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Tutorial letter 102/0/2023

APPLIED AUDITING

AUE4862/NAU4862/ZAU4862

Year Module

Department of Financial Governance

IMPORTANT INFORMATION:

This tutorial letter contains important information

about your module.

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INDEX Page

Due date 3

Lecturers and contact details 3

Prescribed method of study 4

Suggested working programme 5

Understanding the Icons 6

How the topics of this tutorial letter relate to the audit process 7

Study unit 1 The Code of Professional Conduct, By-laws and Rules Regarding
Improper Conduct 8

2 The Auditing Profession Act (APA) of the Independent Regulatory

Board for Auditors (IRBA) 30

3 The auditor's responsibilities relating to fraud in an audit 35

4 The King IV Report on Corporate Governance in South Africa 37

5 Companies Act no 71 of 2008 52

Self-assessment questions 86

Self-assessment solutions 108

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DUE DATE

TEST 1 ON TUTORIAL LETTER 102: 14 March 2023

Please note that the test date is provisional and you should refer to the myUnisa platform for any
changes to the study programme.

LECTURERS AND CONTACT DETAILS

Personnel E-mail address

Lecturers
Ms R van Beek (Course leader) vbeekr@unisa.ac.za
Mr Z Abrahams abrahz@unisa.ac.za
Ms M Ditaole ditaomc@unisa.ac.za
Ms L Grebe grebel@unisa.ac.za
Mr N Hoosen hoosen2@unisa.ac.za
Mr W Kriel krielw@unisa.ac.za
Ms J Kritzinger kritzja@unisa.ac.za
Mr T Matsimela matsict@unisa.ac.za
Mr B Ncemane ncemab@unisa.ac.za
Dr A Terblanche terbleaj@unisa.ac.za

The Department of Financial Governance has a helpdesk for postgraduate students. You may direct
all queries, except those of a purely administrative nature, to the helpdesk, either by e-mail or
telephonically between 08:00 and 16:00, Mondays to Fridays.

E-mail AUDpostgrad@unisa.ac.za
Telephone 012 429 4032

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PRESCRIBED METHOD OF STUDY

1. By this time, you should be familiar with the relevant chapters in your prescribed textbook as
well as all the related theory, which will be covered in study units 1 to 5. Refer to the prescribed
material if you are unfamiliar with any of the principles contained in the questions.

2. Read the theory and interpretation(s) covered in the study units.

3. Answer the questions in this tutorial letter and make sure you understand the principles
contained in the questions.

4. Consider whether you have achieved the specific outcomes of each study unit.

5. After completing of all the study units, attempt the self-assessment questions to test whether
you have mastered the contents of this tutorial letter.

6. Should you need any help with understanding different principles covered in the study material,
please contact one of your lecturers urgently.

SOMETHING TO NOTE

Unisa signed the United Nations Global Compact (UNGC) which aims “to mobilise a
global movement of sustainable companies and stakeholders to create the world that
we want”. The UNGC prescribes ten principles that companies and stakeholder should
adopt in their business activities. You can visit the website for more information:

https://www.unglobalcompact.org

Please visit the “Discussion Forum” to engage with fellow students on the UNGC and
discuss which of the principles are relevant to auditors.

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SUGGESTED WORKING PROGRAMME

January 2023
MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY WEEKEND
2 3 4 5 6 7+8

9 10 11 12 13 14+15

Study Unit 1 Study Unit 2 Study Unit 3

16 17 18 19 20 21+22

Study Unit 4 Study unit 5 Answer the self- Answer the self-
assessment assessment
questions questions

23 24 25 26 27 28+29

Answer the Answer the

self- self-
assessment assessment
questions questions
30 31

MARCH 2023
MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY WEEKEND
1 2 3 4+5

6 7 8 9 10 11+12
Revision Revision Revision Revision

13 14 15 16 17 18+19

Revision Test 1

20 21 22 23 24 25+26

27 28 29 30 31 30

* Please refer to myUnisa for any possible changes/updates in terms of test dates.

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UNDERSTANDING THE ICONS

PRESCRIBED STUDY MATERIAL

The prescribed material that students need to cover and ensure thorough
understanding of all content listed.

Please note that the latest study material was not available at the time of printing this
tutorial letter, therefore some of the references may not coincide with the textbooks.

Any amendments will be shared on MyUnisa under additional resources.

INTRODUCTION

A brief description of the content to be covered in the study unit.

OBJECTIVES

What we aim to achieve by the end of the tutorial letter. Student should always come
back after covering the content to ensure that the outcomes have been achieved.

RECAP QUESTION

This is a quick basic question that students should attempt to answer before reading
the content.

COMMENT

A quick remark from the lecturer that needs to be read and understood by the student.
Should further clarity be needed; the student is to contact the lecturers urgently for
further clarification.

EXAMINATION TECHNIQUE

Covers exam technique that students need to apply to questions. This is very
important, and students need to ensure they apply principles throughout all questions
in the tutorial letter. Should students not understand the principles covered; the student
should contact the lecturers urgently for further clarification.

ANNOUNCEMENTS

Additional resources loaded by the lecturers to assist students with understanding core
concepts and principles.

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HOW THE TOPICS OF THIS TUTORIAL LETTER RELATE TO THE AUDIT

PROCESS

STAGES OF THE AUDIT PROCESS

The Companies Act

Preliminary engagement
activities (TL 103)
(TL 102)

Planning
(TL 103)
King IV (TL 102)

Establish overall audit Develop an audit plan

The Auditing Profession Act

strategy (TL 103) (TL 103)

and By-laws as well as IRBA CPC and Rules Regarding (IRBA) (TL 102)

Internal controls
(TL 103 and TL 104)

Obtain audit evidence (the

auditor's response to
The Code of Professional Conduct (CPC) of SAICA

assessed risk)

Perform tests of Perform substantive

control (TL 104) procedures (TL 104)
Improper Conduct (TL 102)

Evaluation, conclusion
and reporting
(TL 105)

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STUDY UNIT 1 – THE CODE OF PROFESSIONAL CONDUCT, BY-LAWS

AND RULES REGARDING IMPROPER CONDUCT

INTRODUCTION

In your future career as a chartered accountant and/or auditor, you will face many
situations where you have to make decisions based on moral values. For example, am I
going to report a client to the authorities for evading tax? The accounting and auditing
profession's credibility and sustainability depend on its members' ability to act in an
ethical manner, and for this reason, various principles guide members' thinking when it
comes to questions like these.

OBJECTIVES

After completing this study unit, you should be able to identify, discuss and apply the
principles contained in the South African Institute of Chartered Accountants (SAICA)
Code of Professional Conduct (CPC), By-laws the Independent Regulatory Board for
Auditors (IRBA) CPC, Disciplinary Rules and the Rules Regarding Improper Conduct in
any given scenario.

PRESCRIBED STUDY MATERIAL

SAICA Student Handbook 2022/2023 Volume 2B, SAICA and IRBA Pronouncements:
• Section 1: ET
• Section 2: IRBA Rules Regarding Improper Conduct (BN105/2019 and IRBA
RULES)
• Section 5 By-laws – only available on SAICA’s website: www.saica.co.za

Auditing Notes for South African Students (Auditing Notes), chapter 2 (entire chapter).

Please take note that the pronouncements issued by IRBA is not included in Volume
2B, but only available on the IRBA website: www.irba.co.za.

COMMENT

We recommend that you study the CPC directly from the SAICA Student Handbook, as
you may take this book with you when writing the test and/or examination according to
the open book policy. Please refer to chapter 2 of Auditing Notes (revised) for examples
that explain difficult principles.

The Rules Regarding Improper Conduct is not included in the SAICA books but is still
examinable. You should therefore ensure that you are familiar with the content thereof.

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SECTION A – ADDITIONAL INFORMATION

Ethics and Values

Ethics can be divided into three basic categories: personal ethics, business ethics, and professional
ethics. To guarantee the moral and ethical behaviour in the business context and to safeguard public
interest, there needs to be reliance on personal and professional values and their ability to act with
honesty, integrity, accountability, and trustworthiness.

Personal ethics
Personal ethics refer to one’s individual values i.e., their belief of what is right and wrong. A person’s
core values will inform their decision-making process.

What do you think one’s personal ethics are determined by?

Business ethics
Business ethics refers to policies or practices that guides all decisions of the organisation with internal
and external stakeholders. Business ethics when applied correctly assists the organisation to meet
operational goals but can also assist safeguard the reputation of the organisation.

Below is a diagram that lists different stakeholders for a business/organisation:

Business stakeholders

Shareholders and investors

Employees

Suppliers and consumers

Local community

Government

Other

Why do you think it is important for organisations to identify their stakeholders?

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Good for self, good for others

There is a well-known golden rule that subscribes that one should do to others as they would like them
to do unto them. The ‘good for self, good for others’ theory can be explained as that one should not
only do what is good for themselves but should always consider what is good for others.

EXAMPLE

You are the Chief Executive Officer of the Social African Social Security Agency
(SASSA) and you have been approached by one of the leaders in parliament to consider
reducing the COVID relief grant from R350 to R200 per month. The saving in pay-outs
will be used to give all management level employees of government a small increase.
This reason will however not be disclosed to the public.

You are a registered CA(SA).

REQUIRED
Discuss your considerations regarding the reduction of the grant by only using the
information provided in the example above

SELF DEVELOPMENT

Research the following ethical theories:

- Virtue ethics
- Utilitarian ethics
- Stakeholder theory
- Agency theory

A thorough understanding of the theories is needed for assessments.

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Ethical Dilemmas

Ethical dilemmas, which are also referred to as moral dilemmas, are challenges in the
decision-making process between two or more conflicting options which are not entirely
acceptable from an ethical perspective. This may provide context that in business
decisions there may be no right or wrong decisions but rather how we are prepared to
manage the consequences that arise from the decisions made.

Please watch the following Youtube videos which discusses ethical dilemmas:

https://www.youtube.com/watch?v=yg16u_bzjPE&ab_channel=TED-Ed

https://www.youtube.com/watch?v=cyj1wbfukUw&ab_channel=UniversidaddeDeusto
%2FDeustukoUnibertsitatea

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Question 1

Tshepo Tenza is a young entrepreneur who started his own jeans manufacturing and retail business,
Rainbow Threads, in 2017. He began operations from his house and steadily grew the business over
time as the popularity of his jeans increased. The jeans are unique because they have vibrant prints
along the hems and on the pockets. These prints are inspired by the colourful patterns seen in
Ndebele artworks. Tshepo has kept his costs as low as possible, with the result that his unique style of
clothing remains affordable. Rainbow Threads aims to keep on growing the number of customers who
are loyal to the brand.

In early 2018, Tshepo managed to secure equity funding from Flash Venture Capitalists (‘FVC’)
through its early-stage investment programme, which enabled him to expand Rainbow Threads faster.
To obtain the funding, he had to incorporate Rainbow Threads as a private company, Rainbow
Threads (Pty) Ltd (‘RainbowT’) in which he holds 80% of the shares, with FVC owning the balance. As
part of the shareholders’ agreement, FVC also required that RainbowT adopt full International
Financial Reporting Standards (IFRS) and provide audited annual financial statements. The audit for
the financial year ended 30 June 2021 (FY2021) is currently in progress. Tshepo used part of the
funds obtained from FVC to enter into a lease agreement for premises in the Mall of Africa, located in
Gauteng, effective from 1 July 2018.

Tshepo is worried about the current financial position of the business. Because he only has basic
accounting knowledge, he approached his life-long friend, Lebogang Tshabala CA(SA), for advice.
Lebogang is the managing partner at a consultancy firm, TT Consultants. Tshepo asked Lebogang if
TT Consultants could help him to ensure that his accounting records and financial statements continue
to meet the requirements of IFRS.

Lebogang discussed the proposed engagement with her partners at TT Consultants, and they agreed
to provide these services to RainbowT. However, before Lebogang could share the news with Tshepo,
another partner at the firm informed Lebogang that he had reached out to some of his friends and
obtained possible funding to assist Tshepo. He proposed the following:

• TT Consultants should accept RainbowT as a consulting client, and RainbowT will pay an
agreed-upon rate per hour for accounting services provided.

• TT Consultants would then refer RainbowT to MSM Bank (‘MSM’), a privately-owned financial
institution. MSM provides competitive rates on revolving credit facilities and transactional
products and has agreed to purchase some of the trade receivables of RainbowT in a factoring
agreement and to provide additional funding.

• TT Consultants will receive a substantial fee for referring RainbowT to MSM as well as 5%
commission on all future revenue generated by MSM on the RainbowT contract.

Lebogang is concerned about the proposal, as she is aware that the chief executive officer of MSM
has been implicated in corrupt practices. In fact, he is due to testify before a commission of enquiry
regarding these allegations. MSM has been accused of bribing regulators, cabinet ministers and other
government officials.
SAICA ITC January 2022 Adjusted

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Required: Marks
Discuss, with reference to ethical considerations, whether or not Lebogang should advise
RainbowT to accept assistance from MSM. 10

Do not discuss any aspect of the SAICA and IRBA codes of professional conduct.

Question 1 Solution

• Since the commission amount is based on the revenue earned, which is based on the amount
of financing that is granted, TT Consultants may be incentivised to advise RainbowT to request
and/ or accept more financing than is actually necessary. (1)

• Since the CEO of MSM Bank has been implicated in corrupt practices, it is possible that the
financing that they are able to provide are the proceeds from illegal transactions Such illegal
transactions may involving taxpayers’ money, including the current corruption issues plaguing
the country, which may cause great reputational harm as it relates to the public interest. (1)

• Lebogang should consider the potential reputational damage which may arise from being
associated with the CEO of MSM may bring (1)

• in addition to the above conflict of interest, Lebogang is also a life-long friend of Tshepo and
needs to decide between the best interests of her firm and that of a client (and also a friend).(1)

• As a managing partner / Director, Lebogang has a responsibility to the firm in terms of S 76 of

the companies act (act honestly, in good faith and in a manner, they reasonably believe to be
in the best interests of, and for the benefit of, their companies), to ensure that the firm’s
interests and reputation are protected and that clients will not endanger the firm. (1)

• For Lebogang to meet her fiduciary duty to the firm, she has to discuss the offer from MSM
Bank with RainbowT, but she can bring to the company’s attention the potential consequences
of entering into the transaction. (1)

• In addition, Lebogang should also ensure that the advice that she gives to her new client,
RainbowT is sound and steers them in the correct direction from both an ethical and business
perspective. (1)

• The consequence would be that RainbowT can also be negatively affected by the affiliation
with MSM Bank. (1)

• Furthermore, RainbowT runs the risk that FVC might withdraw support or funding from
RainbowT given an affiliation with MSM Bank. (1)

• As this is a small company, the application of King is recommended but not prescribed. King
principles should be applied by the company as suggested including the ethical requirements,
effective leadership etc. (1)

• Lebogang should apply one of the ethical theories such as good for self and good for others. In
making this decision, the following approaches / ethical theories may be relevant in deciding
what is “good”: (1)

• Lebogang will need to evaluate her goals and principles (virtue theory) and determine whether
advising RainbowT to potentially implicate itself in a potentially adverse scenario is aligned with
her virtues. (1)

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• Given that she is a CA(SA) and upholds a high standard of ethics, this would not be aligned to
her professional virtues (which should correlate to her personal virtues) and therefore she
should advise RainbowT to not to take the offer. (1)

• In line with King and the Companies Act, Lebogang should be forthcoming, transparent and
honest with Tshepo regarding the transaction and related risks. (1)

• Going into business with the CEO is not good for “self” in the sense that it is not sound
business practice as the factoring agreement will give rise to discounted receivables which
could hamper profitability and cash flows, (1 mark) although this is good for the “other”, namely
the CEO and MSM Bank (sound business ethic principles) (1)

• When considering the impact on all stakeholders, even though TT Consultants may benefit
from this agreement via the referral fee, this may negatively impact RainbowT through
association with MSM Bank and thus Lebogang should not advise on this offer as it may be to
the company’s detriment. (1)

• The standard for good behaviour through pure rational reflection lends itself to the fact that
Lebogang, as a CA(SA), with an understanding of the current negative impact around the
CA(SA) profession and the need to uphold objective standards of good behaviour should strive
to avoid being implicated in situations that will further tarnish the profession i.e. MSM Bank’s
allegations of bribery. (1)

• Lebogang should encapsulate the concept of “Ubuntu” and respect and understand that she
needs to help RainbowT to achieve the best outcome that is aligned with prioritising all parties
above just her own business. Effectively, if RainbowT fails because of the agreement with
MSM Bank, this will also reflect poorly on Lebogang within the community as she is the one
who advised him on this course of action. (1)

• Lebogang to consider the appropriateness of being remunerated twice for the same service:
hourly rate for advising Rainbow T but also getting a referral fee on securing the funding. This
may not be considered fair business practice. (1)

• Conclusion Therefore, Lebogang should discuss the MSM Bank offer made but should explain
clearly to RainbowT what the risks are and advise accordingly that it should not accept the
offer from MSM Bank. Valid conclusion. (1)
Available 20
Maximum 10

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Professional ethics

Contents of the SAICA CPC

DEFINITIONS, INCLUDING LIST OF ABBREVIATIONS AND STANDARDS

(ALL PROFESSIONAL ACCOUNTANTS)

PART 1

COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND

CONCEPTUAL FRAMEWORK
(ALL PROFESSIONAL ACCOUNTANTS – SECTIONS 100 TO 199)

PART 2 PART 3

PROFESSIONAL ACCOUNTANTS IN PROFESSIONAL ACCOUNTANTS IN

BUSINESS PUBLIC PRACTICE
(SECTIONS 300 TO 399)
(SECTIONS 200 TO 299)
(PART 2 IS ALSO APPLICABLE TO
INTERNAL INDEPENDENCE STANDARDS
INDIVIDUAL PROFESSIONAL
(PARTS 4A AND 4B)
ACCOUNTANTS IN PUBLIC PRACTICE
WHEN PERFORMING PROFESSIONAL
ACTIVITIES PURSUANT TO THEIR PART 4A – INDEPENDENCE FROM AUDIT AND
RELATIONSIHP WITH THE FIRM) REVIEW ENGAGEMENTS
(SECTIONS 400 TO 899)

PART 4B – INDEPENDENCE FOR ASSURANCE

ENGAGEMENTS OTHER THAN
AUDIT AND REVIEW ENGAGEMENTS
(SECTIONS 900 TO 999)

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Part 1: Complying with the code, fundamental principles and conceptual framework

This part of the CPC is applicable to all professional accountants in South Africa (refer to the definition
of professional accountants in the CPC). It establishes the fundamental principles of the professional
ethics for CA(SA)s and provides a conceptual framework for them. This part of the CPC also defines
threats to independence and sets the tone for the rest of the CPC. (Refer to the Guide to the Code.)

