PFA206D: Personal Financial Accounting II Exam Notes (TUT National Diploma: Internal Auditing)

These exam notes are tailored for Tshwane University of Technology (TUT) students registered for PFA206D: Personal Financial Accounting II, especially within the National Diploma: Internal Auditing stream. They summarise the key theory, formats, calculations and exam‑style applications commonly examined in TUT tests, assignments and the final PFA206D examination.

The focus is on South African context (Companies Act, IFRS‑based principles, VAT, PAYE, etc.) and the kind of integrated accounting questions typically linked to internal audit work. Use these notes with your prescribed textbook, TUT study guide and past exam papers for maximum benefit.

1. Core Principles of Personal Financial Accounting II (TUT / PFA206D Focus)

1.1 Position of PFA206D within the TUT Internal Auditing Curriculum

In the TUT: National Diploma: Internal Auditing, Personal Financial Accounting II (module code PFA206D) builds on foundational accounting skills developed in earlier modules (such as PFA105D or equivalent). PFA206D deepens students’ understanding of:

More complex financial accounting transactions and adjustments.
Preparation of complete sets of financial statements.
Interpretation and analysis of those financial statements for decision‑making.
Linking accounting information to internal audit planning and procedures.

For internal auditing students, mastery of PFA206D is critical because:

Internal auditors rely on accurate financial information to identify risks and control weaknesses.
A sound knowledge of double‑entry bookkeeping and financial statement structures helps in evaluating whether transactions are properly recorded.
Many audit tests are in fact re‑performances of accounting calculations taught in PFA206D (depreciation, provisions, accruals, etc.).

1.2 Fundamental Accounting Concepts Revisited

Although PFA206D is an intermediate course, many exam questions still test basic concepts. Always keep these core principles in mind when tackling calculations or preparing statements.

1.2.1 The Accounting Equation

The basic framework underpinning all transactions:

Assets = Equity + Liabilities

Assets: Resources controlled by the entity (cash, equipment, debtors, inventory).
Equity: Owners’ residual interest (capital, retained income).
Liabilities: Present obligations (creditors, bank overdraft, loans).

In double‑entry terms:

Debit side increases assets and expenses.
Credit side increases equity, income and liabilities.

Internal auditors often start by confirming that the accounting equation balances after adjustments, because any imbalance usually indicates posting errors, omissions or double counting.

1.2.2 The Accrual Basis and Matching Concept

PFA206D heavily relies on the accrual basis of accounting:

Income is recognised when earned, not when cash is received.
Expenses are recognised when incurred, not when paid.

Linked to this is the matching concept:

Expenses must be matched to the income they helped generate in the same period.

Example (South African context):

A TUT student runs a small tutoring business. In December 2025, she earns R5 000 by tutoring, but only receives the cash in January 2026.
- Under accrual accounting, she records R5 000 income in December 2025.
- The internal auditor will confirm that December revenue is not understated and January is not overstated.

Common PFA206D exam adjustments based on accrual/matching:

Accrued income (income earned but not yet received).
Income received in advance (cash received now for future services).
Accrued expenses (expenses incurred but not yet paid).
Prepaid expenses (paid now, benefits in next period).

1.2.3 The Going Concern and Prudence Concepts

Going concern: Assumes the entity will continue operating in the foreseeable future.
- Affects depreciation calculations (useful life, residual value).
- Influences whether liabilities are classified as current or non‑current.
Prudence (conservatism): Do not overstate assets or income, and do not understate liabilities or expenses.
- Leads to provisions for doubtful debts, inventory write‑downs, and impairment losses.
- Internal auditors are particularly sensitive to over‑optimistic asset valuations because they distort performance indicators.

1.3 The Accounting Cycle Refresher (with PFA206D Emphasis)

PFA206D exam questions often require students to move through, or at least reference, the full accounting cycle:

Source documents
- Invoices, receipts, bank statements, contracts.
- Internal auditors verify that actual documents support recorded transactions.
Subsidiary journals
- Cash receipts journal, cash payments journal, sales journal, purchases journal, general journal.
- PFA206D continues using these but focuses more on adjusting and correction journals.
Posting to the General Ledger
- Each journal total or entry is posted to ledger accounts.
- Errors here can cause misstatements that internal auditors test for.
Trial Balance (TB)
- List of all ledger account balances (debit and credit).
- An unadjusted TB is usually your starting point in PFA206D exam questions.
Adjusting Entries
- Year‑end adjustments for accruals, prepayments, depreciation, bad debts, allowances, income received in advance, etc.
- These are a major component of PFA206D; internal auditors often re‑perform them.
Adjusted Trial Balance
- TB after all adjustments; used to prepare final financial statements.
Financial Statements
- Statement of Profit or Loss and Other Comprehensive Income (Income Statement).
- Statement of Financial Position (Balance Sheet).
- Statement of Changes in Equity.
- Notes to the Financial Statements.

