Navigating the Transition: Accounting Policies in Financial Statements Amidst IAS 1 Amendments

The preparation of financial statements is a crucial aspect of financial reporting, offering stakeholders a clear narrative of an entity’s financial health and performance. Central to this process is the disclosure of accounting policies, which provides context to the figures presented. Significant changes were made to the International Accounting Standard IAS 1, which now requires entities to disclose “material accounting policy information” instead of “significant accounting policies.” This change, effective for annual reporting periods beginning on or after 1 January 2023, marks a pivotal shift in how accounting policies are communicated in financial statements. We have however noticed, that preparers of financial statements are still hesitant to update the accounting policies to effect this change and rather still disclose the previous year accounting policies and did not make any adjustments to incorporate this change.

Understanding Material Accounting Policy Information

The amendments to IAS 1 underline the importance of disclosing material accounting policy information, which can significantly influence users’ understanding of the financial statements. Material accounting policy information is crucial if, without it, users would struggle to comprehend other material information in the financial statements.

Conversely, the standard also clarifies that immaterial accounting policy information need not be disclosed. However, if disclosed, it should not obscure material information, ensuring that the focus remains on what is truly important for the users.

To further support these amendments, the International Accounting Standards Board (IASB) also updated IFRS Practice Statement 2, “Making Materiality Judgements”, providing detailed guidance on applying the concept of materiality to accounting policy disclosures. This guidance is instrumental in helping entities assess which information is truly material.

Key Areas of Focus in Practice Statement 2

IFRS Practice Statement 2 offers valuable insights into the concept of materiality, particularly in the context of accounting policy disclosures. Four key areas are highlighted:

  1. Materiality Definition: Information is considered material if omitting, misstating, or obscuring it could reasonably be expected to influence decisions made by the primary users of financial statements. Materiality is entity-specific, based on the nature or magnitude of the items in the context of the entity’s financial statements.
  2. Primary Users: Primary users of financial statements are assumed to have a reasonable knowledge of business and economic activities. They include existing and potential investors, lenders, and creditors. Entities must consider whether these users need the disclosed information to understand other material aspects of the financial statements.
  3. Qualitative and Quantitative Factors: In determining materiality, entities must consider both qualitative and quantitative factors. This assessment is critical in ensuring that the disclosed accounting policy information is relevant and useful.
  4. Entity-Specific Information: One of the most challenging aspects of applying the new requirements is ensuring that accounting policy information is specific to the reporting the preparers, who must tailor the information to reflect the entity’s unique circumstances.

Practical Implications of the Changes

The shift from significant to material accounting policy information requires a careful reassessment of the content and structure of accounting policy disclosures. Entities must ensure that their disclosures are tailored to their specific circumstances, avoiding boilerplate or generic statements that do not add value for users.

The key to success in this transition lies in the principles applied during the revision process. These principles include:

  • Compliance with IFRS: Ensuring that required disclosures are included.
  • Relevance: Avoiding unnecessary disclosures that do not apply to the entity’s specific transactions or events.
  • Avoidance of Duplication: Preventing the repetition of information within the accounting policies.
  • Clarity and Judgment: Making complex or judgmental areas of accounting policy clear and understandable.

Conclusion

The amendments to IAS 1 represent a significant shift in the approach to accounting policy disclosures, moving towards a more focused and materiality-driven approach. Adapting to these changes is not just about compliance, but about improving the clarity and relevance of the financial information provided to stakeholders. By focusing on disclosing material accounting policy information, entities can offer users deeper insights into their financial statements, improving overall transparency.

As we move into new reporting periods, it’s crucial for preparers of financial statements to revisit their disclosures and make the necessary adjustments to align with the updated IAS 1 requirements. Don’t fall behind in meeting these new standards – review your accounting policies to ensure they meet the expectations of your users and the evolving regulatory landscape.

Embracing the Future: IAASB’s Move to a Technology-Encouraging Position and What It Means for Assurance and Audit

Embracing the Future: IAASB’s Move to a Technology-Encouraging Position and What It Means for Assurance and Audit

As a product executive at Caseware, I’m excited to share that the International Auditing and Assurance Standards Board (IAASB) has recently transitioned from a technology-neutral stance to a technology-encouraging position. This shift is monumental for our industry, and it’s incredibly relevant for software providers like us at Caseware. The IAASB’s new approach promises to foster innovation, create efficiencies, and ultimately elevate the quality of audit and assurance engagements worldwide.