Part 1 basically sets the groundwork for the entire code, and it is important that you understand all the
basics covered.

The fundamental principles (section 110) are as follows:

• integrity (subsection 111);
• objectivity (subsection 112);
• professional competence and due care (subsection 113);
• confidentiality (subsection 114); and
• professional behaviour (subsection 115).

Fundamental principles are the standard of behaviour that is expected from all CA(SA)s as defined in
the CPC. Ensure that you understand each of these principles, so that you can identify the
fundamental principle under threat in each scenario given in an assessment.

The conceptual framework approach requires the CA(SA)s to (120.2):

• identify the threat to a fundamental principle;
• evaluate the identified threat; and
• address the threat by eliminating or reducing them to an acceptable level.

Before you can identify the threat and start applying the conceptual framework, you need to know
each of the following categories of threats. Please note that more than one threat can be applicable to
any given scenario (R120.6 A3):
• self-interest threats;
• self-review threats;
• advocacy threats;
• familiarity threats; and
• intimidation threats.

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After identifying the threat, which can be challenging, the CA(SA) would need to assess the threat and
ensure that it is at an acceptable level. Should the threat not be at an acceptable level, paragraph
R120.10 would apply.

COMMENT

I suggest that you read part 1 in the SAICA student handbook now. This will help you to
capture all the content covered above. The bare minimum has been covered in the above
summary and it is in no way adequate to cover all knowledge gaps. Students need to
read and highlight in their handbooks; this process assists students in familiarising
themselves with the content. Should you not understand any paragraph in part 1, please
contact one of your lecturers for assistance.

Part 2: Professional accountants in business

This part of the CPC is applicable to professional accountants in business such as employees,
directors (executive or non-executive), partners, owner-managers, and the like. Professional
accountants in business must comply with this part, as well as with part 1 of the CPC. (Refer to the
Guide to the Code.)

This part further sets out additional material that applies to professional accountants in business when
performing professional activities. Professional accountants in business include professional
accountants employed, engaged, or contracted in an executive or non-executive capacity. This part is
also applicable to professional accountants in public practice when performing professional activities
pursuant to their relationship with the firm, whether as a contractor, employee, or owner. This part of
the International Ethics Standards Board for Accountants (IESBA) Code of Ethics was not
incorporated into the IRBA Code.

It is important that you are familiar with each of the specific situations addressed in sections 210 to
270 and how it can be incorporated into assessments. These situations form the basis of questions
that could be set in this area of the CPC.

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We will focus a bit more on section 260 which addresses how to respond to non-compliance to laws
and regulations. Section 260 paragraph 260.2 states that a self-interest threat or intimidation threat to
compliance with principles of integrity and professional behaviour is created when a professional
accountant becomes aware of non-compliance or suspected non-compliance with laws and
regulations. This non-compliance can directly affect the financial statements, or they can affect it
indirectly such affecting the company’s business (material penalties). Please note that they are
different responsibilities listed for senior professional accountants in business and non-senior
professional accountants in business (par 260.11 A1, par 260.24 , par 260.25, par 260.26 and par
260.27). This section has been very topical in prior years’ ITC, so please ensure you are familiar with
the content of this section.

COMMENT

I would suggest that you go read part 2 in the SAICA handbook at this moment. The bare
minimum has been covered in the above summary and it is in no way adequate to cover all
knowledge gaps. Students need to read and highlight in their handbooks; this process
assist the students to familiarise themselves with the content. Should you not understand
any paragraph in part 2, please contact one of your lecturers for assistance.

Part 3: Professional accountants in public practice

This part of the CPC is applicable to professional accountants who are in public practice whether they
provide assurance services or not. This part sets out additional information that applies to professional
accountants when providing professional services.

COMMENT

I would suggest that you go read part 3 in the SAICA handbook at this moment. The bare
minimum has been covered in the above summary and it is in no way adequate to cover
all knowledge gaps. Students need to read and highlight in their handbooks; this process
assist the students to familiarise themselves with the content. Should you not understand
any paragraph in part 3, please contact one of your lecturers for assistance.

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Part 4: International independence standards

This part sets out additional material that applies to professional accountants in public practice when
performing the following engagements:

• Part 4A – Independence for Audit and Review engagements – when performing audit or
review engagements
• Part 4B – Independence for Assurance Engagements other than Audit and Review
Engagements – when performing assurance engagements which are not audit
or review engagements.

Independence threats are very topical, and you need a thorough understanding of this topic together
with the related safeguards. Professional accountants in this part refers to individual professional
accountants in public practice and their firms. As mentioned above professional accountants in public
practice must comply with parts 1, 3 and 4 of the CPC.

You should study all four parts of the CPC, as stated above, to enable yourself to identify which parts
of the CPC are applicable when answering questions.

When attempting questions or writing tests or examinations, you should be on the lookout for persons
in scenarios who are CA(SA)s and bear in mind that they have to comply with the CPC.

Please note that trainees aspiring to become CA(SA)s should comply with the SAICA CPC based on
the provisions of SAICA's training regulations. SAICA's training regulations however do not form part
of your certificate in the theory of accounting (CTA) or Initial Test of Competence (ITC) syllabus.

COMMENT

I would suggest that you go read part 4 in the SAICA handbook at this moment. This will
help you to capture all the content covered above. The bare minimum has been covered
in the above summary and it is in no way adequate to cover all knowledge gaps.
Students need to read and highlight in their handbooks; this process assist the students
to familiarise themselves with the content. Should you not understand any paragraph in
part 4, please contact one of your lecturers for assistance.

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IMPORTANT PRINCIPLE

When dealing with the ethical conduct of a CA(SA) and/or auditor, you need to consider the
following three elements in your answer:

1. Compliance with a fundamental principle being threatened

For example, compliance with the fundamental principle of objectivity is threatened

due to the familiarity threat to the external auditor's objectivity because of the auditor's
family ties with the financial director, a CA(SA) of the client company. The threats can
be categorised as follows (see paragraph 120.6 A3):
• self-interest threats;
• self-review threats;
• advocacy threats;
• familiarity threats; and
• intimidation threats.

2. Evaluation of threat (R120.7 and R120.9)

You should evaluate the significance of each threat. In point 1 above, the financial
director will have a significant influence on the subject matter that will be audited by the
auditor in question, and the threat will therefore be significant.

3. Addressing threats (R120.10 and R120.11)

The threat should be either eliminated or reduced to an acceptable level by putting an

applicable safeguard(s) in place. The professional accountant will do so by:

(a) eliminating the circumstances, including interests and/or relationships, that are
creating threats;
(b) applying safeguards, where available and capable of being applied, to reduce the
threats to an acceptable level; and
(c) declining or ending the specific professional activity.

EXAMINATION TECHNIQUE

1. Most students struggle to identify all the relevant matters relating to improper ethical
conduct in any given scenario. A very good theoretical knowledge of the CPC will help
you with this. The first step is to know what is in your book and what is covered in parts
1, 2, 3 and 4 of the CPC. You should then enhance this knowledge by attempting many
questions under examination conditions.

2. Remember that both professional accountants in business and professional accountants

in public practice must comply with the CPC. It is therefore very important to ensure you
deal with the ethical conduct of all the relevant persons in the given scenario, for
example, a financial director who is a CA(SA) and which parts of the CPC is applicable.

3. The threat to the auditor's independence will always be a topical issue, and you should
be on the lookout for this threat and any others hidden in a scenario. Please refer to the
CPC as well as Auditing notes for practical examples on threats, considerations
regarding the significance of the threat, as well how to address the identified threats. It
is important to link each of the threats identified with the appropriate fundamental
principle as per section 110 of the CPC.

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ANNOUNCEMENTS

Please refer to the Announcements on Tutorial letter 102 on myUnisa for some additional
resources on the content of this Tutorial Letter.

Contents of the IRBA Code:

DEFINITIONS, INCLUDING LIST OF ABBREVIATIONS AND STANDARDS

PART 1

COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND

CONCEPTUAL FRAMEWORK
(ALL REGISTERED AUDITORS – SECTIONS 100 TO 199)

PART 3

REGISTERED AUDITORS PERFORMING PROFESSIONAL SERVICES

(SECTIONS 300 TO 399)

PART 4: INTERNAL INDEPENDENCE STANDARDS

(PARTS 4A AND 4B)

PART 4A – INDEPENDENCE FROM AUDIT AND REVIEW ENGAGEMENTS

(SECTIONS 400 TO 899)

PART 4B – INDEPENDENCE FOR ASSURANCE ENGAGEMENTS OTHER THAN

AUDIT AND REVIEW ENGAGEMENTS
(SECTIONS 900 TO 999)

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IMPORTANT PRINCIPLE

You need to be familiar with the entire contents of “Rules Regarding Improper Conduct of
the IRBA” as well as the “By-laws” of SAICA.

Refer to volume 2B of the SAICA Handbook to access these two documents as well as
the SAICA website.

IN THE NEWS

Read the following article:

https://www.news24.com/fin24/Economy/South-Africa/sa-lost-r15-trillion-to-corruption-in-five-years-
and-continues-to-bleed-report-20210623

Discussion points:
• Is the problem with the apples or the barrel?

Critical thinking is vital; all students should strive to focus on the broader picture and
integration plays a huge role. Ethical dilemmas are never in isolation; they involve real-life
situations that will have an impact on the business profits and other stakeholders such as
employees.

Please use the “Discussion Forum” on myUnisa to discuss among yourselves how you would
approach this question. The discussion board will be viewed during the second week of March
2023 for your comments.

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Watch the following video explaining personal, business and professional

ethics
https://www.youtube.com/watch?v=xyaVzpG8WKc

SECTION B – QUESTIONS ON STUDY UNIT 1

Question 1 15 marks

YOU HAVE 5 MINUTES TO READ THIS QUESTION.

The Code of Professional Conduct identifies possible threats to the fundamental principles of ethical
behaviour and suggests safeguards to reduce or eliminate the threats. Consider the following
unrelated situations:

1. Joe Verster has been the partner in charge of the audit of ABC Ltd, a listed company, for the
past nine years.

2. Du Toit & Co, an audit firm, is asked to provide internal audit services to XYZ Ltd. XYZ Ltd is not
an audit client of Du Toit & Co.

3. Du Toit & Co, an audit firm, has been requested by one of their clients to lend them a trainee
accountant to work in their accounting department for a period of three months.

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4. Du Toit & Co, an audit firm, has been approached by XYZ Ltd, a large client, to recruit a financial
director on their behalf.

YOU HAVE 23 MINUTES TO ANSWER THE QUESTION

REQUIRED Marks
Discuss each of the above situations in terms of possible threats to the fundamental
principles of ethical behaviour as identified by the SAICA Code of Professional Conduct.
Your answer should be set out as follows:

For each of the situations above:

• type of threat;
• for each category of threat, identified of fundamental principle(s) that could possibly
be threatened.
• discussion on why the situation creates a threat; and
• discussion on possible safeguards which could be put in place to reduce the threat. 15
(Source: Applied Questions on Auditing)

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SUGGESTED SOLUTION

Type of threat Fundamental Motivation why threat Safeguard

principle(s)
affected
Situation 1
Familiarity (1) Objectivity. (1) The prolonged period to time during which Joe Verster has The audit of ABC Ltd needs to be rotated to another lead
Professional been the engagement partner could lead to a close engagement partner. (1)
competence and relationship with the company. This could affect his objectivity
due cate. (1) and also lead to situations where problems during the audit
are not discussed with management in order not to harm the
relationship. (1)
Situation 2
Not threat. (1) XYZ Ltd is not a financial statement audit client. (1)
Situation 3
Self-review. (1) Objectivity. (1) Should the clerk be in a position to influence the preparation In practice such assistance may be given but only on the
Professional of the client’s accounts or financial statements and later be understanding that the clerk will not be involved in:
competence and part of the audit, it could affect his objectivity during the − making management decisions; (1)
due care. (1) performance on the audit. (1) − approving or signing agreements or other similar
He will also be hesitant to identify problems with the work documents; or
performed by himself. (1) − exercising discretionary authority to commit the client. (1)
The clerk should also not be given audit responsibility for any
function or activity that they performed or supervised during
their temporary staff assignment. (1)
The audit client should accept its responsibility for directing
and supervising the activities of the clerk. (1)
Situation 4
Advocacy. (1) Objectivity. (1) The firm may be hesitant in criticising the financial director in The HR department should take full responsibility for the
Professional future. (1) appointment of the financial director and the client should be
competence and Subsequent objectivity may be compromised by the fact that 100% satisfied with the candidate. (1)
due care. (1) the firm promotes the appointment of a specific individual. (1) Other valid safeguards. (1)
Maximum (15)

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Question 2 19 marks

YOU HAVE 6 MINUTES TO READ THIS QUESTION.

You are a first-year trainee accountant at Sakhile & Davids (S&D), a firm of registered auditors. S&D is
a medium-sized auditing firm in South Africa (SA) with offices in Cape Town, Durban, Mangaung and
Johannesburg. In the past year, S&D won major tenders to be statutory auditors of companies,
including SA's biggest mobile operator, a manufacturer and distributor of beer, SA's national airline
and ZAMedia Limited (ZAMedia). As a result, S&D increased its first-year trainee accountant intake for
2018/2019 by 70% compared to the previous year.

For further information on staff at S&D, refer to the e-mail of the partner in charge of the audit of
ZAMedia to the chief executive officer (CEO) of ZAMedia, Mr Martin Davies, which is included as
annexure A.

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Annexure A

From: Denzil.phillips@S&D.co.za
Sent: Tuesday, 18 September 2018, 4:45 PM
To: martin@ZAMedia.co.za
CC: tebogo@ZAMedia.co.za
Subject: Recruitment of staff

Dear Martin

This e-mail serves as a confirmation of details discussed during our telephone conversation.

The chief financial officer (CFO) of ZAMedia, Tebogo Maphothoma, will be joining S&D on a
full-time employment basis as a senior audit manager with the prospect of becoming a partner
within two years. Tebogo will commence her employment with S&D on 3 December 2018 in the
position of senior manager in charge of the audit of ZAMedia for the year ended
28 February 2019. ZAMedia will be the main audit client of Tebogo until she becomes the
partner in charge of the audit. Between December 2018 and November 2019, I will allow
Tebogo to work as the company secretary for ZAMedia on a contract basis while she is still
employed at S&D.

Tebogo’s duties as company secretary will include, among other things, providing guidance to
the board on their duties, responsibilities and powers; ensuring that the company complies with
the relevant laws, including the applicable financial reporting framework; and ensuring that the
minutes of shareholders and board meetings are recorded properly.

Karabo Rantekoa, whom I have headhunted because of my confidence in her competency, will be
taking up Tebogo’s position as the CFO of ZAMedia as from 3 December 2018. As agreed, I will
be paid 10% of Karabo’s cost to company for recruiting her for your well-established company.

Thank you so much for your willingness to help our firm during these challenging times. I truly
appreciate it.

PS: My daughter has experienced an increase in the number of customers in her catering
business. Thank you for allowing her to advertise her business on ZAMedia billboards located
along the major highways in Gauteng at no cost.

Regards

Denzil Phillips CA (SA), Registered Auditor

Director

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YOU HAVE 29 MINUTES TO ANSWER THE QUESTION.

REQUIRED Marks
1. With reference to the e-mail in annexure A, discuss any concerns and considerations
in terms of the SAICA Code of Professional Conduct in detail. 18

Communication skills: logical argument 1

(Unisa ‒ 2013 TEST 1, adapted)

SUGGESTED SOLUTION

1. Concerns and consideration in terms of the SAICA CPC

(a) It is a concern that Tebogo, the CFO of ZAMedia, will be the responsible senior audit
manager on the audit of ZAMedia for the 28 February 2019 financial year end. (1)
i. In terms of the CPC, section 522, a self-interest, self-review or familiarity threat on
the objectivity of the auditor exists where a member of the audit team has to
evaluate elements of the financial statements for which the member of the audit
team had prepared the accounting records while with the client. (1)
ii. As the CFO of ZAMedia, Tebogo has been responsible for the information
contained in the financial statements for a major period of time (nine months). (1)
iii. The threat is considered significant, as Tebogo's position as the CFO implies
significant influence over the preparation of ZAMedia's accounting records. (1)
iv. The only safeguard to eliminate this threat is not to assign Tebogo as the senior
audit manager responsible for the audit of ZAMedia or to have an appropriate
reviewer to review the work performed by Tebogo. (1)

(b) It is a concern that Tebogo will be contracted to be the company secretary of ZAMedia,
as it appears that she will still be the senior audit manager responsible of the audit of
ZAMedia for the 2019 financial year. (1)
i. In terms of the CPC, section 523 and 600, self-review and self-interest threats
(par 523.2) as well as an advocacy threat (par 600.7A2) exist when an employee of
the firm serves as the company secretary of an audit client. (1)
ii. This threat is considered significant, and the only safeguard to eliminate the threat
is not to contract Tebogo for the position of company secretary. (2)

(c) It is a concern that the audit partner has headhunted and recruited Karabo for the
position of CFO at ZAMedia. (1)
i. In terms of the CPC, section 609, an auditing firm shall not provide recruiting
services to an audit client that is a public interest with respect to a director's
position exerting significant influence on the preparation of financial statements
(par 609.7). (1)
ii. The provision of recruitment services will affect the auditor's ability to remain
objective. (1)
iii. ZAMedia is a public interest entity, as it is listed on the JSE, and the position of
CFO exerts significant influence on the preparation of financial statements. (1)

(d) It is a concern that the audit partner will be paid 10% of Karabo's cost to company for
recruiting her for the position of CFO at ZAMedia. (1)
i. This will create a self-interest threat to the independence of the audit partner. (1)
ii. The audit partner should not have been involved in head-hunting and recruiting
Karabo for the position of CFO at ZAMedia at all. (1)
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(e) It is a concern that the audit partner's daughter was allowed to advertise her business on
the billboards along major highways in Gauteng at no cost. (1)
i. This provision at no cost will constitute a gift. (1)
ii. In terms of the CPC, section 420, accepting gifts from an audit client may create
self-interest, familiarity or intimidation threats. This will impair the auditor's ability to
act objectively. (1)
iii. This gift is significant, resulting in the threat being significant. No safeguard could
reduce this threat to an acceptable level; the audit partner should not have
accepted this gift. (2)
Communication skills: Logical argument (1)
Available 22
Maximum 19

COMMENT

Refer further to section B of study unit 5 for a comprehensive question (question 2) that
includes the content of most of the study units that will be covered in this tutorial letter.

