ACCOUNTING

Grade12
Chapter 7
AUDIT REPORTS AND
CORPORATE GOVERNANCE
Theory

Compiled by
Mrs CW Brimecombe
1
 TABLE OF CONTENTS Page
1. Acronyms 3

2. Website addresses 4

3. Company’s published annual financial statements 4

4. Directors’ report 5

5. Internal auditors 5

6. Functions of external auditors 5

6.1. Quality of auditors 6

6.2 The external auditor and audit report 6

6.3 Examples of audit evidence 7

6.4 Audit reports 7

7. Corporate governance 8

7.1 The roles of directors 9

7.2 Committees in a company 10

7.3 The aim of the King Code 11

7.4 Characteristics of King Code 12

8. Examples of ethical and unethical behaviour 14

9 References `14

THIS BOOKLET CONSIST OF 14 PAGES

1. ACRONYMS

FAIS • Financial Advisory and Intermediary Services Act

FICA • Financial Intelligence Centre Act

FSB • Financial Services Board

GAAP • General Accepted Accounting Practice

IFRS • International Financial Reporting Standards

IRBA • Independent Regulatory Board of Auditors

SAICA • South African Institute of Charted Accountants

SAIPA • South African Institute of Professional Accountants

SARS • South African Revenue Services

VAT • Value Added Tax

CFO • Chief Financial Officer

CEO • Chief Executive Officer

CIPC • Companies and Intellectual Property Commission

2. WEB SITE ADDRESSES
Acts online www.acts.co.za

FSB www.fsb.co.za

SAICA www.saica.co.za

DIRECTORS https://www.eoh.co.za/eohreports/reports/ir-2020/directors-report.php
REPORT
https://www.pwc.co.za/en/assets/pdf/executive-directors-report-
EXAMPLES
2021.pdf

PUBLISHED https://www.picknpayinvestor.co.za/downloads/2021/annual-results-
FINANCIAL 2021/pick-n-payresults-booklet-2021.pdf
STATEMENTS
https://www.flysaa.com/documents/51855150/0/SAA_IAR+2017.p
PICK A PAY
df/22db54be-b1f5-404a-99fd-d12f3fe9e56b
and SAA

KING CODE https://cdn.ymaws.com/www.iodsa.co.za/resource/collection/684B68A7-

IV B768-465C-8214-E3A007F15A5A/IoDSA_King_IV_Report_-
_WebVersion.pdf

3. COMPANY’S PUBLISHED ANNUAL FINANCIAL STATEMENTS

§ Public companies are obligated to draw up financial statements every six months.
§ Directors are responsible for the entire process leading up to the annual financial
statements including the preparation of the published annual financial statements.
§ The CFO, CEO, Chairman of the Board of Directors, and the Audit Committee finalise
the financial statements after receiving feedback from the independent auditors.
§ The Directors must ensure that the annual financial statements are published within six
months of the financial year-end.
§ The Directors must also, formally approve the annual financial statements as a special
resolution, which is required for more important decisions like those that affect the
constitution of a company, at a board meeting.
§ Directors need to be conscious of what the findings are in the annual financial
statements as they could be held accountable or criminally liable for any statement
that is made in the annual financial statement that is incorrect or exaggerated, even if
the financial statements are audited.
§ Financial statements must comply with International Financial Reporting Standards
(IFRS), the Companies Act, and certain facets of the corporate governance, called the
King Code.
§ Components of the annual financial statement are:

Statement of
Independent Directors'
Comprehensive Balance Sheet
Auditors' Report Report
Income

Cash Flow
Statement
 Supported by:
§ Notes to the financial statements
§ Statements of Changes in Equity
§ Statement of Accounting policies used
§ Remuneration Committee’s Report

4. DIRECTORS REPORT
A director’s report includes:
§ Nature of business of the company
§ Changes to the board of directors
§ The shareholdings of the board of directors
§ Details regarding a new issue of shares
§ Dividends paid and declared
§ Decisions taken in respect of plans for the company
§ Events which may have taken place after the date that the Statement of Financial
Position was compiled.