In the TUT PFA206D context, exam questions typically provide:

A pre‑adjustment trial balance.
A list of additional information (adjustments).
Requirement to:
- Process adjustments,
- Prepare an Income Statement and Balance Sheet,
- Possibly extract or compose one or two notes (e.g. PPE, trade receivables).

1.4 Link between Personal Financial Accounting and Internal Auditing

As PFA206D is part of the TUT National Diploma: Internal Auditing, remember the following connections in exam scenarios:

Accuracy of records: Internal auditors test controls that ensure transactions are recorded correctly; PFA206D is about how that correct recording should look.
Risk areas:
- Revenue recognition (cut‑off errors, fictitious sales).
- Asset valuations (overstated PPE, obsolete inventory).
- Expense manipulation (delaying expenses to improve profit).
Working papers: Adjusted TBs and schedules prepared in PFA206D mirror the kind of audit working papers internal auditors prepare, especially for substantive testing.

An examiner may design a question where incorrect accounting leads to internal control concerns, and you may need to:

Correct the accounting,
Then briefly discuss what it implies for internal auditing (e.g. risk of fraud, need for additional controls).

2. Advanced Double‑Entry, Adjustments and Correction of Errors

2.1 Complex Adjustments in PFA206D

Most PFA206D marks come from year‑end adjustments and related journal entries. These adjustments ensure accurate reporting under accrual accounting and directly affect profit and equity.

Key categories:

Accruals and prepayments.
Depreciation and asset disposals.
Bad debts and allowances for credit losses.
Provision and contingent liabilities.
Income received in advance and accrued income.
Inventory adjustments and cost of sales.

Exam questions frequently combine multiple such adjustments in a single integrated problem.

2.2 Accruals and Prepayments

2.2.1 Accrued Expenses

Definition: Expenses incurred but not yet paid at year‑end.

Example:

A sole trader at TUT owes R1 200 for electricity for March 20X5; year‑end is 28 February 20X5. The March bill relates partly to February consumption: R800 is for February, R400 is for March.

Adjustment:

Only recognise R800 in current year.
Debit Electricity expense R800 (to increase expense).
Credit Accrued expenses (liability) R800.

If the full bill was already recorded as expense in March only, you’d need an adjustment at year‑end to bring R800 back into February. Internal auditors re‑perform this to see if utility expenses are complete and correctly allocated.

2.2.2 Prepaid Expenses

Definition: Cash paid in current period for expenses that relate to future periods.

Example:

Insurance of R12 000 paid on 1 November 20X5 for 12 months.
Year‑end is 31 December 20X5.
Expense for current year: 2 months (Nov–Dec) = R12 000 × 2/12 = R2 400.
Prepaid for next year: 10 months = R9 600.

Adjustment:

At year‑end, if full R12 000 was initially debited to Insurance expense:
- Debit Prepaid insurance (asset) R9 600.
- Credit Insurance expense R9 600.

Internal audit relevance:

Overlooking prepayments overstates expenses in the current year and understates profit. Internal auditors examine cut‑off procedures and supporting documents (policy schedule, receipts) to confirm correct allocation.

2.3 Depreciation and Property, Plant and Equipment (PPE)

PFA206D places strong emphasis on:

Calculating depreciation using straight‑line and diminishing (reducing) balance methods.
Asset disposal entries.
PPE note to the financial statements.

2.3.1 Depreciation: Straight‑Line Method

Formula:

Annual Depreciation = (Cost – Residual Value) ÷ Useful Life (years)

Example:

Equipment cost: R100 000.
Residual value: R10 000.
Useful life: 5 years.

Annual depreciation = (100 000 – 10 000) ÷ 5 = R18 000.

Journal entry (year‑end):

Debit Depreciation expense – Equipment R18 000.
Credit Accumulated depreciation – Equipment R18 000.

Internal auditors check:

Whether the entity uses consistent methods and useful lives in line with policy.
Whether depreciation is recorded up to the correct date (pro‑rata if purchased mid‑year).

