Masters Degrees (School of Accountancy)
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Item Open Access The audit expectation gap: a private company perspective(University of the Free State, 2023) Church, Ané; Prinsloo, F. E.Differences between what financial statement users expect from external auditors and what the external audit actually delivers, give rise to the widely researched phenomenon of ‘the audit expectation gap’. Most extant research focuses on public, listed companies, the findings of which are not necessarily generalisable to private companies which are subject to audit. By focusing on the ‘evolution gap’ component of the audit expectation gap, this study aimed to determine to what extent the expectations of the users of audited private company financial statements differ from what is delivered by the audit engagement undertaken in accordance with applicable audit requirements, which includes International Standards on Auditing, International Standards on Quality Management, the International Code of Ethics for Professional Accountants by the International Ethics Standards Board for Accountants and relevant legislation, such as the Companies Act of South Africa 2008 and the Auditing Profession Act, 2005.. This qualitative, phenomenological study is positioned in the interpretive, constructivist paradigm, and uses induction as the approach to theory development. In-depth interviews were conducted with 20 participants in two financial statement user groups: Management and Shareholders (n=12) and External Stakeholders (n=8), which included participants from banking institutions and the South African Revenue Service (SARS). Data was analysed by using inductive coding to identify codes, which were categorised and synthesised into themes. Four themes emerged from the data. The theme ‘Users of audited financial statements’ identified the users of private company financial statements as members of executive management, shareholders, providers of finance and SARS. The theme of ‘Audit purpose perceptions’ considered those areas typically identified as contributors to the audit expectation gap in public, listed companies. Private company financial statement users shared the expectations that auditors should verify compliance with all laws and regulations applicable to the company and should verify the effectiveness of all internal controls implemented by the company. Participants also expected auditors to detect all errors when underlying company financial records are transferred to the formal set of financial statements, although they did not expect auditors to detect all errors in the financial records itself. Participants, furthermore, expected auditors to play an advisory role where doubt exists over the company’s ability to continue as a going concern. Participants, however, did not expect auditors to detect all fraud, which is the most common expectation in the context of public, listed companies. ‘Audit value perceptions’ addressed factors that participants did not necessarily view as the primary role of the auditor, but which they expected to receive as a consequence of the audit as a value-adding service. This included various forms of advisory services and agency conflict resolution, amongst others. It was also evident from the responses of participants in the Management and Shareholders group that they either misunderstand or have a lower requirement for ‘Auditor independence’ than set by applicable audit requirements. This study underlined the differences between public, listed companies and private companies, emphasising that findings in research on public, listed companies cannot be generalised to private companies. Various factors known to contribute to the audit expectation gap in public, listed companies, were confirmed as not being present in private companies, while additional contributors in the private company context were identified. The findings in this study enable registered auditors, professional accountancy bodies and audit regulators to respond appropriately to the contributors to the audit expectation gap in private companies, which could lead to the improved relevance of private company audits.Item Open Access Public sector accountancy education at South African universities(University of the Free State, 2021-10) James, Sitembele; Crous, C.; Joubert, H.This study has been undertaken against the perceived insufficiency of public sector accountancy education and research at universities, locally and internationally, while the need for public sector accountancy exists. The purpose of this study was to test the perception whether universities in South Africa are responding adequately to the accountancy-related educational needs of the public sector. This study aims to contribute towards the limited literature that exists on public sector accountancy education in South Africa. The study may contribute towards discussions at universities about the inadequacy of public sector accountancy education and research. The literature review in this study focused on public sector accountancy education internationally, covering first world (Australia, the USA, New Zealand) and third-world countries (Ghana and Nigeria). The literature also included discussions about the public sector financial management reforms in South Africa through the relevant enacted laws. In addition, further discussions about accounting education, distinguishing between private sector accountancy education and public sector accountancy