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WORKSHEET 2.2

Accounting principles, business ethics, internal control and audits

2.2.1 Ideal characteristics of financial statements (10 minutes)

Give your opinion on why financial statements should have the following characteristics.

|Desirable characteristic |Opinion: |

|1 |Timeliness: Why should financial statements | |So that the information will not be out of date when it is needed to make|

| |be published timeously? | |decisions. |

|2 |Understandability: Why must financial | |So that the reader can interpret the information easily and correctly. |

| |statements be understandable to the ordinary | | |

| |man in the street? | | |

|3 |Fairness: Why must financial statements be | |So that certain stakeholders are not prejudiced or disadvantaged, while |

| |prepared in such a way that they do not | |others are favoured. |

| |advantage any particular stakeholder, i.e. | | |

| |why must they be fair to all? | | |

|4 |Reliability: Why must financial statements be| |So that readers will have confidence in the accounting profession. |

| |reliable? | | |

|5 |Comparability: Why must financial statements | |So that trends and differences can be noticed and so that appropriate |

| |be comparable, i.e. from one business to | |decisions can be made. |

| |another, or one time period to another? | | |

2.2.2 Application of principles of GAAP (10 minutes)

In order to achieve the characteristics listed above, fundamental accounting concepts are applied to ensure a realistic and uniform treatment of the financial position and financial results of an enterprise. In preparing the financial statements, it is usually necessary to adjust figures at the end of the financial period to cater for these concepts. Consider the table below.

Required

This table is incorrect. You are required to match the example in the left-hand column with the appropriate concept in the right-hand column.

Table:

|Example of year-end adjustment |Appropriate principle applied |

|A. A company owns shares in another company. They bought these shares for|1. Business entity principle |

|R1m, but the value on the securities exchange has gone down by 30%. In | |

|the Balance Sheet this investment is reflected at a value of R700 000. | |

|B. Cleaning materials bought for R25 are shown as part of Sundry |2. Historical cost principle |

|Operating Expenses in the Income Statement. | |

|C. Lebo owns a business Lebo’s Secretarial Services. She has won R10 000 |3. Going-concern principle |

|on the lottery. She does not record this in the books of her business. | |

|D. A business records sales of goods for R12 000. At the same time they |4. Matching principle |

|record the cost of sales and the cost of the advertisement that led to | |

|these sales. | |

|E. A company owns shares in another company. In the Balance Sheet these |5. Principle of prudence |

|are reflected at the cost price of R1m even though the value on the | |

|Securities Exchange has gone up to R2m. | |

|F. A coal mining company has installed equipment underground at a cost |6. Principle of materiality |

|of R500 000. This equipment is useless to any other business. Instead of | |

|writing off the cost immediately, the company decides to depreciate it | |

|over the useful life of the mine which is expected to be 8 years. | |

2.2.3 Definition of GAAP principles (15 minutes)

In order to consolidate your knowledge of these principles or concepts, write down a brief definition of each:

|Principle |Brief definition |

|1. Business entity principle |The financial affairs of the business are kept entirely separate from |

| |those of the owner. |

|2. Historical cost principle |All assets are valued at their original cost. |

|3. Going-concern principle |The assumption is that a business will continue for the foreseeable |

| |future. |

|4. Matching principle |Expenses are offset against income generated by those expenses. Income |

| |and expense items are allocated to the correct time period. |

|5. Principle of prudence |Financial results are reflected on a conservative basis i.e. if in |

| |doubt, the pessimistic viewpoint is used. |

|6. Principle of materiality |Any information which is important to the reader must be highlighted or |

| |reflected separately. Conversely, irrelevant information should not be |

| |highlighted (as this could serve to confuse). |

2.2.4 Accounting fraud (20 minutes)

Consider the following extract from a newspaper report:

WorldCom's Ebbers jailed for 25 years

From Bloomberg and SAPA-AFP July 14, 2005

New York - Former WorldCom chairman Bernard Ebbers was yesterday sentenced to 25 years in prison for orchestrating the largest accounting fraud in US history, an $11 billion (R72 billion) scheme that drove his company into bankruptcy. Ebbers (63), a former milkman and bouncer who helped found WorldCom, was convicted on March 15 of ordering subordinates to cook the books from 2000 to 2002 by hiding debt and inflating revenue. The collapse of WorldCom, once the US's second-largest long-distance telephone company, resulted in the largest bankruptcy in American history.