IAASB’s New Technology Position: A Milestone for Auditing Standards

The IAASB’s decision to actively encourage technology represents a bold leap forward. By moving away from a neutral stance, the organisation acknowledges that technology is no longer an optional tool; it’s an integral part of effective and efficient audit practices. With this new position, the IAASB has demonstrated its commitment to making standards more adaptable, relevant, and beneficial in our increasingly digital landscape. The IAASB has outlined eight key actions that will guide the integration of technology into audit and assurance practices:
  1. Embrace Technology-Driven Innovations: Support and encourage the adoption of innovative technologies.
  2. Remove Barriers in Standards: Identify and address real or perceived obstacles that may limit the use of technology in audit engagements.
  3. Introduce Technology-Specific Requirements and Guidance: Develop guidelines on incorporating technology into audit engagements effectively.
  4. Consider Technology Used by Reporting Entities: Address the influence of clients’ technology systems on the audit process.
  5. Balance Technology’s Opportunities and Risks: Emphasize both the advantages and the potential risks associated with technology.
  6. Align with Ethical Principles: Ensure that technology use adheres to ethical standards in auditing.
  7. Focus on Scalability and Proportionality: Make technology integration adaptable to firms of all sizes and scales.
  8. Foster Stakeholder Engagement: Facilitate ongoing discussions with industry players, regulators, and software providers.
Each of these actions has the potential to transform how practitioners and organisations like Caseware design and implement technology-driven solutions for the industry.

Analytics and AI: The New Frontiers in Assurance

One of the most exciting aspects of the IAASB’s position is the encouragement of advanced analytics and AI within assurance engagements. AI and analytics have the potential to make audits more insightful, accurate, and reliable. This new support from the IAASB not only paves the way for more robust AI integration but also positions AI as an aid in enhancing auditor judgment, providing new insights, and improving audit quality. At Caseware, we’ve already begun exploring how analytics and AI can be seamlessly incorporated into our solutions to add value across assurance processes. From automating routine tasks to identifying trends and anomalies that might be missed by manual processes, the potential benefits of these tools are immense.

Looking Ahead: Opportunities for Client Collaboration

The IAASB’s technology-friendly stance will likely become a key talking point in future discussions with our clients. As technology reshapes the audit landscape, it’s crucial for our clients to understand both the advantages and the implementation process for these new tools. These evolving standards also give us a unique opportunity to collaborate with clients, share insights, and guide them on how to adapt to the rapidly changing regulatory and technological environment. To stay updated on the IAASB’s actions, including further developments in technology standards, visit the project overview here. We encourage everyone to stay informed and engaged, as this shift represents not only a regulatory evolution but a shared commitment to quality and innovation across the audit profession.

Closing Thoughts

The IAASB’s new position is a promising development for the assurance industry, and we are proud to be at the forefront of this transformation. At Caseware, we are committed to helping our clients navigate these changes, leverage advanced tools, and continue delivering high-quality audit and assurance services. This shift to a technology-encouraging framework aligns perfectly with Caseware’s vision of a future where technology supports smarter, faster, and more impactful audits. We look forward to embracing this journey together with our clients, partners, and industry colleagues.

Mastering the Annual Financial Statement Process: Best Practices and Execution Strategies for Corporate Firms

When it comes to corporate governance and financial disclosure, preparing and executing annual financial statements are crucial milestones for any company, especially in South Africa, where statutory adherence and transparency are paramount. This article explores best practices in preparing these statements, considering South Africa’s regulatory landscape and addressing relevant issues from recent reports.

Understanding Regulatory Requirements in South Africa

South Africa’s regulatory framework for financial disclosure is governed primarily by the Companies Act, 2008 (Act No. 71 of 2008), and regulatory authorities such as the Companies and Intellectual Property Commission (CIPC). The IFRS Accounting Standards or IFRS for SMEs Accounting Standard adopted by the country ensure consistency, comparability, and transparency in financial disclosure across all entities.