2.3.2 Depreciation: Diminishing Balance (Reducing Balance) Method

Formula:

Depreciation = Carrying Amount at beginning of period × Rate (%)

Example:

Vehicle cost: R200 000.
Depreciation rate: 20% per year on reducing balance.
Year 1 depreciation: 200 000 × 20% = R40 000; carrying amount end of Year 1 = R160 000.
Year 2 depreciation: 160 000 × 20% = R32 000; carrying amount end of Year 2 = R128 000.

In exams, watch for:

Acquisition during the year (pro‑rata depreciation).
Change in rate or useful life (requires adjusting current and future depreciation).

2.3.3 Disposal of PPE

Steps to account for disposal:

Remove the cost of the asset.
Remove accumulated depreciation up to disposal date.
Record proceeds from disposal (cash or debtor).
Recognise profit or loss on disposal (difference between carrying amount and proceeds).

Example:

Machine cost: R50 000, useful life 5 years, no residual value; straight‑line depreciation.
At disposal date, 3 years’ depreciation have been recorded:
- Accumulated depreciation = 50 000 × 3/5 = R30 000.
- Carrying amount = 50 000 – 30 000 = R20 000.
Sold for R18 000 cash.

Journal entries:

Remove asset and accumulated depreciation:
- Debit Accumulated depreciation – Machine R30 000
- Credit Machine at cost R50 000
- Debit Loss on disposal R?
- This is tidied up in the combined step below.
Recognise sale and gain/loss:
- Debit Bank R18 000
- Debit Accumulated depreciation – Machine R30 000
- Debit Loss on disposal R2 000
- Credit Machine at cost R50 000

Because proceeds < carrying amount, the R2 000 difference is a loss.

Internal audit angle:

Disposal transactions are vulnerable to fraud (e.g. assets “disappearing” or sold below market price). Internal auditors:
- Compare asset registers to physical assets.
- Verify disposal authorisation.
- Recompute gains/losses using methods taught in PFA206D.

2.4 Bad Debts and Allowance for Credit Losses

2.4.1 Direct Write‑off of Bad Debts

When a debtor is clearly not going to pay (e.g. insolvent, absconded), the amount is written off.

Example:

Trade receivable: R4 000.
Deemed irrecoverable.

Journal:

Debit Bad debts expense R4 000.
Credit Trade receivables R4 000.

This reduces both assets (receivables) and profit (expense). Internal auditors confirm:

Adequate evidence that the debt is truly bad (letters, legal notices).
Proper authorisation for writing off debts.

2.4.2 Allowance for Credit Losses (Provision for Doubtful Debts)

Instead of waiting for debts to become irrecoverable, businesses estimate expected losses on receivables at year‑end.

Two common methods:

Percentage of trade receivables balance (e.g. 5% of debtors).
Ageing analysis (different percentages for current, 30 days, 60 days, etc.).

Example (percentage of debtors):

Trade receivables at year‑end (after writing off bad debts): R80 000.
Required allowance: 5% × 80 000 = R4 000.
Existing allowance in TB: R2 500 (credit balance).

Required adjustment:

Increase allowance by R1 500:
- Debit Credit losses (or Bad debts adjustment) R1 500.
- Credit Allowance for credit losses R1 500.

If existing allowance is higher than required, you decrease it:

Debit Allowance for credit losses.
Credit Credit losses income (or Reduction in bad debts).

Internal auditors:

Review the rationale for the percentage used.
Check if the allowance aligns with historical loss patterns.
Evaluate if management is using this account to manipulate profit (e.g. over‑provisioning in good years to release profits later).

2.5 Provisions vs Contingent Liabilities (Overview)

At PFA206D level, the detail of IAS 37 is not usually required, but basic distinctions matter.

Provision:
- Present obligation (legal or constructive).
- Probable outflow of resources.
- Reliable estimate can be made.
- Recognised as liability and corresponding expense.
Contingent liability:
- Possible obligation depending on future events, OR
- Present obligation but not probable or not reliably measurable.
- Not recognised as liability, but disclosed in notes.

Example (provision):

A small business expects to pay R10 000 in warranties on goods sold this year; historical data supports this estimate.

Journal:

Debit Warranty expense R10 000.
Credit Provision for warranties R10 000.

Internal auditors evaluate evidence supporting the provision (past data, expert opinions) and test that changes from year to year are reasonable, not arbitrary.