REQUIRED:

Consider the accusations of ‘hiding debt’ and ‘inflating revenue’. List three possible ways in which Ebbers could have done this.

| |Possible methods of fraud |

|1 |A loan may have been recorded as rent income. |

|2 |Income for the next financial year is treated as income accrued (receivable) at the end of |

| |the current year. |

|3 |Fictitious debtors may have been created with the intention of writing them off the following|

| |year. |

2.2.5 Accounting dilemmas (15 minutes)

Consider each of the following scenarios relating to Juluka Trading Ltd, a public company. If you were the accountant of Juluka Trading Ltd how would you respond to the CEO. Explain the ethical considerations in each case.

|1 |Juluka Trading Ltd is in process of negotiating a sale of a stock items for R900 000. The invoice had not been signed |

| |by the customer on 28 February 2005. The CEO wants you to record the invoice on 28 February 2005. |

| |Matching principle must be applied. The sale actually occurs next year. It would be dishonest to inflate income this |

| |year. |

|2 |Juluka Trading Ltd has paid R50 000 to Avia Travel for the CEO’s 3-week business trip to the Far East. It has come to |

| |your notice that the CEO visited a supplier for two hours on that trip, and that he spent the rest of the time on |

| |holiday. |

| |This is a personal expense, not a business expense. The CEO must repay the amount or the Board of Directors must |

| |declare this additional remuneration or a perk which must be taxed. It should also be disclosed in the financial |

| |statements. |

|3 |The draft financial statements show a loss of R200 000. In order to rectify this situation, the CEO suggests that they |

| |sell a portion of the land and buildings at a profit of R500 000. |

| |The CEO has no right to sell off the business assets in order to boost revenue. Appropriate authorisation procedures |

| |for this must be put in place. The sale of assets will mean that the size of the business and its income-earning |

| |capacity will decrease in future. If approved, the sale of these assets must be reported in the financial statements. |

|4 |The CEO feels that the profits are too high and income tax will be too high. He tells you to change the stock valuation|

| |method from FIFO to LIFO. |

| |This is dishonest and creates a misleading impression. The financial statements for the past two years will not be |

| |comparable. Using LIFO will usually mean that the stock will be under-valued, hence the gross profit will be |

| |understated. |

2.2.6 Examples of unethical conduct (10 minutes)

The activities above covered one type of fraud – Accounting fraud. Compile a list of other types of fraud, dishonesty or immoral conduct that might be encountered in a disreputable business. Try to provide 10 examples of the type of offence, and the stakeholders who will be affected in each case.

|Offence |Stakeholders affected |

|Theft |Owners |

|Bribery |Competitors |

|Environmental abuse |Community |

|Racism |Employees or customers |

|Employing illegal immigrants |Employees |

|Price-fixing or over-charging |Customers |

|Insider trading (using confidential info for self-gain) |Other owners or shareholders |

|Industrial espionage |Competitors |

|Sexual harassment |Employees |

|Trading in illegal goods |All – reputation of the business |

|Discriminatory wage practices |Employees |

|Misleading advertising |Customers |

|Not paying over VAT |SARS |

| | |

2.2.7 Integration of ethical topics (20 minutes)

Matters relating to business ethics and corporate governance can be incorporated into almost every aspect of the study of Accounting. You have compiled your work schedule for Grade 11 which contains the main topics listed in the table below. List ways in which you can integrate ethical topics in each of the main topics listed in the table.