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STUDY UNIT 2 – THE AUDITING PROFESSION ACT (APA) OF THE

INDEPENDENT REGULATORY BOARD FOR AUDITORS
(IRBA)

INTRODUCTION

The APA was enacted by parliament to regulate the auditing profession in

South Africa. Since you are studying the subject of auditing, it is very important for you
to have a good understanding of this very important piece of legislation.

OBJECTIVES

After completing this study unit, you should be able to identify, discuss and apply the
requirements of the APA of the IRBA to a given scenario.

PRESCRIBED STUDY MATERIAL

SAICA Student Handbook 2022/2023, volume 2B:

• Auditing Profession Act (2005)

Auditing Notes, 12th edition, chapter 3, pages 3/68 to 3/79

COMMENT

We recommend that you study the APA directly from the SAICA Student Handbook,
as you may have this book with you when writing the test and/or examination
according to the open book policy.

SECTION A – ADDITIONAL INFORMATION

Background

The APA, as issued by the IRBA, is applicable to Registered Auditors (RAs). You need to familiarise
yourself with the examinable content thereof.

In this tutorial letter, we will only be highlighting areas with which students normally experience
difficulties. This does not imply that the areas of the APA not discussed in this tutorial letter are
less important.

Section 1 ‒ definitions of terms used in the APA, such as "reportable irregularity" (RI)
Ensure that you use the correct terminology and refer to the correct definition
when discussing issues pertaining to the APA.

Sections 37 and 38 ‒ registration procedures for individual and firms as registered auditors.

Section 41 ‒ conduct by and liability of registered auditors relating to public practice.

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Section 44 ‒ duties in relation to an audit

Section 45 ‒ duty to report on irregularities

Refer to the IRBA guide – IRREG ‒ for guidance on what constitutes an RI. (Appendix 7
of the IRREG includes examples which illustrates the application of the guide in
determining the existence of a reportable irregularity).

Section 46 ‒ limitation of the auditor's liability

This section includes the requirements an auditor must meet to be held liable by third
parties who relied on an inappropriate opinion given. Section 46(8) states that the
auditor cannot through agreement or in any other way limit or reduce the liability they
incurred during a statutory audit.

Section 52 ‒ reportable irregularities and false statements in connection with audits

EXAMINATION TECHNIQUE

RI’s will always be hidden in a scenario, and you should always be on the lookout for
them. It is very important to test whether it is a RI by comparing the given information
to the definition and requirements of a RI in section 1 of the APA. Marks will be
allocated for applying the theory to the scenario and not for merely stating the theory.

Do not discuss the auditor's reporting responsibility when you have identified an
RI. Rather analyse the "required" part of the question carefully to ascertain whether the
reporting responsibility would be applicable. Also, use the mark allocation of the
question as guidance. The reporting responsibilities as per section 45 are extensive,
as it would increase the mark allocation significantly.

Refer to Auditing Notes page 3/79 for a handy diagram that you can use to determine
the existence of an RI as well as the process to report an RI.

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SECTION B – QUESTION ON STUDY UNIT 2

QUESTION 1 Marks 13

YOU HAVE 4 MINUTES TO READ THIS QUESTION.

Background information

You are an audit senior at Bakeng & Kgomotso Auditors Incorporated (B&K), currently involved in the
finalisation stage of the statutory annual audit of Med Group Limited (Med) and its two subsidiaries,
Medschem Medical Scheme (Medschem) and Medmanage (Pty) Ltd (Medmanage), for the financial
year ended 30 June 2021. Med is a Johannesburg Stock Exchange (JSE) listed company in the health
care industry of South Africa. The final materiality for the 2021 statutory annual audit is set at
R3 million for Medschem, R1,2 million for Medmanage and R 4 million for the consolidated financial
statements of Med.

Medschem is an independent non-profit medical scheme governed by the Medical Schemes Act and
regulated by the Council for Medical Schemes. Medschem has a good record of diligently paying their
clients’ qualifying medical costs and providing excellent service to its members. Medschem is
administered separately by Medmanage, an authorised financial services provider and for-profit
private company. By separating medical scheme and administration functions between Medschem
and Medmanage, the Med group of companies has been able to gain a significant competitive
advantage by expanding its offerings to the health care market without contravening the Medical
Schemes Act.

In addition to providing administration services to Medschem, Medmanage offers medical industry

related services and products to medical scheme members. These services and products include for
example the purchase and repackaging of vitamins as well as endorsed weight management
products. The group of companies has proven to be highly profitable since it was founded in 1993.
However, the global Covid-19 pandemic that hit South Africa and the rest of the world in 2020,
changed the healthcare landscape significantly.

The Med group of companies saw a significant decline in profits in the 2021 financial year. Although
Medschem initially experienced large surpluses and reserves after fewer operations and doctors’ visits
at the beginning of the outbreak, the scheme had to pay higher claims as hospitalisations due to
Covid-19 increased later during the outbreak. The Council for Medical Schemes further stressed that
uncertainty exists around how Covid-19 will affect medical schemes in the long term.

Raw material procurement from Bestpack

A decision was taken at a Medmanage board meeting before year end, to procure the necessary
repackaging and labelling raw materials for the Swiss vitamin supplements from Bestpack (Pty) Ltd.
Bestpack is a family business that is renowned for providing high quality packaging materials at
affordable prices.

Medmanage’s marketing director, Mr Adrian Viljoen, owns 15% of the equity interest of Bestpack and
the remaining interest is held by his son. His son is also the managing director of Bestpack. Due to this
relationship, Medmanage was able to negotiate a lucrative discount on the contract. As such, the
entire board of directors, including Mr Adrian Viljoen, unanimously voted in favour of the contract at the
board meeting.
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YOU HAVE 20 MINUTES TO ANSWER THE QUESTION.

REQUIRED Marks
Determine whether a reportable irregularity exists in terms of the Auditing Profession Act with
regards to MEd manage (Pty) Ltd’s board decision to award the procurement of packaging
materials contract to Bestpack. 12

Communication skills – clarity of expression 1

SUGGESTED SOLUTION

Determine whether a reportable irregularity exists in terms of the Auditing Profession Act with
regards to Medmanage (Pty) Ltd’s board decision to award the procurement of packaging
materials contract to Bestpack

1. Whether an unlawful act or omission has occurred: (1)

2. Adrian Viljoen contravened section 75 of the Companies Act by not declaring his interest in and
voting on the contract with Bestpack. (1)

3. Whether the unlawful act has been committed by someone responsible for management of the
entity: (1)

4. The unlawful act was committed by Adrian Viljoen, the marketing director of Medmanage. (1)

5. Whether the unlawful act could result in a material financial loss to any partner, member,
shareholder, creditor or investor: (1)

6. The contract is void as Adrian Viljoen did not comply with the requirements of section 75
(section 75(7) and unless ratified by the shareholders or the court, (1)

7. could result in penalties to Medmanage levied by Bestpack if the contract is declared void; or (1)

8. financial loss to Bestpack if the contract is cancelled. (1)

9. However, the shareholders of Medmanage would probably ratify the contract as it appears very
beneficial for Medmanage (good quality at affordable prices, including lucrative discounts) and
would most probably not result in financial loss to any party. (1)

10. Whether it relates to fraud or theft: (1)

11. The unlawful act does not seem to relate to fraud or theft as it may not be intentional, and the
contract terms are fair and beneficial to Medmanage. (1)
OR

12. Adrian Viljoen might have intentionally, fraudulently not declared his interest in order to win a
contract for his son. (1)

13. Whether the unlawful act constitutes a material breach of fiduciary duty: (1)

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14. Non-compliance with section 75 is a significant breach of the companies act, which would be
considered a material breach of a director’s duty of care, skill and diligence (1)

15. If the agreement was indeed the best available option for Medmanage (e.g. good quality at
affordable prices, including lucrative discounts), it could be argued that this does not amount to
a material breach of his fiduciary duty as Adrian Viljoen acted in the best interest of the
company. (1)

OR

16. based on the above, a reportable irregularity exists.

Conclusion: Based on the above, if a RI exists, the auditor will need to report a reportable
irregularity to the IRBA. (1)
Communication skills – clarity of expression (1)
Available 17
Maximum 13

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STUDY UNIT 3 – THE AUDITOR'S RESPONSIBILITIES RELATING TO

FRAUD IN AN AUDIT

INTRODUCTION

In a society where fraud and corruption are rife, there is increasing pressure on the
accounting and auditing profession to act in this regard. It is with this in mind that you
should study ISA 240 and the explanatory notes in Auditing Notes as prescribed below.

OBJECTIVES

After completing this study unit, you should be able to:

• identify and discuss the risk of material misstatement of the financial statements
due to fraud; and

• design appropriate responses to the assessed risk of material misstatement of the

financial statements due to fraud.

PRESCRIBED STUDY MATERIAL

SAICA Student Handbook, 2022/2023, International Audit Standards, Part I, Volume

2A(1):
• ISA 240: The Auditor's Responsibility Relating to Fraud in an Audit of Financial
Statements

Auditing Notes, chapter 7, pages 7/30 to 7/42

SECTION A – ADDITIONAL INFORMATION

Background

The topic of fraud should not be studied in isolation, but rather in the context of how it affects the
entire audit process.

The existence of fraud will affect the auditor's assessment of the risks of material misstatement. Fraud
should be assessed when developing the overall audit strategy.

Refer to ISA 240.12 for a definition of the following terms:

• fraud
• fraud risk factors

The auditor shall identify and assess the risks of material misstatement due to fraud at the
financial statement level and at the assertion level for classes of transactions, account balances
and disclosures (ISA 240.26).

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For the identification and assessment of risk of material statement due to fraud, the auditor will base a
presumption on the fact that there are risks of fraud associated with for instance revenue recognition
and will then have to evaluate the types of revenue, revenue transactions or assertions which gave
rise to such risks (ISA 240.27).

ISA 240.29 to ISA 240.34 deals with the auditor's response to the assessed risks of material
misstatement due to fraud. This is a very important aspect and students should be able to discuss the
effect that the risk of material misstatement due to fraud has on both the audit strategy as well as the
audit plan, in other words at financial statement level as well as assertion level.

Aspects of fraud may be included into many topics, for example in questions on the CPC, reportable
irregularities and risk assessment.

Refer to the following appendices of ISA 240 for examples of fraud risk factors and possible audit
procedures to deal with these.

Appendix 1: Examples of fraud risk factors

Appendix 2: Examples of possible audit procedures to address the assessed risk of material
misstatement due to fraud
Appendix 3: Examples of circumstances that indicate the possibility of fraud

IMPORTANT PRINCIPLE

You need to be familiar with the entire of ISA 240, including all the appendices.
Appendices provide guidance on how fraud could impact on different areas of the audit
process by making it practical with the examples provided in this auditing standard. It
also highlights areas where there could be a possibility of fraud.

Watch the following video explaining the auditor’s responsibility regarding

fraud
https://www.youtube.com/watch?v=D_qpe_gvOwU

Please note that this YouTube video is 04:08 minutes in length.

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STUDY UNIT 4 – THE KING IV REPORT ON CORPORATE GOVERNANCE

IN SOUTH AFRICA

INTRODUCTION

By now, you should be familiar with the concept of “corporate governance”, not only
from your studies leading up to this point, but also from watching the news on television,
reading the newspapers, browsing the internet etc. Unfortunately, companies have been
in the news for the wrong reasons, displaying a lack of good “corporate governance”!

Companies are an integral part of society (as corporate citizens) and we are all linked to
companies in various ways, ranging from buying shares in a company to living in the
same city or neighbourhood that a company operates in. It is for this reason that
companies should operate in a manner that is responsible to society. King IV aims to
promote a culture of good corporate governance in the South African environment.

OBJECTIVES

After completing this study unit, you should be able to:

• demonstrate an understanding of the principles and recommendations of King IV;

• make appropriate recommendations regarding practical aspects of corporate

governance with specific reference to King IV; and

• comment on the compliance and/or non-compliance with the King IV.

PRESCRIBED STUDY MATERIAL

SAICA Student Handbook 2022/2023, volume 2B:

• The King IV Report on Corporate Governance in South Africa

Auditing Notes, 11th edition, chapter 4 (entire chapter)

COMMENT

You should familiarise yourself with the content of the King IV Report as well as the
explanatory notes in Auditing Notes before referring to the notes in this tutorial letter.
By just browsing through the principles and the recommended practices you will
struggle to identify all the related issues and link them to the applicable principles and
recommended practices.

King IV is included in the SAICA Student Handbook, volume 2B. This is very good news
for you, as in terms of the open book policy of SAICA, you may have this book with you
when writing a test or examination. This would also make it easier when answering
questions. However, because King IV is open book you can also expect a greater focus
on application thereof in the questions. It is therefore of vital importance to ensure that
you are able to firstly identify the related principles you are dealing with as discussed in
part 5 of the King IV Report, secondly how to link it with the applicable recommended
practices, and lastly then how to make it applicable to the scenario.

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SECTION A – ADDITIONAL INFORMATION

Watch the following short video explaining the intro to KING IV

https://www.youtube.com/watch?v=aup_jXhG_y8

Please note that this YouTube video is 04:06 minutes in length.

WORKING THROUGH THE KING IV REPORT ON COPORATE GOVERNANCE

What follows is a short summary of the contents of the Report (hereafter referred as King IV). As
explained above, this summary should be studied in the context of the full Report as well the
prescribed material.

Please refer to the SAICA Examinable Pronouncements and Competency Framework for the required
knowledge levels for each of the required sections that are examinable in the 2024 ITC. These
documents are available on the SAICA website.

Levels of learning
Level 1 – knowledge and comprehension
Level 2 – application and analysis
Level 3 – integration

In the majority of cases reference will be made to the King Code as that is where the essence lies
when studying this section and when being tested on this part of the syllabus.

PART 1: GLOSSARY OF TERMS

Refer back to the glossary for clarification of terms used in the King IV.

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PART 2: FUNDAMENTAL CONCEPTS

It is important to read through this part of the King IV report, as it clearly sets out the fundamental
concepts and philosophy on which King IV is based. This will provide you with a solid base to study
and understand the rest of King IV report.

The following are the underpinning philosophies of the report:

• integrated thinking;
• the organisation as an integral part of society;
• corporate citizenship;
• stakeholder inclusivity;
• sustainable development; and
• integrated reporting.

Ensure that you have a thorough understanding of these philosophies and how to translate it into the
principles, recommended practices and intended governance outcomes.

Also, read through the “Highlights of the King IV Code” in detail, as it highlights emerging issues,
corporate governance developments and areas of focus These fundamental concepts are further
explained in Auditing Notes.

PART 3: KING IV APPLICATION AND DISCLOSURE

Legal status and application of King IV

King IV is not law. It is a set of voluntary principles and recommended practices with desired
governance outcomes. This is opposed to, for example the Companies Act, which contains sections
that aim to govern companies. These laws will be intertwined with the principles and recommended
practices in the King IV Code. Whenever there is conflict between legislation and the King IV Code,
the law will prevail.

Note that companies listed on the JSE Limited (JSE) are required, in terms of the JSE’s listing
requirements, to provide a narrative explanation of the recommended practices that have been
implemented, and how these achieve or give effect to the related King IV principles. This application
regime is called “apply and explain”. This is a change from King III where an application regime of
“apply or explain” was followed, which implied that if an organisation did not apply these principles,
they had to provide an explanation for not doing so. The reason for the change in application regime is
to ensure more accommodating, non-prescriptive, outcomes-based approach. Achieving the
principles will ensure that the organisation, by exercising ethical and effective leadership, realise the
intended governance outcomes as defined by King IV being:
• ethical culture;
• good performance;
• effective control; and
• legitimacy.

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Proportionality

King IV applies to all entities regardless of their manner and form of incorporation. Obviously, the size
and complexity of the entity will determine the extent to which the entity applies the code. The King IV
report introduces the idea of proportionality. This entails the “appropriate application and adaption of
practices” taking the following of an organisation into account:
• the size of turnover and workforce;
• resources (the organisation has available, to apply the practices); and
• the extent and complexity of the organisation’s strategic objectives and operations.

For example, a large listed company will have different governance structures than a small business,
but the basic principles of good governance will apply to both.

Disclosure requirements

As mentioned above, a narrative report should be provided on the application of the principles
embedded in the King IV code. Specific disclosure recommendations are included for each principle of
the code. These disclosure recommendations guide the board in making these disclosures and are by
no means descriptive in nature.

King IV states that disclosures should be:

• updated annually;
• formally approved by the governing body; and
• publicly accessible.

Disclosures can be made in:

• the integrated report;
• a sustainability report;
• a social and ethics report; or
• any other printed or online information or reports.

COMMENT

Please note that the King IV report refers to “governing body” as the structure that is
primarily responsible for the governance and performance of an organisation. In the
case of public companies, the board of directors will fulfil this duty. We will therefore
refer to “governing body” and “board” interchangeably in this tutorial letter.

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The following video clips serves as additional information that may be watched
should you require more detail on King IV.
Session Duration Brief description of video with link
23:11 Introductory video to King IV and Corporate
Governance
https://www.youtube.com/watch?v=5OPl-Fu8Fh8

38:42 Discussion of principles 1 to 7

https://www.youtube.com/watch?v=QyCxL4SNuJ8

18:44 Discussion of principles 8 to 10

https://www.youtube.com/watch?v=ijS74n5QQXo

56:37 Discussion of principles 11 to 17

https://www.youtube.com/watch?v=cvD6hCQ3_Qk

PART 4: KING IV ON A PAGE

This section is not specifically examinable and is merely a summary of the principles contained in
King IV.

PART 5: KING IV CODE ON CORPORATE GOVERNANCE

The King IV Code consists of the following five parts:

• Leadership, ethics and corporate citizenship (principle 1 to principle 3);
• Strategy, performance and reporting (principle 4 to principle 5);
• Governing structures and delegation (principle 6 to principle 10);
• Governance functional areas (principle 11 to principle 15); and
• Stakeholder relationships (principle 16 to principle 17).

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These five parts contain the 17 principles and the related recommended practices for each principle
which should be performed by the governing body.

COMMENT

Remember: We explain some of the principles and recommended practices in more

detail below. However, you should study all the relevant principles and recommended
practices directly from the Code.

A summary of the principles and recommended practices can be found in Appendix 1 in

Chapter 4 of Auditing Notes (4/54 to 4/56).