2.6 Correction of Errors (Suspense Accounts)

PFA206D exams frequently include correction of errors and sometimes suspense accounts.

2.6.1 Types of Errors

Error of omission: Transaction not recorded at all.
Error of commission: Posted to wrong account of same type (e.g. wrong debtor).
Error of principle: Wrong type of account (e.g. expense vs asset).
Transposition error: Digits reversed (R5 400 instead of R4 500).
Compensating error: Two errors cancel each other out (harder to detect).

Internal auditors and accountants both need to detect and correct these errors to ensure reliable financial reporting.

2.6.2 Suspense Accounts

When the trial balance does not agree, a suspense account is temporarily used to balance it. Later, as errors are found and corrected, the suspense account is cleared.

Example:

TB totals: Dr = R500 000; Cr = R495 000.
Difference: R5 000 (more debit than credit).
Create suspense:
- Credit Suspense account R5 000.

After investigating, suppose you discover:

Sales of R3 000 recorded correctly in sales journal but only R300 posted to Sales account:
- Under‑crediting of sales by R2 700.
- Correcting entry:
  - Debit Suspense R2 700.
  - Credit Sales R2 700.
A dividend income of R2 300 was debited to Bank but no credit entry made:
- Omission of credit to Dividend income.
- Correcting entry:
  - Debit Suspense R2 300.
  - Credit Dividend income R2 300.

Suspense account now:

Credit opening: R5 000.
Debits when correcting errors: R2 700 + R2 300 = R5 000.
Balance becomes zero; TB now balances.

Internal auditors:

Assess why errors occurred (poor controls? lack of supervision?).
Review the use of suspense accounts to detect potential fraud concealment.

3. Preparation of Financial Statements (Sole Traders & Partnerships – PFA206D Level)

3.1 Income Statement (Statement of Profit or Loss)

The PFA206D exam often requires students to prepare a complete Income Statement from an adjusted trial balance, showing:

Gross profit,
Operating profit, and
Net profit.

3.1.1 Basic Structure

Revenue (Sales)
Minus:
Cost of sales (COGS)
= Gross profit
Minus:
Operating expenses (distribution, admin, other operating expenses)
= Operating profit
Add:
Other income (interest received, discount received)
Minus:
Finance costs (interest paid)
= Net profit for the year

3.1.2 Cost of Sales Calculation (Periodic System)

Common approach in exam questions:

Opening inventory

Purchases
– Purchase returns

Carriage on purchases / freight in
– Closing inventory
= Cost of sales

Example:

Opening inventory: R20 000
Purchases: R100 000
Purchase returns: R5 000
Carriage on purchases: R2 000
Closing inventory: R25 000

Cost of sales = 20 000 + 100 000 – 5 000 + 2 000 – 25 000
= 92 000.

Internal auditing link:

Cost of sales is a high‑risk area: misstatements here affect gross profit and key ratios. Internal auditors test:
- Inventory counts.
- Purchase controls.
- Cut‑off at year‑end (to ensure correct period allocation).

3.2 Balance Sheet (Statement of Financial Position)

The Balance Sheet presents assets, equity and liabilities at a point in time.

3.2.1 Basic Layout (Sole Trader / Partnership)

Assets
- Non‑current assets:
  - Property, plant and equipment (at carrying amount).
  - Intangible assets (if given).
- Current assets:
  - Inventory.
  - Trade receivables (less allowance for credit losses).
  - Prepayments.
  - Cash and cash equivalents.
Equity and Liabilities
- Equity:
  - Capital account(s).
  - Current account(s) (in partnerships).
  - Retained earnings / drawings adjustments.
- Non‑current liabilities:
  - Long‑term loans.
- Current liabilities:
  - Trade payables.
  - Bank overdraft.
  - Accrued expenses.
  - Income received in advance.
  - Short‑term portion of loans.

For PFA206D, examiners often test whether students classify items correctly, especially:

Distinguishing current vs non‑current liabilities.
Showing trade receivables net of allowances.
Recording provisions as liabilities.

3.3 Notes to the Financial Statements

Even though PFA206D is not a full IFRS module, students must prepare certain key notes, such as:

Property, plant and equipment.
Trade and other receivables.
Trade and other payables.