| |Main topics : |Ways to integrate ethical topics: |

|1 |Cash transactions & bank reconciliations |Theft of cash identified when doing a bank reconciliation e.g. receipts|

| | |do not agree with deposit slips |

| | |‘Rolling’ of cash – in order to defraud |

|2 |Fixed assets & asset disposal |Unauthorized use of fixed assets / count of fixed assets dos not agree |

| | |with fixed asset register / old plant used in factory – not safe or |

| | |creates pollution |

|3 |Partnerships |One partner does not work as hard as the other / one partner takes too |

| | |much advantage of drawings |

|4 |Clubs |The treasurer compiles incorrect R&P statements to hide theft of cash /|

| | |members pay high fees to make up for inefficiency of committee |

|5 |Budgets and manufacturing costs |Wage increases for workers are budgeted at the same increase as that |

| | |for managers or directors / opting for cheaper but inferior raw |

| | |materials for greater profit |

|6 |Inventory systems & stock valuations |Minimizing opportunities for theft / incorrect stock valuations will |

| | |affect profit |

|7 |VAT |Failure to pay over VAT is an offence / Charging VAT on exempt items is|

| | |fraudulent |

2.2.8 The King code & business codes of ethics (10 minutes)

Read the following information:

There have been many cases reported in the media relating to fraud and poor management of companies. High profile international cases concerned companies such as Enron, Worldcom and Parmalat, while in South Africa some examples include Leisurenet, Beige and Saambou.

The South African government has been pro-active by appointing a respected judge, Mervyn King, to set up the King Commission to devise recommendations to avoid poor corporate practice in future. The King Commission has issued two reports to date, the second of which covered a Code of Corporate Practices and Conduct, referred to as the King Code.

The Code covers all aspects of good governance including accountability, transparency and responsible management. Although the King Code focuses on companies, it is common sense that these principles should also apply to all types of businesses. Such has been the positive response to the recommendations of the King Commission, it is reasonable to expect that these could find their way to the law-books in future. Teachers are advised to monitor press releases in order to keep up to date with these matters.

It is now becoming common practice for businesses to compile their own codes of business practice which are aligned to their mission statements. These codes of business practice will give guidance to all members of the organisation in dealing with stakeholders and the wider community. Any business which does not have a harmonious relationship with the outside world is likely to find that it will not be able to sustain itself into the future.

Teachers are also advised to get copies of codes of various businesses in order to critique these with their learners in the classroom. These codes are usually available in brochure form or on their websites.

a. A code of ethics for a business (5 minutes)

Read the following information:

People in business are not always trustworthy. When you asked them when are they going to pay their account you know they will say the familiar words: “The cheque is in the post.” Although business people know the right way of doing business they will be dishonest or be silent about information that can have a negative influence on their business. We use words like fairness, reasonable, thoroughly and decently to describe a person’s conduct during negotiations of deal. We know what is the right conduct and behaviour but we sometimes bend it to make the deal. This is the reason why businesses have rules how to behave for their staff – Code of ethics. Ethics are a set of ideals, which may take the form of rules of conduct that provide the distinction between right and wrong behaviour. (The principles and practice of auditing, Puttick, Van Esch, 1963, p 29)`

Every profession has a code of ethics. In this code of ethics the employee of this profession recognizes his/her responsibilities to the public, to clients, to colleagues and to employers. The purpose of a code of ethics is to guide employees in performing professional services.