4.1 Leadership, ethics and corporate citizenship

As discussed above, King IV defines corporate governance as the exercise of ethical and
effective leadership by the governing body towards the achievement of governance outcomes.

Part 1 of the Code is devoted to leadership, ethics and corporate citizenship and consists of the
following three principles:
• Principle 1: The governing body should lead ethically and effectively;
• Principle 2: The governing body should govern the ethics of the organisation in a way
that supports the establishment of an ethical culture; and
• Principle 3: The governing body should ensure that the organisation is and is seen to be
a responsible corporate citizen.

The recommended practices under the first principle deal mainly with leadership and
encourage members of the governing body to set an example by displaying the characteristics
of integrity, competence, responsibility, accountability, fairness and transparency.

The recommended practices under the second principle deal with organisational ethics and
aim to assist with the management of ethics within the organisation.

Finally, recommendations are made under the third principle on how the organisation should
act as a responsible citizen, also as it engages with internal and external stakeholders and
society as a whole.

COMMENT

Corporate citizenship (achieved by ethical and effective leadership) are

underpinning philosophies of good corporate governance. In a test or exam it is
important to evaluate whether lack of good corporate governance in one of the
other areas of the Code, for example a lack of evaluation of the governing body’s
performance (principle 9, see later), relates to the governing body not leading in an
ethical and effective manner.

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4.2 Strategy, performance and reporting

Part 2 of the Code deals with strategy, performance and reporting, and contains the following
two principles:
• Principle 4: The governing body should appreciate that the organisation’s core purpose,
its risks and opportunities, strategy, business model, performance and sustainable
development are all inseparable elements of the value creation process; and
• Principle 5: The governing body should ensure that reports issued by the organisation
enable stakeholders to make informed assessments of the organisation’s performance,
and its short, medium and long-term prospects.

It is recommended as part of principle 4 that the governing body should:

• set the direction, purpose and strategy of the organisation;
• delegate to management the formulation of the strategy;
• approve the strategy;
• approve management policies and plans, including key performance measures and
targets;
• delegate the implementation of plans to management; and
• oversee the implementation of the strategy and plans by management.

As part of principle 5 it is recommended that the governing body should:

• assume responsibility for the organisation’s reporting by setting the direction and
approach to be followed;
• approve the reporting frameworks;
• ensure that all reports comply with legal requirements and that they meet the legitimate
and reasonable expectations of material stakeholders;
• ensure that an annual integrated report is published either as a stand-alone report or as
part of another report;
• approve management’s bases for materiality;
• ensure the integrity of external reports; and
• ensure that the disclosures required by the King IV Code, integrated reports, annual
financial statements and other external reports are available on the organisation’s
website and other appropriate media.

COMMENT

The term “value creation process” is an important concept in King IV. It is defined
as follows: “The process that results in increases, decreases or transformations of
the capitals caused by the organization’s business activities and outputs. For an
explanation on “the capitals”, refer to Auditing Notes page 4/12 and 4/13.

4.3 Governing structures and delegation

The principles contained in part 3 are:

• Principle 6: The governing body should serve as the focal point and custodian of
corporate governance in the organisation;
• Principle 7: The governing body should comprise the appropriate balance of knowledge,
skills, experience, diversity and independence for it to discharge its governance role and
responsibilities objectively and effectively;
• Principle 8: The governing body should ensure that its arrangements for delegation
within its own structures promote independent judgement, and assist with balance of
power and the effective discharge of its duties;

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• Principle 9: The governing body should ensure that the evaluation of its own
performance and that of its committees, its chair and its individual members, support
continued improvement in its performance and effectiveness; and
• Principle 10: The governing body should ensure that the appointment of, and delegation
to, management contribute to role clarity and the effective exercise of authority and
responsibilities.

The Code recommends that the governing body should consider an appropriate size for itself,
having regard for the optimal mix of knowledge, skills, experience, diversity and
independence.

The independence of members of the governing body is recognised as an essential element of

corporate governance. The global financial crisis has however seen the failure of many
organisations despite organisations having the appropriate number of independent directors on
its board. The King IV Code emphasises the importance of independence and stresses that all
members of the governing board have the duty to act with independence of mind in the best
interest of the organisation. It is recommended that the governing body consist of a majority
of non-executive directors, most of whom should be independent. At least the CEO and
one other executive member should be appointed to the governing body.

The Code recommends the appointment of an independent non-executive member as the

chair of the governing body, as well as an independent non-executive member as the lead
independent.

COMMENT

Always evaluate the composition of the governing body and its sub-committees
based on the recommended practices of King IV. A small number of marks will
usually be allocated to the composition of these committees, which are relative
easy marks to score in a test or exam, unless it is specifically excluded as per the
required section.

When the composition of the governing body is evaluated, one should take into
account regulatory requirements, for example the JSE listing requirements dictates
that listed companies must appoint a financial director to the governing body and
in terms of Regulation 43 of the Companies Act, a social and ethics committee
should be appointed in certain cases.

The formation of the following committees is recommended:

• audit committee;
• committee responsible for nominations of members of the governing body;
• committee responsible for risk governance;
• committee responsible for remuneration; and
• social and ethics committee.

It is further recommended that the governing body assume responsibility for performance
evaluations of itself, its committees, its chair and its members, and that an externally facilitated
performance evaluation is performed at least every two years.

The lead independent director is to lead the evaluation of the chair.

The governing body should appoint a Chief Executive Officer (CEO), reserve certain powers
and matters to itself and set those powers and matters to be delegated to management via the
CEO.
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The governing body should ensure that it has access to professional and independent
guidance on legal and corporate governance matters and consider appointing a company
secretary if not mandatory to do so.

IMPORTANT PRINCIPLE

Some students find the concepts independence and being a member of one of the
board committees confusing.

Board committees comprise of members of the board, in other words appointed

directors of the company. A person is therefore first and foremost a director of the
company, appointed to serve on one or more of the committees of the board. The audit
committee for example, should comprise only independent, non-executive directors. A
non-executive director's independence is determined by the characteristics as set out
in the Code (principle 7, recommended practices 25 to 29 and refer to Auditing Notes
4/23 to 4/34) and a not by the fact that he or she serves on a board committee.

Below is a summary of the committees’ composition recommendations:

Committee Members Number of Chairman

members
Audit Independent, non-executive At least 3 Independent, non-executive
directors director
Nominations Non-executive directors, majority At least 3 Chairperson of the board may
should be independent. be elected as chairman.
Chairperson of the board should
be a member.
Risk Executive and non-executive At least 3 Chairperson of the board may
directors, majority whom are non- be elected as chairman.
executive.
Chairperson of the board may be
a member.
Remuneration Non-executive directors, majority At least 3 Non-executive director
should be independent. Chairperson of the board
should not be elected as
chairman.
Social and Executive and non-executive At least 3 Chairperson of the board
ethics directors, majority whom are non- should not be elected as
executive. chairman.
Chairperson of the board may be
a member.

4.4 Governance functional areas

Part 4 of the Code deals with the governance of risk, technology and information, compliance,
remuneration and assurance and contains the following principles:
• Principle 11: The governing body should govern risk in a way that supports the
organisation in setting and achieving its strategic objectives;
• Principle 12: The governing body should govern technology and information in a way
that supports the organisation setting and achieving its strategic objectives;
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• Principle 13: The governing body should govern compliance with applicable laws and
adopted, non-binding rules, codes and standards in a way that supports the organisation
being ethical and a good corporate citizen;
• Principle 14: The governing body should ensure that the organisation remunerates fairly,
responsibly and transparently to promote the achievement of strategic objectives and
positive outcomes in the short, medium and long term; and
• Principle 15: The governing body should ensure that assurance services and functions
enable an effective control environment, and that these support the integrity of
information for internal decision-making and of the organisation’s external reports.

It is recommended that the governing body should:

• set the approach for risk governance with a specific focus on opportunities and risk when
developing strategy;
• approve risk policy;
• evaluate and agree the risks it is prepared to take;
• delegate the implementation of risk management to management;
• oversee the risk management process;
• consider receiving independent assurance on the effectiveness of risk management; and
• make the necessary disclosures regarding risk and opportunities.

It is further recommended that the governing body:

• set the approach for technology and information governance and that it approves the
policy;
• delegate to management effective technology and information implementation;
• oversee the results of the implementation by management;
• oversee management of information and technology;
• consider receiving independent assurance on the effectiveness of technology and
information; and
• make the necessary disclosures regarding technology and information.

Regarding compliance governance, it is recommended that the governing body direct

compliance, approve policy, delegate to management the implementation of compliance
management, oversee compliance management and make the necessary disclosures.
Remuneration governance is covered in a lot of detail. It is recommended that:
• the governing body sets an organisation-wide remuneration policy that articulates and
gives effect to its direction on fair, responsible and transparent remuneration;
• disclosure takes place via a remuneration report containing a background statement, an
overview of the main provisions of the remuneration policy, and an implementation
report; and
• shareholders be given the opportunity to vote on remuneration policy and
implementation.

King IV expands on the combined assurance model by indicating that a combined assurance
model should incorporate and optimise all assurance functions and services so that, taken as a
whole, these enable an effective control environment, support the integrity of information used
for decision-making, and support the integrity of external reports.

4.5 Stakeholder relationships

Part 5 focuses on stakeholder relationships and contains the following two principles:
• Principle 16: In the execution of its governance role and responsibilities the governing
body should adopt a stakeholder-inclusive approach that balances the needs, interests
and expectations of material stakeholders in the best interests of the organisation over
time; and

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• Principle 17: The governing body of an institutional investor organisation should ensure
that responsible investment is practiced by the organisation to promote the good
governance and the creation of value by the companies in which it invests.

Principle 17 above is only applicable to institutional investors.

PART 6: SECTOR SUPPLEMENTS

Part 6 of the King IV Report contains five sector supplements, which illustrate how the King IV Code
should be interpreted and applied in different contexts, situations and legislative regimes. The sector
supplements provide the necessary adaption of terminology and specific recommendations, which
should be considered together with specific industry codes, practices and legislation. All governance
outcomes as per the King IV Code still apply.

PART 7: CONTENT DEVELOPMENT AND KING COMMITTEE

Not examinable.

(Source: Adapted from Dynamic Auditing; 12th Edition; Marx, Van der Watt, Bourne)

EXAMINATION TECHNIQUE

• Please note that when a question refers to the term "corporate governance", it
implies that you have to consider King IV. In addition, you may need to consider
corporate governance issues arising from other sources (e.g. the Companies
Act, Insider Trading Act, business ethics, etc.).

• Corporate governance is very topical and will therefore be examined on a

regular basis.

• As mentioned earlier in this study unit, you have the King IV document at your
disposal when writing a test or examination. Therefore, ensure you are familiar
with the content of the document to enable you to find the relevant sections
without wasting too much time.

• Corporate governance can be integrated with more than one topic. In preparing
for tests and examinations, always envision how the aspects from King IV can
be linked to other topics within auditing (especially with the Companies Act) as
well as with your other subjects.

• Good examination technique includes reading carefully what is required of you.

If you are required to identify instances of non-application of King IV, do not
waste time by mentioning instances where the entity in question has applied
King IV (a common mistake that students make).

• It is very important that you do not make assumptions from the facts given to
you, except when you are instructed to do so. By making assumptions, you are
wasting valuable time by providing information that will not earn you marks.
• As with any of the other topics in auditing, the best way to study this section on
corporate governance is to establish a good theoretical basis and then to
attempt as many questions as possible.

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SECTION B – QUESTION ON STUDY UNIT 4

COMMENT

The question that follows is divided into three parts, namely the scenario, the "required"
and the suggested solution. In the test and the examination, you would also first be
confronted by the scenario, where after the "required" will be handed out separately.

We include the question below for practice purposes. It demonstrates how the scenario
links to the suggested solution.

QUESTION 1 20 marks

YOU HAVE 6 MINUTES TO READ THIS QUESTION.

Please note the “comments” provided in brackets below, links to the corresponding number in
the suggested solution. It is provided to assist you in making the link between the given
information and the suggested solution.

You are an audit senior at Malemela & Company (Malemela), a firm of Registered Auditors and have
been assigned to the 30 June 2016 year end audit of Bizniz (Proprietary) Limited (Bizniz). Bizniz
imports a wide range of photocopying, facsimile and printing machines.

During the review of the audit file, you became aware of the following:

1. Statutory matters

A second-year trainee on the audit performed a statutory review of Bizniz and prepared
working paper B1/1.

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Client Bizniz (Pty) Ltd Prepared by Second-year trainee B1/1

Page 1 of 1
Year end 30 June 2016 Reviewed by KT
Subject Statutory matters

1. Board of directors (comment 1.1)

Karen Wells – CEO and chairperson (comment 1.2)
Bob Cilliers – Finance director
Violet Mguni – Operations director
Jane Witfield – Marketing director*
Christo Van Tonder – Human resources director
Samuel Jackson – Professor in the Auditing Department at Unisa*
William Smith – Government official (only attends board meetings)
* Appointed during the current year. Lead independent director.

Bob, Violet and Christo have served on the board for the past three years.

The audit committee is responsible for the evaluation of the board's performance (comments
1.3 and 1.4). These performance evaluations form part of the determination of the board's
development and of the training needs of directors.

The board meets as and when required, and the board committees, as discussed below, meet
annually.

2. Internal audit
• Internal audit reviews the implementation of the risk management plan on an annual basis
(comment 2.1).
• Jane Witfield heads the Internal Audit Department (comment 2.6) and reports to
Bob Cilliers, the finance director, annually (comments 2.2 and 2.5).
• Internal Audit identifies all the potential risks that Bizniz faces and makes decisions on how
these risks will be mitigated (comments 2.3 and 2.4).
• Internal Audit is responsible for the preparation of the financial statements (comment 2.7).

3. Committees
Audit committee (comments 3.1 and 3.2)
– Violet Mguni
– William Smith
– Bob Cilliers

During the meeting of the audit committee held on 15 May 2016, it was decided that Bizniz
would acquire shares in Africa Coal, a coal mining company listed on the JSE Ltd. A detailed
analysis of the coal-mining sector supported this decision (comment 3.3).

Risk committee (comments 4.1 and 4.2)

– Christo van Tonder
– Samuel Jackson

The risk committee was dismissed during the year (comment 4.3).

During the current financial year, the company had only the above-mentioned board committees
in place (comment 4.3).

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YOU HAVE 30 MINUTES TO ANSWER THIS QUESTION.

REQUIRED Marks
Based on your review of working paper B1/1, comment on the information presented in
terms of the requirements of King IV. 20
(Unisa Test ‒ adapted)

SUGGESTED SOLUTION

1. Board of directors

1.1 The board should comprise a majority of non-executive directors. The majority of non-
executive directors should be independent. (principle 7, recommended practice 8) (1)
• All the non-executive directors are independent, and this complies with the
King IV code. (1)
• There are five executive directors and two non-executive directors, and therefore
not a majority of non-executive directors. (1)

1.2 Karen Wells fulfils the roles of both CEO and chairperson (principle 2.16,
recommended practice 31). (1)
• These roles should be fulfilled by different individuals. (1)
• The chairperson should be an independent non-executive director. (1)

1.3 The board should assume responsibility to evaluate its own performance, not the audit
committee (principle 9, recommended practice 71). (1)

1.4 The lead independent non-executive director should evaluate the chairperson (principle
9, recommended practice 71), and the board should evaluate the CEO (principle 9,
recommended practice 82). (2)

2. Internal audit

2.1 The board should be responsible for the review of the company's risk management plan,
not internal audit (principle 11, recommended practice 3). (1)

2.2 In terms of sound corporate governance principles, Jane Witfield should report
administratively to the CEO and functionally to the audit committee. At Bizniz, Jane
reports to Bob Cilliers, the finance director (principle 15, recommended practice
56). (2)

2.3 The board should be responsible for the governance of risk, as a result it should identify
all potential risks that Bizniz faces and decide on how these risks will be mitigated, not
internal audit (principle 11, recommended practice 1). (1)

2.5 Jane must also have access to the chairperson of the board and audit committee
respectively (principle 15, recommended practice 53). (1)

2.6 The head of internal audit is the marketing director and may not have sufficient
experience and knowledge (principle 15, recommended practice 52). (1)

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2.7 Management should be responsible for the preparation of the annual financial statements
(AFS), not internal audit (principle 5, recommended practice 9). (1)

3. Audit committee

3.1 In terms of King IV, the audit committee should comprise at least three members; Bizniz
has three members, which complies with the King IV Code (principle 8, recommended
practice 46). (1)

3.2 All members should be independent non-executive directors (principle 8, recommended

practice 56); two members of the committee are not independent, non-executive
directors, as they are involved in the day-to-day running of the business. (2)

3.3 As part of risk management, the audit committee cannot make decisions on the
acquisition of shares in Africa Coal. This should be the responsibility of the board (with
the approval of shareholders). (1)

4. Risk committee

4.1 The risk committee should consist of a minimum of three members (principle 8,
recommended practice 46). (1)
• The composition of the risk committee does not comply with sound corporate
governance, as it only has two members. (1)

4.2 The members can be executive and non-executive directors (principle 8, recommended
practice 64). (1)

4.3 Dismissing the risk committee can be seen as an irresponsible act by management and it
does not comply with corporate governance due to the following reasons: (1)
• The risk committee is an important part of integrated reporting that allows the
company to report to all stakeholders on the sustainability of the company. (1)
• Part of this is commenting on the major risks facing the company and explaining
how to deal with these risks. (1)
• King IV requires that the company establish audit, risk, remuneration, nomination,
social and ethics committees (various recommended practices). (1)
• The company did not comply with this requirement, as it only had an internal audit
and audit committee and dismissed the risk committee. (1)
Available 27
Maximum 20

COMMENT

Refer to section B of study unit 5 for a comprehensive question (question 2) which

includes the content of most of the study units that will be covered in this tutorial letter.

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STUDY UNIT 5 – COMPANIES ACT NO 71 OF 2008

INTRODUCTION

As a future accountant and auditor, it is of the utmost importance for you to have a
sound knowledge of the legal environment you will be operating in. Your knowledge of
the Companies Act will therefore be enhanced and tested in this study unit.

OBJECTIVES

After completing this study unit, you should be able to:

• identify and explain the relevant requirements of Companies Act no 71 of 2008;

and

• apply the Companies Act no 71 of 2008 to any given scenario.

PRESCRIBED STUDY MATERIAL

SAICA Student Handbook 2022/2023, volume 2B:

• Companies Act no 71 of 2008 and Companies Regulations

Auditing Notes, chapter 3, pages 3/3 to 3/57

COMMENT

We recommend that you study directly from the SAICA Student Handbook, volume 2B,
and flag all the important sections. If the sections come up in a test or examination, they
will be easy to find.