Best Practices in Preparation of Annual Financial Statements

Early Planning and Preparation:

  • Establish a timeline for the preparation process, ensuring adequate time for gathering financial data, reconciliations, and reviews.
  • Facilitate the installation of the latest Caseware Working Papers and relevant templates, ensuring the appropriate number of licenses are available to the team.
  • Assign responsibilities to qualified personnel who understand the appropriate regulatory requirements and accounting standards.
  • Coordinate Caseware training for any new staff members.

Compliance with Accounting Standards:

  • Adhere strictly to the IFRS Accounting Standards or IFRS for SMEs Accounting Standard when preparing financial statements.

Prepare the Caseware Working Paper file as follows:

  • Initiate a roll forward of the file.
  • Run an update and read the release notes to understand the compliance changes available in the latest template.
  • Map the trial balance to obtain insights on additional disclosures required for the current year.
  • Maintain consistency in the application of accounting policies and disclosures across reporting periods where compliance changes are required.

Transparency and Disclosure:

  • Provide clear and comprehensive disclosures on material accounting policies, estimates, and judgments made in the preparation of financial statements.
  • Provide detailed working papers for calculations (e.g., Cashflow worksheet), along with lead sheets available in Caseware Working Papers to help users understand the underlying balances.

Quality Assurance and Review:

  • Conduct internal reviews and quality assurance checks to identify and rectify errors or inconsistencies.
  • Seek external audit advice or peer reviews to validate the accuracy and completeness of financial statements.

Communication and Stakeholder Engagement:

  • Engage with stakeholders, including shareholders, regulators, and investors, to ensure that their information requirements and expectations are well understood and adequately represented.
  • Communicate financial results and disclosures clearly and effectively to enhance transparency and trust.

The preparation and execution of annual financial statements in South Africa require adherence to rigorous regulatory standards and best practices. Addressing issues highlighted in reports, such as those from Business Live, underscores the importance of governance, transparency, and accountability in maintaining investor confidence and statutory adherence in South Africa’s dynamic business environment.

Learn more about how Caseware’s IFRS Financial Statements and SME Financial Statements can empower your financial statement preparation process.

Concluding our Series on Audit Quality Indicators (AQIs)

Audit Quality Indicators (AQIs)

Throughout this series, we’ve explored a range of Audit Quality Indicators (AQIs) essential for evaluating and enhancing audit quality within firms. From Independence to Staff Turnover, each AQI provides valuable insights into different aspects of audit performance and organisational dynamics.

Here’s a quick recap of the key topics we’ve covered

Independence

Assessing the balance between audit and non-audit fees to safeguard independence and decision-making integrity.

Tenure

Evaluating the duration of firm-client relationships and its implications for independence and familiarity threats.

Review Processes

Understanding the effectiveness of internal review mechanisms in maintaining audit quality.

Workload Distribution

Analysing the allocation of workload among engagement partners and managers to ensure effective supervision and resource management.

Technical Resources

Examining the ratio of engagement partners to technical partners and its impact on access to expertise and audit quality.

Training

Assessing the investment in structured training for audit staff to enhance professional competence and maintain high-quality standards.

Staff Turnover

Understanding the turnover rate and its implications for team consistency, innovation, and audit quality.

What’s Next? As we conclude this series, it’s crucial for audit professionals and firms to leverage these AQIs as tools for continuous improvement. By monitoring and interpreting these indicators, firms can identify areas for enhancement, implement targeted strategies, and uphold the highest standards of audit quality and professionalism.

Let’s Keep the Conversation Going! I encourage fellow audit professionals to continue exploring and discussing the significance of AQIs in ensuring audit quality and client satisfaction. Together, let’s strive for excellence in our practices and contribute to building trust and confidence in financial reporting.

Thank you for following along with this series, and I look forward to engaging with you further on this important topic!

AQI14 – Examining Staff Turnover: (%)

Staff turnover

Assessing staff turnover provides valuable insights into the firm’s ability to maintain consistency within its engagement teams. Let’s delve into the description, interpretation, and implications of Staff Turnover: (%).

Staff Turnover Indicator

Staff Turnover: (%) represents the percentage of staff who have left the firm, excluding those whose training contracts have ended, in categories such as engagement partners, audit managers, and audit supervisors. It is calculated based on the opening number of staff in each category, divided by the average number of staff for the year.

