in the second chapter, including the meaning of “risk-based audit approaches”. Audit approaches are discussed that developed before the acceptance of the risk-based audit approach, together with audit approaches that were never followed or accepted by practitioners, and which influenced the development of risk-based audit approaches. The development of the first risk-based audit approach, the statistical audit risk approach (audit risk model) that originated from the Elliott and Rogers model is discussed in the third chapter. The critique on the statistical audit risk approach is summarised and consists mainly of the following: that the audit risk model’s event structure is ill-defined and that the risk components lack independence, which is a basic assumption for the use of the multiplicative formula. The risk components are complex and interdependent and are difficult to assess therefore, practitioners prefer to assess these risk components in linguistic terms e.g. low, medium and high. The multiplicative rule does not provide protection against an understatement of audit risk if the audit outcome space is not completely specified and when a revision of the audit plan is needed. The aggregation of the individual risks is problematic and therefore the audit risk model should be used only for planning purposes. The development of the inherent risk audit approach (audit risk model from a conceptual perspective) is discussed in the fourth chapter. The critique against the inherent risk audit approach includes the unsuccessful decomposition structure of audit risk, due to the interdependency of inherent risk and control risk. The concept of “inherent risk” is also too broad and vague. The business risk audit approach is also discussed in the fourth chapter. This approach was developed by audit firms as an intended improvement on the inherent risk audit approach and is still widely used. The main critique against the business risk audit approach is the lack of a clear link between business risks and possible risks of material misstatement. The “risk-process audit approach” is addressed in the fifth chapter. For the purposes of this study, the name of the current risk-based audit approach is the risk-process audit approach. The reason for this formulation is the emphasis in the audit risk standards on the risk management tasks. The concept of “risk” in the performance of the task of identification of risks is, in essence, a choice in which the auditor has the freedom to choose an approach, and is referred to as “risk of material misstatement”. The concept of “risk of material misstatement” is much broader and different from the suggested definition in the auditing standards, and includes the consideration of potential misstatements according to the assertions on the assertion level (assertion-focus), and lacks conceptual clarity. The criteria for the task of “assessment of identified risks” are as follows: the different types of assertions are used as the criteria for assessing risks of material misstatements through the identification of possible misstatements. The concept of “misstatements” is the criterion used to consider the likelihood of misstatement(s), and the concept of “planning materiality” is used to consider the magnitude of misstatement(s). In the sixth and final chapter of this study, the development of risk-based audit approaches is summarised through a comparison of the risk-based audit approaches. In the future development of the current risk-process audit approach it is suggested that a fourth aspect, the significance of audit procedures, additional to the current nature, timing and extent of audit procedures maybe considered in respect of aspects that influence the response to risks of material misstatement included in the audit plan. Furthermore, the definition of the concept of “risk of material misstatement” could include the assertionfocus. The importance and possibilities of the division of audit planning in the financial statement level and the assertion level is also not yet fully considered. In conclusion, the author believes that the history of risk-based audit approaches has repeated itself and that the development of the risk-based audit approach and changes thereto were not considered against, and based on a sound foundation of auditing theory.Item Open Access Sectional title property in South Africa: an accounting and auditing perspective(University of the Free State, 2013-01) Lubbe, Leandi; Lubbe, D. S.English: This study was undertaken against the background of the current housing problem in South Africa. Sectional titles play an important role in addressing this challenge, which is a high priority problem in the country. Very little research has so far been done on the South African sectional title industry from an accounting and auditing perspective. Furthermore, legislation in this regard is often contradictory and confusing. In addition, pressure regarding costs such as audit fees and management fees from owners of sectional title units bring about unique challenges and problems for the industry. These aspects do, however, provide ample opportunity for research. The first main aim of this study was an overview of practical problems experienced from an accounting and auditing perspective regarding risks associated with sectional titles, auditing-specific problems relating to sectional title and accounting-specific problems relating to sectional title. The second, two-fold aim of the study was to find possible solutions to the above-mentioned problems and to make recommendations in this regard. The third aim of the study was to set industry benchmarks by way of analysis and interpretation of a sample of annual financial statements of sectional title schemes over a three year period. These benchmarks can be of assistance as an industry standard for owners, trustees, managing agents, auditors and accountants rendering a professional service within the sectional title industry. The literature review of this study covered three main aspects in respect of sectional title schemes, namely legal aspects relating to accounting and auditing matters of sectional title schemes, auditing and assurance aspects and accounting and reporting aspects. The literature review paved the way for a detailed analysis of the auditing and accounting aspects relating to the sample of body corporate financial statements and an empirical study performed on the sectional title industry in South Africa by way of interviewing a sample of role players in the industry. The results of the empirical study and data analysis revealed a great number of contradictory and confusing legal aspects as well as uncertainties in the industry. Various problems and concerns were addressed and practical recommendations were made of which the industry should take note. The empirical findings can also be used as a valuable basis for further research.