5. INTERNAL AUDITORS
§ Their role is to ensure the internal controls are tested and play an important role in
looking for fraud or mistakes in the business.
§ They must also check, for example, debtors, wages, or computer entries in every
aspect of the business.
§ The internal auditor is appointed by the directors and will earn a salary from the
company.
§ The external auditor will consider findings and checks that would have been carried out
by an internal auditor.

6. FUNCTIONS OF EXTERNAL AUDITORS

§ Once an external auditor has signed the Auditor’s Report, it serves as an assurance to
shareholders (owners) that the financial statements are fair and reliable.
§ The external auditor must check certain transactions and investigate errors and
fraudulent transactions.
§ They give the shareholders a recommendation on the financial statements and their
opinion on whether this is a true and fair representation of the company’s operations
for that financial year-end that ends on a specific date.
§ The shareholders base their decisions on the financial statements.
§ It is the external auditor’s duty to report this to the shareholders when the auditor
becomes aware of fraud.
§ Auditors are governed by exceptionally high, ethical standards and can face
disciplinary actions should they be found to have been negligent e.g. if they knowingly
approve a personal expense as a business expense.
6.1. QUALITY OF AUDITORS
External Auditors should be registered professionals with professional bodies such as
South African Institute of Charted Accountant (SAICA) and the Independent Regulatory
Board for Auditors (IRBA). Advantages of using registered Auditors:
§ Auditors are guided by a professional code of ethics.
§ Companies are assured of high-quality work from qualified Auditors.
§ High professional standards are maintained since auditors are answerable to their
affiliate bodies.
§ Disciplinary measures can be taken against Auditors who are negligent in performing
their duties.
§ Auditors may be deregistered from professional bodies if they commit any act or
misconduct.
§ Auditors can be sued for producing a misleading report.
§ Auditors may lose future contracts due to the production of substandard work.

6.2 THE EXTERNAL AUDITOR AND AUDIT REPORT

§ An auditor gives an unbiased opinion on the internal accounting methods and
procedures which ensures the validity and accuracy of its financial statements.
§ The external auditor cannot be an employee of the company.
§ The external auditor is appointed at the AGM (Annual General Meeting) by the
shareholders, and not the directors.
§ Auditors get paid a fee called audit fees. This is regarded as a business expense by
the company.
§ The opinion of the external auditor must be based on an assessment of whether the
financial statements:
* have been prepared so as to give a fair representation of the company’s activity;
* are understandable and not confusing to the reader;
* are prepared in accordance with GAAP;
* are set out in accordance with the requirements of the Companies ACT.
* are prepared in accordance with the requirements of IFRS.
§ Use a sample test, an auditing procedure where only a small amount of items within
an account balance or class of transactions are chosen to be audited, to select
documents for verification.
§ An independent auditor will stipulate the page numbers in the audit report and will
stipulate the directors’ responsibilities in the audit report.
o The reason for this:
* Readers must be certain what parts of the annual report have been audited.
* If readers are unhappy with any misstatement of the financial statements, the
auditors will not be held responsible unless the auditors have been negligent in
their duties in conducting the audit.
6.3 EXAMPLES OF AUDIT EVIDENCE

Policies and procedures of the company

Records of asset registers, stock registers

Source documents to verify transactions

Journals and Ledgers

Internal control processes and the efficiency of internal audit

Reports of internal auditors to ensure that controls are efficient/ Reports of audit
committee which assess the internal and external audit processes.

Confirmations may be received from outstide parties

Written and oral representations from management and staff

6.4 AUDIT REPORTS

§ Auditors will issue a report to express an opinion of the findings, after the completion
of the audit.
§ The report is addressed to the shareholders (owners of the company).
§ The report could be:
 A FAIR UNBIASED OPINION ON THE FINANCIAL
STATEMENTS

HAPPY SAD DISASTER

UNQUALIFIED QUALIFIED DISCLAIMER ADVERSE
• Has not • Has identified a • The auditor is of • Financial
identified any concern relating the opinion that statements of a
concerns to the fair the financial company are
relating to the presentation of statements are misstated, do
fair presentation the financial not reliable. not conform with
of the financial statements. This They refuse to GAAP, stating
statements. This will be disclosed express an that the
is desired by to the opinion. This will information is
shareholders. shareholders have incorrect,
consequences unreliable and
for the company. inaccurate

7. CORPORATE GOVERNANCE
§ Structures and processes for the direction and control of companies.
§ The relationship amongst management, Board of Directors, shareholders and other
stakeholders.
§ A company that provides good corporate governance contributes to sustainable
economic development by improving the performance and increasing the access of
outside investment in the country.

