Auditing Standards Chapter XI

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Questions and Answers

Which principle must an authorised user, participant, or clearing member of an independent clearing house or central counterparty follow?

Acting honestly and fairly in the interest of a client (correct)

Striving for personal gain over client satisfaction

Acting covertly to protect client interests

Avoiding communication with clients to minimize conflict

What is a key aspect of the conduct standard for regulated persons other than those mentioned in subsection (1)?

Acting honestly and fairly while considering client interests (correct)

Prioritizing company profits over client care

Disclosing minimal information to clients to avoid liability

Encouraging clients to take unnecessary risks

Which activity does a conduct standard NOT typically prohibit for regulated persons?

Misleading marketing tactics

Full disclosure of material information (correct)

Fraudulent advertising

Proper record-keeping

What must an authorised user do in situations of conflicting interests?

Act fairly and disclose the conflict to the client Signup and view all the answers

Which of the following is NOT a responsibility of a regulated person under the conduct standard?

Providing false information to clients when beneficial Signup and view all the answers

What does the conduct standard say about proper safekeeping of clients’ funds and securities?

It is mandatory to protect clients’ interests Signup and view all the answers

What should an authorised user do to understand a client's needs under the conduct standard?

Seek information about the client's financial position and objectives Signup and view all the answers

Which action aligns with the principle of upholding the integrity of financial markets?

Reporting any discrepancies or unethical behavior Signup and view all the answers

What is the primary requirement for a regulated person in appointing an auditor?

The auditor must engage in public practice and have no financial interest in the regulated person. Signup and view all the answers

Which of the following statements about the auditor's financial interest is true?

No auditor with a financial interest may be appointed to audit a regulated person. Signup and view all the answers

What is required for an OTC derivative provider to become authorized?

The application must contain prescribed information by the Authority. Signup and view all the answers

What must an authorized OTC derivative provider do after executing an OTC derivative transaction?

Report transactions to a licensed trade repository as per the Authority's guidelines. Signup and view all the answers

For how long must a regulated person preserve accounting records?

For a minimum of five years from the last entry. Signup and view all the answers

Which factor is NOT considered when determining eligibility for mandatory clearing of OTC derivatives?

The fees associated with the clearing process. Signup and view all the answers

What is necessary for the annual financial statements prepared by a regulated person?

They must conform to financial reporting standards prescribed under the Companies Act. Signup and view all the answers

What power does the Authority have regarding audits of regulated persons?

The Authority may direct an audit and request results to be submitted within a specified time. Signup and view all the answers

What is the primary responsibility of an authorized OTC derivative provider regarding cleared transactions?

To ensure cleared transactions are submitted to a licensed central counterparty. Signup and view all the answers

In what situation is an auditor required to provide reports despite other laws or codes of conduct?

When required by the Act, regardless of any contrary provisions. Signup and view all the answers

When conducting assessments for mandatory clearing of OTC derivatives, what is prioritized?

Level of contractual and operational standardization. Signup and view all the answers

Which entity must approve the appointment of an auditor for a market infrastructure?

The Authority. Signup and view all the answers

How does the Authority ensure the integrity of the financial system when evaluating OTC derivatives for mandatory clearing?

By assessing the potential impact on the levels of counterparty credit risk. Signup and view all the answers

What is the consequence if an auditor has a financial interest in a regulated person?

The auditor will be automatically disqualified from the appointment. Signup and view all the answers

Which of the following is a relevant consideration for the Authority when determining clearing eligibility?

Resources and suitability of the central counterparty. Signup and view all the answers

What key aspect should be monitored to maintain financial market integrity regarding OTC derivatives?

The interconnectedness between counterparties effect on market stability. Signup and view all the answers

What is the primary responsibility of an authorised OTC derivative provider in relation to transaction reporting?

Report OTC derivative transactions to the relevant licensed trade repository. Signup and view all the answers

Which of the following factors is NOT considered by the Authority when determining eligibility for mandatory clearing?

Estimated profitability of the OTC derivative transactions. Signup and view all the answers

What must a licensed central counterparty do after accepting OTC derivative transactions for clearing?

Report all accepted transactions to a licensed trade repository as soon as practicable. Signup and view all the answers

Which of the following is a determinant factor for the Authority to consider in terms of suitability for OTC derivative clearing?

The interconnectedness between counterparties involved. Signup and view all the answers

Which of the following best defines the Authority's role regarding OTC derivative transactions?

