Who am I? Leeantha Naidoo Audit and Learning & Development Manager at SIZWENTSALUBAGOBODO Mobile:

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2 Who am I? Leeantha Naidoo Audit and Learning & Development Manager at SIZWENTSALUBAGOBODO Mobile:

3 Matters to be covered today 1. Maintaining Trust accounts 2. Maintaining Business accounts 3. Preparing for the Audit 4. Accounting records must be audited per the relevant sections in EAAA 5. Implications of the Audit Report 6. Submission of the Audit Report

4 1. Maintaining Trust Accounts Sec. 29(a) of the EAAA requires for all accounting records to be audited (Therefore all Assets, Liabilities and all transactions) Both Trust accounts and Business accounts are required to be kept separately and audited separately, as per section 32(1): Every estate agent shall open and keep one or more separate trust accounts, which shall contain a reference to this section, with a bank and such estate agent or his or her employee, as the case may be, shall forthwith deposit therein all trust money held or received by or on behalf of such estate agent and the name of such bank and the number of each such trust account shall forthwith be notified to the board (para 1) If the trust account is closed, the Estate Agency is required to deregister as operating without one is disallowed Trust accounts (bank)need to be reconciled monthly to the Trust creditors ledger(estate agents books)

5 1. Maintaining Trust Accounts Continued Per section 32(2), any estate agent may invest in a separate savings or other interest-bearing account opened by him with any bank, building society or any institution or class of institution designated by notice in the Gazette by the Minister in consultation with the Minister of Finance, any moneys deposited in his trust account which are not immediately required for any particular purpose (para a) Any savings or other interest-bearing account referred to in paragraph (a), shall contain a reference to this subsection Interest on moneys deposited in a trust account referred to in subsection (1), and on moneys invested in terms of paragraph (a), shall, subject to the express terms of the mandate in question, which shall be in writing, be paid to the fund by the estate agent concerned (para c) Trust money in an account invested in terms of paragraph (a) or deposited in terms of subsection (1) shall be retained by the estate agent in question in that account until the estate agent is lawfully entitled to it or instructed to make payment therefrom to any person

6 1.1 How to Review a Reconciliation Test the mathematical accuracy Confirm the opening and closing balances of the trust account and the trust general ledger by inspection Trace outstanding deposits/deposits in transit This is an understatement on the banks side Compare outstanding cheques This is an overstatement on the banks side Verify all bank charges and credits Validate the closing trust account balance against the trust account(bank) and they should match

7 Example of a Recon: Balance per bank statement ADD: Additive reconciling items LESS: Subtractive reconciling items Balance per general ledger

8 Trust Creditors Ledger Information that should be found in a trust creditors ledger: the name and address of an agent s client; the names of other parties to the transaction; the date of each transaction; the names of persons from whom money was received or to whom money was paid; the reason for the movement of money; the amount of money paid or received; either the cheque number, receipt number or transfer journal folio number that matches the movement of money; and the balance after each entry.

9 1.2 What does a Trust Recon look like? A surplus may mean the completeness or accuracy of the trust creditors ledger is in doubt. A deficit is more serious and means the estate agent does not have enough money in the trust accounts to pay all the trust creditors. Total of trust creditors as at month end (to agree to the trust creditors ledger balance listings) Reconciled trust account balance as at month end (to agree to the bank reconciliation as per your other slide) Surplus/(deficit) Jan Feb Mar Apr May R R R R R

10 2. Maintaining Business Accounting Records Sec. 29(a) of the EAAA requires for all accounting records to be audited( Therefore all Assets, Liabilities and all transactions) Companies Act Section 28 requires : Any documents, accounts, books, writing, records or other information that a company is required to keep in terms of this Act or any other public regulation must be kept in a written form or other form or manner that allows that information to be converted into written form within a reasonable time and it must be kept for a period of seven years or longer is specified. Estate agents may conduct estate agency activities in any of the following legal bodies: Sole Proprietor Partnership Company Close Corporation Auditors will audit the financial statements(transactions and account balances) of these entities*

11 2.1 How to account for transactions in a legal entity: The accounting equation: A=OE+L (Assets=Owners Equity + Liabilities)

12 2.2 T accounts that account for transactions Assets Owners Equity DR CR DR CR Balance xxxxxx Balance xxxxx Liabilities Income DR CR DR CR Balance xxxxxx Balance xxxxxx Expenses DR CR Balance xxxxxx

13 2.3 Accrual basis An accounting method that measures the performance and position of a business by recognizing economic events regardless of when cash transactions occur. The general idea is that economic events are recognized by matching revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made (or received). This method allows the current cash inflows/outflows to be combined with future expected cash inflows/outflows to give a more accurate picture of a business's current financial condition.

