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What do B-BBEE Rating Agencies mean with the term “Assessing Risk?"



* With reference to Government Gazette No.31255, issued on the 18th of July 2008, more commonly known as the Verification of and Reporting on Broad-Based Black Economic Empowerment in terms of The Codes of Good Practice, (Verification Manual of 2008).


Sanas accredited B-BBEE Rating Agencies are accredited on the basis of the technical application of this manual on the B-BBEE Codes of Good Practice.



B-BBEE Rating agencies need to pay special attention to the following concepts contained within this manual when determining a final outcome of the measured entity’s BEE compliance status:


Admissible / Appropriate Evidence

- refers to the measurement of the quality of evidence in respect of its relevance and reliability in providing support for or detecting misstatements affecting individual scorecard elements. The reliability of evidence is influenced by its source and its nature and is dependent on the individual circumstances under which it is obtained.


Control Risk

- the risk that a misstatement that could occur in an assertion from which the elements of the scorecard of the measured entity are derived and B-BBEE status determined, will not be prevented or detected and corrected on a on a timely basis by the measured entity’s internal control.


Detection of risk

- refers to the risk that the B-BBEE Rating Agency procedures will not detect a misstatement that exists in an assertion from which the elements of the scorecard of the measured entity are derived and B-BBEE status determined.


Evidence

- refers to all the information used to establish a fact in issue. Including information supplied by the measured entity and used by the B-BBEE Rating Agency in determining the scores allocated to individual B-BBEE scorecard elements and B-BBEE status for the measured entity. Evidence includes the information contained in the accounting records underlying the financial statements and other information relating to the measured entity’s B-BBEE scorecard elements obtained through inquiry, inspection of records or documents or written confirmations, recalculations and analytical procedures.


"B-BBEE Rating agencies need to pay special attention to the following concepts contained within the manual when determining a final outcome of the measured entity’s BEE compliance status."

Inherent risk

- refers to the susceptibility material misstatement of an assertion from which the elements of the scorecard of the measured entity are derived and B-BBEE status determined to misstatement that could be material assuming that there were no related internal controls.


Materiality

- refers the extent to which the omission or misstatement of information could influence the determination of the individual scorecard elements or the overall rating and B-BBEE status. Materiality depends on the impact of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut off point rather than being a primary qualitative characteristic which information must have if it is to be useful.

Professional Skepticism

- refers to a questioning approach coupled with the critical assessment of information.

Random Sampling leads to the request of information which is different from one year to the next. By assessing the risk of a measured entities portfolio, the concept of random sampling comes into effect. Random Sampling is therefore the application of verification procedures to less than 100% of items selected within a group or class of transactions in a manner which provides all units of a group “the population” with an equal chance of selection.

This will enable the Rating Agency to obtain and evaluate evidence about some characteristic of the items selected in order to form, or assist in forming a conclusion concerning the population from which the sample is drawn.

· The “population” in a B-BBEE engagement may refer to underlying information for each scorecard element being verified and may comprise of financial or non-financial information.

· Sampling can use either a statistical or non-statistical approach.


Sufficiency of evidence

- refers to the measure of the quantity or quality of evidence. The quantity of evidence required is affected by the risk of misstatement (the greater the risk of misstatement the more evidence is likely to be required) and also by the quality of such evidence (the higher the quality, the less evidence may be required).


In closing, B-BBEE Rating Agencies conduct a verification procedure and not an audit procedure. A verification means the process and activities conducted by a rating agency to assess, verify and validate that the score awarded to a measured entity is a result of individual scorecard elements supplied by a measured entity, and to evaluate BEE transactions in order to provide an indicative B-BBEE score and certification based on the principles of the Broad-Based BEE Codes of Good Practice.


"The overall aim of verifying is to give confidence to all parties that rely upon the score set out in the verification certificate that the information on which the certificate is based has been tested for validity and accuracy."

The overall aim of verifying is to give confidence to all parties that rely upon the score set out in the verification certificate that the information on which the certificate is based has been tested for validity and accuracy.

Verification is intended to reduce the risk of misstatement of individual scorecard elements to an acceptably low level and to provide an assurance of the integrity of the information on which the verification is based. An acceptably low level of risk is achieved if a reasonable person with sufficient knowledge of the Codes will be able to arrive at a similar conclusion based on the same set of information.

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