Bica technical bulletin january 2018 issue 3

technical ebulletin News from Botswana Institute Issue 003 > February 2018 of Chartered Accountants

CONTENTS

EXPLORING THE GROWING USE OF TECHNOLOGY IN THE AUDIT, WITH A FOCUS ON DATA ANALYTICS.

1

THE NO INPUT VAT CLAIM– NO OUTPUT VAT PRINCIPLE

2

IPSAS 33 - FIRST-TIME ADOPTION OF ACCRUAL BASIS IPSAS – Article III.

3

EXPLORING THE GROWING USE OF TECHNOLOGY IN THE AUDIT, WITH A FOCUS ON DATA ANALYTICS. Feedback Statement Prepared by the Staff of the IAASB, January 2018.

INTRODUCTION In September 2016, the International Auditing and Assurance Standards Board (IAASB)’s Data Analytics Working Group (DAWG) issued a Request for Input (RFI), Exploring the Growing Use of Technology in the Audit, with a Focus on Data Analytics. The RFI provided insights into the opportunities and challenges with the use of data analytics in the audit of financial statements and outlines the insights gained from the DAWG’s extensive outreach activities to date WHY THE IAASB UNDERTOOK THE INITIATIVE Technology continues to evolve at a rapid pace, impacting the way that audits are undertaken.

The IAASB has recognized the importance of understanding how the use of technology, and more specifically data

analytics, is influencing audit quality. In order to ensure that the International Standards on Auditing (ISAs) continue to form the basis for high quality, valuable and relevant audits, the IAASB agreed to explore whether the ISAs remain “fit for purpose” in light of emerging developments in the technologies used by auditors.

The DAWG was established in mid-2015, and its activities have included the monitoring and gathering of information on the various applications of data analytics and the relationship to the financial statement audit (including, for example the effect on risk assessments, testing approaches, analytical procedures and other audit evidence). The DAWG has also undertaken extensive outreach with a broad range of stakeholders, as well as benefited from the insights gained from robust discussions and debate on the topic of data analytics at various IAASB meetings.

Against this backdrop, the IAASB decided to issue the RFI to explore relevant issues, and to determine what actions may be appropriate going forward.

The purpose of the RFI was to:  Inform stakeholders about the IAASB’s ongoing work to explore effective and appropriate use of technology, with a focus on data analytics, in the audit of financial statements; and Obtain stakeholder input and perspectives on whether all

4% 4%

10%

PURPOSE OF THIS FEEDBACK STATEMENT This Feedback Statement provides an overview of the key messages from the responses to the questions in the RFI. The views expressed offered valuable insights relevant to the ongoing work of the IAASB and sharing them will be useful in stimulating further thinking and exploration of this very important topic.

OVERVIEW OF RESPONDENTS The comment period closed on February 15th, 2017, with 51 responses received from a broad range of stakeholders across a wide range of jurisdictions (the Appendix sets out the names of the respondents). The responses to the six questions posed were supportive of the DAWG in its current role and encouraging in future directions expressed in the RFI.

RESPONDENTS

12%

6% 14%

31%

the considerations relevant to the use of data analytics in a financial statement audit have been identified.

19%

Regulation and Oversight Authorities National Auditing Standard Setters Accounting Firms Member Bodies and Other Professional Organisation Public Sector Organisation Academics Investors Indivituals and Others

WHAT WE HEARD Key Messages  Respondents expressed strong support for the work of DAWG, praising both the summary of the current data analytics landscape and its role in developing consensus around key issues and contributing to the improvement of audit quality.  The ISAs aren’t “broken” and should remain principlesbased, but need to reflect the digital era in application guidance. Respondents overwhelmingly described a strong desire for practical guidance on the use of data analytics technology. Most respondents believe that the principles in the extant ISAs are still appropriate and accommodate the use of data analytics, and caution against prematurely rushing to change requirements in the standards.

 Applying Professional Skepticism when using data analytics remains paramount, as professional skepticism is integral to understanding the benefits and limitations of data analytics in view of its intended use in the audit

and consideration about the outputs from procedures being performed using data analytics.

Environmental Factors and Circumstances Impacting the use of Data Analytics in a Financial Statement Audit.