TRIPPLE BOTTOM LINE:

§ The THREE P’S – Profits, People and Planet.
§ Companies should commit to measuring their social and environmental
impact, in addition to their financial performance.

PROFITS PEOPLE PLANET

•Financial •Taking care of •Making positive

performance community impact on the planet
•Maximize profit, •Consider the impact •Do not damage the
reducing cost on community in planet
making decision
Extract from the Accounting Grade 12 Examination Guideline on Corporate Governance covers:
§ Effective, responsible, and ethical management of a company. This is an extension of the
concepts of management and control (by directors and shareholders). The concepts of
board of directors and CEO are often used in examination papers. It is necessary that the
mission and work of the board be explained, as well as its composition, including the need
for two types of directors with the emphasis on the word ‘executive’ as used in CEO.
§ Work of specific committees to ensure accountability and transparency. This may include
an audit committee, a remunerations committee, an ethics committee and any other
committee that might address any particular circumstances or problem that might be
relevant to a company, e.g. pollution/ environmental awareness, skills development,
wealth/job creation or support of community projects (corporate social investment).

7.1 THE ROLES OF DIRECTORS

§ Directors should:
* Exercise care, skill and diligence when performing their duties
* Act in the best interest of the company and its shareholders, never benefitting one
over another.
* Not compete with the company or disclose company’s information.
* Not violate the law of the articles.
§ Directors should not encourage or be party to fraudulent activities.
§ Directors should not make false statements or falsify the books of the company in any
way.
§ When doing business, the directors should not manipulate information, use improper,
false, or deceptive practices when trading shares.
§ Directors need to declare when the company is insolvent.
§ Directors must maintain a healthy and safe environment for all employees.
§ Directors should ensure to adhere to all environmental laws.
§ Directors must call a general meeting when shareholders request such a meeting.
§ Directors may not give financial assistance regarding the purchase of the company
shares.
 EXECUTIVE NON-EXECUTIVE
Involved in the day-to-day
management. Provide an objective judgement that
is independent of management on
Receives a salary in the form of issues facing the company.
Director’s fee.

Developing and directing Monitor the performance of executive

organizational strategy. management, especially with regards
to the progress made towards
achieving the determined company
Reporting on income and strategy and objectives.
expenses
Review the performance of the They connect the business and board
company with networks of potentially useful
people and organisations.
Engaging in community groups
They satisfy themselves on the
Create sound business plans integrity of financial information and
those financial controls and
systems of risk management are
Coaching department head robust and defensible.

7.2 COMMITTEES IN A COMPANY

• Review salaries, bonuses and other earnings.

• To prevent directors paying themselves very, high salaries.
• They must approve and give advice on the proposed fees, bonuses
REMUNERATION etc.

• Make submission to the board regarding accounting policies, financial

controls, accounting record and reporting.
• Nominate external auditor.
• Ensures appointment of auditor complies with the Company Act and
AUDIT
International Reporting Financial Standards (IRFS).
 • Responsible for performing the risk policy plan
• This plan must monitor and review policies and plans.
• Performing risk assessment on regular basis.
• Determine the company’s risk appetite and risk tolerance.
• Monitor the whole risk management process, the internal and
RISK external assurance providers will provide feedback on the
effectiveness of this process.

• Monitor the company’s social and economic development.

• Monitor good corporate citizenship
• Monitor the impact of the public activities, its products or services
to the environment, health, and public safety.
Social and • Monitor consumer relationships, the company’s policies and
Ethics record relating to advertising, public relations, and compliance
with consumer protection

7.3 THE AIM OF THE KING CODE

§ The main aims addressed, by the King Committee, are issues of corporate
governance.
§ The King Code encourages ethical business practices which have fallen away in
society and business today.
§ It further strives to ensure that all businesses practise ethical behaviour, addressing
misappropriation of funds, employee misconduct and inadequate environmental
practices.
§ The King Code III refers to ‘the right way of doing things’ in a company.
§ Companies are vulnerable to bad corporate governance due to separation of
ownership, and the company itself.
§ It is the directors’ responsibility to apply the King Code framework that governs the
company to ensure good corporate governance.
7.4 CHARACTERISTICS OF KING CODE

STARDIF

S •Sustainable

T •Transparency

A •Accountable

R •Responsible management

D •Discipline

I •Independence

F •Fairness

7.4.1 SUSTAINABILITY

§ The ability to maintain economic, social, and environmental resources.