SECTION A – ADDITIONAL INFORMATION

The SAICA syllabus provides the overall framework that you should benchmark your knowledge
against, as your ultimate aim is to qualify as a CA(SA).

The topics listed here are important statutory requirements that candidates need to know from an audit
perspective. Professional accountants may hold statutory positions, such as judicial manager,
liquidator or accounting officer. Therefore, candidates must be aware of the relevant legal
requirements and be able to identify these readily from texts brought into the open book
examination.

Please refer to both the SAICA Examinable Pronouncements as well as the Competency Framework
and note the level of knowledge required for each section that is examinable in the 2024 ITC.

Levels of learning
Level 1 – knowledge and comprehension
Level 2 – application and analysis
Level 3 – integration

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INTRODUCTION

As you will note, we explain some sections in detail by means of diagrams or examples.
However, your approach should be firstly to study all the relevant sections from your
prescribed textbook or directly from the source.

The sections of the Companies Act discussed in this tutorial letter will be examinable by
Unisa in 2023 and by SAICA in 2024.

EXAMINATION TECHNIQUE

As you know, the examination will be conducted under limited open book conditions.
However, you should bear in mind that you will not be able to merely look up the
answers to questions in the examination but will have to integrate and apply your
knowledge.

You will earn the majority of the marks for applying your knowledge. However, to build a
logical argument in any question, you need to start with basic theory and definitions,
whether you recall them from memory or access them from a textbook. You should use
the information in the prescribed textbook as building blocks in formulating an applied
answer to a given scenario.

COMMENT

Students are often unable to identify all the related Companies Act and
Companies Regulations sections that are relevant to a specific scenario.

There is skill involved in identifying the key issues in a scenario involving the
Companies Act and Companies Regulations. You will need to practice answering
questions to develop this skill. It is essential that you only review the solutions after
attempting the questions on your own to ensure that you develop this skill.

What are the Companies Regulations? Please refer to page 3/3 of Auditing Notes for a
detailed description as well as examples on the Companies Regulations.

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This table contains references to your prescribed textbook. Remember to study the examinable
sections that we do not cover in this table directly from the Act.

Section Description Reference

AN*(pg)
1 Relevant definitions 3/10
2 to 6 Interpretation 3/10–3/12
8 Categories of companies 3/13–3/14
13, 15 to 16 and 19 to 22 Incorporation and legal status of companies 3/15–3/19
23, 24 and 27 to 30 Transparency, accountability and integrity of companies 3/19–3/23
35 to 48 Capitalisation of profit companies 3/23–3/29
49 to 53 and 55 Securities registration and transfer 3/29–3/30
57 to 69 and 71 to 78 Governance of companies 3/30–3/41
84 to 85 Application and general requirements 3/42
86 to 89 Company secretary 3/42–3/43
90 to 93 Auditors 3/43–3/45
94 Audit committees 3/46–3/47
112 to 114 Approval for certain fundamental transactions 3/47–3/49
128 to 129 and 131 Business rescue proceedings 3/49–3/51
140 to 142 Practitioner's functions and terms of appointment 3/51–3/52
144 to 148 Rights of affected persons during business proceedings 3/52–3/52
150 to 154 Development and approval of business rescue plan 3/53–3/53
155 Compromise with creditors 3/53
159 Protection of whistle-blowers 3/54–3/55
161 to 163 Rights to seek remedies 3/55
213 to 215 Miscellaneous matters 3/57
Schedules to the Act
5 Transitional arrangement (parts 1 to 11 and 14) 3/5 (par
3.2.6)
Companies Act
Regulations
26 to 29 Public interest scores 3/5–3/9
AN* Auditing Notes

COMMENT

We find that students do not work through enough questions in auditing. Remember
that you must train yourself to be "test-fit" and "examination-fit", and you need to work
through enough questions during the year to achieve this.

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5.1 PROPOSED GUIDANCE FOR SOLVING PROBLEMS

COMMENT

Please note that it is your responsibility to study the Act and to be familiar with important
aspects contained therein. The textbook provides good guidance in this regard, and we
also emphasise some of the important aspects in this tutorial letter. The Act also forms part
of the documents you are allowed to have with you during tests and examinations in terms
of the open book policy.

Your knowledge of the relevant legislation may be tested in one or more of the following ways:

• A question may provide a scenario and require you to evaluate the legality of any transactions or
schemes that are contemplated or were implemented. You may also need to advise regarding
alternatives and/or further requirements that have to be met.

• A question may set out certain transactions or schemes that are contemplated or were
implemented and require you to describe the audit procedures that should be performed to
obtain sufficient appropriate audit evidence on them.

We suggest that you approach questions as follow:

A. Questions that require advice on or the evaluation of a given situation

• Identify all transactions/events.

• Determine which requirements of the relevant acts relate to each transaction or event.
These requirements may relate to the following:
− the powers of the entity (memorandum; sections of Act);
− specific authorisation required (e.g. a special or ordinary resolution); and/or
− special preconditions (liquidity and solvency).

• Reproduce the theory applicable to each transaction or event.

• Apply the theory to the facts given in question.

• Conclude on the legality of each transaction or event.

• Make recommendations or discuss alternatives (if required by the question).

COMMENT

Additional tip: Pay attention to the wording of the requirements. If asked

about concerns, you should only discuss non-compliance. The best way to deal
with a concern is to start your sentence with "It is a concern that…” Some
questions require discussion of both compliance and non-compliance, in which
case you should not limit your answers just to non-compliance.

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B. Questions requiring audit procedures

Normally, only substantive procedures will be possible since transactions affected by specific
legal requirements usually occur sporadically and no or limited internal controls will be present
to mitigate the risks related to them.

• Identify all transactions or events.

• Determine which requirements of the Act relate to each transaction or event (see list
given above of aspects that requirements may relate to).

• Visualise and note the accounting journal entry underlying each transaction described in
the question.

• Identify source(s) of audit evidence.

• Develop audit procedures, using the following audit assertions:

– occurrence (power, authorisation, special requirements)
– accuracy (amount or calculation, all aspects of each transaction)
– completeness (all transactions)
– cut-off (correct period)
– classification (as current or non-current asset or liability, or income or expense)
– disclosure (based on statements of IFRS/GAAP)

Remember that the purpose of performing audit procedures is to obtain sufficient appropriate
evidence that the financial statements are fair. Possible sources of evidence include:

• memorandum of incorporation • notes to the annual financial statements

• notices of meetings • deposit slips
• minutes (always be specific as to those of • general ledger account(s)
directors' meetings or members' meetings) • paid cheques
• statutory registers

Due to the extensive documentary evidence available with regard to statutory matters, the term
inspect is of great importance when formulating procedures.

COMMENT

VERY IMPORTANT: In the examination and in the test, the Companies Act may
be integrated with the rest of your auditing syllabus as well as with other
statutory, regulatory and ethical matters, such as the King IV Report on
Corporate Governance. Certain sections of the Companies Act have a direct link
with the King IV Report, therefore you should not study them in isolation.

Remember: We explain some of the sections in more detail below. However,

you should study all the relevant sections directly from the Act.

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5.2 INTERPRETATION, PURPOSE AND APPLICATION

5.2.1 Related and inter-related persons, and control (section 2) and subsidiary relationships
(section 3)

These two sections are very important, since a number of other sections in the Companies Act
refer to related persons and subsidiary relationships. The purpose of these sections is to
prevent individuals or companies to circumvent certain prohibitions of the Act by using another
individual or company as a medium.

CONSANGUINITY AND AFFINITY

Section 2 uses the terms consanguinity and affinity. With regard to consanguinity, it is
important to note the following:

2nd degree Brothers/Sisters 2nd degree

Grandparents

Parents 1st degree

YOU

Children 1st degree

Grandchildren 2nd degree

Blood relationship (consanguinity)

Your brothers, sisters, grandparents and grandchildren are thus related to you in the second
degree of consanguinity (second degree of blood relationship). In other words, there is one other
generation between you and a person related to you in the second degree. The persons who are
related to you in the first degree of consanguinity are your children or your parents.

Relationship by marriage (affinity)

A relationship by marriage is sometimes referred to as being related by affinity. A husband and
wife are related to the first degree by marriage. For other relationships by marriage, the degree of
relationship is the same as the degree of underlying relationship by blood.
Example: John and Steve are brothers and are therefore second-degree relatives by blood.
John's wife, Linda, is related to Steve to the second degree by marriage.

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5.2.2 Solvency and liquidity test (section 4)

In terms of various sections of the Companies Act, the solvency and liquidity test must be
applied to particular transactions. Conducting the solvency and liquidity test forms part of the
requirements for that transaction to be valid and it must be proved before certain resolutions
can be passed. Students should be able to apply the requirements of this section and
especially note the requirements relating to the financial information being used to perform the
test.

5.2.3 Categories of companies (section 8)

The Act provides for two categories of companies, namely non-profit and for-profit (or profit)
companies. These companies have different characteristics, and different requirements may
apply to each of them in terms of the Act. The diagram below illustrates the differences
between the different categories of companies as prescribed by the Companies Act:

Non-profit companies (section 10)

- public benefit purpose
- except for reasonable compensation for services rendered, the income and property of
these companies are not distributable to incorporators/members/directors/officers
- apply assets and income to advance their objectives
- minimum of three incorporators
- minimum of three directors

Profit companies (section 8(2))

- state-owned companies
- private companies
- personal liability companies
- public companies

Charac-
teristics

State-owned Private companies Personal liability Public companies:

companies (section 8(2)(b)): companies (section - unrestricted
(section 1): - fewer disclosure and 8(2)(c)): transferability
- state-owned transparency require- - meets criteria of private - offers to public
enterprise; or ments than that of public company permissible
- company owned companies - memorandum of - minimum of one
by a municipality - transferability of securities incorporation states incorporator
restricted that it is a personal - minimum three
- minimum of one liability company. directors (for
incorporator governance
- minimum of one director purposes)

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5.3 INCORPORATION AND LEGAL STATUS OF COMPANIES

5.3.1 Memorandum of Incorporation (MOI), Shareholder agreements and rules a company

(sec 15 to 16)

In terms of the Act, the founding document of a company is known as the Memorandum of
Incorporation (MOI) which sets out shareholders, directors and others’ duties, responsibilities
and rights. Please take note that sections 15 and 16 does not only deal with the MOI, but also
include rules of companies and shareholder agreements as well as the amendment thereof.
The MOI of a company is subject to the Companies Act, and it must therefore be consistent
with the provisions of the Act. To the extent that a provision of the MOI contravenes or is
inconsistent with the Act, it will be void in terms of section 15(1) of the Act. Always remember to
consider the provisions of the MOI as part of your considerations/procedures in a question!

5.3.2 Pre-incorporation contracts (sec 21)

Pre-incorporation contracts are entered into, with, or on behalf of a company that is not yet
incorporated. This section is necessary, as the company does not exist as a juristic person
prior to incorporation, which implies that it cannot exercise its powers.

5.3.3 Reckless trading prohibited (sec 22)

This is an important section, as it links to other sections in the Act as well as to other topics in
the auditing environment. It should also be studied in conjunction with Regulation 19 of the
Act.

In terms of section 22, “a company must not carry on its business recklessly, with gross
negligence, with intent to defraud any person or for any fraudulent purpose; or trade under
insolvent circumstances”. A fair amount of subjectivity is involved in determining whether the
directors have been reckless, but the key will be whether the directors have acted as
reasonable persons within good faith and in the best interest of the company.

Please note the link between section 22 and the going concern assumption as well as
possible reportable irregularities arising from reckless trading. At this point, the integration of
your knowledge should be focused on a possible reportable irregularity and not the going
concern assumption.

A director may be liable to the company for any loss suffered by the company while trading
under insolvent circumstances [section 77(3)] and be liable to third parties who have had
dealings with the company and suffered a loss.

The question is whether a reasonable person would have acted in the same manner under a
situation of factual insolvency.

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Consider the following examples in conducting the reasonable person test:

(a) Assuming the company is factually insolvent, would it be reasonable for a company to
enter into a lease agreement for a very expensive fleet of company vehicles for its
directors?

(b) Alternatively, would it be reasonable for three or four directors to go on an extensive

overseas trip to visit trade fairs when one director would have been sufficient?

(c) Would it be reasonable for the directors to vote in favour of large bonuses for
themselves or substantial salary increases?

(d) Would it be reasonable for the directors to continue incurring debt when there is, to the
knowledge of the directors, no reasonable prospect of the company creditors ever
receiving payment for those debts?

All of the above may constitute reckless trading, and thus a breach of section 22 would have
taken place.

In terms of Regulation 19 of the Act, the Commission may, if it has reasonable grounds to
believe that a company is engaging in prohibited conduct or is unable to pay its debts as they
become due, issue a notice to the company ordering it to give reasons why it should be
permitted to continue the prohibited conduct.

If the company cannot satisfy the Commission that it is not engaging in prohibited conduct or
that it is able to pay its debts as they become due, the Commission may request the company
to cease the prohibited conduct.

5.4 TRANSPARENCY, ACCOUNTABILITY AND INTEGRITY OF COMPANIES

5.4.1 Form and standards of company records (sec 24), accounting records (sec 28) and
financial statements (sec 29).

All companies must keep accurate and complete accounting records as well as all the
documents set out in section 24 of the Act. In addition to the requirements of section 24(5), a
company’s record of directors must include additional information as set out in Regulation 23
of the Act.

A company’s accounting records, and financial statements should adhere to the requirements
of Regulation 25 of the Act in order for it to comply with section 28(1) and 29(1) of the Act.

The table on page 3/7 of Auditing Notes sets out the financial reporting standard requirements
as referred to in section 29(4) to (5) of the Act.

5.4.2 Annual financial statements (sec 30)

Each year, a company must prepare annual financial statements within six months after the
financial year end [sec 30(1) to (7)].

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To determine whether a company should be audited or independently reviewed (in terms of the
International Statement on Review Engagements, ISRE 2400, which was covered in
Tutorial Letter 105), please refer to the table below:

Category of company Audit/Review

1. Public companies and state-owned companies Audit (by a registered auditor)
2. Non-profit companies (incorporated by state) Audit (by a registered auditor)
3. Profit companies and non-profit companies that hold Audit (by a registered auditor)
assets in a fiduciary capacity exceeding R5m at any
time of the financial year
4. Other companies or close corporations with public Audit (by a registered auditor)
interests scores of
• 350 or more
• 100 but less than 350
and whose financial statements are compiled internally
5. Other companies, with a public interest score of at least Review (by a registered
100 but less than 350, whose financial statements are auditor or chartered
not compiled internally (i.e. compiled independently) accountant (SA))
6. Other companies with a public interest score of less Review (by a registered
than 100 auditor or chartered
accountant (SA) or
accounting officer)
7. Other companies in which the directors of the company No audit or review
hold or have all of the beneficial interests in the
securities issued by the company and close
corporations, if not subject to a "public interest audit" as
per categories 3 and 4 above [sec 30(23A)].
8. Other companies, which fall within categories 5, 6 and 7 Audit (by a registered auditor)
above, may select to have a voluntary audit in terms of
• the MOI requirements;
• a shareholder’s resolution; or
• a board resolution.
(Adapted from Delport 2012)

In order to understand the concept of a “public interest score”, study the section that deals with
Regulation 26 in Auditing Notes.

Refer to Regulation 26 on how to calculate the public interest score of a company.

Regulations 27 to 29 are discussed in Auditing Notes and you need to study these
Regulations regarding the financial reporting standard requirements, as well as the audit or
review requirements referred to above.

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5.5 CAPITALISATION OF PROFIT COMPANIES

5.5.1 Authorisation for shares (sec 36)

In its MOI, a company must set out the different classes and number of shares that it is
authorised to issue. Please note that a company is not allowed to issue shares to itself (not to
be confused with a company buying back its own shares in terms of section 48 of the Act).

Should a company want to change the classification, authorisation or number of shares, the
MOI must be amended in terms of section 26, as explained below.

Special resolution

• The shareholders may amend the MOI by means by a special resolution [sec 36(2)(a)].
• The board may (unless prohibited by the MOI) [sec 36(2)(b)]
− make changes to the number of authorised shares;
− reclassify unissued, authorised shares;
− classify unclassified shares; and
− determine the preferences, rights and limitations of authorised shares [sec 36(3)].
• In terms of section 38, the board may also increase the shares and the shareholders may
retroactively ratify the increase by means of a special resolution.

In any instance, a notice of amendment of the MOI [sec 36(4)] must be filed.

5.5.2 Preferences, rights, limitations and other share terms (sec 37)

Section 37 deals with the voting and other rights of shareholders.

In terms of section 37 of the Act, if a company has only one class of shares, all these shares
will have equal preferences, rights, limitations and terms.

5.5.3 Issuing shares (sec 38)

The board of directors has the power to issue shares in terms of section 38(1) of the Act.
However, such a share issue must be approved by a special resolution if the issue is to a
director or prescribed officer (or a person related to or interrelated to the director, prescribed
officer or the company), or to a future director or prescribed officer. (Note that these
requirements do not apply to a business rescue scheme where the practitioner may issue
shares and determine the consideration.)

Actions, if the board issues shares that either are not authorised (in terms of section 36), or
are exceeding the number of authorised shares of any particular class:

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Issue can be retroactively authorised (within 60 business

days) in accordance with section 36 [sec 38(2)].
- The contract will be null
and void to the extent
that authorisation is
Special resolution if Resolution not passed then exceeded
- Subscribers should be
repaid (including interest)
Any director, who was party to such an - Share certificates should
issue, may be held liable for losses be nullified
suffered by the company due to the and - Entries in share register
invalid issue [sec 38(3)(d)]. should be nullified
[sec 38(3)(a to c)]

5.5.4 Subscription of shares (sec 39)

This section does not apply to public or state-owned companies (except if provided otherwise
in the MOI) [sec 39(1)(a)].

Private company or public liability company

proposes to issue shares.

Existing shareholders have a pre-emptive right before others to

subscribe for a percentage of the shares offered [sec 39(2)]
• equal to the voting power immediately before the offer; and
• within a reasonable time.

Subject to

Any limitations, negations, restrictions or other conditions as provided for

in the MOI [sec 39(3 to 4]

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5.5.5 Financial assistance for subscription of securities (sec 44)

May financial assistance be provided by a company for the subscription of its own/related
company’s securities (such as shares)?

Remember: Financial assistance may be in the form of a loan, a guarantee, a provision of security,
etc. Another form (apart from loans) of financial assistance is often hidden in the scenario.

Is the primary business of this company the lending of money?

