UNIVERSITY OF JOHANNESBURG

DEPARTMENT OF ACCOUNTANCY

Auditing 300/BCTA

2024

Finance and Investment Cycle

INDEX:

PRE-READING

A INTRODUCTION
B CHARACTERISTICS AND ACCOUNTS IN THE CYCLE
C DOCUMENTATION AND FUNCTIONAL AREAS
D CONTROLS WITHIN THE CYCLE
E SUBSTANTIVE PROCEDURES
F QUESTIONS RELATING TO THE TOPIC

PRE-READING
 IN THE NEWS
Eskom signs R20-billion credit facility with banks
28 February 2018
Eskom has today signed an R20-billion short-term credit facility with a consortium of
local and international banks. The government-guaranteed facility will form part of
the financing of Eskom’s current capital expenditure programme‚ the utility said in a
statement. The terms of the facility are comparable to Eskom’s existing facility
agreements and pricing is aligned to market benchmarks of similar structures‚ it
added.

Eskom’s Interim Group Chief Executive Phakamani Hadebe said: ‘We view the
successful execution of this facility as a demonstration of the financial markets’
confidence in Eskom’s turn-around strategy. We are cognisant of the challenges that
are still ahead for the business and we are committed to ensuring that we expediently
transition Eskom’s operational and financial profile to adequate standards. Eskom
remains a critical enabler for South Africa’s economic growth and we must attain
maximum operational efficiency for the business to avoid negatively impacting the
macro-environment’.

Acting Chief Financial Officer Calib Cassim said: ‘Concluding this facility with the
suite of banks reiterates the renewed willingness by financial markets to engage with
Eskom. The funding provides Eskom with sufficient liquidity to allow the company time
to continue resolving its governance-related issues and enables Eskom to recommence
with its normal funding programme required to execute the FY2018/19 funding plan’.

The news article illustrates how a company's financing and investment cycle often relates
to obtaining further financing, its short-term liquidity and its ability to continue operating
as a going concern.

Eskom, for example, needed funding to support its turnaround strategy and to continue
addressing its governance-related issues. The company secured a short-term credit
facility worth 20 billion rand ($1.7 billion) from a group of banks. This funding was
intended to help stabilise the company in the short term and finance the development of
its assets (i.e. capital expenditure programme), which would generate additional returns
in the long run.

It should be noted that the financing was obtained based on market benchmarks of similar
structures. However, the financing came with significant finance charges and repayments
that would impact the company's cash flow.

PART A: INTRODUCTION

1. Introduction of the topic

The finance cycle of a company involves transactions that enable it to raise funds
through means such as issuing shares or borrowing money from a bank or
investment company. Additionally, this cycle includes investments made by the
company, such as in property, equipment or long-term loans, or investing surplus
funds. These transactions usually result in the creation or alteration of an account
balance, for example, an investment in property, plant and equipment, but may
also result in cash inflows and outflows, which are written off at the end of the
financial year, for example, interest or dividends received on investments or
interest paid on borrowings.

The investment and financing cycle refers to the process of obtaining capital
assets and raising funds through owner's equity and long-term debt. It also
involves the repayment of such funds, as well as the management and
accounting of related investment and financing income and expenses.

The link between finance and investment cycle and the other cycles

Investment transactions involve acquiring and paying for assets, which makes
the cycle interface with the purchases and payments cycle for routine goods and
services. Similarly, when cash is used for interest and dividend payments, share
redemption and debt repayments, it also interfaces with the purchases and
payments cycle where payments are made.

Furthermore, the cycle also interfaces with the revenue and receipts cycle as
receipt and accrual of interest income and dividends on investments involve
revenue and cash receipt transactions. This cycle also applies to the receipt of
the entity's loan or equity funding.

The way this cycle operates can vary significantly depending on the entity. As a
result, the source documents, records, and controls in this cycle may differ
greatly among different entities. Each business has its own distinct methods and
controls for starting, recording, processing, and reporting transactions and
balances related to this cycle, which are included in their annual financial
statements.