3.3.1 Example: PPE Note

A simple PPE note for machinery might appear as:

Machinery (R)	Amount
Cost at beginning of year	150 000
Add: Additions	50 000
Less: Disposals (at cost)	(30 000)
Cost at end of year	170 000
Accumulated depreciation at beginning	(60 000)
Add: Depreciation for year	(22 000)
Less: Accumulated depreciation on disposals	18 000
Accumulated depreciation at end of year	(64 000)
Carrying amount at end of year	106 000

The notes help internal auditors:

Trace changes in asset balances.
Identify unusual additions or disposals.
Cross‑check depreciation charges to the income statement.

3.4 Partnership Accounts (Where PFA206D Includes Partnerships)

Some PFA206D curricula at TUT cover basic partnership accounting, especially:

Appropriation of profit.
Partners’ current and capital accounts.
Interest on capital, salaries, bonuses, and drawings.

3.4.1 Partnership Profit Appropriation

The Profit and Loss Appropriation Account distributes net profit between partners:

Start with Net profit for the year.
Deduct:
- Salaries to partners.
- Interest on capital (if treated as appropriation).
Add:
- Interest on drawings (charged to partners).
Remaining balance is shared according to profit‑sharing ratio.

Example:

Net profit: R120 000.
Partners: A and B; profit ratio 3:2.
Salaries: A: R12 000; B: R18 000.
Interest on capital: A: R6 000; B: R4 000.
Interest on drawings: A: R1 000; B: R800.

Appropriation:

Net profit R120 000
Less: Salaries (12 000 + 18 000) (30 000)
Less: Interest on capital (6 000 + 4 000) (10 000)
Add: Interest on drawings (1 000 + 800) 1 800
Remaining profit to share 81 800

Share according to 3:2:

A: 81 800 × 3/5 = R49 080.
B: 81 800 × 2/5 = R32 720.

Total to A: R12 000 + 6 000 + 1 000 + 49 080 = R68 080 (credit to A’s current account).
Total to B: R18 000 + 4 000 + 800 + 32 720 = R55 520 (credit to B’s current account).

Internal auditors review partnership agreements and current account movements to ensure compliance with agreed terms and detect any unauthorised withdrawals or misallocations.

4. Interpretation of Financial Statements and Ratio Analysis (Internal Auditing Application)

4.1 Purpose of Financial Statement Analysis

For TUT internal auditing students taking PFA206D, the analysis of financial statements is not just a theoretical exercise; it directly supports:

Risk assessment: Identifying areas of financial weakness or possible manipulation.
Audit planning: Allocating more audit effort to high‑risk segments.
Performance evaluation: Assessing trends and variances over time.

Examiners may provide extracts of financial statements and require you to:

Compute key ratios.
Interpret what they indicate about profitability, liquidity, efficiency and solvency.
Comment from an internal auditing perspective.

4.2 Key Categories of Ratios

Profitability ratios.
Liquidity ratios.
Efficiency (activity) ratios.
Solvency / leverage ratios.

Always show:

Formula.
Substitution (numbers from the statement).
Final answer (with appropriate rounding and unit).
A brief interpretation.

4.3 Profitability Ratios

4.3.1 Gross Profit Percentage (GP%)

Formula:

Gross profit ÷ Revenue × 100

Example:

Revenue: R400 000.
Cost of sales: R260 000.
Gross profit: 400 000 – 260 000 = R140 000.

GP% = 140 000 ÷ 400 000 × 100 = 35%.

Interpretation:

A GP% of 35% means that for every R1 of sales, R0.35 is left to cover operating expenses and profit.
If GP% drops sharply compared to previous year or industry average, internal auditors suspect:
- Under‑recorded sales.
- Overstated cost of sales.
- Increased discounts or theft (inventory shrinkage).

4.3.2 Net Profit Percentage (NP%)

Formula:

Net profit ÷ Revenue × 100

Using above revenue and assuming net profit is R60 000:

NP% = 60 000 ÷ 400 000 × 100 = 15%.

Interpretation:

After all expenses, the business retains 15% of sales as profit.
A widening gap between GP% and NP% suggests rising operating expenses.

4.3.3 Return on Capital Employed (ROCE)

Formula (simple version):

Net profit before interest and tax ÷ Capital employed × 100

Where capital employed = equity + long‑term debt.

Example:

Net profit before interest and tax: R80 000.
Equity: R300 000.
Long‑term loan: R100 000.
Capital employed = 300 000 + 100 000 = R400 000.

ROCE = 80 000 ÷ 400 000 × 100 = 20%.