education, the current state of public sector accountancy education and the related unique skills were provided. The literature review was followed by a detailed analysis and comparison of the technical competencies on the SAICA and SAIGA competency frameworks. As a result, similarities and differences were identified between the technical competencies in the two frameworks. Based on the results from the analysis and comparison of the two competency frameworks, an interview schedule was developed and used to guide the discussion with the key role-players in the private sector audit firms, public sector institutions, the AGSA and two universities in the Eastern Cape to gather their opinions about the research problem. The role-players included the Audit Partners, Senior Managers and HoDs at the institutions mentioned above. The results of the empirical study, which included the document analysis and the semi-structured interviews, were aligned. The key findings from the study indicate:• the SAICA competency framework is business orientated, while the SAIGA competency framework is public sector orientated; •the public sector environment is highly regulated, and therefore its financial management processes and financial reporting frameworks are governed by the Constitution, MFMA, PFMA, Treasury regulations and GRAP, Modified-Cash Standards and IPSAS; • the highly regulated public sector environment contributes to accountancy professionals such as CA(SA)s being less attracted to the public sector for fear of reputational damage and a loss of jobs because of non-compliance with the related laws and regulations; • the transition from the private sector to the public sector accountancy environment is difficult for accountancy graduates when assigned to public sector assignments, owing to their lack of understanding of the public sector environment. Additionally, the university accountancy programmes are more private sector aligned than public sector aligned; • the public sector accountancy is perceived as specialised owing to its uniqueness; • a call was made by the participants for an increased focus on development of public sector accountancy education, through SLPs, public sector accountancy courses within existing accountancy programmes and undergraduate and postgraduate qualifications by universities, focused on public sector accountancy; • the proposed inclusion of the public sector content by SAICA on its new CA2025 competency framework is viewed as insufficient to address the inadequacy of public sector accountancy education; and • public sector accountancy is not the same as public administration. This study makes the following recommendations as a means to address the above-mentioned findings: • universities should increase the level of awareness of the public sector environment in their accountancy programmes. Additionally, the SAICA-accredited programmes should do more than is required in terms of the inclusion of the public sector content per the new CA2025 competency framework; • courses focused on public sector accountancy should be designed and included in the existing accountancy programmes. These courses could be compulsory or elective; and • owing to the perception that public sector accountancy is a specialist area, universities should expand their programme qualification mix, to include public sector-focused accountancy programmes at undergraduate and postgraduate levels, for example a Bachelor of Accounting (public sector specialisation) and a Postgraduate Diploma in Public Sector Accountancy. These qualifications would increase the number of competent public sector accountants. Finally, a conclusion is provided for the study. This study activates the debate and discussion around the research question in South Africa when the SAICA competency framework was amended to consider the importance of the public sector.Item Open Access Belastingverligting as moontlike aansporingsmaatreël in die grondhervormingsproses(University of the Free State, 2018-12) Kotze, Wilmien; Koekemoer, A. D.English: Many policies have been developed, programmes launched and legislation proclaimed since 1994 to promote land reform in South Africa. The need for land reform is clear from studying its history. Despite a number of policies and legislative decisions over the past 24 years, land reform in South Africa has not been successful thus far. Radical pronouncements and proposed legislation currently circulating show the urgent need for successful land reform. The ruling ANC adopted an official policy of land expropriation without compensation in December 2017, which raises concern if the possible consequences of this policy is analysed. It is, therefore, important that government’s current tax regime is not a hindrance to land reform. To this day, the implications of tax measures on the land reform process has not been investigated. The purpose of this study is to investigate the role that taxation plays in the land reform process in South Africa. Before considering potential tax relief, the factors that are preventing successful land reform, first had to be determined. These factors should be addressed in order to eliminate obstacles in the way of successful land reform. Tax relief, that could possibly address some of these factors, were identified in this study. A literature study was undertaken to identify the factors preventing the success of land reform. The degree to which tax relief supports or inhibits these factors was used as a conceptual