2. Prior knowledge

From an accounting perspective, you are expected to have basic knowledge of

finance and investment activities.

3. Resources

To master this topic you should make use of the following resources

3.1 Lecture attendance and consultation

3.2 Module notes

3.3 Lecture slides

3.4 Question Bank

4. Study outcomes

After you have completed studying this topic you should be able to:

4.1. Understand the nature, purpose and accounting implications in the cycle
4.2. Understand the documents utilised in the cycle and describe the purpose of
each, both manual and computerised.
4.3. Understand the risks in the cycle and be able to recommend controls to mitigate
risks evident in a case study.
4.4. Understand controls in the cycle (both manual and computerised)
4.5. Understand how to gather audit evidence in relation to the affected account
balances and or transactions in the cycle

5. Examination possibilities

You can expect questions that include:

 Scenario-based application.

PART B: CHARACTERISTICS AND ACCOUNTS IN THE CYCLE

i. Characteristics of the cycle

The finance and investment cycle is characterised by:

 Frequency of transactions is considerably small.
 The size of transactions is usually material.
 Legal and regulatory requirements – transactions are frequently
governed by statute and the company’s MOI (e.g. issue of shares
should comply with the Companies Act requirements).
 Transactions in the cycle are not subjected to the routine everyday
transaction controls. (non-routine internal contros).
 Major risk within the cycle is generally the client understating long-term
liabilities or overstating the existence and valuation of investments
made in PPE or other private or public companies.

Considering these characteristics, it becomes evident that a one-size-fits-all

approach to internal controls cannot be implemented for all organizations. As a
result, controls may differ significantly from one entity to another. Furthermore,
due to the nature of transactions (such as the small number of transactions),
most entities only have a few standard, routine internal controls in place for their
investment and financing cycles.

ii. Accounts affected by this cycle:

The following accounts are affected by investment activities:

1) Within the Statement of Comprehensive Income
  Depreciation expense,
 Amortisation expense;
 Impairment expense;
 Profits and losses on disposals;
 Revaluations;
 Finance revenue; and
 Gains and losses on financial instruments.

2) Within the Statement of Financial Position

 Property, plant and equipment – vehicles, land and buildings, plant
and machinery, furniture and fittings;
 Intangible assets – licences, patents, copyrights, computer
software;
 Goodwill (purchased goodwill);
 Financial instrument investments (e.g. investments (shares) in
other companies); and
 Revaluation reserves.

The following accounts are affected by financing activities:

1. Statement of Comprehensive Income
 Dividends declared/paid;
 Finance expense; and
 Gains and losses on financial instruments.

2. Statement of Financial Position

 Share capital (and other relevant owner’s equity accounts in the
entity);
 Retained income;
 Long-term loans;
 Debenture financing; and
 Financial instrument liabilities.

iii. Relevant accounting standards

Management needs to follow the accounting standards that apply to the

investment and financing cycle when preparing the financial statements of the
company. Failure to comply with these standards may lead to significant errors in
the financial statements, which could affect the accuracy of the information
presented. Therefore, the management must adhere to the relevant accounting
standards to ensure the transactions, balances, and disclosures are reported
correctly in the financial statements.

What standards are to be considered in respect of investment activities?

IAS 16: Property, Plant and Equipment
IAS 36: Impairment of Assets
IAS 38: Intangible Assets
IAS 40: Investment Property
IFRS 3: Business Combinations (i.r.o. goodwill)
IAS 32/IFRS 7/IFRS 9: Financial Instruments Recognition and
Measurement/Presentation/Disclosures

What standards are to be considered in respect of financing activities?

