Factors affecting ROM

Question 1

Answer 1

Question 2

Answer 2

Group Accounting
If accounts are consolidated, group
statements may be misstated due to:
- Transfer Pricing
- Intercompany transactions
- Different accounting policies

Question 3

Business risks increasing ROMM
isa 315 A63

Answer 3

Question 4

Answer 4

Question 5

Question 6

Revenue - Completeness, Occurrence, Accuracy

Answer 6

• Dependence on IT system increases
  the risk of errors
• Dependence on outsourcers increases
  the risk of errors.
• Risk that cash transactions are not
  record (related to Misappropriation of
  Funds)
• Risk that revenue is calculated
  incorrectly, due to complex nature.
• Revenue may not be recognised at fair
  value due to present value or related
  parties

Question 7

Inventory;
Existence:

Answer 7

• Inventories stored in different
  locations dispersed throughout the
  country may result in inventory being
  double counted
• Inventories on consignment may be
  double counted/incorrectly included
• Stolen goods included

Question 8

Inventory - Rights and obligation

Answer 8

• Inventories stored in different
  locations dispersed throughout the
  country may result in inventory being
  double counted
• Inventories on consignment may be
  double counted/incorrectly included
• Stolen goods included

Question 9

Completeness/ Cut-Off

Answer 9

• Items on consignment may not be
  included
• Items ordered may be recognised in
  the wrong period
• Goods in different locations may not
  be included

Question 10

Accuracy:

Answer 10

Imports need to be at spot
- May not include transport and
customs duty costs
- Manufactures may misallocate costs
to finished products or work in
progress

Question 11

Valuation:

Answer 11

• May be damaged-inventory on
  consignment
• May be obsolete due to technical or
  specialised nature
• NRV may be lower than cost especially
  for perishable goods.

Question 12

Accounts Receivable:

Answer 12

Existence:
- Fictitious debtors may be included
- Duplicate debtors may be included
Rights and Ownership:
- Debtors may have been factored
Completeness/Cut-off:
- Debtors may not have been recorded
and included in year-end balance
- Debtors may be included in incorrect
period
Valuation and Accuracy:
- Accounts receivable may not be at
present value
- Incorrect calculation of amounts owed
- Inclusion of amounts that will not be
received (Bad-Debts not written-off)
- Understatement of allowances for
doubtful debts. (Estimates or
Assumptions inappropriate

Question 13

InterCompany transaction

Uhesa prepares consolidated financial statements and the risk exists that consolidation
errors (in terms of the accounting standards etc.) are made, such as:

Intercompany balances and transactions are not eliminated / correctly accounted for
(consolidation risk).

Intercompany transactions are not identified/ disclosed

Intercompany transactions not at arm’s length

Answer 13

The risk that the going concern basis of accounting, used in the preparation of the
financial statements, may have been inappropriately applied, because of the :

A drop in reserves / incurring of a loss during 2016, as a result of increased costs
which were not matched by a corresponding increase in revenue (from fees and
government subsidies). Moreover, this situation is likely to persist for at least the near
future.

Even though the university incurred a loss of +/- R215 million in FY2016, this does not
appear to take into account:

• the possible R58 million overstatement of government subsidies; and
• the cost of repairing damages to property should the insurer repudiate the claim.
• The increase in operating costs (maintenance and security).

Further future cost increases are also likely should the outsourced workers eventually
have to be insourced (as has been the case at a number of other public universities).

The low staff morale will result in it being difficult to ‘remedy’ the situation in the near
future (e.g. revenue from research outputs is likely to remain low and will be difficult to increase).

The negative cash flows experienced for FY2016 – which are likely to persist for at least
FY2017 as well.

The state of the economy will put further pressure on the recovery of the debtors’
book, as parents who are unable to pay their children’s fees will put further pressure
on cash flows going forward.

Debtors have increased significantly ,with 50% of the debtors book provided for the
past two years;

Large write-off of outstanding student fees expected will increase the risk of the going
concern assumption being incorrect.

A decline in student numbers with the consequential negative effect on fees /
government subsidies / profits / cash flows going forward due to

negative publicity resulting from protests and damage to university property (failure
to attract appropriate students);

private higher education providers attracting students away from Uhesa; and

highly respected academics leaving the university – which will undermine the
credibility / marketability of the university’s programmes/ Difficulty in providing
high quality programs

Question 14

Academic and other staff leaving university employment:
* resulting in termination of employment payments, such as pension fund and
accumulated leave, that will put further strain on cash flows;

Answer 14

Student protests and violence could result in litigation against the university which may
have a further negative impact on the profitability and cash flows of the university.

Question 15

There are some concerns regarding the institutional risk register which could cast doubt
on the effectiveness of the institution’s risk management system and ultimately the
control environment

application

The 3 large risks make no mention of the financial sustainability of the university, which
under the present circumstances is a significant risk.