§ Business should operate in such a way that does not jeopardise our current and
future social, environmental, and economic wellbeing.
§ Sustainability is the main moral and economic issue of the 21st century.
§ Today’s leaders must consider economic, environmental, and social issues when
making decisions.

7.4.2 TRANSPARENCY

§ Is when a company conducts business in an open manner, without withholding

information or having any hidden agendas.
§ Information that is disclosed should also be true, accurate and complete.
§ Directors and managers are expected to operate in a manner that is easy for
stakeholders to understand.
§ Ways in which businesses can apply King Code principles for good corporate
governance:
* Decisions / Actions must be clear to all stakeholders.
* Staffing and other processes should be open and transparent.
* Employees / Shareholders / Directors should be aware of the employment policies
of the business.
* Auditing and other reports must be accurate / available to shareholders /
employees.
* Regular audits should be done to determine the effectiveness of the business.
* Business deals should be conducted openly so that there is no hint / sign of
dishonesty or corruption.
* Businesses should give details of shareholders' voting rights to them before or at
the Annual General Meeting (AGM).
* The board of directors must report on both the negative and positive impact of
the business on the community and environment.
 * The board should ensure that the company's ethics are effectively implemented.
7.4.3 ACCOUNTABILITY

Stakeholders should hold directors and officials responsible for their decisions and
actions.
Accountability is to acknowledge and assume responsibility for your actions, duties and
decisions. In other words, it is the obligation of an individual or business to account for its
activities and to be held responsible and answerable for the quality and accuracy of these
activities or results.
§ There must be regular communication between management and stakeholders.
§ Businesses should be accountable / responsible for their decisions and actions.
§ Companies should appoint internal and external auditors to audit financial statements.
§ The board should ensure that the company's ethics are effectively implemented.
§ Businesses should present accurate annual reports to shareholders at the Annual
General Meeting (AGM).
§ Top management should ensure that other levels of management are clear about
roles and responsibilities to improve accountability.

7.4.4 RESPONSIBLE MANAGEMENT

§ Management of a business has a legal and moral obligation to the economic, social
and natural environment which it operates in.
§ Responsible management is an essential aspect of good leadership and is a multi-
faceted task. Responsible management involves conducting business activities:
• with care and regard for the interests of all stakeholders;
• in a sustainable and socially acceptable manner;
• without taking unnecessary and undue financial risks;
• in an ethical and law-abiding manner.

7.4.5 DISCIPLINE
§ is the commitment by leaders to behave and carry out duties in a correct and proper
manner.
§ by doing so, leaders set a standard of good and ethical conduct for others to follow.
7.4.6 INDEPENDENCE
§ Being able to avoid conflicts of interest and undue influence.
§ Leaders who display this quality, act objectively and with integrity and are not swayed
by external influences.
7.4.7 FAIRNESS
§ All actions and decisions should be made impartially and free from any bias,
dishonesty, or prejudices.
§ For example, accountants have an ethical duty to ensure that financial statements are
fairly presented.
8. EXAMPLE OF ETHICAL AND UNETHICAL BEHAVIOUR

Ethical business practices Unethical business practices

§ Using fair advertising § Unfair advertising
§ Treating all employees equally § Pricing of goods in rural areas
§ Paying fair wages § Tax evasion
§ Operating within the law § Paying employees unfair wages
§ Business deals are conducted openly § Disobeying the law
§ Ensuring that the environment is not § Using bribery to gain business
polluted

9. REFRENCES

Notes from the Gauteng Department of Education. Auditing and Corporate

Governance.
New Generations Publishers. 2013. New Era Accounting Grade 12
Learner’s Book. Auditing reports and published annual reports.
Oxford. 2013. Oxford Successful Accounting Learner’s Book. Analysis and
interpretation of Financial Statements and Ethics
Accounting Grade 12 Exam Guidelines 2021.