Factors affecting ROM Flashcards
STUDY
Group Accounting
If accounts are consolidated, group
statements may be misstated due to:
- Transfer Pricing
- Intercompany transactions
- Different accounting policies
Business risks increasing ROMM
isa 315 A63
Revenue - Completeness, Occurrence, Accuracy
- 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
Inventory;
Existence:
- 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
Inventory - Rights and obligation
- 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
Completeness/ Cut-Off
- Items on consignment may not be
included - Items ordered may be recognised in
the wrong period - Goods in different locations may not
be included
Accuracy:
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
Valuation:
- 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.
Accounts Receivable:
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
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
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
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;
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.
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.
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.