No Yes

This is financial assistance Section 44 does not apply if the lending is in

in terms of section 44. the ordinary course of business [sec 44(1)].

Requirements

The following conditions should be met:

- Any conditions set out in the MOI in this regard should be adhered to [sec 44(3)(b)(i to ii)].
- Liquidity/solvency test should be satisfied immediately after the financial assistance has been
granted [sec 44(3)(b)(i)].
- Fair and reasonable terms should apply to the financial assistance [sec 44(3)(b)(ii)].
- A special resolution should be obtained (must have been passed within previous two years)
[sec 44(3)(a)(ii)], if not pursuant to an employee share scheme [sec 44(3)(a)(i)].

If these requirements (of section 44) are not adhered to:

- the transaction will be void; and
- the directors may be held liable for losses incurred by the company in this regard [subject to
(sec 44(6)(a) to (b) and sec 44(5 to 6)].

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5.5.6 Loans or other financial assistance to directors (sec 45)

To determine if a company may provide financial assistance to any of the parties as set out in
section 45(2) of the Act, you can consider the following:

Remember: Financial assistance may be in the form of a loan, a guarantee, a provision of security,
etc. Apart from loans, another form of financial assistance is often hidden in the scenario, as with
section 44 on the previous page.

Exclusions [sec 45(1)(b)]

- The primary business of the company is the lending of money (and the loan in question is in the
ordinary course of business).
- The financial assistance is for meeting legal expenses (relating to a matter concerning the
company).
- The financial assistance is for expenses to be incurred by the person on behalf of the company.
- The financial assistance comprises an amount to defray the person’s expenses for removal at
the company’s request.

Requirements
The following conditions should be met before providing the assistance:
- Any conditions set out in the MOI in this should be adhered to [sec 45(4)].
- A liquidity/solvency test should be satisfied immediately after the financial assistance has been
granted [sec 45(3)(b)(i)].
- The terms should be fair and reasonable [sec 45(3)(b)(ii)].
- A special resolution should be obtained (must have been passed within previous two years)
[sec 45(3)(a)(ii)], except if the financial assistance is pursuant to the employee share scheme.
- Written notice of the meeting and of the intended assistance should be given to all
shareholders (unless all shareholders are directors) [sec 45(5)].
- Written notice of the meeting and of the intended assistance should be given to any trade
union that is representing the employees of the company [sec 45(5)].

If the requirements of section 45 are not adhered to:

- the transaction will be void [sec 45(6)]; and
- the directors may be held liable for losses incurred by the company [subject to [sec 45(7)].

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5.5.7 Distributions must be authorised by board (sec 46)

Study the definition of a distribution as set out in sections 1 and 46 of the Act.

It is important to note that distributions include payments for share buybacks and the payment
of dividends.

Distribution

Is it pursuant to an existing legal obligation The distribution should be authorised

or court order? [sec 46(1)(a)(i)] by a resolution [sec 46(1)(a)(ii)].

Solvency/liquidity tests immediately after completing the proposed distribution must be

satisfied and acknowledged by the board (repeated if distribution not completed within
120 days) [sec 46(1)(b) and (c) and sec 46(3)].

If these requirements (of sec 46) are not adhered to:

- the directors may be held liable for losses incurred by the company; and
- the transaction will be void [sec 46(6)].

5.5.8 Company or subsidiary acquiring company’s shares (sec 48)

May a company buy back its own shares?

Yes, provided that the requirements section 48 are met.

May a subsidiary of a company buy the shares of that company?

Yes, provided that:

- no more than 10%, in aggregate, of any class of share is held by or for the benefit of all the
subsidiaries taken together [sec 48(2)(b)(i)]; and
- the voting rights attached to those shares are not exercised [sec 48(2)(b)(ii)].

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5.6 GOVERNANCE OF COMPANIES

5.6.1 Shareholder’s resolutions (sec 65)

Shareholder’s resolutions can be either:

 ordinary resolutions (must be supported by more than 50% of voting rights exercised); or

 special resolutions (must be supported by at least 75% of voting rights exercised).

The MOI may require a higher percentage of voting rights for ordinary resolutions to be
approved (except for the removal of a director under section 71), or one or more higher
percentages of voting rights in order to approve ordinary resolutions on one or more specific
matters [sec 65(8)]. The percentage required for special resolutions to be approved may be
lower, as provided for in the MOI.

There should be at least a 10% difference between the percentage approval required for
ordinary and special resolutions [sec 65(8)].

Refer to Auditing notes for a list of instances where a special resolution is required in terms of
the Companies Act.

5.6.2 Board, directors and prescribed officers (sec 66)

Minimum number of directors required for different types of companies (MOI may specify a
higher number):

Type of company Minimum number

(as explained in 15.2.3 of this study unit) of directors
Private company ((Pty) Ltd) 1
Personal liability Company (Inc) 1
Public company (Ltd) 3
Non-profit company (NPC) 3

In addition to the minimum number of directors as prescribed (by the Act or MOI), a company
must also satisfy the requirements of section 72(4) to appoint an audit committee or a social
and ethics committee [but see sec 66(12)].

A profit company (other than a state-owned company) must allow shareholders to elect a
minimum of 50% of the directors and 50% of alternate directors may be appointed by any other
person stipulated in the MOI [sec 66(4)(b)].

Directors’ remuneration for services acting as directors is required to be approved by a special

resolution. This special resolution will be valid for two years.

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5.6.3 Board committees (sec 72)

The Act provides that, except when the MOI provides otherwise, the board of directors may
appoint any number of committees and may delegate any of the authority of the board to a
committee. The board is responsible for performing its duties properly, and a director or the
board cannot use the appointment of a committee as a shield against their own responsibility.

You should study Regulation 43 of the Act with regard to the social and ethics committee, in
conjunction with this section.

Note: This section should be studied in conjunction with the board committee requirements of
the King IV Code, and it is often integrated in examination or test scenarios.

5.6.4 Director’s personal financial interests (sec 75)

This is always an important section.

The Act sets out procedures required for a director to disclose a personal financial interest of
that director, or of a person related to that director, in respect of any matter to be considered by
the board. Study the definition of personal financial interest in terms of section 1.

5.6.5 Standards of directors conduct (sec 76)

For the purpose of this section, directors include prescribed officers and members of board
committees.

A director of a company must exercise the powers and functions of a director in good faith and
in the best interest of the company, and must act with a certain degree of care, diligence and
skill. The section also extends the duty to apply to a subsidiary.

Familiarise yourself with the duties and functions of a director.

5.6.6 Liability of directors and prescribed officers (sec 77)

This section deals with instances where a director and prescribed officer may be held liable for
losses suffered by the company. In addition to the list of officers outlined in this section,
directors could be liable to shareholders for fraudulent acts or acts of gross negligence
[sec 20(6)] or to any third party who has suffered a loss by virtue of the directors breaching the
Act [sec 218(2)].

Please note that members of board committees and audit committees will have the same
liability that directors have under section 77, even if the members of the board committees are
not directors and even though they have no right to vote on any matters considered by board
committees.

COMMENT

Important!

Students should remember to consider sections 76 and 77 as part of their answers as a

consequence of the transgression of certain of the other sections in the Companies Act.

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5.7 ENHANCED ACCOUNTABILITY AND TRANSPARENCY

5.7.1 Secretaries and auditors (sec 84 and 85)

Study the table below, relating to the requirement to appoint a company secretary and an
auditor.

Is the company a public company or a state-owned company?

Yes No

Must appoint [sec 84(4)] Not required to have financial statements

➢ a company secretary; and audited, BUT
➢ an auditor.
➢ Audit committee Stakeholders (shareholders, providers of
finance) may require that the financial
statements be audited. Therefore, take note
➢ the MOI may make it a requirement.
Note 1: Where the auditor general has elected to
A private company’s financial statements
conduct an audit, the company may not appoint
may also require an audit if it is in public
an (external) auditor for that year.
interest. The decision will be influenced by
Note 2: Any person, who is disqualified from
the public interest score of the company
acting as a director, may not be appointed as a
(refer to pages 3/6 and 3/7 of Auditing
company secretary, auditor or member of the
notes).
audit committee of that company [sec 84(5)].

Every company, which appoints a company secretary or auditor

➢ must maintain a record of [sec 85(1)(a)]
• the name of the person; and
• the date of appointment.
If it is a firm or juristic person [sec 85(1)(b)]
• the name, registration number and registered office address must be indicated.

Note: Within 10 days of making an appointment or after termination of an auditor or

secretary, the company must file notice of appointment or termination [sec 85(3)].

Companies must also maintain a record with detail of their secretaries and auditors (if any), as
required in terms of section 85(1).

5.7.2 Company secretary (sec 86 to 89)

The board of directors appoints the secretary and the directors must be satisfied that the
person is suitably qualified with the necessary experience to perform the duties of a company
secretary. The secretary is accountable to the board of directors. Section 88 includes the duties
of the company secretary.

You should study the requirements regarding the appointment and resignation/removal of the
company secretary in Auditing notes.
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5.7.3 Auditors (sec 90 to 93)

Sections 90 to 93 deal with the appointment, resignation, rotation, rights and restricted
functions of auditors. These sections are very topical, especially section 90 that deals with the
appointment of the auditor. Section 90 contains provisions applicable to an auditor engaged to
perform a statutory audit of a company or a close corporation (CC). Section 90(2) further
prohibits an auditor to provide audit and certain specified services to the same client. There
was great uncertainty as to how this section will be enforced practically, and therefore,
SAICA and the IRBA issued a guide (“Guidance on section 90 of the Companies Act,
2008”) on this matter. The guide is available on the IRBA website.

5.7.4 Audit committees (sec 94)

Familiarise yourself with the composition and duties of an audit committee.

Study Regulation 42 of the Act regarding the required qualifications of members of the audit
committee.

It is important to note that King IV recommends that all other companies establish an audit
committee and define its composition, purpose and duties in the MOI.

Also, note that King IV aligns with, and expands on, the duties of an audit committee as set out
in section 94(7) of the Act.

5.8 REMEDIES AND ENFORCEMENT

5.8.1 Protection for whistle blowers (sec 159)

Section 159 applies to whistle blowers who disclosed in good faith that the company
or director
− contravened the Companies Act or another act enforced by the Commission;
− failed (or was failing to) to comply with any legal obligation to which the company is
subject;
− engaged in conduct that holds a health or safety risk for any individual, or a risk of
environmental damage;
− unfairly discriminated against any person; and
− contravened any legislation that could expose the company to risk/liability
[sec 159(3)(b)].

By offering
− qualified privilege in respect of the disclosure; and
− immunity from civil, criminal or administrative liability with regards to the disclosure
[sec 159(4)]

To the following whistleblowers with regard to the company

− shareholders;
− director;
− company secretary;
− prescribed officer;
− employee;
− trade union;
− to other representatives of employees;
− suppliers of goods or services; and
− employees of such suppliers.

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5.9 OFFENCES AND PENALTIES

Study this chapter on your own, with reference to the knowledge level required in terms of the SAICA
syllabus.

5.10 SCHEDULES TO THE COMPANIES ACT

Study the schedules on your own, with reference to the knowledge level required in terms of the
SAICA syllabus.

SECTION B – QUESTIONS ON STUDY UNIT 1 TO 5

ANNOUNCEMENTS

Please refer to the Announcements on Tutorial letter 102 on myUnisa for some additional
resources on the content of this Tutorial Letter. You can find these discussion videos
under TL102.

QUESTION 1 52 marks

YOU HAVE 16 MINUTES TO READ THIS QUESTION.

You are a senior trainee accountant in your audit firm’s technical department. Your responsibility is to
advise fellow staff members, conducting an audit, on statutory and corporate governance matters. One
of the firm’s clients is the Hello-Dolly Group. All companies in the group manufacture retail or
wholesale dolls and doll accessories.

The group is structured as follows: Hello-Dolly Ltd holds 60% of Doll-Face Ltd, 80% of
Doll-Prams (Pty) Ltd and 70% of Doll-Fashions (Pty) Ltd. Doll-Prams (Pty) Ltd holds 100% of the
shares in Pram-Wheels Ltd.

Your firm holds the appointment, as auditors of all companies in the group and the various audit teams
are currently engaged in the 30 September year end audit.

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You have received the following queries from fellow trainees:

1. From Fred Astaire, on the audit of Doll-Fashions (Pty) Ltd

We identified an amount of R4,6 million in trade creditors owed to Silky-Sewing (Pty) Ltd. This
represents the purchase during August of a machine that manufactures dresses for the different
doll ranges. The machine has been installed. However, it appears that Silky-Sewing (Pty) Ltd
is fully owned by Barbie Sibaya and Ken Booth, two of the four directors of
Doll-Fashions (Pty) Ltd (concern 1). Neither of them is shareholders of
Doll-Fashions (Pty) Ltd. The purchase documentation, for example, a purchase order, delivery
note, invoice and entries in the records, is correct and R4,6 million is the fair price for such
machines (concern 2). Do I have any further responsibilities arising from this transaction? (8)

2. From Marlon Brando, on the audit of Doll-Prams (Pty) Ltd

The company has made a number of loans during the past year. I considered each of the loans,
but I would like to raise queries with you in respect of one of them.

A loan of R150 000 to John Bratz, the managing director of Pram-Wheels Ltd (concern 3),
who also serves on the board of Doll-Prams (Pty) Ltd and who intends using the loan to make a
private investment. Is this loan acceptable, and if so, what are the requirements of the
Companies Act, 2008? (3)

3. From John Lennon, on the audit of Hello-Dolly Ltd

During the year under audit, the company undertook a buyback of its own shares (concern
4). Prior to this buyback, the company had one million no par value shares, all of which had
been issued at R5 a share. 250 000 shares (concern 5) were repurchased at R7 a share
(concern 6), and the buyback was effected by Isaak Angel, the company secretary to the
Hello-Dolly group. Advise me on the procedures I should conduct to audit the buyback. (18)

4. From Charlie Chaplin, on the audit of Doll-Face Ltd

Mr Plastic, the managing director of Doll-Face Ltd has approached a trainee for advice on what
authority and conditions must be met so that each of the following can be executed legally.
(Doll-Face Ltd has an authorised share capital of 100 000 shares, of which 80 000 shares
have been issued (concern 7). The balance of the stated capital account is R140 000.)
• Equipment is to be purchased from a director, Ms Pink, for R900 000 (Ms Pink purchased
the equipment one month previously for R785 000) (concern 8). The purchase price
will be settled by obtaining a loan of R800 000 from the company’s bankers.
• 60 000 shares will be issued to Ms Pink, at their fair market value of R1,67 per share, to
settle the balance of the purchase price. (5)
• Ms Skinny was requested to resign as a director. She refused and was dismissed by the
other directors. She will be paid an amount of R80 000 to compensate her for the loss
of office (concern 9). (6)

5. From Frank Sinatra, on the audit of Pram-Wheels Ltd

During the financial year, interest-free loans of R500 000 and R750 000, respectively, were
granted to Mr Firestone (director: operations) and Mr Continental (director: human resources),
respectively (concern 10). These loans were granted in terms of a directors' resolution and were
not granted to cover business expenses. By examining the MOI it was determined that the MOI
does not prohibit such loans. No repayment terms for these loans are known. (12)

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YOU NOW HAVE 78 MINUTES TO ANSWER THIS QUESTION.

REQUIRED Marks
(a) Respond to the queries/requests 1 to 4 from the audit teams by giving reasons for
your responses. 40
(b) Refer to audit query 5 and formulate the audit procedures that you would perform
regarding the loans granted to the board members of Pram-Wheels Ltd during the
year. Assume that the company gave sufficient notice in an appropriate manner
before all meetings. You do not need to include audit procedures in respect of notices
in your answer. 12
(Adapted from Gowar & Jackson 2011; Prinsloo 2011 and Stellenbosch University)

SUGGESTED SOLUTION

(a) To Fred Astaire

1. Yes, you should conduct further procedures. (1)

2. This purchase appears to result in a contract in which two of the directors of

Doll-Fashions (Pty) Ltd have a personal financial interest because Barbie Sibaya and
Ken Booth own Silky-Sewing (Pty) Ltd (sec 75). (This is indicated in concern 1 of the
scenario.) (1)

3. Firstly, you should inspect the company’s MOI to determine whether any conditions or
restrictions are applicable to directors with personal financial interests in contracts, into
which their company enters. If there were conditions or restrictions, you would have to
confirm whether they had been complied with. (1)

4. In terms of section 76(2)(b), directors must communicate to the board, at the earliest
opportunity, any information that comes to their attention (pertaining to the affairs of the
company). (1)

5. It is also required by section 76(3)(a) and (b) that directors exercise their powers and
perform their functions
• in good faith and for a proper purpose; and (1)
• in the best interest of the company. (1)

6. Barbie Sibaya and Ken Booth should have notified the other directors of their personal
financial interest in the contract to buy an R4,6m machine, prior to the decision taken by
the board to purchase the machine [sec 75(4)] (indicated by concern 2 in the
scenario). (1)

7. Therefore, you should inspect the minutes of the meeting, at which the decision was
taken to purchase the machine, to confirm/determine that
7.1 the meeting was properly constituted (e.g. a quorum); (1)
7.2 the interest and its general nature (e.g. ownership of the company supplying the
machine) was disclosed before being considered at the meeting [sec 75(5)(a)]; (1)
7.3 the two directors made any other disclosure that may have significance (may be
nothing) [sec 75(5)(b)]; (1)
7.4 the two directors left the meeting after making the disclosures (this should be
recorded) [sec 75(5)(d)] (i.e. did not form part of the quorum for this purpose of this
resolution); (1)
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7.5 the two did not vote on the decision to purchase [sec 75(5)(e)] [sec 75(5)(f)]; and
(1)
7.6 the resolution to purchase was approved by the other directors (both should have
voted for the resolution to be passed). (1)
Available 13
Maximum 8

To Marlon Brando

1. John Bratz is a director of a wholly owned subsidiary of the company making the loan,
that is, a related company (indicated by concern 3 in the scenario). (1)

2. In terms of section 45(2), a company may make a loan to a director of a related company
(directly or indirectly). The company (board) must comply with the Companies Act and
any requirements/restrictions of the MOI of Doll-Prams (Pty) Ltd [sec 45(2)]. (1)

3. However, despite anything the MOI might state, the board may not authorise the loan
unless
3.1 it is pursuant to a special resolution of the shareholders who approved the specific
loan (i.e. to John Bratz) and adopted it within the previous two years, or generally
for a category of recipients, for example the directors [sec 45(3)(a)]; and (1)
3.2 the board is satisfied that, immediately after providing the financial assistance, the
company would satisfy the liquidity/solvency test [sec 45(3)(b)]. (1)