framework against which current tax relief was measured. It appears that current tax legislation pertaining to land reform is lacking and there are opportunities for improvement. This study makes recommendations with regard to amendments to existing tax legislation on land reform, as well as general tax lexislation in order to advance the land reform process. A legal doctrinal research methodology is used.Item Open Access Harmonising user needs with reporting requirements of close corporations(University of the Free State, 2004-11) Kruger, Renshia; Van Wyk, H. A.English: The Close Corporations Act requires that the annual financial statements of close corporations must, in conformity with generally accepted accounting practice appropriate to the business of the corporation, fairly present the state of affairs of the corporation at the end of the financial year concerned, and the results of its operations for that year. According to generally accepted accounting practice, the objective of financial statements is to provide useful information about the enterprise to the primary user groups of the financial statements, independent of the size of the entity. The primary user groups of the financial statements of close corporations are the members, SARS and bankers. The recognition, measurement and disclosure requirements contained in the Statements of GAAP do not give rise to cost-effective and useful information being provided to the users of financial statements of close corporations and other small entities, because these users do not require the extensive information provided in general purpose financial statements. Consequently, an accounting standard is required to differentiate between general and limited purpose financial statements. In South Africa, the Limited Purpose Financial Reporting Standards (LPFRS) were developed. The modifications stipulated in this LPFRS mainly relate to the disclosure requirements that were reduced, with only a few alternatives allowed to the recognition and measurement criteria relating to deferred tax and financial instruments. These developments may not be sufficient enough for the purposes of close corporations. Accordingly, the study recommends that a formal, separate set of simplified differential reporting standards be developed for the purpose of close corporations. To be acceptable, the reporting method should meet most of the information needs of the users of the financial statements of close corporations and other small entities, and simultaneously provide cost-effective information that is a fair presentation of the results, taking into consideration the additional costs that may result from adopting differential reporting standards.Item Open Access Die openbaarmaking van finansiële instrumente in die finansiële state van mikro-gelduitleners(University of the Free State, 2000-05) Jasper, Zuleka; Van Wyk, H. A.English: Since 1992 the micro lending industry experienced significant growth. The industry is now in the position where it forms an integral part of the financial sector in South Africa. Very little formal research has been undertaken in die micro lending industry. It appears that no research what so ever has been done with respect to the financial presentation by micro lenders. It is very important to understand the micro lending industry. A short overview of the industry, as well as an overview of the regulatory body: the MicIO Finance Regulatory Council, are presented in this thesis. The purpose of financial reporting is to provide information to the stakeholders of an entity. In the South African context the King report is the most important document that defines and addresses the term stskeholder. In chapter 12 of the King report it defines stakeholders as /I any person, entity OI interest gIOUp that has some association with the en terprise," It was found necessary to identify the most important stakeholders of micro lending entities due to the wide span of the term stakeholders. The following stakeholders were identified as being the most important: o The owners o The suppliers of long term funds o The loan debtors o The employees. Stakeholders need sufficient information to make informed decisions. The quality of this information is imperative. Financial statements are the main source of information. It is important that the information in these financial statements are of outstanding quality. A number of business types are found in the micro lending industry. This study has shown that the most important and often used types are the close corporation and the company. Both the Company's Act and the Close Corporation's Act refer to Generally Accepted Accounting Practice (GAAP) as the basis for financial presentation. However, the interpretation of the term does not necessarily mean that statements on GAAP need to be applied. Fortunately this position is changing. This thesis was thus based on the assumption that reference to GAAP in die Company's Act and Close Corporation's Act means that statements on GAAPhave to be applied. The core of the study involves a discussion of the presentation requirements regarding the financial instruments that have been identified during the empirical study. Special reference was given to AC12S - Financial instruments: disclosure and presentation. The definitions in this document were detailed as it was used as a measure to identify the financial instruments included in the financial statements of micro lenders. The following financial instruments were