IAS 32/IFRS 7/IFRS 9: Financial Instruments Recognition and
Measurement/Presentation/Disclosures

PART C: DOCUMENTATION AND FUNCTIONAL AREAS IN THE CYCLE

I. Documents in the cycle

Below is a table providing the necessary documentation and a description of the

document:
 Capital budget o A capital budget caters for items of a
capital nature, such as property, plant
and equipment, to be acquired during
the year.
 Memorandum of o The company's Memorandum of
Incorporation Incorporation may contain provisions
regarding investment activities that
must be followed when investment
transactions are considered for
approval by the board of directors.
o Details the authorised shares of a
company and any restrictions on
borrowings or financing transactions.
 Minutes of the board o These minutes reflect the resolution of
meeting the board of directors to authorise the
acquisition of material items.
o The minutes reflect the resolution of
the board of directors to authorise the
share issue or raise debt financing.
 Fixed asset requisition o An asset requisition is completed by
an employee (usually management),
setting out the requirements of an
asset and requesting that it be
purchased.
 Specific purchase o These are entered into between the
agreements/contracts entity and a third party on the
purchase of material assets, setting
out all relevant purchase information
including the terms and conditions of
purchase.
 Share certificate for o Certificates issued to the entity on the
financial instrument purchase or subscription of shares for
assets owned by the investment purposes in another
entity company.
 Detailed fixed asset o This is a register detailing all assets on hand.
register/listing
 Schedules of calculations o Various non-standard schedules may
be created and utilised by
management in the calculation of
impairments, revaluations and profits
and losses on sale of assets, to be
recorded in the financial statements
 Master file amendment o form is completed each time a new
forms asset is purchased or disposed of or a
change is made to a related
accounting policy (e.g. a change in
method of depreciation or change in
useful life of an asset).
o Completed each time a change in
shareholding occurs and a change to
the computerised securities register is
required.
 Specific financing o An agreement is entered into between
agreement/contract the entity and the lender/bank on the
receipt of loan funding, setting out all
relevant information, including the
terms and conditions of issue, such as
interest charges, repayment details
and any security provided.
 Schedules of financing o Various schedules may be created
calculations and utilised by management in the
calculation of, for example, debenture
costs, dividends declared or effective
interest charges, to be recorded in the
financial statements. An example is
an amortisation table for a loan.
II. Functional areas

Investment Activities
Acquisition of property, plant and equipment
Disposal of property, plant and equipment
Accounting for the use of assets and changes in asset value

Financing Activities
Issue of shares
Payment of dividends
Raising a long-term loan
Finance charges and loan repayments

INVESTING ACTIVITIES
1. Acquisition of property, plant and equipment;

Purpose:
To invest funds in non-current assets to commence and operate the business
and to generate working capital that provides profits for the entity, be it
directly or indirectly.

Main activities:
- Significant acquisitions require approval by the board of directors prior to
commencing with the transaction.
- Feasibility studies are generally conducted first.
- A cost proposal for the purchase and the installation is prepared and
presented to the board for consideration.
- The board also takes into account the capital budget for the particular
financial year.
- To submit a cost proposal, it is required to provide quotes from suppliers
to support the proposed cost.
- Any decision taken by the board with regard to significant acquisitions has
to be within the mandate granted to it in terms of the company’s
Memorandum of Incorporation.
- After the board approves the purchase, the acquisition process follows a
series of activities similar to those described for purchases.
 - All new acquisitions of property, plant, and equipment are recorded in the
fixed asset register, which serves as the subsidiary ledger to the main
general ledger accounts for those assets.

2. Disposal of property, plant and equipment

Main activities
- Significant disposals of PPE require board approval and any decision
should be within the MOI mandate
- Once approved, the relevant items are advertised for sale.
- After disposal of the PPE the original cost and the accumulated
depreciation up to the date of sale must be removed from the general
ledger account and the fixed asset register.

3. Accounting for the use of assets and changes in asset values

Purpose:
- To account for the use of and changes in value of items of property, plant
and equipment over time.

Main activities
- Calculating and recording depreciation, impairments and revaluations by
suitably qualified personnel.

FINANCING ACTIVITIES

1. Issue of shares
Purpose :
- To obtain cash inflows by allowing potential (or current) shareholders to
purchase an interest in the company.