2.2.10 Basic principles for business ethics (15 minutes)

Briefly describe each of the following basic principles which should be reflected in a code of ethics. You may add further principles if you wish.

|1 |Accountability |To be responsible for your decisions and actions and to be able to explain them when |

| | |called to account. In other words you have an obligation to give an account. In a |

| | |company the directors are for example accountable to the shareholders and should |

| | |therefore provide an annual report and accounts. |

|2 |Transparency |Making decisions or taking action in and open manner. Not having a hidden agenda. |

|3 |Integrity |Integrity demands honesty and frankness, in other words professional services are |

| | |offered and provided with honesty and being straightforward. As an accountant one is|

| | |placed in a position of trust and confidence and the source of this trust is one’s |

| | |personal integrity. When deciding what is right and just, one should rely on one’s |

| | |personal integrity and never act out of personal gain or advantage. Therefore |

| | |integrity can never co-exist with deceit or subordination of one’s principles. It |

| | |also refers to the receipt of gifts |

|4 |Objectivity |Objectivity demands intellectual honesty and impartiality. The aim of the rules and |

| | |regulations required to achieve objectivity is that users should be able to compare |

| | |financial statements for different companies over a period of time with confidence |

| | |that the statements have been prepared on the same basis. Services delivered should |

| | |be free of conflicting interest, prejudice and bias. |

|5 |Competence |Competency means that the Accountant should possess the necessary knowledge and skill|

| | |to provide expert service in an accounting environment. To be competent, one should |

| | |possess an adequate level of knowledge and skill and be able to apply that knowledge |

| | |effectively. It also implies that one should admit limitations and know when to |

| | |refer a client for supervision or to seek technical advice. To stay competent and |

| | |informed the Accountant should engage in lifelong learning and professional |

| | |improvement and education. |

|6 |Fairness |Fairness requires impartiality and intellectual honesty. Professional services |

| | |provided are to be fair and reasonable to all parties involved and disclose any |

| | |conflict of interest. Personal feelings, prejudices and desires are subordinate to |

| | |business or client interest. |

|7 |Confidentiality |Confidentiality is based on a relationship of trust. Information revealed to the |

| | |accountant is to be treated confidential to protect the client’s privacy. |

| | |Confidentiality means that no confidential client information without the specific |

| | |consent of the client may be disclosed unless in the case of a legal process, in |

| | |defense against charges of wrongdoing by the accountant or in connection with a civil|

| | |dispute between the accountant and the client. |

|8 |Professionalism |Professionalism means to act with dignity and courtesy to every one, one comes into |

| | |contact, also those in related professions. In the accounting environment an |

| | |employee has an obligation to cooperate with fellow financial members in order to |

| | |enhance and maintain the public image of the profession, and to work together in |

| | |order to improve the quality of services rendered and never act in a way that may |

| | |bring discredit to the profession. |

|9 |Diligence |Diligence means to provide services in a prompt and thorough manner. It also |

| | |includes proper planning for rendering professional services. The code of ethics of a|

| | |business will enable the staff to know what the values and convictions of the |

| | |managers are. The advantage of a code of ethics is that is explained to the employees|

| | |what is acceptable and unacceptable conduct. It also assists employees to take |

| | |decisions when they are exposed to ethical situations. |

|10 |Service delivery |Being able to serve customers or clients at the level of excellence expected by them.|

2.2.11 Stakeholders and codes of ethics (15 minutes)

Consider the following stakeholders of a typical business. List points that each of them would like to see written in the code of ethics of that business.

| |Stakeholders |Points they would like to see |

|1 |Owners |Good reputation of the business, sustainability into the future |

|2 |Employees |Good working conditions, fair wage determination |

|3 |Customers |Efficiency, friendly atmosphere, good after-sales service |

|4 |Suppliers |Loyalty to suppliers, prompt payment |

|5 |Lenders |Prompt re-payment, loyalty to the lending institution, security of funds |

| | |loaned |

|6 |Local community |Social support, job opportunities, support of local initiatives, concern |

| | |for the environment |

|7 |Government organisations e.g. SARS |Compliance with the law, prompt settlement of amounts due |

2.2.12 Internal control & internal audits (5 minutes)

Read the following information:

All members of business organizations are accountable to the various stakeholders. Their interaction with them should be honourable and transparent. For example, the directors of a company are appointed at an AGM by the shareholders who expect them to work towards achieving the objectives and aims of the company. The directors are therefore responsible for ensuring that the necessary controls are applied in a company in order to achieve those objectives.