identified: o Bank and cash balances o Debtors (other than loan debtors) o Loan debtors o Long term loans ,0 Creditors. In view of all relevant statements, legislation and corporate requirements a wide-ranging summary including all relevant presentation requirements regarding financial instruments have been incorporated. In the second section of the thesis the scope and results of the empirical study are discussed. The empirical study was performed on a sample of close corporations and companies that have been registered or provisionally registered with the Micro Finance Regulatory Council. The selected micro lenders' financial statements were analysed to establish the degree of compliance with the proposed financial reporting requirements. The writer thoroughly believes that the micro lenders' financial statements do not comply to the prescribed financial reporting requirements and leave much to be desired. Substantial enhancement is of crucial importance before these entities will effectively address the needs of all their stakeholders.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.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 Best corporate governance practices: financial accountability of selected churches in the Free State province(University of the Free State, 2016-01) Goodchild, Elmarie; Lubbe, D. S.English: South Africa’s economy tells a daunting story of poverty, economic inequalities, unemployment statistics that have reached an all-time high and the increased threat of receiving a “junk” rating by grading agencies. These realities result in the mounting social and economic ills of society that are amplified by the repercussions of government’s poor record in service delivery. Social services are on the verge of a collapse because they are not properly supported by the government. The insufficient subsidies provided by government, as well as the significant delay or non-payment of subsidies, result in subsidy crises to many social organisations. The aftereffect of the subsidy crises is that some old-age homes, children’s homes, orphanages, kids’ shelters, welfare homes, care havens, homes for orphaned HIV/AIDS, to name but a few, are battling to survive. This is an untenable situation as millions of vulnerable South Africans, particularly children and elderly people, are dependent on social organisations for their survival. The shrinking economic resources, the social needs of communities that are left unfilled by government, as well as the reigning subsidy crises, provide fertile soil for churches to be involved in these social challenges. As South Africa is a developing country, the provision of social services by churches are imperative and the government cannot afford to lose the wide range of contributions to social services by churches. The future of some churches are, however, affected by the unprecedented decline in membership, as well as the negative impact of secularisation and migration. Many churches are facing aging members, youth leaving the church and several church buildings are sold due to the battle for financial survival. The challenges faced by churches are amplified by the media being flooded with reports of scandals ranging from 1) alleged financial misconduct amongst some of the most well-known televangelists in the United States of America, the 2) controversial sex scandals in the Roman Catholic Church and 3) many instances of misconduct in church finances. These challenges impose significant threats to the financial sustainability of some churches. In addition, it threatens the sustainable involvement of churches in the provision of social services. The root of all these challenges can be traced back to the concept of corporate governance. As soon as churches have a significant presence and influence in their community, stakeholders will normally take on a role of encouraging and demanding the illustration of sound corporate governance principles by churches. The term corporate governance has evolved to become a mainstream concern amongst all stakeholders in various industries and across the different sectors of the economy. The King Reports have provided, not only in South Africa, but also internationally, the lead in good governance and is generally accepted as the source document for what constitutes sound governance. The abovementioned challenges surrounding churches arouse the concern as to what extent churches should implement sound corporate governance principles, as prescribed by the King Reports. This study consists of a literature component and an empirical component. The aim of the literature study was to provide 1) an overview of the development of corporate governance, with specific reference to the King Reports, 2) a regulatory framework of non-profit organisations and churches and 3) an overview of the relevance of the principles of corporate governance from the King Reports to all types of organisations, and for the purpose of this study, specifically churches. The empirical research component was conducted by means of a semi-structured interview. The principles of good governance as prescribed by the King Reports have been used as the main source in the development of the interview schedules. The aim of the empirical study was primarily to analyse the extent to which corporate governance guidelines are implemented by a selected sample of congregations. The congregations were selected from two denominations, namely the Dutch Reformed Church and the Apostolic Faith Mission