14 2.4 Cash Basis A major accounting method that recognizes revenues and expenses at the time physical cash is actually received or paid out. This contrasts to the other major accounting method, accrual accounting, which requires income to be recognized in a business's books at the time the revenue is earned (but not necessarily received) and records expenses when liabilities are incurred (but not necessarily paid for)

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16 3. Preparing for an Audit Who is an external independent auditor and what do they do? A registered auditor with the Independent Regulatory board of Auditors who examines the financial records and business transactions of a company that he/she is not affiliated with. An independent auditor is typically used to avoid conflicts of interest and to ensure the integrity of the auditing process. When an audit is performed, it is the financial auditor's job to make sure that records are examined in an honest and forthright manner. Independent auditors are sometimes called external auditors.

17 3. Preparing for an Audit Continued... Can a review be performed for an estate agency instead of an audit? No. It is a legal requirement of the EAAA to have an audit with no exceptions When must the audit happen? Within 4 months after year -end. If the audit runs over 4 months, the estate agency( including all principal and non principal estate agents working under the entity) will be automatically disqualified, and the Fidelity Fund Certificate (FFC) will not be awarded or withdrawn

18 3. Preparing for an Audit Continued... What will the auditors need? They need to collect sufficient and appropriate audit evidence based on various audit methodologies that include samples, materiality and risk calculation that will indicate whether the financial results are fairly represented (Materiality defines the threshold or cut off point after which financial information becomes relevant to the decision making needs of the users) The auditor will be putting together an audit file that will house all the audit evidence collected as well as any substantiating documents. It is of paramount importance that all records are filed and kept safely (Electronic and original hard copy is advised) External sources of information will always be favoured by the auditor, such as and not limited to banks, attorneys, investment houses, debtors and creditors. Schedules such as general ledgers, debtors and creditors listings, fixed asset registers, trial balance, company profile, changes in management, and description of internal controls.

19 3. Preparing for an Audit Continued... What is a reportable irregularity? Auditors are regulated by the Auditing Professions Act which defines reportable irregularities as any unlawful act or omission committed by any person responsible for the management of an entity, which has caused or is likely to cause material financial loss to the entity or to any partner, member, shareholder, creditor or investor of the entity in respect of his, her or its dealings with that entity; or is fraudulent or amounts to theft; or represents a material breach of any fiduciary duty owed by such person to the entity or any partner, member, shareholder, creditor or investor of the entity under any law applying to the entity or the conduct or management thereof. Section 45 of the Auditing Profession Act

20 3. Preparing for an Audit Continued... Common examples of Reportable Irregularity in estate agency industry? Trading illegally without an FFCs in contravention of section 26 of our Act Not submitting audit report to EAAB within 4 months in contravention of section 29(b) Operating without a trust account in contravention of sections 32(1) and 32(2) Not balancing trust accounting records monthly in contravention of section 32(3)(b) Not keeping separate accounting records in contravention of section 32(3)(a) Not administering the trust account in the prescribed manner (deficits or surplus) in contravention of section 32(3)(c) Not registering as an accountable institution with FIC Not reporting unusual and suspicious transactions to FIC Not reporting cash transactions above R to FIC

21 3. Preparing for an Audit Continued... Things to be mindful of: Commit to the audit deadline with staff to ensure that the audit is completed within 4 months after year-end Make sure that all financial information is filed in a systematic consistent manner Read and understand the terms and conditions of the audit engagement letter Both trust accounts AND business accounts need to be audited by law so keep accurate records of all transactions. Be nice to auditors, they are wonderful people

22 4. Implications of the Audit opinion Nature of matter gicing rise to the Modification Auditor's Judgement about the Pervasiveness of the Effects or Possible Effects on the Financial Statements Financial Statements are materially misstated Material but not Pervavsive Qualified Opinion Material and Pervavsive Adverse Opinion Inability to obtain sufficient appropriate audit evidence Qualified Opinion Disclaimer of Opinion

23 3.1 Implications of the Audit Report Continued... Types of Audit Opinions per ISA 705 Unqualified opinion The unqualified opinion has no reservations concerning the financial statements. This is also known as a clean opinion meaning that the financial statements appear to be presented fairly. Qualified opinion This means that the auditor has taken exception to certain current-period accounting applications or is unable to establish the potential outcome of a material uncertainty. Disclaimer opinion This is a special type of audit report that should be issued when the auditor does not permit his or her name to be associated with financial statements that were not examined in accordance with generally accepted auditing standards. (Conflict of interest / Limitation of scope) Adverse opinion This is a type of audit opinion which states that the financial statements do not fairly represent the financial position, results of operations, and changes in financial position, in conformity with generally accepted accounting principles. Lets look at an actual audit report and what each section entails

24 3.1 Implications of the Audit Report Continued... If a qualified, adverse or disclaimer opinion is given, the financial results will be requested by the EAAB and further investigated Basis of opinion analysed by EAAB Audit Compliance Department and if it amounts to contravention of the EAAA or FIC, escalated to EAAB Legal Department Disciplinary process initiated by EAAB Legal Department Appear before a Disciplinary Committee If found guilty, sanctions range from: o Up to R fine o Withdrawal of FFC o Reprimand