It was emphasized by accounting firms that they are investing heavily in data analytic technology and thus consider the work of the DAWG both timely and relevant.

Respondents generally view the DAWG as a catalyst to develop consensus around key issues, whose work will contribute to the improvement of audit quality.

The RFI listed a number of circumstances and factors that impact the use of data analytics in a financial statement audit.

These include data acquisition; conceptual challenges, in that data is being used differently than in past audits; legal and regulatory challenges; resource availability; how regulators and audit oversight authorities maintain oversight; and the investment in re-training and re-skilling auditors.

Respondents also emphasized the importance of exercising professional skepticism when using data analytics, including making the link to the procedures performed, the nature of the evidence obtained

There was overwhelming agreement by all the respondents with the circumstances and factors impacting data analytics listed in the RFI.

Regulators and oversight authorities and national auditing standard setters were most concerned with issues of data acquisition and auditor skills, noting that the source and quality of the data remained a key consideration. It was also noted that audit clients may be hesitant to provide access to live operational systems, and therefore that the results of the data analytics procedures undertaken are only as reliable as the data upon which the results are based.

Accounting firms shared the concerns noted in the RFI about retraining and re-skilling auditors. Many respondents believed this challenge applies to a broader audience; for example, it was noted that regulators and audit committees would need the ability to understand the data analytics performed as part

of assessing the work of the auditor. Accordingly it would be likely that collaboration with universities and other educational institutions, including those providing continuing professional education, would also be necessary.

Respondents from accounting firms highlighted concerns about regulators and oversight authorities maintaining oversight in a rapidly changing area, when these authorities have little experience themselves of inspecting audits involving the use of data analytics and other technology innovations.

Accounting firms identified a reluctance to embrace data analytics because of the concern that regulators may have different interpretations on how audit standard objectives are met. For example,

one respondent is aware of situations in which auditors used data analytics on 100% of a population, but also believed it necessary to perform sampling procedures on the same population to meet the requirements of the ISAs. Firms also noted that data analytic technology and tools are likely to be developed globally at the accounting firm or network level. As a result, a consistent approach to oversight may be challenging.

Respondents also discussed the need for data standards (that is, standardization of data) and suggested involving the Internet Engineering Task Force.

Audit Standard-Setting Challenges All of the respondents expressed agreement with the challenges identified in the

RFI. Regulators and oversight authorities highlighted the biggest challenge as relating to the determination of whether the requirements of the ISAs have been met. These respondents were particularly concerned with how audit evidence provided by data analytics is demonstrated within the existing audit model, in particular in applying the documentation requirements.

National auditing standard setters emphasized the challenge of considering the relevance and reliability of data, whether internally generated or external to the entity, and determining the appropriate level of work effort for exceptions identified.

Other possible challenges identified by respondents included:

1

How stakeholder expectations are managed in relation to the procedures undertaken, for example, reference to “100% testing� may be misleading in some instances. The impact of other emerging and evolving technologies, such as block chain.

2

Differences in the audit approach (or quality control processes) when using internally developed data analytics tools versus third-party tools.

3

Performing data analytic procedures on non-financial data.

4

The impact on the audit when the client integrates data analytics in its control environment.

5

How the concept of performance materiality applies when designing data analytic audit procedures.

6

Ethical requirements; for example, the implications when the client integrates its own or the auditor’s data analytic technology or tools in its control environment.

7

The impact of auditor rotation; for example, the work effort required during the audit of opening balances when the prior year auditor utilized data analytic technology or tools.

The Standard-Setting Path Ahead Respondents offered a variety of suggestions for possible ways to meet the challenges described in the RFI. While some suggested that changes to the standards may be needed, most cautioned against rushing to change the requirements in the standards.

Many respondents urged that the standards should remain principles-based, believing that provides the flexibility necessary to accommodate the rapid pace of technological change.

Most respondents identified guidance in using data analytics to meet the requirements of the ISAs as one possible

1 Retaining the risk-based approach in the ISAs.

2 Considering the implications for audits in which data analytics are not being applied.

solution to the standardsetting challenges. Practical guidance is widely seen as the best way in the short-term to address the challenge that, while the current standards do not prohibit the use of data analytics, they do not encourage the use of innovative, technology-enabled procedures. It was noted that as compared to revising standards, non-authoritative guidance, with real-life examples, can be produced more quickly.

solutions were also provided.