Church, in the Free State region. The interviews were used to obtain insight from important role players of the respective congregations. The answers provided by the interviewees enabled the researcher to reach conclusions and make recommendations regarding the implementation of corporate governance principles. The results of this study should assist congregations in enhancing and improving the implementation of corporate governance principles. This should therefore assist congregations in maintaining financial sustainability and in taking up their rightful place in playing an indispensable role in the provision of, amongst others, social services in South Africa. The study is set out in 5 chapters. Chapter 1 provides the introduction to the study, sketching a few of the scandals that the world and churches are currently faced with as a means to illustrate the importance of corporate governance. This is followed, in Chapter 2, by an overview of the development of corporate governance. The chapter also discuss the development of the different sectors in the economy, with specific focus placed on the non-profit sector, of which churches form part. The chapter concludes with a discussion on the importance and relevance of corporate governance in the non-profit sector. Chapter 3 provides an overview of the history and establishment of the two denominations as mentioned, in South Africa, coupled with an overview of the governance structures of the denominations. This is followed by an analysis of the findings gathered from the interview schedules in Chapter 4. Chapter 5 finally consists of the conclusions and recommendations for improvement of corporate governance by churches 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 The effect of estimates in financial statements(University of the Free State, 2008) Raubenheimer, Elizabeth Johanna; Van Wyk, H. A.The International Financial Reporting Standards (IFRSs) requires a number of accounting estimates for the preparation of financial statements. The purpose of this study is to establish the effect of estimates in financial statements. The possible increases in required accounting estimates in the IFRSs are examined by comparing the IFRSs of 2003 to 2006. With this comparison it is established that the requirements of the IFRSs for fair value accounting is mainly responsible for the increases in allowed accounting estimates. The IFRSs of 2006 is examined to establish the frequency of use of estimates in financial statements. In order to get a better picture of the frequency of use of accounting estimates in financial statements, a list of allowed accounting estimates for each of the components on the Balance Sheet (also referred to as the “statement of financial position”) has been compiled. It is concluded that the components on the balance sheet are to a significant extent influenced by accounting estimates. The literature on earnings management and creative accounting are examined to determine if there is any risk that accounting estimates could be used to manipulate financial statements. This gives an indication of the reliability of accounting estimates within financial statements. It is concluded that the difference between fair presentation and creative accounting seems to be the intention of management which is difficult to assess. The “corporate reporting supply chain” has some responsibilities to prevent and detect creative accounting practices and fraud. These responsibilities can limit the risk that accounting estimates may be used in creative accounting and financial statement fraud. In the wake of some financial disasters, these checks and balances should restore public trust in financial reporting. An empirical study is performed on five companies that form part of the Construction and Materials sector of the JSE to establish the effect of estimates on their financial statements. The study indicated that: • the average percentages of assets, including cash and cash equivalents, of the five companies affected by accounting estimates are 60% for 2004, 60% for 2005 and 59% for 2006. If cash and cash equivalents are excluded from the calculation of assets affected by accounting estimates, the average percentages are 72% for 2004, 77% for 2005 and 76% for 2006; • there is an increase in the number of “estimate” hits from 2004 to 2006 in the financial statements of the five companies in the empirical group; and • the disclosure provided on key sources of estimation uncertainty is however, limited. A number of recommendations are made to limit the risk that accounting estimates could be used for creative accounting purposes. The negative effect of the use of accounting estimates in financial statements is a loss of reliability. The positive effect of the use of accounting estimates in financial statements is that of relevance.Item Open Access Algemeen aanvaarde rekeningkundige praktyk vir niewinsgewende organisasies, met verwysing na die NG Kerk in die Vrystaat(University of the Free State, 2006) Rossouw, Jacobus; Van Wyk, H. A.English: Not-for-profit organisations, and thus the congregations and welfare organisations of the Dutch Reformed Church in the Free State, exhibit certain unique characteristics, different from businesses. In essence, the primary objective of not-for-profit organisations is not to realise a profit to be distributed to equity participants (e.g. shareholders), but to meet certain religious, cultural, social and other non-commercial needs of the community. Not-for-profit