Not-for-profit organisations, and thus the congregations and welfare organisations of the Dutch Reformed Church in the Free State, exhibit certain unique characteristics, different from businesses. In essence, the primary objective of not-for-profit organisations is not to realise a profit to be distributed to equity participants (e.g. shareholders), but to meet certain religious, cultural, social and other non-commercial needs of the community. Not-for-profit organisationsâ need for relevant accounting standards in fact emanates from their unique characteristics. Owing to the nature of not-for-profit organisations, the users of their financial statements require information (financial and non-financial) which is different from the information required by users of financial statements of businesses. Financial reporting which makes it possible for the users of financial statements of not-for-profit organisations to assess the stewardship of the organisationâs management, is the central focus because management are accountable to the members of the organisation, and also especially to donors. Standards of Generally Accepted Accounting Practice (GAAP) are drawn up primarily for businesses, and specifically to enable users of financial statements of companies in the international capital markets, to make economic decisions. Given this fact, and the unique nature and characteristics of not-for-profit organisations, it follows that Standards of GAAP are neither relevant nor appropriate in the case of not-for-profit organisations. Standards of GAAP therefore cannot be applied indiscriminately to not-for-profit organisations, albeit that appropriate South African legislation (Nonprofit Organisations Act) probably requires compliance with Standards of GAAP. In the international accounting environment, attempts have been made to develop unique accounting standards for small- and medium-sized entities, while unique accounting standards have also been drawn up for government institutions on the basis of their unique accounting needs. The same approach should also be followed for not-for-profit organisations since their unique nature and characteristics also necessitate typical accounting standards. Where not-for-profit organisations do indeed attempt to apply Standards of GAAP, they nonetheless experience problems in this regard. Some of these problems derive from the theoretical irrelevance of Standards of GAAP, while other problems are of a more practical nature. The fundamental problem derives from the question whether the cash or the accrual basis is the most appropriate in the case of not-for-profit organisations. Moreover, âfund accountingâ is typical of not-for-profit organisations; however, an accounting standard for treatment of âfundsâ does not exist. In addition, various problems are also experienced with the recognition of assets, impairments and depreciation of assets, because the definition of âassetsâ and the recognition criteria do not consider the unique nature of not-for-profit organisations. Various questions exist with respect to the recognitio n of receipts as income. The question in particular is whether donations received for a specific purpose, donations which may only be utilised in future periods, as well as capital donations, should be recorded as income, liabilities or directly as funds. Not-for-profit organisations also experience problems with the recognition of so-called âin naturaâ receipts, and other forms of income. Given the nature and characteristics of not-for-profit organisations, performance reporting is also problematic because the âprofit figureâ and other reported financial information often do not capture the real âperformanceâ (i.e. the achievement of objectives) of not-for-profit organisations. Furthermore, certain terminologies in GAAP are also not applicable to not-for-profit organisations. In some countries, accounting standards have been developed and issued specifically for not-for-profit organisations. The standards issued by the United States of America , the United Kingdom, Canada and Australia have been analyse d and compared to establish appropriate accounting principles for not-for-profit organisations. Accounting practice, applied in the above-mentioned countries, was reviewed by means of empirical tests among congregations and welfare organisations of the Dutch Reformed Church in the Free State. Specific aspects that were addressed and which have led to proposals for typical standards of generally accepted accounting practice for not-for-profit organisations are the following: · Presentation of financial statements; · Reporting on the restrictions imposed by donors on the utilisation of funds; · Accounting in terms of a cash basis versus the accrual basis ; · Recognition and measurement of fixed assets and accompanying expenses, such as depreciation and impairments, as well as the recognition and measurement of inventory; · Recognition and measurement of income in general, and in particular, recognition of donations and contributions, ârestricted donations receivedâ, and donations âin naturaâ; · Performance reporting by not-for-profit organisations; and · Aspects related to fund accounting. The core recommendations derive from the position that existing and formal Standards of GAAP should be used as a basis, and these standards should be modified to deal with the typical accounting concerns that pertain to not-for-profit organisations. The accounting profession, not-for-profit organisations, and other stakeholders must take note of the irrelevance of GAAP for not-for-profit organisations, the accounting problems experienced in the context, as well as the need for, and the recommendations made with respect to typical accounting standards for not-for-profit organisations. Like some other countries, South Africa should also play an active role in developing accounting standards which are applicable and relevant to not-for-profit organisations.