Answer 15

Management has an incentive to misstate the financial position/override controls of the university to reflect a more negative view than what is actually the case, in order to
obtain more grant money from government thus the risk of fraud is increased.

Question 16

The alleged instruction from Dr Brown to write off in excess of R1.5 million in student
debt owed by students in contravention of the credit control policy of the university
could cast doubt on the integrity of management which in turn could negatively affect
the control environment within the institution, creating a fraud risk.

Answer 16

Incorrect calculation of the subsidy can cast doubt on either the integrity or competence
of Dr Brown, which could negatively affect the control environment, creating a fraud risk
or risk of error.

Question 17

The implementation of an aggressive performance management system linked to
bonuses creates an incentive for employees of the commercial entities to misstate the
financial statements in order to meet performance targets

Answer 17

Currently the accountant wants to record the damage to university property and related
insurance claim incorrectly. This increase the risk due to error as it seems the accountant
may not have the competence to account for transactions correctly.

Question 17

The university uses a TIS Computer system. No visible audit trail and therefore it may be
difficult to detect and correct errors due to the automated nature of the system

Answer 17

Increased risk of a weak control environment and errors and or fraud resulting from:

• No prospects of future salary increase could negatively impact the control
  environment.
• the previous experienced head was removed (or resigned), errors may occur (not
  detected by the system of review) due to her not having the needed experience
  yet

Question 18

The following factors decrease the risk of material misstatement at the overall financial
statement level:

Answer 18

‘world-class, internationally recognized
qualifications’ – assisting in tapping into new markets and revenue stream

Question 19

As a publicly funded university, the government is likely to step in to help out the
university at some point in the future, if necessary;

Answer 19

The university resolved to implement a number of ‘mitigating factors’ to ensure that the
university remains a going concern (at the November 2016 Council meeting).

Question 20

The company is an established institution with a 12 year proven record, which has
experienced phenomenal growth and success since its creation

Answer 20

If the claim for R53m succeeds it would relief pressure on cash flows

Question 21

The strong payment terms (60 days) ;interest on overdue accounts and withholding
exam results in case of non-payment may result in an increase in student fee payments.

Answer 21

Investment property that is sold may relief pressure on cash flows.

Question 22

The additional procedures and security checks may decrease the possibility of future
unrest, damages and losses

Answer 22

The Council is committed to sound corporate governance throughout all university
structures, which will minimize the risk that fraud will cause material misstatements in
the AFS

Question 23

The Audit and Risk Committee comprises of CAs (SA), so appears to have competent
individuals serving thereon, which will provide effective oversight over the financial
statements – increasing the likelihood that they will present fairly in terms of IFRS;

Answer 23

There appears to be a strong focus on risk management and internal control, and an
effective internal audit function. This will provide for a strong control environment and
reduce the risk that material misstatements will occur, or if they do occur that they will
be detected and corrected

Question 24

Overall risk of material misstatement at overall financial statement level is assessed as HIGH

Answer 24

effect that each of the actions taken by the Council on ROMM of Revenue The decision that there will be no salary increases for any staff member for the next two years will potentially increase our assessment of the risk of material misstatement regarding all the assertions related to revenue – as it could affect the morale of staff / lead to resignations of competent staff in the accounting departments leading to errors or fraud. This decision will only affect the transactions recorded in the last month or two of FY2016, as the decision was taken in November 2016. This will reduce the resulting risk that material misstatements will arise.

Question 25

The implementation of an aggressive performance management system linked to bonuses for employees of the commercial entities will increase our assessment of the risk of material misstatement regarding occurrence of revenue as it creates an incentive for staff to overstate revenue in order to meet performance targets (e.g. potential for early cut-off of research contracts to meet targets).

Answer 25

This decision, will increase our assessment of the risk of material misstatement regarding completeness of revenue as: as it creates an incentive to understate tuition fees in order to motivate additional grants being sought from the government. research output can be manipulate/overstated for additional grants; delay of research contract revenue; etc

Question 26

This decision will increase our assessment of the risk of material misstatement regarding occurrence / cut-off of revenue as: the amounts could be incorrectly recognised as revenue and not an accrual / fees received in advance until the service is delivered.

Answer 26

The revenue could incorrectly be recorded gross of the 25% discount resulting in overstated revenue (accuracy of revenue incorrect); and incorrect presentation of it. As the scheme is only being implemented in the last month or two of the financial year, the risk of material misstatement due to the scheme may be reduced, as it is unlikely that a large amount of upfront payments would have been made in the period before 31/12/2016.

Question 26

Repair and maintenance activities would be cut back by 50% to save costs This will have no effect on the assessment of the risk of material misstatement for revenue.

Answer 26

This will increase our assessment of the risk of material misstatement regarding: classification/accuracy/presentation as this revenue should not be classified as tuition fees (Normal Revenue), but Profit from sale of Investment Properties (presented under “other income” with a corresponding disclosure) and could be calculated incorrectly due to this being a transaction that does not occur regularly and the accounting staff may not know how to account for it