Purpose of this ratio

This ratio provides insights into the firm’s ability to retain talent and maintain stable engagement teams.

How to Interpret the Audit Quality Indicator (AQI)

Indicator of Team Consistency

Staff turnover serves as an indicator of the firm’s ability to maintain consistent engagement teams. Consistency within teams can contribute to sustainability and foster improved audit quality and professional knowledge retention.

Balancing Retention and Recruitment: Firms aim to strike a balance between retaining existing staff and recruiting new talent. While low turnover rates indicate stability, some turnover can bring in fresh perspectives and ideas to enhance audit quality.

Implications and Considerations

Sustainability and Audit Quality: Consistent teams foster continuity and familiarity, which can positively impact audit quality and client service. Reduced turnover rates may indicate higher levels of satisfaction and engagement among staff.

Promoting Innovation: While low turnover rates are desirable, some level of turnover can inject new energy and perspectives into the firm, fostering innovation and adaptation to changing industry dynamics. Retention Strategies: Firms should focus on implementing effective retention strategies to retain top talent while also attracting new professionals. Investing in professional development, creating a positive work culture, and offering competitive benefits can contribute to employee retention.

Analysing Staff Turnover

Staff Turnover(%) offers insights into the firm’s workforce dynamics and its implications for audit quality and organizational sustainability.

As audit professionals, it’s essential to prioritise strategies that promote both staff retention and innovation, ultimately contributing to sustained audit quality and client satisfaction.

AQI13 – Understanding Technical Resources: Partner (Ratio)

The engagement partner to technical partner ratio offers insights into the availability of technical support for engagement partners within an audit firm. Let’s explore the description, interpretation, and IRBA Code considerations regarding Technical Resources: Partner (Ratio).

Indicator

Technical Resources: Partner (Ratio) represents the ratio of engagement partners to technical partners within the audit firm.

Purpose

This ratio indicates the level of access engagement partners have to technical expertise and support.

How to Interpret the Audit Quality Indicators (AQI)

Higher Ratios

A higher ratio implies that each technical partner serves more engagement partners, potentially indicating limited access to technical resources for engagement partners. In contrast, a lower ratio suggests greater access to technical expertise.

IRBA Code Considerations

Professional Competence and Due Care

The IRBA Code emphasises the importance of maintaining professional knowledge and skill at the required level and acting diligently in accordance with applicable standards. Access to technical expertise ensures competent professional service delivery.
Need for Technical Expertise: Engaging with technical experts and consulting on technical or industry-specific issues is essential for exercising professional judgment effectively and addressing threats to compliance with fundamental principles.

Analysing Technical Resources: Partner (Ratio) provides insights into the availability of technical support within the audit firm and its impact on audit quality and decision-making processes.

As audit professionals, it’s crucial to ensure access to adequate technical resources, maintain professional competence, and uphold the highest standards of diligence and professionalism.

AQI13 (Audit Quality Indicators) – Exploring Training: Hours per Person

Assessing the total hours of structured training delivered for audit professional staff provides valuable insights into a firm’s commitment to improving audit quality and maintaining professional knowledge. Let’s delve into the description, interpretation, and IRBA Code considerations regarding Training: Hours per Person.

Indicator for IRBA Code considerations

Training

Hours per Person represents the total hours of structured training delivered for audit professional staff in the previous calendar year as a ratio to the average monthly audit professional staff count for the same period.

Purpose

This ratio reflects the firm’s investment in formal training and development initiatives.

How to Interpret the  AQI (Audit Quality Indicators)

Level of Investment

The level of investment in formal training serves as an indicator of the firm’s dedication to enhancing audit quality and fostering professional development among its staff.

Consideration of Training Quality

When interpreting this metric, it’s essential to consider the type, quality, and relevance of the training provided. Additionally, distinguishing between input-based (attendance) and output-based (knowledge gained) training is crucial for a comprehensive understanding.

IRBA Code Considerations

Professional Competence and Due Care: Registered auditors are obligated to ensure that individuals working under their authority receive appropriate training and supervision, as stipulated in the IRBA Code.

Exercise of Professional Judgment

Professional judgment involves applying relevant training, knowledge, skill, and experience to make informed decisions. Adequate training plays a pivotal role in developing professionals’ ability to exercise sound judgment.