organisations’ need for relevant accounting standards in fact emanates from their unique characteristics. Owing to the nature of not-for-profit organisations, the users of their financial statements require information (financial and non-financial) which is different from the information required by users of financial statements of businesses. Financial reporting which makes it possible for the users of financial statements of not-for-profit organisations to assess the stewardship of the organisation’s management, is the central focus because management are accountable to the members of the organisation, and also especially to donors. Standards of Generally Accepted Accounting Practice (GAAP) are drawn up primarily for businesses, and specifically to enable users of financial statements of companies in the international capital markets, to make economic decisions. Given this fact, and the unique nature and characteristics of not-for-profit organisations, it follows that Standards of GAAP are neither relevant nor appropriate in the case of not-for-profit organisations. Standards of GAAP therefore cannot be applied indiscriminately to not-for-profit organisations, albeit that appropriate South African legislation (Nonprofit Organisations Act) probably requires compliance with Standards of GAAP. In the international accounting environment, attempts have been made to develop unique accounting standards for small- and medium-sized entities, while unique accounting standards have also been drawn up for government institutions on the basis of their unique accounting needs. The same approach should also be followed for not-for-profit organisations since their unique nature and characteristics also necessitate typical accounting standards. Where not-for-profit organisations do indeed attempt to apply Standards of GAAP, they nonetheless experience problems in this regard. Some of these problems derive from the theoretical irrelevance of Standards of GAAP, while other problems are of a more practical nature. The fundamental problem derives from the question whether the cash or the accrual basis is the most appropriate in the case of not-for-profit organisations. Moreover, “fund accounting” is typical of not-for-profit organisations; however, an accounting standard for treatment of “funds” does not exist. In addition, various problems are also experienced with the recognition of assets, impairments and depreciation of assets, because the definition of “assets” and the recognition criteria do not consider the unique nature of not-for-profit organisations. Various questions exist with respect to the recognitio n of receipts as income. The question in particular is whether donations received for a specific purpose, donations which may only be utilised in future periods, as well as capital donations, should be recorded as income, liabilities or directly as funds. Not-for-profit organisations also experience problems with the recognition of so-called “in natura” receipts, and other forms of income. Given the nature and characteristics of not-for-profit organisations, performance reporting is also problematic because the “profit figure” and other reported financial information often do not capture the real “performance” (i.e. the achievement of objectives) of not-for-profit organisations. Furthermore, certain terminologies in GAAP are also not applicable to not-for-profit organisations. In some countries, accounting standards have been developed and issued specifically for not-for-profit organisations. The standards issued by the United States of America , the United Kingdom, Canada and Australia have been analyse d and compared to establish appropriate accounting principles for not-for-profit organisations. Accounting practice, applied in the above-mentioned countries, was reviewed by means of empirical tests among congregations and welfare organisations of the Dutch Reformed Church in the Free State. Specific aspects that were addressed and which have led to proposals for typical standards of generally accepted accounting practice for not-for-profit organisations are the following: · Presentation of financial statements; · Reporting on the restrictions imposed by donors on the utilisation of funds; · Accounting in terms of a cash basis versus the accrual basis ; · Recognition and measurement of fixed assets and accompanying expenses, such as depreciation and impairments, as well as the recognition and measurement of inventory; · Recognition and measurement of income in general, and in particular, recognition of donations and contributions, “restricted donations received”, and donations “in natura”; · Performance reporting by not-for-profit organisations; and · Aspects related to fund accounting. The core recommendations derive from the position that existing and formal Standards of GAAP should be used as a basis, and these standards should be modified to deal with the typical accounting concerns that pertain to not-for-profit organisations. The accounting profession, not-for-profit organisations, and other stakeholders must take note of the irrelevance of GAAP for not-for-profit organisations, the accounting problems experienced in the context, as well as the need for, and the recommendations made with respect to typical accounting standards for not-for-profit organisations. Like some other countries, South Africa should also play an active role in developing accounting standards which are applicable and relevant to not-for-profit organisations.