Unpacking the Differences: Unpacking the Differences: Unpacking the - - PDF document

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Unpacking the Differences: Unpacking the Differences: Unpacking the Differences: Unpacking the Differences: Audit Audit Audit Audit -

• Independent Review

Independent Review Independent Review Independent Review -

• Compilation

Compilation Compilation Compilation

Financial Reporting Frameworks Financial Reporting Frameworks Financial Reporting Frameworks Financial Reporting Frameworks

• Financial reporting framework = set of guidelines used in the preparation of financial statements.
• Typically based on:

‒ type of business; ‒ objective of the financial statements; ‒ applicable laws and regulations.

• Why do we need a financial reporting framework?

‒ To provide useful information to the users of financial statements. ‒ To provide information about the cash flows to which an entity is subjected, including the timing and uncertainty of cash flows. ‒ To disclose the obligations and economic resources of an entity. ‒ Comparability of financial statements. ‒ Improves efficiency of business across borders.

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IFRS for SMEs versus Tax Base IFRS for SMEs versus Tax Base IFRS for SMEs versus Tax Base IFRS for SMEs versus Tax Base

Tax base

• Based on historical cost
• Profit or loss equates to taxable profit or loss – except for permanent differences

IFRS for SMEs (International Financial Reporting Standards for Small and Medium-sized Entities)

• Based on principles of fair value
• Profit or loss does not equate to taxable profit or loss
• Requires management accountability and responsibility for accounting policy choices, estimates

and judgements made.

IFRS for SMEs versus Tax Base IFRS for SMEs versus Tax Base IFRS for SMEs versus Tax Base IFRS for SMEs versus Tax Base

Examples Line Item IFRS for SMEs Tax Base

Property, plant and equipment Depreciation Wear and tear Investment property Fair value gain/loss

• Mortgage bond

Amortised cost Historical cost Office rental payments Straight-lining Expense Salary bonuses Provision Expense Taxation Current and deferred tax Current tax

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Compilation

Audit

Independent Review

Unpacking the Differences Unpacking the Differences Unpacking the Differences Unpacking the Differences

Compilation

• Engagement to assist management with the preparation and presentation of historical financial

information of an entity in accordance with an applicable financial reporting framework.

• Provides no assurance on financial statements.
• However -> “implied assurance” about the fair presentation and relevance of the financial

statements (as required by accounting standards) and the procedures prescribed in terms of ISRS 4410.

• Requirements:
• Independence and integrity of the compiler;
• Application of accounting and financial reporting expertise;
• Compliance to accounting standards (financial reporting framework);
• Preparation of documentary evidence to support compilation procedures;
• Consideration of “materiality”.

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Independent Review

• Engagement to perform a review of the historical financial statements of an entity and to express

a conclusion about whether the financial statements as a whole are free from material misstatement.

• Provides limited (negative) assurance on financial statements:

“…nothing has come to my attention that causes me to believe that these financial statements do not present fairly, in all material respects, the financial position of ABC Company (Pty) Ltd as at 28 February 2018, and its financial performance and cash flows for the year then ended in accordance with the International Financial Reporting Standard for Small and Medium-sized Entities and the requirements

• f the Companies Act of South Africa.”

Unpacking the Differences Unpacking the Differences Unpacking the Differences Unpacking the Differences

Independent Review

• Requirements:
• Independence and integrity of the reviewer;
• Compliance to accounting standards (financial reporting framework);
• Assessment of financial statement risk;
• Application of professional judgement/scepticism, inquiry and analytical procedures;
• Preparation of documentary evidence to support review procedures.

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Audit

• Engagement to perform an examination of the entity’s accounting records, to express a

conclusion about whether the financial statements are presented fairly, in all material respects.

• Provides reasonable (positive) assurance on financial statements:

“… the financial statements present fairly, in all material respects, the financial position of the company as at 28 February 2019, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standard for Small and Medium-sized Entities and the requirements

• f the Companies Act of South Africa.”

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Audit

• Requirements:
• Must be performed by a registered auditor and comply with certain standards;
• Performance of procedures on the amounts disclosed in the financial statements - testing a

sample of transactions and balances;

• Procedures designed to identify material misstatements;
• Compliance to accounting standards (financial reporting framework);
• Preparation of detailed documentary evidence to support audit procedures performed and

results of testing.

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• Summary

Summary Summary Summary

Compilation Independent Review Audit

Objective To assist management in presenting financial information in the form

• f financial statements.

To obtain limited assurance that there are no material modifications that should be made to the financial statements. To obtain a reasonable level of assurance about whether the financial statements as a whole are free of material misstatement thereby enabling the auditor to express an opinion on whether the financial statements are presented fairly, in all material respects. Level of assurance No assurance. Moderate (negative) assurance. Reasonable (positive) assurance.

Unpacking the Differences Unpacking the Differences Unpacking the Differences Unpacking the Differences -

• Summary

Summary Summary Summary

Compilation Independent Review Audit

Common applications Generally appropriate for privately held companies. Often prepared for privately held companies because third parties seek comfort that the financial statements are not materially misstated. Mandatory or often prepared for companies due to third parties requiring an auditor’s

• pinion on the financial

statements. Reliance on management Almost entirely relies on information presented by management. Requires some testing of the information provided by management using mainly analytical procedures and inquiry. Significant corroboration

• f account balances and

information provided by management. Understanding of internal controls None required. Obtained through inquiry. Testing performed on the system of internal control.

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When to use which When to use which When to use which When to use which engagement? engagement? engagement? engagement?

Public Interest Score

Beneficial interest Average employees Third party liabilities Revenue

When to use which framework? When to use which framework? When to use which framework? When to use which framework?

Public Interest Score Financial Reporting Framework PIS ≥ 350 IFRS / IFRS for SMEs PIS ≥ 100 and < 350 and AFS were internally compiled IFRS / IFRS for SMEs PIS ≥ 100 and < 350 and AFS independently compiled IFRS / IFRS for SMEs PIS < 100 and AFS independently compiled IFRS / IFRS for SMEs PIS < 100 and AFS internally compiled The Financial Reporting Standard as determined by the company - as long as no Financial Reporting Standard is prescribed.

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Practical Practical Practical Practical C C C Considerations

• nsiderations
• nsiderations
• nsiderations

Compilation

Engagement acceptance Obtain knowledge and understanding

• f business

Documentary evidence and adherence to ISRS 4410 Compiling and reporting

Practical Practical Practical Practical C C C Considerations

• nsiderations
• nsiderations
• nsiderations

Independent Review

Planning Obtain knowledge and understanding

• f business

Assess financial statement assertions and identify risk areas Perform review procedures – analytical procedures and inquiry Consider compliance with financial reporting standards Documentary evidence and adherence to ISRE 2400 Concluding and reporting

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Practical Practical Practical Practical C C C Considerations

• nsiderations
• nsiderations
• nsiderations

Audit

Planning Risk assessment Audit strategy and plan Gathering evidence Finalisation

Practical Considerations Practical Considerations Practical Considerations Practical Considerations

What role does your accountant play?

• Maintaining accurate and complete accounting records;
• Ensuring compliance;
• Exercising integrity and ethical practices;
• Acting with professional competence;
• Drafting annual financial statements;
• Performing review and related services engagements;
• Assisting with audit…

25-Jul-19 10 Join us for the next of our Client Webinar series:

The Dirty Dozen: The Most Dangerous Agreements on Earth

Webinar Made Simple for the SME Business Sector 29 August 2019 09:00 – 10:00

Questions? Questions? Questions? Questions?