Main activities:
- Board formal approval of the decision to issue shares
- Shareholder agreement drawn up and entered into between the new
investor and the company
- Investor pay for the shares per the agreement
- Share certificate is issued

2. Payment of dividends
Purpose:
- To provide returns to shareholders, the company declares and pays
dividends for the period shares are in issue.

Main activities:
- A dividend is authorised by a resolution of the board of directors during a
meeting. This distribution has to comply with section 46 of the Companies
Act.
- Resolution should be minuted.
- The settlement of the dividend takes place per the board’s decision.
- Dividend is recorded in accounting records.
 3. Raising a long-term loan
Purpose:
- To obtain cash inflows from a bank or other lender for funding purposes

Main activities: (example – plant purchase)

- Having decided that the entity has to invest in a new plant, the directors
have to decide how best to finance the acquisition.
- Having obtained approval for the bank loan from the board, agreement will
have to be reached with the bank to finalise the repayment terms, interest
rates, and any other conditions of the loan. Formally documented in a loan
agreement.
- On signing the loan agreement, the funds are advanced by the bank either
directly to the supplier of the plant or to the entity, which then has to pay
the supplier.

4. Finance charges and loan repayments

Purpose:
- To account for finance charges (interest) and loan repayments in terms of
the loan agreement with the lender.

Main activities:
- Interest is usually calculated by the lender and is automatically added to
the loan account.
- Payment of interest invariably takes place automatically via a debit order
set up against the entity’s current bank account in terms of the loan
agreement.
- Repayments are done in terms of the loan agreement
- Accounting records are then updated for finance charges and loan
repayments

PART D: CONTROLS WITHIN THE CYCLE

A. Test of controls

INTERNAL CONTROL TEST OF CONTROL

Validity:
All recorded assets are valid (really exist) and are supported by proper
documentation.
 All fixed asset purchases are  Select a few fixed asset
supported by a fixed asset purchases and inspect the
requisition and capital budgets. supporting requisition and
(Supporting documentation). capital budget.
 Recorded assets are periodically  Enquire with the client's
compared to physical assets by an personnel about the
independent senior official. procedures i.r.o. purchasing of
fixed assets and periodic
comparison of physical fixed
 assets with recorded assets.
 Inspect proof of comparisons
by senior official (signature)
Authorisation:
All purchases and disposals are authorised according to company’s policy.
 Purchases and disposals of fixed  Enquire with the client personnel
assets: about the policy i.r.o.
o Authorised by senior authorisation of purchases and
management disposals.
o Authorisation/decision
recorded in minutes.  Inspect supporting
documentation and minutes as
proof of authorisation.
Completeness:
All valid fixed assets are recorded and nothing is omitted.
 Capital requisitions are numerically  Inspect capital requisitions for
accounted for (Sequentially pre- numerical sequence and proof of
numbered). client review (signature).

 The list of missing numbers is  Inspect the fixed asset register

regularly followed up. for proof of review (signature).

 Fixed assets are recorded in a fixed

asset register and are regularly
compared with physical fixed assets.
Accuracy:
All fixed assets are recorded at the correct amount and are arithmetically
correct.
 Fixed assets are recorded at the  Enquire about procedures
amount of the invoice. followed.

 Independent review of depreciation  Select a few purchases from the

and other calculations. records and compare the
amount to the invoice.

 Inspect schedules for proof of

client review of calculation
(signature).
Recording:
All transactions i.r.o. fixed assets and depreciation are correctly recorded.
 All purchases and disposals of fixed  Select purchases and disposals of
assets are recorded in the fixed fixed assets from the cash book
asset ledger accounts (control and follow it through to the source
accounts) and fixed asset register documents, fixed asset register
from the source documents. and entries in the ledger. Agree
details such as the date, amount,
description and category of asset.

 The fixed asset register is reconciled  Inspect the reconciliation and

 with the control accounts in the agree it with the accounting
ledger on a regular basis. records and source documents.