Work Environment Considerations

The work environment, including educational, training, and experience requirements, influences the evaluation of threats to fundamental principles. Firms must create a conducive environment that supports ongoing learning and development.

Analysing Training

Hours per Person offers insights into the firm’s commitment to professional development and its impact on audit quality and staff competence.

For our Caseware users, we launched our complimentary hashtag #GetAhead training series designed to enhance the skills of trainees. By enrolling your trainees, you not only elevate the quality of their work but also ensure that manager supervision is effectively utilised at the appropriate level.

As audit professionals, it’s essential to prioritise continuous learning, uphold professional standards, and ensure adequate training and supervision for all staff members.

AQI11 – Understanding Span of Control: Professional Staff (Ratio)

Assessing the ratio of audit professional staff to partners in an audit firm provides valuable insights into the capacity of partners to supervise junior team members and the level of support available for partners. Let’s explore the description, interpretation, and IRBA Code considerations regarding Span of Control: Professional Staff.

IRBA Code considerations 

Indicator – Span of Control: 

Professional Staff (Ratio) represents the ratio of audit professional staff headcount (including accounting, audit, and risk professionals) to partners in the audit firm.

Purpose of professional staff ratio

This ratio indicates the balance between partner responsibilities and available professional staff support

How to Interpret the AQI (Audit Quality Indicators)

Higher ratios suggest that partners have more responsibilities and potentially face increased time pressure due to managing a larger team. This may divert their attention from individual audit engagements. However, higher ratios can also indicate efficient management of professional staff or a well-resourced firm with skilled professionals requiring less supervision.

IRBA Code Considerations

Professional Competence and Due Care: Partners and professional staff are obligated to maintain professional knowledge and skill at the required level and act diligently in accordance with applicable standards. This principle underscores the importance of effective supervision and support within the audit firm.

Our audit templates have been updated to provide partners with appropriate information in engagement files so that they can focus their attention. It is imperative that engagement partners ensure engagement files created are on the latest versions:

  1. Audit International: 25.1
  2. Probe Audit Premium Plus: 2023.20.13

As audit professionals, it’s crucial to ensure effective resource allocation, maintain professional competence, and uphold the highest standards of diligence and professionalism.

Guidelines for the public sector in adopting cloud-based software

Cloud Market Trends in South Africa

The use of cloud-based solutions in South Africa is on an upward trajectory. The SA Cloud Market Report 2023 published by BMIT last year, that the compounded annual increase in South Africa’s cloud-based services market will be over 27% in the next five years. Many Departments of Public Service and Administration can benefit from cloud-based solutions.

This is in line with the demand for cloud-based services in Africa. According to digital research consultancy Xalam Analytics, the industry on the continent consistently shows an annual 25-30% growth rate.  

Overcoming Misconceptions in the Public Sector
Many departments of public service and administration in South Africa’s public sector are not benefitting from cloud-based solutions, being under the impression that the government is limiting the use of these services. This perception is currently preventing many departments from taking advantage of cloud-based services and becoming more efficient and effective in fulfilling their deliverables.  

Fortunately, the reality is that South Africa’s government departments of public service and administration are permitted to use cloud-based services and the Department of Public Service and Administration (DPSA) have published guidelines set out by the Determination and directive on the usage of cloud computing services in the public service that outlines the processes that should be followed.  

Government Directives Encouraging Cloud Adoption
The directive actively encourages the use of cloud services. According to the directive, “The Head of Department must ensure that Cloud Services are the first option explored before any on-premise infrastructure investments are made. This option must be fit for purpose, and preference (not exclusive use) must be given to private government cloud where the capability exists”.  

Ministerial Guidance on Cloud Services
In a notice by the Minister for the Public Service and Administration (MPSA), Ms Ayanda Dlodlo, on 10 February 2022, said, “The purpose of the Determination and Directive is to provide clear guidance to public service departments on adopting and using Cloud Computing services and technologies”. 

Minister Dlodlo provided details on the three permitted services and four deployment models. These include “Public Cloud, Government Private Cloud, Hybrid Cloud and Community Cloud.  The cloud service models are Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS),” she said.  