The directors and the owners rely on the financial statements to make decisions. Consequently, it is vital that the financial statements are reliable. The internal controls also serve to ensure that the financial information is accurate.

Because the directors cannot observe every activity in their organization every minute of the day, they might well employ one or more internal auditors who will continuously assess and check whether the necessary internal controls are being applied, in order to minimize the opportunity for any unethical conduct such as theft or fraud, and to minimize errors and omissions in the financial information. Because the internal auditors will be dealing mainly with financial information, they are usually required to have a qualification such as a CA (SA), CPA, MBA or B Com.

The internal controls that are set up will incorporate procedures such as:

• Proper authorization of transactions

• Accurate documentation

• Proper recording procedures

• Safeguarding of records and restricted access

• Division of duties (so that one employee serves as a check on another)

• Proper management of resources (including human resources)

2.2.13 Possibilities for fraud (15 minutes)

Consider the following scenarios. Explain how the individual/s concerned could defraud the business, and what you should do to prevent the individual from perpetrating the fraud:

| |Scenario |Ways of defrauding |Ways to prevent fraud |

|1 |Mrs Jones controls the invoices, |She could pocket cash from debtors and |Divide these duties with another employee.|

| |the credit notes and the |cover this up by issuing a credit note for|Mrs Jones must not control receipts and |

| |receipts. |an allowance |credit notes. Spot checks of documents and|

| | | |cash on hand by a senior employee. |

|2 |Mr Peters orders and receives |He could order goods at a high price from |Divide these duties with another employee.|

| |goods, returns defective goods, |a friend and then get a personal monetary |Mr Peters must not order goods and make |

| |writes up the CJ, CAJ and CL, he |kick-back from the friend. |payments. Regular checks of documents and |

| |issues the cheques and he | |journals and stock counts overseen by a |

| |controls the stock. | |senior employee. |

|3 |Mr Mzolo employs the casual |He could draw wages for fictitious |Divide these duties with another employee.|

| |workers, checks their daily |employees. |Mr Mzolo must not control the workers and |

| |attendance, and packages and pays| |pay the wages. Spot checks of wages |

| |their weekly wages. | |journals and head counts by a senior |

| | | |employee. |

|4 |Mrs Naidoo calculates salaries |She could calculate wages for fictitious |Divide these duties with another employee.|

| |and deductions each month and |employees. |Mrs Naidoo must not calculate the salaries|

| |ensures that direct transfers are| |and make the transfers. Spot checks of |

| |made to settle these. | |salaries journals and head counts by a |

| | | |senior employee. |

|5 |Mr Smith controls all fixed |He could take fixed assets for personal |Physical counts overseen by senior |

| |assets, he attends to repairs, |use, or he could sell unused assets and |employee and regular check of fixed assets|

| |and he does the physical counts |pocket the proceeds. |register. |

| |at the end of each month. | | |

b. Procedures for internal auditors (15 minutes)

You have been appointed as the internal auditor of Ace Sports Ltd. Briefly list the procedures for internal control that you would like to see in this business with regard to:

| |Control of: |Procedures for internal control: |

|1 |Fixed assets |Division of duties. Fixed assets register. Regular counts. |

|2 |Receipts |Division of duties. Receipts and cash slips agreed to deposit slips. Physical security of|

| | |cash till. Regular surprise counts of cash. |

|3 |Payments |Division of duties. Proper authorization of payments. Two signatures on each cheque. All |

| | |payments supported by proper vouchers. |

|4 |Stock |Division of duties. Regular stock counts agreed to ledger account to identify deficits or|

| | |surpluses. |

|5 |Petty cash |Division of duties. Regular surprise counts. All payments supported by proper vouchers. |

|6 |Debtors |Division of duties. Proper authorization of credit notes or GJ entries. Price codes to |

| | |prevent under-charging. |

|7 |Creditors |Division of duties. Proper authorization of purchases and payments. Proper documentation.|

|8 |Salaries |Division of duties. Employment contracts in place. Clock card system for wage earners. |

| | |Head-counts. Salary review committee / Remuneration committee for public companies. |

c. Integration of internal control aspects (10 minutes)