 Inspect the reconciliation for proof

of review by a senior employee at
the client (signature).
Classification:
All transactions i.r.o. fixed assets are correctly classified according to its
nature.
 Fixed assets are classified into the  Verify procedure by means of
respective categories according to enquiries.
company policy.

 Improvements are capitalised as  Review the fixed assets register

fixed assets and clearly and the ledger accounts for repair
distinguished from repair expenses. costs that have been erroneously
classified.

Cut off:
All purchases and sales of fixed assets are recorded in the period to which it
relates.
 Fixed assets purchased are  Enquire about procedures i.r.o.
recorded at the date of receipt (per recording and cut-off.
GRN) and when sold as from the  Select purchases and disposals
date that the risks and rewards of from source documents and follow
ownership passes to the purchaser it through to the ledger accounts
in substance. and fixed asset register - ensure
recorded in correct period. (Test
also in other direction from
records to supporting
documentation).
General Controls:
Assets are properly safeguarded against theft and physical elements.
 Fixed assets are, as far as  Enquire with personnel about
possible, stored in permanent form procedures i.r.o. safeguarding.
(bolted).
 Observe procedures i.r.o.
 Safe guard assets by: safeguarding.
o Limiting access to  Investigate company policy and
authorised persons (locked, proof of application.
key control)
o Controls protecting assets  Confirm by way of enquiry and
against physical elements inspection of insurance contracts
(rain, weather) that the assets are insured.

 Asset adequately insured

 B. Possible risks and their related controls

Transactions that are not valid, accurate and complete (caused by the control
objectives not having been achieved) will result in investment and financing
transactions (and related account balances) being misstated in the accounting.
records, which will in turn result in the financial statements being misstated.