A key suggestion included having the International Accounting Education Standards Board’s (IAESB) International Accounting Education Standards address the perceived skills gap in data analytics among auditors.

Regulators and oversight authorities also provided insights as to matters of importance to consider as revisions are made to the standards, including:

Specific suggestions from respondent groups for possible

3 Clarifying when data analytics may be appropriate in all standards for which the issue is relevant.

4

Clarifying that when data analytic procedures are applied, documentation should be sufficient for a knowledgeable third party to understand and support the conclusion reached.

5 Revising the standards in a way that reflects current technology, yet remains technologically neutral and provides the ability to adapt to and accommodate changes in technology.

National auditing standard setters urged continued engagement with stakeholders, specifically auditors already utilizing data analytics, data analytic specialists and data scientists, and software developers.

Accounting firms stressed that the development of nonauthoritative guidance is critical, and expressed concern that premature standardsetting might hinder or slow down innovation.

Public sector organizations repeated the themes expressed by other respondents, such as keeping the standards technologically neutral. Some public-sector organizations urged caution against developing premature solutions; one noted that it is “early days for solutions” and the “emphasis… should be on observing the responses

of practitioners to these challenges.”

Member bodies echoed the call for guidance on the use of audit data analytics, and the need for auditing standards to remain principles-based and sufficiently flexible and adaptable in a changing business environment. Some suggested engaging in the work of others in various projects relating to data analytics (for example the AICPA). As with other groups of respondents, comments regarding changing standards spoke to the balance required between obtaining sufficient information to revise well-established requirements and having an excess of caution that hinders innovation.

Academics noted that active communication between accounting firms, academic institutions, regulators, DAWG, and other standard-setters is

essential, so that the standards reflect current practice and developments. Individuals and others who responded also stated that priority should be given to developing nonauthoritative guidance and emphasized the importance of training of auditors. Some respondents believe that currently, auditors tend to have an insufficient understanding of IT to be able to come up with relevant and effective audit procedures using data analytics.

IAASB Projects Currently Underway The IAASB currently has a number of ongoing projects and initiatives, as detailed in its Work Plan for 2017–2018.

As stated in the RFI, the DAWG is actively involved in the IAASB’s current projects on professional skepticism, ISA 315 (Revised) 1 , quality

control and group audits (ISA 6002 ), to contribute to the further progress of those projects, including where the standards addressed by those projects might make reference to or include language related to data analytics.

increased or accelerated. Views were expressed that projects with the potential to advance data analytics be given priority, and that the IAASB may need to invest additional resources to progress data analytics related activities.

All respondents supported the DAWG’s planned involvement in these projects, and many suggested that the DAWG’s involvement needs to be

Respondent’s Views on Next Steps Respondents overwhelmingly supported the next steps of

Next

the IAASB and DAWG that were included in the RFI. Respondents suggested that the revision of ISA 230, Audit Documentation, and ISA 500, Audit Evidence, be prioritized by the IAASB and that the effects of new technologies, such as block chain, artificial intelligence, and robotics, be considered. Most significantly, responses to the question about next steps reiterated the importance of guidance.

THE WAY FORWARD

The importance of the use of data analytics in a financial statement audit has been recognized by the IAASB and its stakeholders.

The DAWG is committed to exploring and understanding how the use of technology and more specifically, data analytics, can enhance audit quality, and to articulating this clearly for stakeholders.

Firstly, the DAWG will continue

inputting to current IAASB projects through its interaction with current IAASB project task forces and working groups, so that the IAASB’s standards, as they are developed and revised, will appropriately incorporate more up-to-date considerations relevant to the use of data analytics in current and future financial statement audits. As the IAASB commences its work on audit evidence (incorporating further

consideration of data analytics in the ISAs) The IAASB will also continue to monitor the activity of the AICPA Audit Evidence Task Force and consider the implications for potential revisions to ISA 500. (Note that this monitoring will be facilitated by the fact that the chair of the DAWG is also chair of the AICPA Audit Evidence Task Force.)