25 3.1 Implications of the Audit Report Continued... The following steps will be followed in cases of contraventions (non-compliance with the EAAA, FICA) in the audit report or Reportable Irregularities: Escalated by EAAB Audit Compliance Department to EAAB Legal Department Disciplinary process initiated by EAAB Legal Department Appear before a Disciplinary Committee If found guilty, sanctions range from: Up to R fine Withdrawal of FFC Reprimand

26 4. Submission of the Audit Report The audit report is due to the EAAB 4 months after the year-end date, with no exceptions The IT3b is compulsory and should be submitted together with the audit report always, in the absence of which a letter by the bank on why the IT3b cannot be issued should be submitted, note that the IT3(b) applies to the trust bank accounts only(old pronouncement) (Refer to new pronouncement on next slide) The auditor is responsible for the submission of the audit report as per section 32(4) of the EAAA via the auditors portal on the EAAB website The auditor has to register and log on with a username to complete and submit the audit report EAAB no longer accepts audit reports via , post or hand deliver. If these methods are used, the estate agency will be disqualified and face potential charges.

27 AUDIT COMPLIANCE NOTIFICATION IT3b CERTIFICATES AND AUDIT CONFIRMATION LETTER 01 JUNE 2015 It has come to our attention that a number of auditors of estate agents submitting the audit reports online are having difficulties or experiencing delays in obtaining the IT3b certificates from the banks and/or experiencing difficulties in understanding the contents of the Audit Confirmation Letter required as part of documents to be uploaded when submitting the audit report online. IT3b Certificates We hereby advise that it will be acceptable for the auditor to attach a covering letter (in place of the IT3b certificate) explaining the reasons why the IT3b certificate could not be obtained and attached when submitting the audit report online. The delays or difficulties in obtaining the IT3b certificates from banks should not delay the submission of the audit reports within the prescribed four months after the financial year end.

28 4. Submission of the Audit Report Continued Failure to submit the Audit report within 4 months of financial year end, or not submitting at all will result in the following consequences: Disqualified from obtaining an FFC and invalidating the current FFC In order to regularise the registration status and be eligible for an FFCs, the following will apply: o Submit the outstanding audit report online through the auditor o the audited financial statements to EAAB Section 27 Department o Submit an affidavit to EAAB Audit Compliance Department by the principal(s) of the estate agent, detailing: Reasons for non-compliance History and experience within the estate agency industry Reasons why it is considered to be in the interest of justice for the estate agent to be issued with fidelity fund certificate o If audit opinion unqualified, pay the appropriate fine for late submission based on the audited revenue o If audit opinion qualified, adverse or disclaimer, go through the disciplinary process first

29 Questions on the AUDIT of an estate Trust?

30 Thank You

31 2014/2015 AUDIT CYCLE FOR ESTATE AGENCIES WITH 28 FEBRUARY 2015 FINANCIAL YEAR END FEEDBACK ON THE AUDIT REPORTS SUBMISSION PROCESS USING THE MyEAAB AUDITORS PORTAL Presentation by: Thomas Makupo CA(SA), RA Audit Compliance Manager ESTATE AGENCY AFFAIRS BOARD

32 Number of audit reports received since pronouncement on 1 March Total and prior

33 Number of audit reports received during last 3 working days of deadline Total 30-Jun Jun Jun-15

34 Audit reports submissions compliance levels % % %

35 Query types received from auditors 1. Requests for Firm PIN Numbers especially for Sole Proprietorships 2. Delays in the system sending log-in details very few received 3. Problems in attaching documents very few received 4. Heavy load errors none received 5. Auditors Portal down only for a few hours on 19 June 2015

36 Positive comments received from auditors (What did you like most about the MyEAAB Auditors Portal?) NOT HAVING TO SEND THE REPORT BY MAIL OR , BUT UPLOADING IT DIRECTLY TO THE EAAB AND IMMEDIATE CONFIRMATION THAT THE REPORT HAS BEEN SUBMITTED. SIMPLICITY WHEN COMPARED TO THE OLD SYSTEM Very convenient for submission It was easy to log in and fill in information and fill out the form Confirmation that it was received by the EAAB.

37 Positive comments received from auditors (What did you like most about the MyEAAB Auditors Portal?) We have found the portal to be a fantastic move on the part of the EAAB. It has eradicated issues previously encountered with tracking reports which had been sent but not recorded on the EEAB. It is user friendly and I can be rest assured that the audit report was submitted. Submission is quick and confirmation is received almost immediately. This is a good move to keep up with technology. It saves time than to prepare a manual EAAB auditors report scan and it.

38 Benefit to estate agents Renewal and obtain the 2016 FFCs with effect from 1 July 2015 when the renewal period commenced

39 Regularisation Process for disqualified estate agents Current FFC (2015) of no force and effect if disqualified Not able to renew and obtain 2016 FFC if disqualified Old Section 27 process New Section 27 process

40 Questions?

41 Thank You