Die ontleding van rekeningkundige finansiële jaarstate, as 'n hulpmiddel vir die ouditeur, met verwysing na die gebruik daarvan in Transvaal

Abstract

In terms of the Company's Act 1973, every company has to appoint external auditors to audit its annual financial accounts. In recent years, companies have tended to expand in one way or another. Consequently, the entries in the financial books recording the trading activities, have become so numerous that it is absolutely impossible for the auditors to control all entries. Sophisticated techniques, like test checking and statistical sampling, have developed in the quest for time-saving methods. It is obvious, however, that these methods are not sufficient for the auditor's purpose. Some additional techniques are necessary to increase the value of test checking and auditing of a limited number of transactions. One such technique is the analysis and interpretation of financial accounts as an integral part of so-called analytical auditing. Before the technique itself is examined the substance of "auditing" and "analysis and interpretation of financial accounts" will have to be determined. A start is made in Chapter 1 by probing available literature and interviewing auditors to determine the origin and development of the auditing practice. Basically auditing started off when people entrusted their finances to others to administer. It soon proved that mutual trust was insufficient and some form of checking the reports was needed. Auditors were appointed to check the facts on which subsequent reports were based. Initially all facts and transactions were included in such checking. With the expansion of companies, however, the work became too voluminous and test checking became an accepted method. At this stage the different forms of evidential matter also warrant attention. It is significant that most of the auditing text books mention the

"analysis and interpretation of financial accounts" as a means of gathering evidential matter for auditing purposes. Considering the different forms of evidential matter it became evident that · a major drawback in accounting is the lack of uniform objectives and principles. Indications are that this will be remedied in the not too distant future. As a result of the foregoing Chapter 2 deals with the accounting principles and objectives insofar as such information is necessary to determine plausible auditing standards and techniques for future use. This chapter should not be seen as conclusive but only as an aid that is essential in any audit practice. In Chapter 3 the performance of an audit is investigated. Because of the influence it has on the approach to auditing in this country - the scrutiny includes the U.S.A., the U.K. van Australasia. This investigation proved to be a very interesting exercise. In the U.K. auditors approach their work in a way very similar to our local methods. Some voices are clamouring for change but no strong case has yet been made out. In Australasia the position is also very similar except for the aspect of analysis and interpretation of financial accounts which forms part of their auditing system. The most interesting development, however, has occurred in the U.S.A. A positive attitude was adopted a number of years ago in order to find a better way of auditing. The result was the acceptance of analytical auditing as the method for the future. In South Africa the position is very similar to the U.K. Attention is given to internal control, indepth test of certain transactions and a balance sheet audit. At no stage is the business entity as a whole considered. Too much attention is given to transactions and too little to relationships between transactions and their effect on the entity

as a whole . Because of this and the result s obtained in the U.S.A., it is felt that the analysis and interpretation of financial accounts can play a major part in the performance of the analytical audit in the R.S.A. This is discussed in Chapter 4 where the proposed approach is discussed . An analytical audit should most definitely be performed and the analysis and interpretation of financial accounts is one of the important facets forming part of this technique. It should never be used as an independent tool but should always form a~ integral part of the analytical audit . Chapter 5 deals primarily with the analysis and interpretation of financial accounts. Once again the development of the technique is investigated. It is found that from a humble beginning, where it was used as a measure of credit worthiness, this technique has developed into an extremely useful tool . It is currently extensively used by bankers , financiers , investors, shareholders, government departments and many more. The only group missing from the list is the auditors themselves because apparently the advantages of applying this technique has not yet been fully appreciated. Most of the auditors want to know what advantages can be gained by using this method as an auditing tool. The next step is to investigate the different ratios and analysis techniques in order to determine their uses and advantages for auditing purposes. The income statement i s taken as a s tarting point in Chapter 6. The balance sheet is traditionally considered to be the logical starting point. However , the auditor could with advantage start with the income statement . Information regarding stock, adjustments to net profit and sales, for example, which will be required later on, can be gathered in this way . The interpretation of such information would be more logical as