The IAASB firmly believes that further exploration of this topic is key. The DAWG will therefore continue its outreach, including, as appropriate, activities such as roundtables, both in-person and virtual, with for example a variety of firms to more fully understand current applications of data analytics, and to learn more about the firms’ concerns and best practices. The DAWG will also consider how it can leverage the work of others in this area by reaching out to other groups who are also exploring the sue of data analytics in a financial statement audit, for example, the DAWG intends to establish on-going interaction with the US Public Company Accounting

Oversight Board (PCAOB), and will continue dialogue with the Data Analytics Project Advisory Panel.

The DAWG will also refer the feedback received from respondents about other technologies whose impact on auditing deserves further consideration, such as blockchain technology, artificial intelligence, robots, etc., to the IAASB’s Innovation Working Group.

The objective of the Innovation Working Group is to explore emerging developments in the audit, assurance and related services fields for the purpose of assisting the IAASB

in identifying opportunities for relevant and effective standard setting, or determining other potential actions, in a timely and informed manner, especially in light of the IAASB’s development of its Strategy and Work Plan for 2020–2023.

Heeding the strong call for guidance from the respondents to the RFI, the DAWG has begun drafting examples and illustrations of the use of data analytics for inclusion in the application material of the IAASB standard-setting projects noted previously that are intended to illustrate how data analytics can be used in meeting the requirements of the auditing standards and enhancing audit quality.

THE NO INPUT VAT CLAIM – NO OUTPUT VAT PRINCIPLE

By Jonathan Hore Managing Tax Consultant Aupracon Tax Specialists

There is an interesting aspect in the VAT Act in which a VAT-registrant does not have to charge output VAT in cases where s/he is denied input VAT. VAT can only be charged by a person who is registered for VAT. That person is required to regularly file VAT returns to BURS in respect of transactions that would have occurred during each tax period. A tax period is either a period of 1 or 2 months of trading, during which the VAT registrant is required to account for VAT. VAT charged by a VAT registrant is called Output Tax whilst VAT paid or incurred when a VAT registrant acquires services and goods is called Input Tax. WHEN IS VAT CHARGED? VAT registrants are required to charge VAT in almost all

instances in which they make supplies of taxable goods or services. Taxable supplies refer to the sale of goods or services on which VAT is required to be charged. Supplies on which VAT is charged at 12% are commonly referred to as standard-rated supplies. Zerorated supplies is a term referred to supplies chargeable at zero percent. Where VAT is not chargeable at all, the supplies are referred to as exempt supplies. It follows therefore that except if the supply is exempt or is a non-supply, a VAT registrant should charge VAT on such supply. This means that the VAT registrant should charge VAT and pay it to BURS or offset it against VAT incurred and then net is paid or claimed from BURS.

LEGAL BACKING FOR THE PRINCIPLE The major exception to the rule that VAT should be charged whenever a taxable supply is made is when the VAT registrant is denied an input tax claim on acquiring the goods or services. The authority to this principle is section 4(19) of the VAT Act, which prescribes that

‘where a registered person supplies goods or services and a deduction for input tax paid on the acquisition of such goods or services was denied, the supply by the registered person is a supply of goods or services otherwise than in the course or furtherance of a taxable activity.’,

The above quote basically prescribes that a VAT registrant who has been denied input tax on acquiring goods or services should not charge VAT on the supply of the same goods or services to clients. I must hasten to state that this, in practice, applies to goods more than it does to services.

WHEN IS INPUT TAX DENIED? Input tax is denied in a number of instances, primarily by section 20 of the VAT Act. The most common example of a scenario where input tax cannot be claimed is on the purchase or hire of a passenger vehicle by a person who does not deal in or hire passenger vehicles. The VAT Act defines a passenger vehicle as a vehicle which carries not more than 9 seated passengers.

These are vehicles primarily designed for the conveyance of passengers and not goods,

i.e. bakkies and lorries are not passenger vehicles. A tax consulting firm cannot claim input tax whenever it purchases passenger vehicles but a car dealer or a car hire company can. So, for the tax consulting firm, it is denied an input tax claim whilst the car dealer/ trader is not denied the input tax claim.