Steps to Implement Cloud-Based Solutions

The guidelines have been created to provide clear instructions to ensure that government departments can benefit from the efficiency of cloud services, particularly regarding financial management, data analytics, security, and audit capabilities available on the cloud.  

Step 1: Cloud Readiness Assessment
The first step is to complete a cloud readiness assessment. This allows the department to understand its current systems and investigate the requirements to suit its objectives.   The directive states that any consideration for a cloud-based solution needs to be “fit for purpose”, and the “proper procurement processes” must be adhered to.  

Step 2: Business Plan Development
The second step is the business plan, which needs to include the following details: These include the outcome of the risk assessment, the scope of services required, the budget, the cost of ownership, the skills and infrastructure required and the benefit the solution will provide.  

The security and ownership of the data need to be outlined. The level of data needs to be ascertained, and the classification needs to comply with the Minimum Information Security Standards (MISS). The Head of Department must ensure, where possible, that Information classified as “Secret” or “Top Secret” should prefer not to be moved to a Public, Hybrid or Community cloud service 

In addition to the contract requirements in the directive, the service provider must also furnish the government department with the following information: This includes all data processing to comply with the Protection of Personal Information Act (POPIA), the geographic location where the data is stored, the jurisdiction which governs the contract’s operations and the area where the data is confined.  

Cloud-based service providers can guide the Head of Departments in the public sector to assist with benefitting from the services whilst being compliant with the directive and all relevant legislation.  

To facilitate the adoption of cloud-based solutions, departments can consider platforms like Caseware Cloud, which empowers the preparers and reviewers of financial statements in public entities, state-owned enterprises, TVET colleges, municipalities, municipal entities, constitutional entities, legislatures, and trading accounts. Caseware Cloud enables public sector financial professionals to store a single centralized copy of every financial statement engagement and collaborate seamlessly from any location at any time.  

How can Caseware help integrate Cloud Solutions for Public Sector?

Caseware Cloud operates on a Software as a Service (SAAS) model and employs redundancy architecture, ensuring robust reliability and accessibility. Completely web-based, it adheres to the highest industry security standards, including ISO 27001:2013 and SOC 2, Type 1 & 2 certifications. Data is securely stored across multiple geographic locations, with continuous and seamless backups, safeguarding against any potential disruptions or data loss. 

By Stephan van der Merwe, Product Manager, Caseware Africa 

AQI10 – Understanding Workload: Manager Supervision (%)

Examining the extent of audit manager involvement in audit engagements is essential for assessing team dynamics and ensuring adequate supervision. Let’s explore the description, interpretation, and IRBA Code considerations regarding Workload: Manager Supervision.

Indicator: Workload: Manager Supervision (%) represents the total audit manager hours charged to the audit client as a percentage of the total audit hours for completed engagements.

Purpose: This metric gauge the level of supervision provided by audit managers.

How to Interpret the AQI:

Higher Percentages: Indicate greater involvement of audit managers in engagements. This could result from various factors, including complex engagements or a lack of engagement partner review. However, high percentages may also signal inadequate engagement partner involvement or understaffing.

Consideration of Firm Model: Understanding the firm’s engagement model and the nature of engagements is crucial for interpreting this metric accurately. Different firms may have varying levels of manager involvement based on their operational structure and client needs.

IRBA Code Considerations:

Professional Competence and Due Care: Audit professionals are required to maintain professional knowledge and skill at the required level and act diligently in accordance with applicable standards. This principle underscores the importance of competent and diligent supervision by audit managers.

I was not surprised to see this ratio going down substantially from 2021 and 2020 as we see the tail end of the COVID-19 pandemic effects on audit engagement, staff upskilling and manager involvement.

This made me re-read a previous piece I did: Bridging the COVID-19 Knowledge Gap and it does seem that relevant steps were put in place, and we were able to avoid a potentially continuing escalating crisis.

For our Caseware users, we launched our complimentary hashtag #GetAhead training series designed to enhance the skills of trainees. By enrolling your trainees, you not only elevate the quality of their work but also ensure that manager supervision is effectively utilised at the appropriate level.

As audit professionals, it’s imperative to ensure appropriate resource allocation, maintain professional competence, and uphold the highest standards of diligence and professionalism.

 

 

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