Brainstorm ideas of how to incorporate internal control issues:

1. Across all LO’s and AS’s

2. To cater for multiple intelligences

| |

|Use internal control or fraud as the issue to provoke reaction from learners – thereafter use the documents and the entries in|

|the books in order to apply these as strategies to prevent the problem |

|Learners discuss scenarios of problems and present solutions to the class |

|Learners research fraud problems in the media or on the Internet |

|Obtain audit checking procedures from a local firm of accountants and critique these with learners |

| |

Worksheet 3 Inventory Valuations & Validations

3.1 Inventory Valuation Methods

Possible solution

Part A: FIFO METHOD

Opening stock

= 10 pens x R30 = R300

Bought on 30 April 2005

= (100 pens x R32= R3200) + R140 = R3340 i.e. landed cost R33,40 each

Bought on 31 August 2005

= (180 pens x R36=R6480) + R340 = R6820 i.e. landed cost R37,89 each

Bought on 31 January 2006

= (200 pens x R41=R8200) + R500 = R8700 i.e. landed cost R43,50 each

|Stock value for the 230 pens on hand at the year-end. |R9 836,70 |

|200 at R43,50 each = R8700,00 | |

|30 at R37,89 each = R1136,70 | |

|Calculate cost of sales. |R9 323,50 |

|10 at R30 each = R300,00 | |

|100 at R33,40 = R3340,00 | |

|150 at R37,89 = R5683,50 | |

|Calculate the gross profit. |R3 676,50 |

|Sales = 260 at R50 each = R13000 | |

|COS = R9323,50 | |

|Calculate the mark-up % for the year. |39,4% |

|3676,50 / 9323,50 x 100 | |

|Draft the Trading Account using the periodic inventory system. |20 cents out due to |

|TRADING ACCOUNT |rounding off? |

|Opening stock 300,00 Sales 13000,00 | |

|Purchases 17880,00 Closing stock 9836,70 | |

|Carriage on purchases 980.00 | |

|Profit & loss 3676,70 | |

|22836,70 22836,70 | |

|Draft the Trading Account using the perpetual inventory system. | |

|TRADING ACCOUNT | |

|Cost of sales 9323,50 Sales 13000,00 | |

|Profit & loss 3676,50 | |

|13000,00 13 000,00 | |

Possible solution

Part B: WEIGHTED AVERAGE METHOD

Opening stock

= 10 pens x R30 = R300 (NB: This is the weighted average)

Bought on 30 April 2005

= (100 pens x R32= R3200) + R140 = R3340 i.e. landed cost R33,40 each

Bought on 31 August 2005

= (180 pens x R36=R6480) + R340 = R6820 i.e. landed cost R37,89 each

Bought on 31 January 2006

= (200 pens x R41=R8200) + R500 = R8700 i.e. landed cost R43,50 each

|Total value of goods available for sale |

|490 pens at a total landed cost of R19160 = R39,10 each |

|Stock value for the 230 pens on hand at the year-end. |R8993,00 |

|230 at R39,10 each | |

|Calculate cost of sales. |R10166,00 |

|260 at R39,10 each | |

|Calculate the gross profit. |R2834,00 |

|Sales = 260 at R50 each = R13000 | |

|COS = R10166 | |

|Calculate the mark-up % for the year. |27,9% |

|2834 / 10166 x 100 | |

|Draft the Trading Account using the periodic inventory system. |R1,00 out due to |

|TRADING ACCOUNT |rounding off? |

|Opening stock 300,00 Sales 13000,00 | |

|Purchases 17880,00 Closing stock 8993,00 | |

|Carriage on purchases 980.00 | |

|Profit & loss 2833,00 | |

|21993,00 21993,00 | |

|Draft the Trading Account using the perpetual inventory system. | |

|TRADING ACCOUNT | |

|Cost of sales 10166,00 Sales 13000,00 | |

|Profit & loss 2834,00 | |

|13000,00 13 000,00 | |

3.3 COMPARISON OF THE TWO STOCK VALUATION METHODS

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WORKSHEET 4

PUBLISHED FINANCIAL STATEMENTS OF COMPANIES

4.1 INSPECTION OF AN ANNUAL REPORT (20 minutes)

Procedure:

• Refer to the annual report of a public company given to you.