Internal audit perspective:

Sharp fluctuations in ROCE may indicate earnings management or substantial one‑off items.
Internal auditors may perform detailed testing on major income and expense lines affecting ROCE.

4.4 Liquidity Ratios

4.4.1 Current Ratio

Formula:

Current assets ÷ Current liabilities

Example:

Current assets: R150 000.
Current liabilities: R75 000.

Current ratio = 150 000 ÷ 75 000 = 2:1.

Interpretation:

The business has R2 in current assets for every R1 of current liabilities.
A ratio significantly below 1 indicates liquidity risk (possible difficulty in paying short‑term obligations).

Internal auditors:

Look at the quality of current assets, especially inventory and receivables.
A high current ratio with mostly slow‑moving stock may still be risky.

4.4.2 Quick (Acid‑Test) Ratio

Formula:

(Current assets – Inventory) ÷ Current liabilities

Using the same example, assuming inventory is R60 000:

Quick ratio = (150 000 – 60 000) ÷ 75 000 = 90 000 ÷ 75 000 = 1.2:1.

Interpretation:

Excluding inventory, the business has R1.20 of liquid assets for each R1 of current liabilities.
In many industries, a quick ratio below 1 may be concerning.

Internal auditing viewpoint:

If the quick ratio is borderline, auditors may focus more on cash flow forecasting, credit control, and bank covenant compliance.

4.5 Efficiency Ratios

These ratios show how well the business uses its assets and manages working capital.

4.5.1 Inventory Turnover and Days

Inventory turnover:

Cost of sales ÷ Average inventory

Inventory days (average holding period):

365 ÷ Inventory turnover

Example:

Cost of sales: R300 000.
Opening inventory: R50 000.
Closing inventory: R70 000.
Average inventory = (50 000 + 70 000) ÷ 2 = R60 000.

Inventory turnover = 300 000 ÷ 60 000 = 5 times.

Inventory days = 365 ÷ 5 = 73 days (approx).

Interpretation:

Inventory takes on average 73 days to be sold.
A rising inventory days trend might imply over‑stocking, obsolete items, or weak sales.

Internal auditors:

Examine slow‑moving items.
Investigate the risk of inventory obsolescence or theft.

4.5.2 Debtors Collection Period

Formula:

Average trade receivables ÷ Credit sales × 365

If credit sales are not given, total sales are sometimes used (with a note).

Example:

Trade receivables opening: R30 000.
Trade receivables closing: R40 000.
Average receivables: (30 000 + 40 000) ÷ 2 = R35 000.
Credit sales: R280 000.

Collection period = 35 000 ÷ 280 000 × 365 ≈ 45.6 days.

Interpretation:

The business collects its debts on average in about 46 days.
If normal credit terms are 30 days, this ratio highlights inefficient credit control.

Internal auditors test:

Sample of customer accounts for adherence to credit terms.
Adequacy of allowance for credit losses (per Section 2.4).

4.5.3 Creditors Payment Period

Formula:

Average trade payables ÷ Credit purchases × 365

This ratio indicates how long on average the entity takes to pay its suppliers.

Internal audit implication:

A very long payment period might suggest cash flow problems or poor supplier relationships.
A very short period may indicate the business is not taking advantage of credit terms, potentially missing out on cash management benefits.

4.6 Solvency and Gearing Ratios

4.6.1 Debt to Equity Ratio (Gearing)

Formula:

Total interest‑bearing debt ÷ Equity × 100

Example:

Long‑term loans: R200 000.
Bank overdraft (interest‑bearing, but sometimes separated): R50 000.
Equity: R400 000.
Suppose we treat only long‑term borrowings as interest‑bearing debt here:

Debt to equity = 200 000 ÷ 400 000 × 100 = 50%.

Interpretation:

For every R1 of equity, the business has R0.50 of long‑term debt.
Higher gearing means higher financial risk but also potentially higher returns (if investments are profitable).

Internal auditors:

Review loan covenants, interest coverage, and compliance with reporting requirements.
Focus on classification of loans (current vs non‑current portions).

4.7 Using Ratios for Internal Audit Risk Assessment (PFA206D Link)

In TUT internal auditing modules (e.g. IAD206D or higher‑level modules), risk assessment uses the accounting data learned in PFA206D.