Another example of scenarios where input tax is denied is on the purchase of canteen equipment or the construction of canteen buildings. The basis for such denial is that such expenditure is regarded as entertainment and as such, input tax can only be claimed by those in the business of providing entertainment such as hotels. A tax consulting firm cannot therefore claim input VAT on the purchase of canteen equipment..

NO INPU TAX CLAIM – NO OUTPUT TAX! So, the VAT Act clearly states that where a VAT registrant is denied input tax, s/he shall not be required to charge VAT whenever s/he makes a supply of that good or service. Below are scenarios which put this concept into perspective:

Company A, a tax consulting firm, purchased a Toyota Hilux, which is a passenger vehicle for P 300 000 and could not claim the VAT thereon of P 36 000. When the company sells the vehicle, it cannot charge VAT on the basis that it was denied input tax on acquisition. This is still applicable despite the fact that VAT is charged on the sale of passenger vehicles; and An audit firm acquired a fridge (considered entertainment) and did not claim the VAT on acquisition. The audit firm cannot charge VAT on the subsequent sale of the fridge on the basis that a VAT claim was denied

This is what is basically referred to as the no input tax-no output tax principle and hoping it was insightful.

Disclaimer: Jonathan Hore is a practicing Tax Consultant with over 17 years in Tax and Customs matters and writes on behalf of Aupracon Tax Specialists. The information contained in this article is of a general nature and is not meant to address particular circumstances of any person.

IPSAS 33 - FIRSTTIME ADOPTION OF ACCRUAL BASIS IPSAS – Article III.

By George Kiilu, Director, Rankuke Investment (Pty) Ltd

In this third article we turn our focus to paragraphs 64 – 87 which offer exemptions that do not affect fair presentation and compliance with accrual basis IPSASs during the period of adoption. A first time adopter is required, or may elect to adopt these.

USING DEEMED COST TO MEASURE ASSETS AND/OR LIABILITIES Where a first time adopter is not able to reliably obtain information about the cost of assets/liabilities, he may elect to use fair values of the following assets/liabilities as deemed cost. (a) Inventory (see IPSAS 12); (b) Investment property, if the first-time adopter elects to use the cost model in IPSAS 16; (c) Property, plant and equipment (see IPSAS 17);

(d) Intangible assets, other than internally generated intangible assets (see IPSAS 31) that meets: (i) The recognition criteria in IPSAS 31 (excluding the reliable measurement criterion); and (ii) The criteria in IPSAS 31 for revaluation (including the existence of an active market) (e) Financial Instruments (see IPSAS 29); or (f) Service concession assets (see IPSAS 32).

Use of fair values as deemed costs does not constitute a revaluation or the application of fair value model for subsequent measurement in accordance with other IPSASs. If a first time adopter had revaluation amounts under its previous basis of accounting, then such amounts may be used as deemed costs if the following criteria is complied

with. That the amounts are broadly comparable to:  Fair value or Cost or depreciated cost, where appropriate, in accordance with IPSASs is adjusted to reflect, say changes in a general or specific price index.

A first time adopter may also use event driven fair value measurements as deemed costs if the following criteria is fulfilled.  If the measurement date is at or before the date of adoption of IPSASs, such event-driven fair value measurements may be used as deemed cost for IPSASs at the date of that measurement.  If the measurement date is after the date of adoption of IPSASs, but during the

period of transition, the event-driven fair value measurements may be used as deemed cost when the event occurs. A first-time adopter shall recognize the resulting adjustments directly in accumulated surplus or deficit when the asset is recognized and/or measured In the case of inventory or investment property of a specialized nature, a first time adopter may consider the following measurement alternatives in the absence of market-based evidence of fair value to determine deemed costs.  For inventory, current replacement cost; and  For investment property of a specialized nature, depreciated replacement cost.

USING DEEMED COST TO MEASURE ASSETS ACQUIRED THROUGH A NONEXCHANGE TRANSACTION If no reliable cost information about an asset acquired through a non-exchange transaction is available, a first time adopter may elect to use the assets fair value.