4. There is of course the general rule that in making the loan, the directors must act in good
faith and in the interests of the company [sec 76(3)(a) and (b)]; therefore, the terms of
the loan should be fair and reasonable to the company. (1)
Available 5
Maximum 3

To John Lennon

1. The purchase by Hello-Dolly Ltd of its own shares (indicated by concern 4 in the
scenario) amounts to a “distribution” as defined in the Act.
1.1 It is a transfer by a company of money to the holders of shares of that company as
consideration for the acquisition of any of its shares (sec 46). (1)

2. The “distribution” must only be made if it is pursuant to an existing legal obligation or

court order [sec 46(a)]. You may establish this by doing one of the following:
2.1 Inspect the minutes of the directors' meeting and the enquiry of Isaak Angel, the
company secretary. (1)
2.2 Inspect the minutes of board meetings to ensure that it is authorised by the board
of the company [sec 46(1)(a)]. (1)
2.3 The court order may also be inspected to ensure that it exists and relates to the
matter in question. (1)

3. You should inspect the minutes of the meeting of directors (obtain the relevant date from
Isaak Angel) to determine that
3.1 the meeting was quorate – the decision will be a majority decision and therefore at
least half of the directors must have been present; (1)
3.2 the directors applied the liquidity/solvency test [sec 46(1)(b)], that is, after the
distribution the company (1)
- will be able to pay its debts (and has been able to do so) in the normal course
of business for the 12 months after the distribution; and (1)
- the company’s assets, fairly valued, exceeded its liabilities; (1)
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3.3 the directors acknowledged in the minutes that they had applied the liquidity/
solvency test and had concluded that the test was satisfied [sec 46(1)(c)]. (1)

4. Obtain the working schedules used by the directors and confirm by inspection,
recalculation, analytical review, etc, that the test was conducted based on
4.1 accurate and complete accounting records; and (1)
4.2 financial statements that comply with the financial reporting standards regarding
form and content (as we are conducting the audit, this should not be difficult to do).
(1)

5. You should also inspect the MOI to determine whether any conditions/restrictions must
be complied with. (1)

6. Obtain a summary from Isaak Angel detailing the buyback and confirm by inspection that
6.1 the number of shares purchased, was 250 000 (concern 5) Hello-Dolly Ltd shares;
(1)
6.2 the purchase price was R7 (concern 6); (1)
6.3 the transaction took place within the financial year and that these details all agree
with the directors' meeting minutes; and (1)
6.4 the buyback price of R7 was fair and reasonable (concern 6). (1)

7. Inspect the paid cheques/bank transfers/bank statement to confirm that

7.1 the buyback took place within 120 business days of the resolution, in full (Note: if it
did not, the directors must reperform the liquidity/solvency/acknowledgement
exercise.) (1)
7.2 the amount paid out was R1 750 000 (250 000 x R7). (1)

8. Inspect the share register to confirm that the shareholders details/holding has been
amended correctly. (1)

9. Confirm by inspection of the financial statements that

9.1 the buyback has been accurately and completely disclosed; (1)
9.2 issued share capital has been reduced by 250 000 shares; and (1)
9.3 stated capital has been reduced by R1 250 000 (250 000 x R5) and reserves by
R500 000 (R1 750 000 – R1 250 000). (1)
Available 22
Maximum 18

To Charlie Chaplin

Purchase of equipment

1. As Doll-Face Ltd has insufficient authorised ordinary shares available to allow for the
fresh issue of 60 000 shares (indicated by concern 7) (100 000 – 80 000 = 20 000), the
authorised shares will have to be increased by at least 40 000 (20 000 + 40 000 =
60 000). This increase must be authorised in terms of section 36, by
1.1 an amendment to the MOI through a special resolution of shareholders
[sec 36(2)(a)]; or (1)
1.2 the board of directors, unless the MOI provides otherwise [sec 36(2)(b)]. (1)
1.2.1 The company must file a notice of amendment of its MOI, setting out the
changes effected to the authorised share capital. (1)

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2. If the market value of the equipment appears to be below R900 000 (the equipment was
purchased very recently for R785 000, which is R115 000 less than R900 000, as
indicated by concern 8 in the scenario), it would constitute financial assistance for the
purchases of shares in terms of section 44, in which case the following applies:
2.1 The financial assistance must have been authorised by a special resolution of the
shareholders, adopted within the previous two years [sec 44 (3)(a)]. (1)
2.2 The board of directors must be satisfied that
2.2.1 after providing the financial assistance, the company would satisfy the
solvency and liquidity test [sec 44(3)(b)]; (1)
2.2.2 the terms under which the financial assistance is given are fair and
reasonable to the company [sec 44(3)(b)]; and (1)
2.2.3 all the related conditions/restrictions set out in the MOI have been satisfied
[sec 45(4)]. (1)
Available 7
Maximum 5

Dismissal of director

Dismissal

1. Irrespective of anything to the contrary in the company’s MOI, a director can be

dismissed before the termination of her or his term of office [sec 71(1)]. (1)
However, this removal requires an ordinary resolution passed at a shareholders' meeting
[sec 71 (1)] – the directors’ resolution is insufficient. (2)

2. If, however, Ms Skinny is removed because of being ineligible or being disqualified as a

director, or she is incapacitated [sec 71(3)(a)] or has otherwise neglected [sec 71(3)(b)]
her duties, the board resolution will suffice, provided that (1)
2.1 due notice of the board meeting and proposed resolution is given to Ms Skinny
[sec 71(4)(a)]; and (1)
2.2 she was provided with a reasonable opportunity to make a presentation before the
vote took place [sec 71(4)(b)]. (1)

Compensation for loss of office

3. As it appears that the payment was made to Ms Skinny in her capacity as a director of
the company (concern 9 in the scenario), the payment thereof must be/have been
authorised by the shareholders by way of a special resolution passed within the
preceding two years [sec 66(9)]. (1)

4. The amount paid in respect of the loss of office must be disclosed in the annual financial
statements. (1)
Available 8
Maximum 6

(b) AUDIT PROCEDURES – Loans to directors

[Note: Section 45 of the Companies Act, 2008 is applicable to loans granted to directors
(indicated by concern 10 in the scenario). In addition to the resolution at the board meeting,
a special resolution to approve such loans should also have been passed during the preceding
two years].

• Inspect the minutes of the board meeting [sec 45(2)] at which the resolution to approve
the loans to the two directors was passed and ensure
− that a quorum was present at the meeting; (1)
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− that there is an indication that the directors applied the solvency and liquidity test
and that they considered, after the loans were granted, whether (1)
the company’s assets would exceed its liabilities and that the company would be
able to pay its debts in the normal course of business for at least 12 months after
the loans had been granted [sec 45(3)(b)]; (1)
− that the directors acknowledged in the minutes that they had applied the test and
came to the conclusion that they complied with the requirements of the test; and (1)
− that the majority of directors approved the resolution to grant the loans. (1)

• Examine the cash flows, forecasts and management accounts, etc, used by the directors
in respect of the application of the liquidity and solvency test and ensure, through
inspection, recalculation and analytical review, that the directors applied the test
correctly. (1)

• Examine the MOI for any constraints and conditions, which must be complied with regard
to granting loans (to directors). If so, confirm that these conditions were met [sec 45(4)].
(1)

• Inspect the minutes of the shareholders' meeting [sec 45(3)(a)] for the approval of a
special resolution and confirm that
− a quorum was present at the meeting (unless the MOI states differently, at least
three shareholders who hold at least 25% of the voting rights); (1)
− the resolution was taken within the preceding two years; (1)
− the resolution approves loans to the two directors specifically, or to directors in
general; and (1)
− the resolution was approved by at least 75% of the voting rights exercised (unless
the MOI states differently). (1)

• Inspect the loan agreement with the directors and

− compare the amount and any conditions applicable to the loans with the minutes of
the meetings; and (1)
− confirm that the agreement was properly signed by the respective directors and an
authorised representative of the company. (1)

• Confirm the existence of the loans and the outstanding amounts at year end by obtaining
written confirmation from the two directors. (1)

• Confirm through inspection of the financial statements that the loans to the directors were
properly disclosed as directors’ remuneration. (1)
Available 15
Maximum 12

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MARKERS’ COMMENTS

• Time management is a major problem to which students need to pay attention.

Many scripts indicated little or no attempt at an answer. Remember, we cannot give
you marks if you do not write something down.

• Many scripts were very difficult to mark due to poor handwriting. Students also
made use of unknown abbreviations. Students need to ensure that their handwriting
is legible and must refrain from using an “SMS-style of writing”.

• Many students have not yet realised that they are postgraduate students. Success
at this level requires a serious commitment to your studies. You are required to
make a comprehensive study of the theory of auditing, and then to try doing as
many questions as possible.

• Students did not apply theoretical knowledge but merely quoted the theory. At a
postgraduate level, you need to demonstrate that you can apply theoretical
knowledge.

• Students made the following common errors:

− Solutions were not structured in an orderly manner. Students are advised to
use sub-headings and discuss each sub-heading accordingly.
− Repetition of facts: This will also be avoided if sub-headings are used.
− Over-elaboration of one fact: This will also be avoided if sub-headings are
used, as it will prevent you from discussing only one aspect.

• Students failed to apply the following steps:

(1) state the matter;
(2) state the applicable legislation;
(3) apply the legislation to the practical situation; and
(4) draw a conclusion.

• Conclusions were drawn without proper justification

Important!
Do not be misled by the fact that you will write an open book examination. You still
need to know the theory to identify the applicable issues. Only use the prescribed
textbooks for reference. You will not have time to browse for answers.

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QUESTION 2 67 marks

YOU HAVE 20 MINUTES TO READ THIS QUESTION.

Aero Africa Ltd (‘AA’) is an airline that listed on the Johannesburg Securities Exchange in
June 2017.

AA is a decentralised company with the following divisions:

• Aero Africa;
• Aero Africa Mobilechefs (catering division);
• Aero Africa Technical (the technical division which provides aircraft maintenance services);
and
• Aero Africa Travel Centres (Aero Africa’s own branded travel agencies).

United Auditors Inc., a firm of Registered Auditors, has been the external auditor of AA for the past
ten years. United Auditors Inc., based in Johannesburg, is currently comprised of three audit
partners and 30 trainees. Kingston Jacobs was the audit engagement partner for AA prior to his
resignation from United Auditors Inc. in February 2017.

Governance arrangements

Prior to its listing, all the shares in AA were owned by Mr Marc Brooney, a highly successful
South African businessman. Mr Brooney introduced a policy ten years ago whereby directors on AA’s
Board were appointed for a three-year period only, in order to promote transformation. Since
then the only person who has been reappointed was Ms Luhle Jacobs, who was the information
technology director. To date, Ms Jacobs (wife of Mr Kingston Jacobs) has been a director for ten
and a half consecutive years.

Prior to its listing, Mr Brooney consistently had to provide financial support to AA to enable it to
continue as a going concern. Therefore, to eliminate the need for on-going financial support of the
airline, Mr Brooney proposed that –
• AA be listed at R50 per share;
• he would own 51% of the shares;
• all directors would receive share options on listing and annually thereafter;
• Mr Jacobs would be appointed as the chief executive officer (CEO); and
• Ms Jacobs would be appointed as the chief operating officer (COO).

Investors did not, however, accept Mr Brooney’s proposed listing price and shareholding. Rather,
they believed that a market related price was R20 per share, and that Mr Brooney should own
no more than 40% of the shares. Mr Brooney agreed to these conditions but added a condition of
his own, namely that his shareholding would permit him to appoint the majority of the Board
members. This was accepted, and the Memorandum of Incorporation of AA was amended to
reflect this.

Once listed and with the approval of Mr Brooney, Kingston and Luhle Jacobs nominated and
appointed the following persons to the Board of Directors for a three-year period:

• Non-executive directors
 Mr Ryan Abbott (22), a qualified aircraft technician;
 Mr Nathan Barclay (70), a retired marketing manager who is now a director of
various companies; and
 Mr Tyler Callan (24), a travel agent.
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• Executive director
 Ms Alexia Viljoen (41) CA (SA), as the chief financial officer (CFO).

There are no other directors. An audit committee and remuneration committee were established
once the company had listed. In terms of a Board resolution, the internal audit services have
been outsourced to United Auditors Inc.

Within a few months of the listing, AA stated at a press conference that Ms Viljoen had ‘resigned
with immediate effect to pursue personal interests. In her letter of resignation to the Board of
Directors of AA, Ms Viljoen stated the following:

The high director turnover rate at AA is a consequence of the three-year contract appointments
made while it was a private company. This has resulted in the following practices, which are
continuing even though the company is now a public company and listed:

• Upon their appointment, directors negotiate very large payments that would be payable to
them if they were not reappointed after their three-year term.
• The rigging of tender processes is common practice – tenders are awarded to companies
or individuals who secretly pay incentives to the executive directors.
• There is no focus on employee recruitment, remuneration or incentives, which has resulted
in poorly skilled employees and a generally unhappy employee base.

When the CEO signed the engagement letter for the reappointment of United Auditors Inc. As the
company’s registered auditor despite my reservations, and without the knowledge of the
shareholders, I had no other option but to resign.

Shortly thereafter the public shareholders of AA began raising concerns about the company’s
commitment to compliance with the Companies Act, 2008 and its application of The King IV
Report on Governance for South Africa (King IV).

YOU NOW HAVE 101 MINUTES TO ANSWER THIS QUESTION

REQUIRED Marks
Discuss, with reasons, any concerns you have about the current (i.e. post-listing) corporate
governance arrangements of AA. 65

Communication skills – clarity of expression; logical argument 2

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SUGGESTED SOLUTION

Discuss, with reasons, any concerns you have about the current (i.e. post-listing) Marks
corporate governance arrangements of AA
1 Appointment of directors
1.1 There is no chairman of the Board of Directors. 1
The King Code requires the Board to be chaired by an independent non-
executive director. (P7.R31) 0.5
1.2 With the exception of Mr Barclay and Alexia Viljoen, the directors who have been
appointed appear to lack the necessary competence and experience required of
individuals to serve on the Board – this would be the case for both Kingston and 0.5
Luhle Jacobs (relevant experience) and Messrs Abbott and Callan (age and
experience). (P7.R6) 1
1.3 King Code requires that directors do not hold more directorships than is 0.5
reasonable for them to exercise due care, skill and diligence. Given that
Mr Barclay holds various directorships and given his age, this could represent a
potential risk for AA. (For chair: P7.R35; but in general – directors should be able to 1
properly perform their duties)
1.4 According to King Code the Board should be composed with a balance of
knowledge, skill, experience, diversity and independence (P7.R6) and needs to have 0.5
targets for race and gender representation (P7.R11) 0.5

AA needs to find independent, suitably skilled and demographically acceptable

directors. It can be argued that the Board at present is not representative in terms 1
of gender
1.5 In terms of t he King Code, the Board and not one of the major shareholders, i.e. 0.5
Mark Brooney, as is the case at AA, should appoint the chief executive officer.
(P10.R76) 1
1.6 The board should comprise a balance of power, with a majority of non-executive
directors. The majority of the non- executive directors should be independent 0.5
(P7.R8).
However:
1.6.1 • Six directors have been appointed, three executive, and three non-executives –
i.e. there is not a majority of non- executives. 1
1.6.2 • The risk exists that none of the directors appointed to the Board can be
considered independent, as they have been appointed by the Jacobs’s (i.e. by
the CEO and COO) OR that the individual could have been an employee of 1
AA or that the employee works for a material customer of AA.
1.6.3 • The desirability of appointing a husband and wife (familiarity threat to objectivity)
into two of the three senior executive posts in AA is questionable – as this will
undermine effective control and governance (incl. segregation of duties and
management oversight) and would be a succession planning (P7.R13) nightmare. 1
They would also be able to dominate the board, which requires a balance of
power (P8.R44c))
1.7 In terms of P7.R14 of the King Code, directors should be appointed through a 0.5
formal process – however, with the approval of Mark Brooney, the Jacobs’
nominated the directors 1

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Marks
1.8 In terms of section 66(4) of the Companies Act, at least 50% of the directors must 0.5
be elected by shareholders – the appointments have been made without the
involvement of all the shareholders. 1
1.8.1 • Marc Brooney can only have a right to vote on the appointment of directors
in accordance with his shareholding. A 40% shareholding will not give him the
ability to appoint the majority of the Board of directors. The other shareholders’ 1
approval should therefore have been sought in the appointment of the directors.
1.8.2 • In addition, the JSE does not permit a minority shareholding to exercise 1
negative control as a result of any contract or agreement. Bonus
2. Remuneration of directors
2.1 There is reason to believe that P14.R29 of the King Code (that a fair, responsible
and transparent remuneration policy be approved) has not been applied 0.5
appropriately by AA. For example –
2.1.1 P14.R28 (of the King Code), states that companies should adopt a remuneration 0.5
policy that promote positive outcomes and responsible corporate citizenship. Given
that 3-year appointment terms apply at AA and that directors negotiate large
termination payments if not reappointed indicates a shortcoming in the corporate 1
governance of AA.
2.1.2 This indicates a lack of a remuneration policy aligned with the strategy of the
company and linked to individual performance (a recommended practice per the 1
King Code P14.R28).
2.1.3 A special resolution every two years in terms of which shareholders are required
to approve directors’ remuneration (in terms of section 66 of the Companies 1
Act) – the shareholders need to approve the directors’ remuneration.
2.1.4 P14.R37 (King Code) stipulates that the remuneration policy be discussed at the
annual general meeting with shareholders being able to express their views on 1
said policy.
2.1.5 P8.R65-67 (King), states that the remuneration committee should assist the
Board in setting and administering remuneration policies across the company, 1
including for directors.
3 Succession planning
3.1 While appointing directors on three-year contracts is acceptable, the previous 0.5
practice of replacing virtually all directors on the termination of contracts is of
concern. In terms of P7.R13 of the King Code, the Board should ensure that
there is succession planning for the CEO and other senior executives and officers. 1
3.2 P7.R12 of the King Code states that the governing body should establish 0.5
arrangements for periodic, staggered rotation. If all directors’ contracts terminate
after three years, then no appropriate rotation exists at AA. 1
4 Committees of the governing body
4.1 In terms of P8.R62-64 of the King Code the company should also have 0.5
established a risk committee (in addition to the audit and remuneration committees) 1
– there is no risk committee at present.