Examples of integrated thinking:

Declining GP% + rising inventory days:
- Risk of inventory obsolescence and possible overstatement.
- Internal auditors plan to:
  - Observe physical stock counts.
  - Review valuation methods (FIFO, weighted average).
  - Test cut‑off at year‑end.
Increasing debtors collection period + rising allowance for credit losses:
- Risk of significant bad debts and overstated trade receivables.
- Audit procedures:
  - Confirm balances with major debtors.
  - Review subsequent receipts.
  - Evaluate adequacy of allowance.
High gearing + tight liquidity:
- Risk of going concern issues.
- Internal auditors may:
  - Review cash flow forecasts.
  - Check compliance with loan covenants.
  - Recommend management or governance interventions.

In PFA206D exam essays, you may be asked to comment on the financial health of a business and sometimes link that to potential audit areas of concern. Show you can use ratios to tell a coherent story about the business, not just calculate numbers.

5. Exam Strategy, Typical Question Types and Integrated Practice (TUT PFA206D / Internal Auditing)

5.1 Typical Structure of a TUT PFA206D Exam Paper

While exact formats can vary, a common structure for a 3‑hour PFA206D exam includes:

Section A: Short theory questions and definitions
- 10–20 marks.
- Concepts: accrual vs cash, provisions vs contingent liabilities, reasons for depreciation, qualitative characteristics of financial information.
Section B: Adjustments and journal entries
- 30–40 marks.
- Given TB balances and additional information, process:
  - Accruals, prepayments.
  - Depreciation.
  - Bad debts and allowances.
  - Correction of errors and suspense accounts.
Section C: Preparation of financial statements
- 40–60 marks.
- From adjusted TB and notes, prepare:
  - Income statement.
  - Balance sheet.
  - Selected notes (PPE, trade receivables).
Section D: Interpretation / ratio analysis
- 20–30 marks.
- Compute ratios and comment on financial performance and position.

Internal auditing students should be prepared for integrated questions where:

You adjust accounts (from Section B),
Prepare statements (Section C), and
Interpret results (Section D).

5.2 Common Pitfalls and How to Avoid Them

Not reading the date carefully
- Many adjustments require pro‑rata calculations (months).
- Always underline the financial year‑end and any transaction dates.
Mixing up debits and credits
- Remember:
  - Assets & expenses – debit.
  - Equity, income & liabilities – credit.
- In adjustment journals, double‑check each entry logically.
Ignoring instruction to show workings
- PFA206D markers at TUT award method marks for correct workings.
- If your final answer is wrong but method is correct, you still get partial marks.
Incorrect classification in the Balance Sheet
- Do not list long‑term portions of debts as current liabilities.
- Show allowance for credit losses separately from trade receivables.
Not reconciling to total TB figures
- After adjustments, quickly verify:
  - Total debits = total credits in your adjusted TB.
  - Net profit in Income Statement flows correctly into equity in Balance Sheet.

5.3 Step‑by‑Step Approach to a Big Integrated Question

When facing a typical 40–60 mark question requiring full financial statements:

Scan the trial balance
- Mark all items that obviously belong to:
  - Income Statement (expenses, income).
  - Balance Sheet (assets, equity, liabilities).
Read additional information slowly
- Number each adjustment (1, 2, 3, …) and tick them off as you process.
- Example adjustments list may include:
  - Closing inventory.
  - Depreciation.
  - Accrued income/expense.
  - Prepayments.
  - Bad debts and allowance.
  - Income received in advance.
Process each adjustment in working papers
- For each adjustment:
  - Write a mini‑journal entry (debit/credit).
  - Update ledger or TB line items in pencil in your rough working.
- Only then transfer final figures to Income Statement and Balance Sheet.
Prepare Income Statement first
- Start with Sales, subtract Cost of Sales.
- Add other income, subtract all operating expenses, then finance costs.
- Determine net profit.
Prepare Balance Sheet
- List non‑current assets (PPE, with carrying amounts).
- Current assets (including adjusted receivables and inventory).
- Equity (opening capital plus net profit minus drawings).
- Liabilities (short and long term, including any provisions).
Quick cross‑check
- Confirm that Assets = Equity + Liabilities.
- Reconcile any difference before moving to next question if time allows.