USING DEEMED COST FOR INVESTMENTS IN CONTROLLED ENTITIES, JOINT VENTURES AND ASSOCIATES (IPSAS 34) Where a first-time adopter measures an investment in a controlled entity, joint venture or associate at cost in its separate financial statements, it may, on the date of adoption of IPSASs, elect to measure that investment at one of the following amounts in its separate opening statement of financial position:

 Cost; or  Deemed cost. The deemed cost of such an investment shall be its fair value (determined in accordance with IPSAS 29) at the first-time adopter’s date of adoption of IPSASs in its separate financial statements.

DATE AT WHICH DEEMED COST CAN BE DETERMINED Where a first time adopter takes advantage of paragraph 36, the date can either be  any date within the transition period On the date the exemptions expiry. Where the first time adopter does not take advantage of paragraph 36 the date will be  at the beginning of the earliest period for which

he presents IPSAS financial statements. When a deemed cost is determined during the transition period, a first-time adopter shall recognize the adjustment against the opening accumulated surplus or deficit in the year in which the deemed cost of the asset and/or liability is recognized and/or measured.

IPSAS 1, PRESENTATION OF FINANCIAL STATEMENTS PARA 77 - 84.

Comparative Information A first time adopter is not required to present comparative information either when presenting its first transitional IPSAS financial statement or

 its first accrual based IPSAS financial statementBut where comparative information is presented then it shall conform to the requirements of IPSAS 33.

Where a first time adopter opts not to present comparative information, then its first transitional IPSAS financial statement or first accrual based IPSAS financial statements shall include the following: One statement of financial position, and an opening statement of financial position at the date of adoption of accrual basis IPSAS;  One statement of financial performance; One statement of changes in net assets/equity; One cash flow statement; A comparison of budget

and actual amounts for the current year as a separate additional financial statement or as a budget column in the financial statements if the first-time adopter makes its approved budget publicly available; and Related notes and the disclosure of narrative information about material adjustments as required by paragraph 142.

Where a first time adopter opts to present comparative information, then its first transitional IPSAS financial statement or first accrual based IPSAS financial statements shall include the following  One statement of financial position with comparative information for the preceding period, and an opening statement of

financial position as at the beginning of the reporting period prior to the date of adoption of accrual basis IPSAS;  One statement of financial performance with comparative information for the preceding period;  One statement of changes in net assets/equity with comparative information for the preceding period;  One cash flow statement with comparative information for the preceding period;  A comparison of budget and actual amounts for the current year as a separate additional financial statement or as a budget column in the financial statements if the first-time adopter makes its approved budget publicly available; and

 Related notes including comparative information, and the disclosure of narrative information about material adjustments as required by paragraph 142.

Where a first time adopter applies the transition exemption, comparative information for the year following the date of adoption of IPSASs shall be adjusted only when information is available about the items, following their recognition and/or measurement during the relief period.

NON-IPSAS COMPARATIVE INFORMATION Where a first time adopter decides to use comparative information based on the previous basis of accounting then i.He must ensure that this information is clearly labeled as not prepared in accordance with accrual IPSAS ii.He must disclose the nature of the main adjustment required to comply with IPSAS iii. He should not apply transitional exemptions and provisions provided by this standard.

NON-IPSAS HISTORICAL SUMMARIES The standard does not require presentation of historical summaries to comply with recognition and measurement

requirements, but where the first time adopter elects to do so under the previous basis of accounting then, he must prominently label that information and disclose the nature of the main adjustments that would be required to comply with IPSASs IPSAS 4, THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES - PARA 85 - 87 Where a first time adopter of IPSASs opts not to comply with the requirements for cumulative translation differences that existed at the date of adoption of IPSASs then All cumulative translation differences for all foreign operations shall be deemed to be zero at the adoption date and

Any gain or loss on a subsequent disposal of any foreign operation shall exclude only translation differences arising before the adoption date.

A first time adopter is permitted to treat any goodwill and fair value adjustments thereon arising from acquisition of a foreign operation as assets or liabilities of that operation prospectively on the date of adoption of IPSASs. A first time adopter who applies the provisions of para 85 shall a) not restate prior years for the acquisition of a foreign operation acquired prior to the date of adoption of IPSASs b) where appropriate, treat goodwill and fair value adjustments arising on acquisition as its assets and liabilities rather than as assets and liabilities of the foreign operation.