well because the mind will be free from the influence of ratios which should be considered at a later stage. There are basically two approaches to analysing and interpreting the income statement. Firstly, all items may, for example be expressed as a percentage of sales. Secondly, ratios could be calculated. In addition to the foregoing it will be necessary to perform some form of comparison. It could be internal, external or a combination of the two methods. For auditing purposes the most beneficial approach will be to combine the different methods - thus expressing all the items in the income statement as a percentage of sales, calculating certain ratios and performing either an internal, external or combined analysis, using certain predetermined standards or norms. The next aspect is dealt with in Chapter 7. In this chapter the most important ratios which can be calculated by using the information contained in the financial statements will be discussed. In each case the ratio itself will first be considered then all conclusions that may be arrived at, any restrictions that apply and finally, the suggested recommendations divided into three categories. The absolutely necessary ratios fall into the primary category. The secondary essential category contains all ratios which are not of prime importance for auditing purposes but which the auditor should nevertheless know. All ratios that may be calculated if the auditor so wishes are called secondary supplementary. This approach to a division in categories is definitely not a regoristic one. Different approaches could very well be used on different auditing assignments. Nevertheless, it is important to remember that ratios which are extremely important for a certain group of users may be worthless for others. For that reason the ratios have been divided into certain groups according to prominent characteristics. The most important

information required by the auditor has prompted the use of these groups. It includes liquidity, profitibality, short term and long term finance, cash flow and the capital structure. For each group it will be advantageous to try and determine a trend over a certain period of time which can then be used as a basis for the conclusions to be reached . If used intelligently the ratios in each group should act as a pointer to aspects which require thorough auditing attention. Matters of importance that may be ignored in a traditional audit ought to be picked up in this way. An investigation was made to discover whether this technique is actually used in practice. The investigation proved extremely disappointing as described in Chapter 8. A very small percentage of participating firms use this technique as an aid during the audit. Besides, some of those using it can be ignored because it is being applied without the necessary planning and follow-up procedures. On the contrary, some of the firms are engaged in serious experimentation and considerable headway has been made towards developing a refined technique of how to apply the analysis and interpretation of financial accounts as an auditing tool. In general the feeling is that this technique could be developed into a very valuable aid in auditing. In the final chapter a summary is made of the conclusions reached after interpreting both the text books and the results from the investigation. Both these sources indicate a need to use the analysis and interpretation of financial accounts during the audit. Nevertheless, this technique should never be applied without additional accepted auditing components. For example, when applied together with the investigation of the internal control it should emphasize weaknesses and areas requiring precise and

detailed investigation. The efficiency of the routine audit should thus be increased. After completion of any audit a complete analysis and interpretation of the relevant accounts should indicate whether the accounts reflect the circumstances of the business as seen by the auditor after auditing the books and records. Once again the question arises whether the accounts fairly present the financial position of the company (and its subsidiaries) as well as the results of its operations. The analysis and interpretation of the accounts will surely assist to arrive at a better answer to this question. It has been mentioned that the analysis and interpretation of financial accounts as an auditing technique should form an integral part of the analytical audit. The very first step in this approach is connected with planning. The main aim of the auditor at this particular stage is to determine the reliability of the figures in the financial books. This is done by collecting background knowledge of the business as well as its activities. After that the internal control may be investigated in order to reach conclusions as to the reasonability of the figures in the accounts, any problematic areas, additional information and explanations required and the extent and level of auditing tests to be performed. The business background falls outside the scope of this study but the internal control, and to be more precise, the reliability of the figures, is most important. The key to success in determining the reliability of the financial accounts could be found in the determination of the relationship between figures, budgets and managerial reports. As in the case of considering the adjustments made to trading stock by management, experience from the past plays an immensely important role. Suppositions, budgets and standards are factors to be extremely wary of. Outdated standards cause incorrect valuations and serve no purpose. On the other hand intelligent use of standards and budgets can be advantageous to any business. After determining the reliability of the figures the said reliability should be tested by using applicable techniques. Such techniques should determine whether the figures are fair, any problematic areas exist, the required information has been obtained as well as the extent and level of required auditing tests. To do this successfully will entail the comparison of figures and ratios with that of previous periods and budgets, the determination of variances together with reasons for them. The interpretation of the foregoing must be coupled to all relevant assets and liabilities in order to discover abnormal variances . The financial condition as a whole should be the focal point. The auditor should ascertain whether each and every aspect of the business has been subjected to auditing. Where necessary the particular aspect should be afforded sufficient attention. This type of investigation will act as a pointer to what, how much and when should be audited. The focus is clearly on variances. The principle of management by exception can therefore be introduced into auditing as auditing by exception. After discovery of the exceptions normal auditing routines may be applied. The analysis and interpretation of accounts will also give the auditor a clear picture of what is being conveyed to the reader. It will not merely be a summary of transactions that is published but a properly judged set of accounts. Finally, a summary of all conclusions and recommendations will be informative. It is felt that the auditor should consider the accounting principles and objectives to be part of the analysis and interpretation of financial statements.