5.4 Worked Mini‑Scenario Integrating PFA206D and Internal Auditing Thinking

Consider a simplified exam‑style scenario:

Trio Traders, owned by a TUT graduate, sells electronics.
Trial Balance at 28 February 20X6 includes:
- Sales: R800 000 (credit).
- Cost of sales (before adjustment): R480 000 (debit).
- Inventory at 1 March 20X5: R60 000 (debit).
- Purchases: R450 000 (debit).
- Purchase returns: R10 000 (credit).
- Operating expenses: R180 000 (debit).
- Trade receivables: R120 000 (debit).
- Allowance for credit losses: R4 500 (credit).
- Trade payables: R90 000 (credit).
- Equipment cost: R200 000 (debit).
- Accumulated depreciation equipment: R60 000 (credit).
- Bank: R40 000 (debit).
- Capital: R220 000 (credit).
- Drawings: R40 000 (debit).

Additional information:

Closing inventory at 28 February 20X6 is valued at R70 000.
Depreciation on equipment is 10% per annum on cost.
An amount of R5 000 from a debtor is irrecoverable and must be written off.
The allowance for credit losses must be adjusted to 5% of trade receivables after writing off the bad debt.
Accrued expenses at year‑end total R8 000.

Required (typical PFA206D tasks):

Process year‑end adjustments.
Prepare the Income Statement for the year ended 28 February 20X6.
Prepare the Balance Sheet at that date.
Briefly comment on one ratio from the statements from an internal auditing perspective.

Sketch of solution ideas (not full detail):

Cost of sales:
Opening inventory 60 000 + Purchases 450 000 – Returns 10 000 – Closing inventory 70 000 = 430 000.
But TB shows 480 000 as cost of sales before adjustment; you would re‑allocate purchases and inventory correctly in workings.
Depreciation: 10% of 200 000 = 20 000.
Bad debts:
Write off R5 000: DR Bad debts, CR Trade receivables.
New receivables = 120 000 – 5 000 = 115 000.
Allowance required = 5% × 115 000 = 5 750.
Existing allowance 4 500 (credit).
Increase by 1 250: DR Credit losses (or bad debts adjustment), CR Allowance.
Accrued expenses: DR Expense R8 000, CR Accrued expenses.

From here, you can:

Compute gross profit, net profit.
Adjust capital: opening capital + net profit – drawings = closing equity.
Classify assets and liabilities.

Internal auditing remark (example):

After preparing the statements, suppose:
- Gross profit % = 800 000 – 430 000 = 370 000; GP% = 370 000 ÷ 800 000 × 100 = 46.25%.
- If last year’s GP% was 35%, this sharp increase may suggest either:
  - Successful cost control, or
  - Possible misstatement (e.g. understated purchases or inventory).
- Internal auditors would plan substantive tests of purchases and inventory valuations to confirm the reason for this improvement.

5.5 Study and Revision Tips for TUT PFA206D Students (Internal Auditing Stream)

Use past TUT PFA206D papers
- Identify recurring patterns: depreciation, bad debts, provisions, full statement preparation.
- Time yourself on at least two full‑length past papers.
Summarise key formats
- Prepare one‑page templates for:
  - Income Statement.
  - Balance Sheet.
  - PPE note.
  - Partnership appropriation (if in your syllabus).
- Practise filling them quickly using random TBs.
Memorise common journal entry patterns
- Depreciation, bad debts, allowance adjustments, accruals, prepayments, disposals.
- This frees mental space in the exam for interpretation and checking.
Link to internal auditing modules
- As you study each accounting topic, ask:
  - “What is the risk if this is done incorrectly?”
  - “How would an internal auditor test this area?”
- This integrated thinking is valuable in later TUT modules such as Internal Auditing III and in workplace learning.
Work in study groups (where possible)
- Explain adjustments to each other.
- Mark each other’s practice answers using memoranda or model solutions.
- Teaching others reinforces your own understanding.
Stay aligned to South African context
- Remember VAT where applicable (though PFA206D may not focus heavily on it).
- Keep in mind that reporting formats are IFRS‑influenced, but at a simplified level.
Exam technique on the day
- Start with the questions you know best to gain confidence and marks early.
- In big integrated questions, do not aim for perfection at the cost of time:
  - Once your statements balance reasonably, move on.
- Always show workings clearly; untidy working can still earn you marks, but only if the marker can follow it.

These notes are aligned with the typical expectations of PFA206D: Personal Financial Accounting II within the Tshwane University of Technology (TUT) National Diploma: Internal Auditing. A disciplined focus on adjustments, full statement preparation, and basic ratio analysis, combined with an awareness of internal audit implications, will position you well to succeed in the PFA206D examination and in subsequent internal auditing modules.