To set eligibility criteria and conduct assessments for mandatory clearing. Signup and view all the answers

What must an authorised OTC derivative provider ensure regarding transactions deemed eligible for clearing?

They are cleared through a licensed central counterparty as prescribed. Signup and view all the answers

What additional requirement may the Authority impose on OTC derivative transactions?

Assessing additional categories of transactions for mandatory clearing. Signup and view all the answers

Which of the following statements is true regarding reporting obligations for OTC derivative transactions?

Reports must be completed using the format prescribed by the Authority. Signup and view all the answers

What is a fundamental principle an authorised user, participant, or clearing member must adhere to in their conduct standard?

Acting honestly and fairly in the interest of a client Signup and view all the answers

In terms of conflict of interest, what must an authorised user specifically do?

Disclose any personal interests that may affect their judgment Signup and view all the answers

What is a required action that must be taken for proper record-keeping under the conduct standard?

Keeping accurate and comprehensive records of all client transactions Signup and view all the answers

Which of the following actions is explicitly encouraged by the conduct standard for regulated persons?

Separating and protecting client funds and securities Signup and view all the answers

What aspect of market conduct is NOT prescribed by the conduct standards?

Disregarding client feedback and concerns Signup and view all the answers

What is one of the specified obligations of a regulated person regarding client interactions?

To seek and consider client information relevant to their services Signup and view all the answers

What must a conduct standard ensure in terms of a regulated person’s duty to clients?

To uphold and maintain the integrity of financial markets Signup and view all the answers

Which of the following practices is encouraged under the conduct standard regarding client information?

Full disclosure of actual or potential own interests to clients Signup and view all the answers

Which of the following actions is prohibited for a person not authorized as an authorised user?

Provide securities services for unlisted securities Signup and view all the answers

Under what condition can a clearing member provide services according to the Act?

If authorized by either a licensed exchange or a licensed independent clearing house Signup and view all the answers

What is the primary requirement for an individual acting as a participant?

To comply with authorizations set by an exchange regulation Signup and view all the answers

What type of licensing is required for a person to operate as a trade repository?

Licensing under section 56 of the Act Signup and view all the answers

What is one of the conditions under which a person may act as an authorised user?

They must be authorized by a licensed exchange in accordance with exchange rules Signup and view all the answers

Which of the following statements accurately reflects the Act's restrictions on authorized users?

They can only provide services as authorized by the licensed exchange. Signup and view all the answers

Which of the following roles requires explicit authorization set forth in the Act?

Acting as an approved nominee Signup and view all the answers

What responsibility does an unauthorised person have regarding advertising for authorized user services?

They must be a participant or an officer of an authorized entity to engage in advertising. Signup and view all the answers

What is the primary aim of the Financial Markets Act in South Africa?

To regulate financial markets for fairness, efficiency, and transparency Signup and view all the answers

Which organization can create rules and directives under the Financial Markets Act?

The Johannesburg Stock Exchange (JSE) Signup and view all the answers

What is a major commitment of the Financial Markets Act regarding OTC derivatives?

To improve trading conditions and mitigate conflicts of interest Signup and view all the answers

Which act did the Financial Markets Act 2012 repeal?

The Securities Services Act, 2004 Signup and view all the answers

Which principle does the Financial Markets Act NOT prioritize?

Ensuring monopoly control over trading practices Signup and view all the answers

What is the maximum duration for which a regulated person is required to preserve accounting records?

Five years Signup and view all the answers

What must the financial statements prepared by a regulated person conform to?

Financial reporting standards prescribed under the Companies Act Signup and view all the answers

What condition disqualifies a firm from being appointed as an auditor for a regulated person?

The firm has a financial interest in the regulated person Signup and view all the answers

What document must an auditor provide, regardless of any conflicting law?

Any report or information as required by the Act Signup and view all the answers

What must the Authority do if it deems necessary regarding an auditor's appointment?

Withdraw the appointment's approval Signup and view all the answers

What requirement is imposed on a regulated person concerning the appointment of an auditor?

The auditor must engage in public practice and have no financial interest Signup and view all the answers

Under what condition can the Authority request an audit of a regulated person's accounts?

Upon written notice specifying a time frame Signup and view all the answers

What is a requirement for maintaining accounting records by a regulated person?

They must be maintained on a continual basis according to joint standards Signup and view all the answers

Study Notes

Auditing Requirements

A regulated person must appoint an auditor who engages in public practice with no financial interest in the business.
Audit firms or their members cannot be appointed as auditors if any financial interest exists with the regulated person or its staff.
The Authority must approve auditor appointments for all market infrastructure entities, with the power to withdraw approval if necessary.

