25-Jul-19 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. 1
25-Jul-19 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 2
25-Jul-19 Unpacking the Differences Unpacking the Differences Unpacking the Differences Unpacking the Differences Audit Independent Review Compilation 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”. 3
25-Jul-19 Unpacking the Differences Unpacking the Differences Unpacking the Differences Unpacking the Differences 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 of 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. 4
25-Jul-19 Unpacking the Differences Unpacking the Differences Unpacking the Differences Unpacking the Differences 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 of the Companies Act of South Africa.” Unpacking the Differences Unpacking the Differences Unpacking the Differences Unpacking the Differences 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. 5
25-Jul-19 Unpacking the Differences Unpacking the Differences Unpacking the Differences Unpacking the Differences - - - Summary - Summary Summary Summary Compilation Independent Review Audit Objective To assist management in To obtain limited To obtain a reasonable presenting financial assurance that there are level of assurance about information in the form no material modifications whether the financial of financial statements. that should be made to statements as a whole are the financial statements. 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) Reasonable (positive) assurance. 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 Often prepared for Mandatory or often privately held companies. privately held companies prepared for companies because third parties seek due to third parties comfort that the financial requiring an auditor’s statements are not opinion on the financial materially misstated. statements. Reliance on management Almost entirely relies on Requires some testing of Significant corroboration information presented by the information provided of account balances and management. by management using information provided by mainly analytical management. procedures and inquiry. Understanding of internal None required. Obtained through inquiry. Testing performed on the controls system of internal control. 6
25-Jul-19 When to use which When to use which When to use which When to use which engagement? engagement? engagement? engagement? Beneficial interest Public Average Interest Revenue employees Score Third party liabilities 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 IFRS / IFRS for SMEs compiled PIS ≥ 100 and < 350 and AFS independently IFRS / IFRS for SMEs compiled PIS < 100 and AFS independently compiled IFRS / IFRS for SMEs The Financial Reporting Standard as PIS < 100 and AFS internally compiled determined by the company - as long as no Financial Reporting Standard is prescribed. 7
25-Jul-19 Practical Practical C Considerations onsiderations Practical Practical C C onsiderations onsiderations Engagement acceptance Obtain Compiling and Compilation knowledge and reporting understanding of business Documentary evidence and adherence to ISRS 4410 Practical Practical Practical Practical C C Considerations C onsiderations onsiderations onsiderations Planning Obtain Concluding and knowledge and reporting understanding of business Independent Review Assess financial Documentary statement evidence and assertions and adherence to identify risk ISRE 2400 areas Consider Perform review compliance procedures – with financial analytical reporting procedures standards and inquiry 8
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