• List the aspects of the annual report which Grade 12 learners will be able to read and interpret.

• Note the aspects of the annual report which Grade 12 learners will probably not find accessible, and how these should be addressed in the classroom.

|Aspects of published reports that Grade 12 learners will find accessible |

| |

|Income Statement, Balance Sheet, Cash Flow Statement, Certain financial indicators, Directors’ Report in narrative form |

| |

|Possibly: Changes in equity, audit report |

| |

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| |

|Aspects of published reports that Grade 12 learners will not find accessible and how this should be addressed in the classroom|

| |

|Different categories of shares – either brief explanation, or independent research |

| |

| |

4.2 COMPONENTS OF THE AUDIT REPORT (20 minutes)

“Audio” = To hear – The term ‘auditor’ originated from the practice of giving verbal explanations to the people checking the financial results.

Components of the Audit Report – every word is very carefully chosen. Consider why this is so.

|To the shareholders addressed to them – they appoint the auditor at the AGM |

|We have examined indicates their duty |

|Pages ..to ..limitation of their role |

|Test basis limitation of their role |

|In our opinion limitation of their liability |

|Fairly present not biased towards any particular group of readers |

|State of affairs i.e. the Balance Sheet |

|Results of operations i.e. the Inc Stmt & Cash Flow Stmt |

|Companies Act in accordance with law – complies with requirements on disclosable items |

4.3 INSPECTION OF ABBREVIATED VERSIONS IN NEWSPAPERS (15 minutes)

Procedure:

• Refer to the abbreviated versions of company reports given to you.

• List the aspects of the annual report which Grade 12 learners will be able to read and interpret.

• Note the aspects of the annual report which Grade 12 learners will probably not find accessible, and how these should be addressed in the classroom.

|Aspects of these versions that Grade 12 learners will find accessible |

| |

|Income Statement, Balance Sheet, Cash Flow Statement, Certain financial indicators, Directors’ Report in narrative form |

| |

|Possibly: Changes in equity, audit report |

| |

|Also: These versions are usually accompanied by an article in the press from a financial journalist highlighting the major |

|points |

|Aspects of these versions that Grade 12 learners will not find accessible and how this should be addressed in the classroom |

| |

|Different categories of shares – either brief explanation, or independent research |

4.4 ROLES PLAYED BY DIRECTORS, SHAREHOLDERS & THE INDEPENDENT AUDITORS (15 minutes)

Three main stakeholders interact directly with the published annual financial statements of a public company. Summarise the role played by each.

|Role played by Directors with regard to the published financial statements |

| |

|Directors must ensure that the f/s are compiled and published timeously and that they comply with the requirements of the Companies Act. |

|It is their duty to ensure that fraud has not occurred. |

|Role played by Shareholders with regard to the published financial statements |

| |

|The shareholders must study the published financial statements and they have a duty to query unsatisfactory aspects at the AGM. They can |

|vote for new directors if they are unhappy with the performance of the company. They can appoint a new auditor if they are unhappy with |

|the job done by the incumbent auditor. |

|Role played by Auditors with regard to the published financial statements |

| |

|Due care to be taken in inspecting the records and expressing an opinion. They earn an audit fee for this role. Test basis only in |

|checking the financial records, but must extend the tests if not satisfied. Detection of fraud is not their primary responsibility. Must |

|alert shareholders to any irregularity they might encounter. Must comply with the code of conduct of their professional body. |

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