The purpose of the study is to trace the development of risk-based audit approaches, in order to understand the complexities and difficulties of these approaches, as well as to evaluate these risk-based audit approaches, with the objective of assisting in the process of improving the risk-based audit approach followed by the audit profession. The only defence auditors have against the anger (or frustration) of stakeholders in instances of corporate failures is sufficient, appropriate audit evidence that proves their innocence. This audit evidence will be the result of a well-planned and performed audit. An audit approach, currently a risk-based audit approach, is therefore a crucial component in the performance of an audit. Changing the risk-based audit approach is a normal consequence of the striving for the improvement and development of the services that the auditing profession provides. In developing the risk-based audit approach, there are certain complexities surrounding an audit that should be considered. The major complexities in the performance of an audit are: first, the expectation gap; second, the uncertainties surrounding the responsibilities of the auditor; third, the provision of reasonable assurance, and fourth, the practical implementation of audit standards. The auditing profession should, during this continuous process of changing the auditing standards and guidance, consider and evaluate changes against the theoretical foundations of auditing to support the credibility of the audit process. The theoretical framework that formed the background of this study is discussed in the second chapter, including the meaning of ârisk-based audit approachesâ. Audit approaches are discussed that developed before the acceptance of the risk-based audit approach, together with audit approaches that were never followed or accepted by practitioners, and which influenced the development of risk-based audit approaches. The development of the first risk-based audit approach, the statistical audit risk approach (audit risk model) that originated from the Elliott and Rogers model is discussed in the third chapter. The critique on the statistical audit risk approach is summarised and consists mainly of the following: that the audit risk modelâs event structure is ill-defined and that the risk components lack independence, which is a basic assumption for the use of the multiplicative formula. The risk components are complex and interdependent and are difficult to assess therefore, practitioners prefer to assess these risk components in linguistic terms e.g. low, medium and high. The multiplicative rule does not provide protection against an understatement of audit risk if the audit outcome space is not completely specified and when a revision of the audit plan is needed. The aggregation of the individual risks is problematic and therefore the audit risk model should be used only for planning purposes. The development of the inherent risk audit approach (audit risk model from a conceptual perspective) is discussed in the fourth chapter. The critique against the inherent risk audit approach includes the unsuccessful decomposition structure of audit risk, due to the interdependency of inherent risk and control risk. The concept of âinherent riskâ is also too broad and vague. The business risk audit approach is also discussed in the fourth chapter. This approach was developed by audit firms as an intended improvement on the inherent risk audit approach and is still widely used. The main critique against the business risk audit approach is the lack of a clear link between business risks and possible risks of material misstatement. The ârisk-process audit approachâ is addressed in the fifth chapter. For the purposes of this study, the name of the current risk-based audit approach is the risk-process audit approach. The reason for this formulation is the emphasis in the audit risk standards on the risk management tasks. The concept of âriskâ in the performance of the task of identification of risks is, in essence, a choice in which the auditor has the freedom to choose an approach, and is referred to as ârisk of material misstatementâ. The concept of ârisk of material misstatementâ is much broader and different from the suggested definition in the auditing standards, and includes the consideration of potential misstatements according to the assertions on the assertion level (assertion-focus), and lacks conceptual clarity. The criteria for the task of âassessment of identified risksâ are as follows: the different types of assertions are used as the criteria for assessing risks of material misstatements through the identification of possible misstatements. The concept of âmisstatementsâ is the criterion used to consider the likelihood of misstatement(s), and the concept of âplanning materialityâ is used to consider the magnitude of misstatement(s). In the sixth and final chapter of this study, the development of risk-based audit approaches is summarised through a comparison of the risk-based audit approaches. In the future development of the current risk-process audit approach it is suggested that a fourth aspect, the significance of audit procedures, additional to the current nature, timing and extent of audit procedures maybe considered in respect of aspects that influence the response to risks of material misstatement included in the audit plan. Furthermore, the definition of the concept of ârisk of material misstatementâ could include the assertionfocus. The importance and possibilities of the division of audit planning in the financial statement level and the assertion level is also not yet fully considered. In conclusion, the author believes that the history of risk-based audit approaches has repeated itself and that the development of the risk-based audit approach and changes thereto were not considered against, and based on a sound foundation of auditing theory.

The International Financial Reporting Standards (IFRSs) requires a number of accounting estimates for the preparation of financial statements. The purpose of this study is to establish the effect of estimates in financial statements. The possible increases in required accounting estimates in the IFRSs are examined by comparing the IFRSs of 2003 to 2006. With this comparison it is established that the requirements of the IFRSs for fair value accounting is mainly responsible for the increases in allowed accounting estimates. The IFRSs of 2006 is examined to establish the frequency of use of estimates in financial statements. In order to get a better picture of the frequency of use of accounting estimates in financial statements, a list of allowed accounting estimates for each of the components on the Balance Sheet (also referred to as the âstatement of financial positionâ) has been compiled. It is concluded that the components on the balance sheet are to a significant extent influenced by accounting estimates. The literature on earnings management and creative accounting are examined to determine if there is any risk that accounting estimates could be used to manipulate financial statements. This gives an indication of the reliability of accounting estimates within financial statements. It is concluded that the difference between fair presentation and creative accounting seems to be the intention of management which is difficult to assess. The âcorporate reporting supply chainâ has some responsibilities to prevent and detect creative accounting practices and fraud. These responsibilities can limit the risk that accounting estimates may be used in creative accounting and financial statement fraud. In the wake of some financial disasters, these checks and balances should restore public trust in financial reporting. An empirical study is performed on five companies that form part of the Construction and Materials sector of the JSE to establish the effect of estimates on their financial statements. The study indicated that: ⢠the average percentages of assets, including cash and cash equivalents, of the five companies affected by accounting estimates are 60% for 2004, 60% for 2005 and 59% for 2006. If cash and cash equivalents are excluded from the calculation of assets affected by accounting estimates, the average percentages are 72% for 2004, 77% for 2005 and 76% for 2006; ⢠there is an increase in the number of âestimateâ hits from 2004 to 2006 in the financial statements of the five companies in the empirical group; and ⢠the disclosure provided on key sources of estimation uncertainty is however, limited. A number of recommendations are made to limit the risk that accounting estimates could be used for creative accounting purposes. The negative effect of the use of accounting estimates in financial statements is a loss of reliability. The positive effect of the use of accounting estimates in financial statements is that of relevance.