Accounting Records and Financial Statements

Regulated persons must maintain accounting records in accordance with joint standards and prepare annual financial statements meeting the Companies Act requirements.
Annual financial statements need to be audited by the approved auditor within a specified timeframe.
All records must be preserved, including digital formats, for at least five years from the last entry.

Auditor's Reporting Obligations

Auditors are required to provide necessary reports or information as dictated by the Act, overriding any conflicting laws or professional codes.

Authority's Audit Powers

The Authority can direct a regulated person to have accounts audited and requires submission of results by a specified deadline.

OTC Derivative Provider Regulations

Authorised OTC derivative providers must report transactions to licensed repositories in prescribed formats.
Clearings of OTC derivative transactions accepted must be reported promptly to licensed trade repositories.

Mandatory Clearing Requirements

The Authority, along with the Prudential Authority, sets eligibility criteria for transactions requiring mandatory clearing and assesses additional categories for such requirements.
Authorised providers must clear transactions deemed eligible through licensed central counterparties.

Principles of Conduct Standards

Conduct standards are binding for authorised users and participants of independent clearing houses or counterparties and their related officers and clients.
Authorised users must act with integrity, skill, and diligence in clients' interests, ensuring proper operational resources are in place.

Client Interaction and Fairness

An authorised user must gather relevant client financial information and act fairly, especially with conflicting interests in mind.
Regulated persons must act honestly and maintain market integrity while serving client interests.

Provisions for Conduct Standards

Conduct standards may include requirements for transparent disclosure of interests, effective record-keeping, and protection of client funds.
Standards should also prevent fraudulent advertising and ensure proper handling of clients' transactional documents.

Financial Markets Act (FMA) Overview

Enacted in South Africa as Act 19 of 2012 to promote fairness, efficiency, and transparency in financial markets.
Repealed the Securities Services Act of 2004, establishing it as the main regulatory framework for financial markets.
Introduces regulations for over-the-counter (OTC) derivatives in line with G20 commitments.

Key Objectives

Enhance investor confidence in financial markets.
Regulate OTC derivatives and improve trading practices to eliminate misleading and conflict-of-interest transactions.
Align national legislation with international standards from bodies like G20 and Basel Committee.

Regulatory Framework

Establishes rules for exchanges, central securities depositories, clearing houses, trade repositories, and overall market infrastructure.
Prohibits insider trading and market manipulation, ensuring a safe and fair trading environment.

Licensing and Authorizations

Authorisation required for individuals or entities to operate as users, participants, or clearing members.
Self-Regulatory Organisations, like the JSE, have powers to create rules and oversee their members without requiring an FSP license.

Reporting Obligations (Section 3)

OTC derivative providers must report transactions to licensed trade repositories as specified by the Authority.
Licensed central counterparties must report cleared transactions promptly to trade repositories.

Clearing Requirements (Section 4)

The Authority with the Prudential Authority sets criteria for mandatory clearing of qualifying OTC derivatives.
Providers must clear eligible OTC transactions through licensed central counterparties.

Prohibitions (Section 4)

Unauthorized trading as an user, securities services for unlisted securities, or acting as a nominee is prohibited.
Strict conditions for operating as a participant or clearing member to maintain regulatory integrity.

Conduct Standards (Chapter VIII)

Establishes requirements for all regulated persons to act honestly and fairly, maintaining market integrity and prioritizing client interests.
Include stipulations on resource management, conflict of interest transparency, record-keeping, and client fund protection.

Auditing Provisions (Chapter XI)

Regulated entities must appoint independent auditors who have no financial interest in the entity.
Mandatory annual audits of accounting records and financial statements in compliance with Companies Act standards.
Audit results must be submitted to the Authority upon request.

Information Reporting

Auditors are required to provide necessary reports to the Authority without conflict with professional conduct codes.

Authority's Powers

The Authority can mandate audits of regulated persons' financials and records, ensuring compliance with the Act.

Conclusion

The Financial Markets Act serves as a comprehensive reform of South Africa's financial market framework, promoting transparent operations and regulatory adherence to protect investors and stabilize the financial system.

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Description

Test your knowledge on Chapter XI of the Auditing Standards, focusing on the regulations regarding the appointment and responsibilities of auditors. This quiz covers essential definitions and legal requirements necessary for maintaining compliance in public practice. Perfect for students and professionals in the accounting field.