Key risks Examples of controls to be

implemented
Financing activities
Issue (or repurchase) of shares Specific high-level authorisation and
Invalid issues (or repurchases) of approval are required for all share issue
shares may occur (i.e. that are not or repurchase Specific high-level
in line with the requirements of the authorisation and approval are required
Companies Act, the Companies for all share issue or repurchase.
Regulations or the company’s  Before the resolution is passed,
Memorandum of specific
Incorporation). consideration must be given to
the requirements of the:
 Applicable statutory
requirements, such the
Companies Act, with regard to
share issues or repurchases;
and
 Company’s policies and the
Memorandum of
Incorporation, such as the
number of authorised shares
in issue.
 The company’s company
secretary or legal
compliance department should be
responsible for confirming that the
above requirements are satisfied.
 All statutory and governance
requirements that have to be met
for a decision must be adequately
minuted.
Payment of dividends  Specific high-level authorisation
Invalid dividends (i.e. that are not in and approval are required for all
line with the requirements of the dividends declared – authorized
Companies Act, the Companies by the board of directors after
Regulations or the company’s considering the solvency and
Memorandum of Incorporation) may liquidity of the company, other
be declared and invalid and/or statutory requirements (per the
inaccurate payments may be made. Companies Act), and the
company’s Memorandum
oIncorporation. The minutes must
reflect the board resolution and
the fact that these requirements
 were considered and satisfied.
 A detailed securities register must
be maintained by the company
and updated timeously for any
changes to the shares in issue.
The information in the securities
register should then be used by
the accounting department to
calculate and process the
dividend transactions.
Raising/obtaining of a long-term Decisions to initiate and obtain financing
loan are
Invalid loan financing may be processed by specific control activities
obtained by the entity. which
may include, among others, the
following:
 Specific high-level authorisation
and approval are required for all
financing decisions. This should
be by way of resolutions of
management/board of directors
and evidenced in the minutes of
these meetings
 Before the resolution is passed,
specific consideration must be
given to:
o Statutory requirements
o Company policies and the
MOI
o Projected cash
requirements of the entity
 Legal advice should be obtained
to consider implications for the
entity before concluding any
material agreement
 Authorised individuals in the entity
should properly initiate
transactions involving long-term
loan financing.
 Properly signed agreements
should be entered into and should
include all relevant terms and
conditions.
Accounting for finance charges,  All calculations of finance charges
loan repayments and other and capital repayments must be
adjustments made based on properly signed
Invalid, incomplete and/or loan agreements that include all
inaccurate finance charges relevant terms and conditions.
and/or repayment transactions may  Qualified personnel should
be recorded and paid.
 perform these calculations.
 Detailed calculation
schedules/amortisation tables
(e.g. for debentures) must be
prepared and updated regularly.
 These finance charge calculations
should be checked by a second
(more senior) employee and the
calculation schedule initialled as
evidence of the check.
 If applicable, an internal audit
department should perform
regular reviews of adherence to
the above controls and report to
management in this regard.
Investment activities
Acquisition of tangible assets  Adequate segregation of duties is
(property, plant and equipment): necessary – one individual should
 Asset purchases may be not be responsible for initiating
invalid (e.g. for personnel’s and approving a capital asset
personal use) and thus result purchase transaction.
in unnecessary asset  Large capital asset purchases
purchases or even fraud as may be subject to specific control
a result of non-legitimate activities in addition to this and
payments being made. may include, among others, the
 Investment decisions and following:
purchases may place o Specific high-level
financial strain on the entity authorisation and approval
and not be in line with the should be obtained for non-
entity’s budgets. current asset purchases.
 The entity may pay too much This could be by way of
for an item – the cost may resolutions of a fixed asset
not be in line with committee, a steering
reasonable market-related committee, an investment
prices. committee or the board of
 Once a tangible asset is on directors. These
hand, it may be lost, stolen, resolutions should be
damaged and therefore minuted.
inappropriately recorded in o Before these resolutions
the entity’s financial records. are passed, due
consideration should be
given to the entity’s policies
(if applicable) and the
entity’s budgets and cash
flow forecasts (e.g. is
adequate funding available
to settle the purchase
consideration?).
o Adequate controls over the
purchasing of items should
 be in place, such as
obtaining multiple
quotes from preapproved
suppliers before entering
into a purchase
transaction.
 Security guards, cameras and
locks should physically secure all
material tangible assets to avoid
theft of assets and loss to the
entity.
 A detailed fixed asset register
should be kept Regularly
(possibly monthly or semi-
annually) and at least once a
year, a physical count should be
performed and each material
asset in the register should be
inspected and its condition
assessed for any indication of
impairment.
 Any items in the fixed asset
register that were not physically
verified should be investigated by
management and the reasons
thereof ascertained.
 Plant, machinery and vehicles
should be serviced regularly to
maintain their functionality.

Accounting for the use and  A detailed fixed asset master file
change in asset values should be kept and continuously
Assets may be incorrectly valued updated. The master file should
through the invalid, inaccurate or contain depreciation methods,
incomplete recording of rates, useful lives and residual
depreciation, amortisation, values so that depreciation
impairments and revaluations. calculations can be computerised
(calculated electronically without
 human intervention if possible).
For this purpose, sound general
controls and application controls
in respect of the depreciation
calculations, are essential.
 Qualified personnel (who
understand the requirements of
the applicable accounting
standards and the asset types)
should calculate all relevant
estimates (e.g. useful lives and
residual values).
  Detailed depreciation/amortisation
calculation schedules must be
prepared and kept up to date.
 Material decisions about these
impairments or revaluations
should be made by the relevant
high-level management
committee responsible, based on
all available information.
 Where necessary, experts should
be contracted to assist with the
determination of the appropriate
asset values (i.e. for the
revaluation and impairment of
assets).
 If applicable, an internal audit
department should perform
regular reviews in the cycle, such
as physical asset
inspections/verifications to the
fixed asset register, and report to
management in this regard.

After we have obtained an understanding of the controls in the investment cycle

and tested the implementation and operating effectiveness of these controls, the
next step will be to perform audit procedures on this cycle. The major account
that we will be focusing on in this cycle is fixed assets.

PART E: SUBSTANTIVE PROCEDURES

SUBSTANTIVE PROCEDURES

A) ANALYTICAL PROCEDURES B) DETAIL SUBSTANTIVE

A) ANALYTICAL PROCEDURES

Substantive analytical procedures include comparisons of current information to

prior year’s or budgets, ratio analysis, comparison of financial and non-financial
information derived from understanding the core of the processes and related
business processes of the entity.

B) DETAIL SUBSTANTIVE PROCEDURES

Existence:

 Select a sample of items from the fixed asset register, including new
additions, and physically inspect the assets
 With physical inspection, consider the condition of the assets and whether
assets are still in use

Additions of fixed assets:

 Select all material purchase transactions and inspect supporting

documentation for approval (minutes, invoices, title deeds)
 For a sample of purchase transactions compare details in the fixed asset
register to suppliers invoice/purchase contract. (amount, date, description
etc.)

Disposal of fixed assets:

 Enquire from management with respect to disposals, scrapings, insurance

claims
 Request to audit insurance claim documentation in detail, ensure correct
accounting in general ledger (claim received and assets removed)
 Inspect correspondence with insurers and obtain confirmation from
insurers for claims pending
 With discontinued operations, enquire about disposals and inspect
receipts
 Inspect fixed asset register to ensure assets disposed are reflected as
zero

Repairs and improvements:

 Scrutinise the repair expense account for any unusual items and follow up
 For a sample of material expenses, inspect the source documentation to
determine the exact nature of the expense

Rights and Obligation:

 Inspect the underlying documents of title deeds/contracts/lease

agreements for terms and conditions, parties involved etc
 Review minutes of directors/shareholders meetings for approval of fixed
asset acquisitions


Valuation:
Revaluation of assets:

 Consider if assets are valued by an expert - consider ISA 620 “ Using

work of an auditor’s expert”
o For the expert consider:
 - Independence of the expert
- Qualifications of the expert
- Experience and reputation of the expert
o Assess assumptions and methods used by the expert
o Re-perform calculation perform by the expert
 Where assets are revalued – re-perform calculation performed by the
client

Depreciation:

 Obtain fixed asset summary schedule for purposes of recalculation

 Obtain rates and basis of calculation from prior year working papers or
financial statements
 Through enquiry & re-performing of calculations ensure rates and basis
are consistently applied
 Obtain evidence of estimated useful lives and residual value of assets and
assess the reasonableness.

Amortisation of intangible assets:

 Inspect evidence of rights attached to intangible assets/management’s

projections to determine the reasonableness of amortisation method and
period applied

Impairment:

 Enquire from management and obtain evidence regarding factors, which

could indicate impairment:
o Market value decline
o Changes in technology, market, economic conditions
o Increase in market interest rates
o Asset physically damaged/obsolete
o Discontinued operations
 Discuss with management the underlying assumptions and reperform the
calculation of the impairment loss
 Obtain evidence that the estimate of value in use, selling price, discount
rates of future cash flows are appropriate/reasonable
 Ensure impairment loss is disclosed in financial statements according to
IFRS.
 Consider the use of an expert

Accounting estimates:

 Review and test process used by management to develop estimate for

reasonableness
 Evaluate underlying assumptions used in deriving the estimate and
consider their appropriateness
 Test calculations
 Compare prior year estimates with actual results
  Consider approval process
 Compare with independent estimate
 Review subsequent events to confirm estimate
 Consider the use of an expert

Completeness:

 Scrutinise minutes/contracts/lease agreements/invoices to identify any

material purchase transactions and follow through to entry in fixed asset
register.
 Select a sample of assets on hand and trace to relevant entries in the
fixed asset register.

Presentation and disclosure:

 Inspect the financial statements to ensure that amounts are classified and
disclosed correctly in terms of IFRS.

PART F - QUESTIONS RELATING TO THIS TOPIC

The questions relating to this cycle as well as solutions are in the question bank.