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4.2 Moreover, in terms of P8.R60-61 of the King Code, the company should have 0.5
established a nomination committee to assist with the process of identifying
suitable Board members – which does not appear to have happened (e.g. the 1
Board members were ‘nominated’ by the Mark Brooney and the Jacob’s).
4.3 In terms of Regulation 43 of the Companies Regulations, 2011, every listed 0.5
public company (such as AA) should establish a social and ethics committee within
12 months of the effective date of this regulation – however, no such committee 1
appears to have been established.
4.4 Given that there are no independent directors on the Board –
4.4.1 The remuneration committee will not be adequately constituted by at least the
majority of independent non- executive directors – as recommended by P8.R66 of 1
the King Code.
4.4.2 The audit committee should be comprised exclusively of independent directors
(minimum of three) – such an arrangement would be contrary to P8.R56 of the King 1
Code.
4.4.3 Should any of the current independent directors be elected as chairperson of the
Board, the audit committee would no longer comply with the aforementioned 1
requirement since the chairperson may not be a member of the audit committee.
(P7.R36)
4.5 King P8.R55 & Regulation 42 prescribes that at least one-third of the members 0.5
of an audit committee must have academic qualifications, experience in
economics, law, corporate governance, finance, accounting, commerce, industry,
public affairs or human resource management – this could be an issue for AA 1
(only Mr Barclay potentially has these skills).
4.6 The audit committee, although established, is not effective as it appears to have 1
played no role in the reappointment of United Auditors (in terms of King). (Section
94(7)(a))
4.6.1 The Committee is required to nominate the external auditor for appointment and 0.5
approve the terms of engagement (per section 94 of Companies Act). 1
(Section 94(7)(a))
4.7 This committee is required to monitor and report on the independence of the
external auditor – however, there are significant threats to the auditor’s 0.5
independence which do not appear to have been addressed (King P8.R59a). 1
4.7.1 In terms of the SAICA Code of Professional Conduct (R 524.6), in a situation 1
where a key audit partner joins the audit client that is a public interest entity (such
as AA), independence would be compromised given that the client has not yet
issued audited financial statements covering a period of not less than 12 Months
(cooling off period is required).
4.8 In terms of Companies Act Section 94(7)(d)&(e) the audit committee is required
to determine the nature and extent for non-audit services by the auditor and 0.5
approve contracts for the external audit firm to render non- audit services –
however, the outsourcing of the internal audit services appears to have been done 1
without reference to the audit committee (it was done in terms of a Board
resolution).

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4.9 In terms of section R606.5 of the SAICA Code of Professional Conduct, the 0.5
appointment of United Auditors to render internal audit services is of concern as the
Code states that for a public interest entity (such as AA), the services shall exclude 1
controls and systems relating to financial reporting.
4.10 King P15.R51 requires that the internal audit function be independent of
management. Given that the internal audit function has been outsourced to 0.5
United Inc. (small firm) where Mr Jacobs (now the CEO of AA) was a partner,
would result in the independence of the internal audit function being questioned 1
(familiarity).
4.11 The committee is required to review the quality and effectiveness of the external
audit process – however, the competence of the external audit firm to perform 0.5
the engagement is in doubt (King Code, P8.R59c). It is doubtful whether three
partners and 30 trainees (capacity) will satisfy the ISQC 1 skills and competence 1
requirements given that AA is a fairly large listed client, with complex operations.
4.12 The audit committee needs to ensure that the JSE approves the appointment of the 1
audit firm – given United Inc.’s limited resources, this is debatable. Bonus
5 In terms of the Companies Act (section 90), the auditor must be appointed at
every annual general meeting of the company (i.e. by the shareholders). Only if 0.5
no such appointment was made, can the Board of directors proceed to make an
appointment. The fact that the appointment was made without the knowledge of 1
the shareholders is therefore of concern.
6 The manner in which Alexia Viljoen’s resignation was communicated gives rise to
the following concerns:
6.1 The communication was done by way of a press conference rather than a SENS 1
announcement – which is inconsistent with the JSE Listings Requirements. Bonus
7 Given the directors’ conduct generally, there is reason to believe that they are 1
acting contrary to their statutory fiduciary duties. For example:
7.1 In terms of section 76(2) of the Companies Act, a director must not use the 0.5
position as a director to gain an advantage for him/herself – yet directors negotiate
large payments on the termination of their contracts, and they participate in the 1
rigging of tender processes.
7.2 In terms of section 76(3) of the Companies Act, directors must exercise the 0.5
powers and functions of a director in good faith, in the best interests of the
company and with a reasonable degree of care and skill – however, failing to
focus on the employees (in an industry where skills are in short supply (e.g. pilots 1
and engineers)) and participating the rigging of tenders, is not consistent with
the statutory requirements.
7.3 Principle P1. R1a (King) requires the board and directors of the company to act 0.5
in the best interests of the company (Integrity), which appears not to be happening
given the illegal tendering process and large severance packages paid. 1
(Competence)
8 It is doubtful whether the executive directors who ‘secretly’ received incentives
from the recipients of tenders disclosed their interests in the contracts prior to 1
entering into these contracts in the manner required by section 75 of the
Companies Act. (Also, King P7.R25&26)

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8.1 By conducting themselves in this manner, the directors would also not be
complying with the following principles of the King Code:
8.1.1 The Board should ensure that the company’s ethics are managed effectively 0.5
(principle 2). According to the King Code, ‘Good corporate governance requires
that the Board takes responsibility for building and sustaining an ethical corporate 1
culture in the company’ the action breaches this requirement since the Board is
the problem.
8.1.2 The Board should ensure that the company complies with applicable laws 1
(principle 13) – such as the Prevention and Combatting of Corrupt Activities Act
(PRECCA). Principle 1 also requires Competence). Bonus
9 The fact that there is poor corporate governance in place especially from the
leadership could result in fraud in other parts of the company. This is more likely 1
when employees are dissatisfied.
10 Now that Alexia Viljoen has resigned, AA is operating without a financial director.
JSE Listing requirements requires the company to have a CEO and chief 1
financial officer indicating non-compliance. Bonus
11 There is doubt as to whether or not a company secretary has been appointed which
results in non-compliance with the Companies Act section 86. 1
12 Given the fact that the directors have contravened the Companies Act, the 0.5
directors need to be aware that they can be held personally liable in such
instances where breaches in complying with the Companies Act section 77 have 1
taken place.
13 From the perspective of the external auditors of AA, they would need to
consider the requirements of the Audit Profession Act section 45 in respect of 1
the tender rigging qualifying as a reportable irregularity which they would need to
report on.
13.1 An unlawful act has occurred through the tender rigging as well as non- 1
compliance with various statues (refer above).
13.2 This act has been committed by management (the Board of Directors) 1
13.3 Material breach of fiduciary duty (Section 76 – best interest of company) has 1
occurred OR Material financial loss (tender rigging and severance packages) has
occurred for the company OR Fraudulent act (tender rigging)
14 Given the relevant concerns identified one can conclude that AA is not a responsible 1
corporate citizen.
15 Any other valid relevant point (limited to one mark) 1
Communication skills – clarity of expression; logical argument 2
Maximum 67

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4

SELF-ASSESSMENT QUESTIONS

The following questions are included in this tutorial letter. The questions are extracts from previous
Unisa tests. Please note that the reading and writing time were rounded up. In terms of SAICA, you
will receive 30 minutes' reading time for a 100-mark question and two and a half hours writing time.

NO Name SOURCE Auditing Topics MARKS SCENARIO SOLUTION

covered PAGE PAGE
1 Danko Unisa 2022 – King IV,
Farming Ltd Test 4 Paper Companies Act, 60 87 108
2 CPC (Paper 2)

2. Propco Ltd Unisa 2021 – King IV, 40 90 114

Test 4 Companies Act,
CPC
3. Bright Light Unisa 2020 – APA, King IV, 40 96 119
Incorporated Test 4 Companies Act,
CPC
4. Best Price Unisa 2019 – APA, King IV, 40 100 123
Practice Inc Test 4 Companies Act,
CPC
5. Broad Based Unisa 2018 – CPC, Companies 40 104 128
Investments Test 1 Act, King IV
Limited

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SELF-ASSESSMENT QUESTIONS – SCENARIOS AND REQUIRED

QUESTION 1 60 marks

YOU HAVE 18 MINUTES TO READ THIS QUESTION.

This question consists of two related parts, PART A and PART B. PART B is not included in
this tutorial letter

PART A 60 marks

You are a CA(SA) and a senior audit manager at the firm of Noord Auditors Inc. (“Noord”). Noord is
conducting the audit of Danko Farming Ltd (“Danko Farming”). Danko Farming is an RSA registered
(resident) company that specialises in the manufacturing and retail of industrial farming equipment and
has a 30 June year end. Danko Farming is registered as a category C value-added tax (“VAT”)
vendor.

Danko Farming was established on 1 July 2005 by Betty Bomb and Jon Kraga and they each hold
35% of the issued shares. The rest of the issued shares are held by various shareholders. Danko
Farming was incorporated in Vereeniging and still has a factory in that area. Danko Farming rely on
more than 15 years of experience and terabytes of precision data to know them and their businesses
better than anyone else. Their easy-to-use technology helps deliver results they see in the field, on the
job site, and on the balance sheet. Danko Farming ensures seamless access to parts, services, and
performance upgrades to trade-in by providing world-class support throughout the lifecycle of their
equipment, with productivity and sustainability always in mind.

Change of audit partners

Kevin Kline CA(SA) has been the audit partner of Danko Farming for the past 6 years during his
employment at Noord. Kevin Kline resigned from Noord and has accepted a new position as the Chief
Financial Officer at Danko Farming.

Zara Harris CA(SA) has been appointed as the audit partner for the audit of Danko Farming to replace
Kevin Kline. The following came to light during the handover meeting with Kevin Kline:

1. Noord accepted a large sum of money from Danko Farming in one of its bank accounts, which
are kept in a separate account. These funds are strictly off limits to Noord. Zara Harris will now
be responsible to manage this account on behalf of Danko Farming until Danko Farming
requests the amount to be transferred to their bank accounts.

2. One of the directors, who prefers to remain anonymous, requested the issuing of an unqualified
audit report for Danko Farming and should this be done, an additional fee of 2.5% over and
above the agreed upon audit fee will be paid to Noord and Zara Harris.

3. The same director (mentioned in 2 above), has further guaranteed that Noord will remain the
auditors of Danko Farming as long as Zara Harris is the engagement partner and keeps up the
good work.

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4. The audit of the 2022 financial year has commenced. All the resources for the audit have been
finalised and the same audit team who conducted the audit in the previous year will be utilised
for the 2022-audit of Danko Farming. The team is competent and need very little guidance.
Kevin Kline is always available to assist should Zarra Harris need further clarity regarding any of
the allocated team members.

5. The audit register for the Danko Farming audit is complete, and no additional risks need to be
added to the risk register.

Governance structure

Current governance structure

No. Name Capacity on board Committees

1. Ben Diora Chief Executive Officer Chairperson of the risk committee
2. John Kraga Non-executive Director N/A
3. Tom Hiller Independent non-executive Director Chairperson of the nominations
committee
4. Ken Kors Independent non-executive Director Chairperson of the audit
committee
5. Ralph Laury Independent non-executive Director N/A
6. Hugo Bason Independent non-executive Director Chairperson of the remuneration
and ethics committee

Danko Farming is currently expanding their current governance structure and the following candidates
are under consideration:

No. Name Capacity on board Qualifications and experience

1. Kevin Kline Chief Financial Officer CA(SA), over 10 years’ experience
in auditing listed companies
2. Tshepo Geans Independent non-executive Director LLB, over 20 years in the estate
planning
3. Thulas Indi Independent non-executive Director Registered engineer, over 3 years
in the construction industry

The above candidates are currently under consideration for the director position for the governing
body. One of the directors, not included above, was fired by John Kraga due to an unresolved
personal conflict between the two parties. As John Kraga fired the director, it is his responsibility to
appointment a director within the next 2 weeks to ensure that the governing body is adequately
resourced. John Kraga, as founder of Danko Farming, will consider all candidates. No other
procedures were followed upon the firing of the director by John Kraga.

John Kraga has scheduled private interviews with each of the candidates whereafter the appointment
will be made. No other processes and procedures will be performed before the selection of the
successful candidate as John Kraga’s choice will be final.

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List of contracts:

Kevin Kline (refer above) provided you with the following detail in respect of contracts and agreements
applicable to Danko Farming Ltd’s 2022 year of assessment:

• The directors resolved that an eighteen (18) month contract be entered into with
Cleaning Services (Pty) Ltd (a company registered in South Africa and a value-added tax
(“VAT”) vendor) for providing cleaning services (that meet the requirements of section 11(a) of
the Income Tax Act) to Danko Farming at a total cost of R360 000 (including VAT). Services
commenced on 1 September 2021, the date on which the R360 000 was paid.

REQUIRED

YOU NOW HAVE 90 MINUTES TO ANSWER THIS QUESTION.

This required consists of two related parts, PART A and PART B (Part B is not included in this
tutorial letter).

PART A 60 marks

MARKS
Sub- Total
Total
(a) With reference to the change of audit partners:

Discuss your concerns in terms of the SAICA Code of Professional

Conduct. Include safeguards in your answer. 29

Communication skills: clarity of expression 1 30

(b) With reference to the governance structure:

1. Discuss any corporate governance concerns that you may have in

terms of the King IV Report on Corporate Governance and
Companies Act 71 of 2008. 13
2. In terms of the candidates under consideration for the director’s
vacancy, discuss and make a recommendation on which director
should be appointed in compliance with King IV Report on
Corporate Governance. 8 21
(c) Assume that the VAT implication for the Cleaning Services (Pty) Ltd
contract was not recorded by Cleaning Services (Pty) Ltd to avoid
payment obligations to SARS. Compile a Compliance Checklist that will
be used by Cleaning Services (Pty) Ltd’s engagement auditor to ensure
compliance with Section 45 of Audit Professional Act no.26 of 2005. 8

Communication skills: layout and logical argument 1 9

Total 60

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QUESTION 2 40 marks

YOU HAVE 12 MINUTES TO READ THIS QUESTION.

Background information

Propco Ltd (Propco) is a property rental management company established on 1 July 2010 and is a
JSE listed company. Some of the services that Propco provides to landlords includes rent
management where Propco collects rent on behalf of the landlord, administer late payment penalties,
provide up to date financial records, maintenance and repairs management (where Propco will
perform any maintenance or repairs needs on the property and bill this onto the landlords), and
marketing management where Propco will market properties, attract and screen potential tenants. In
addition to providing these services, Propco also owns and sublets properties to tenants. The financial
year end of Propco is 30 June 2021.

Auditco Incorporated (Auditco) has been the auditors of Propco since 1 July 2014 and Mr Thabo
Mahlangu (CA)SA (Thabo) has been the audit partner from this date. Given the longstanding business
relationship, Thabo has become good friends with the chief financial officer (CFO) at Propco, Naiema
Kalam (Naiema). Both Thabo and Naiema’s families often go on vacation together and their children
attend the same school. During the financial year, Naiema and Thabo had a discussion at a parent-
teacher association meeting, and Naiema told Thabo that Propco expected a significant reduction in
its audit fee, rather than an increase, as the property rental market has seen a decline in revenue
since the advent of the COVID-19 pandemic. If a significant reduction could not be accommodated,
Propco would put the audit out to tender. In order to reduce the audit fees for Propco, Thabo is under
pressure to reduce the number of audit staff in order to retain Propco as a client. Propco represents a
significant customer to Auditco.

The following information was made available to you, the third year trainee accountant by Naiema for
the financial year ending 30 June 2021:

1. The company structure

FinUs Ltd (FinUs), a registered financial institution and financiers of Propco, provided initial
capital in exchange for equity shareholding and currently own 30% of the issued share capital of
Propco. FinUs also provided other forms of debt financing such as mortgage loans, overdrafts,
etc. They are entitled to representation on the board of directors.

In order to gain exposure within the community that Propco operates, 19% of the issued share
capital of Propco is owned by a community trust.

The chief executive officer (CEO) and chairperson of Propco is one of the founders and owns
20% of Propco. The remaining 31% shareholding is divided amongst 10 other founders.

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2. Board composition

The company secretary provided the following information on the composition of the board of
directors:

Note Name Designation

1 Peter Muloto Chief Executive Officer (CEO) and Chairman
2 Dzhivu Walele Managing Director (MD)
3 Naiema Kalam CA(SA) Chief Financial Officer (CFO)
4 Dr David Smith Independent, non-executive director
5 Prof Matshego Independent, non-executive director
6 Jimmy Hendricks Independent, non-executive director
7 Steve Shapiro Independent, non-executive director

Notes:

1. Peter Muloto – CEO and Chairman of Propco: Peter does not have any proven
qualifications, but he is well connected to the right people.
2. Dzhivu Walele – Managing Director of Propco: Dzhivu’s professional examinations are
still outstanding, and he was never admitted as a SAICA member. However, Dzhivu
believes he is a CA(SA) in substance.
3. Naiema Kalam CA(SA) – Chief financial officer of Propco.
4. Dr David Smith – Independent, non-executive director: Represents FinUs, the financiers
on the Board.
5. Prof Matshego – Independent, non-executive director
6. Jimmy Hendricks – Independent, non-executive director: Represents the community trust
on the Board.
7. Steve Shapiro– Independent non-executive director: Owner of Shapiro Properties.
Propco leases its premises from Shapiro Properties

3. Major contracts

Propco has the following contracts that are considered significant:

Contract description Service provider Value

Lease agreement (Expense) Shapiro Properties* R500,000 per month
Advanced Rental Management System ABC Solutions** R50,000 per month
(Expense)
External Real Estate Agents (Expense) Realco Agents 5% of revenue
* Owned by Steve Shapiro
** The founders own 50% of ABC Solutions

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4. Other matters

• The accounts receivable balance has been increasing since the inception of the
company. More than half of the accounts receivable balance is made up of uncollectable
rental commission. The increase in subscriptions did not result in cash collections.
Propco has not provided for bad debts, as its management believed it would not create
the right impression with the financiers.

• The financial performance of the company as at the interim period and year end was as
follows:

June 2021 January 2021

(Year end) (Interim)
Debtors days 120 60
Creditors days 150 35
Solvency 1,8 0,8
Liquidity 0,6 1,2

• The purchase of 19% of Propco by the community trust was financed by Propco itself
during the 2021 financial year. Propco obtained a mortgage against one of its properties
to facilitate the transaction. The loan to the community trust bears interest at the prime
interest rate and is repayable over 10 years. Due to the urgency of the matter, no
resolution was obtained. It is expected that the Board will ratify the decision in due
course.

Propco provided the minutes of a board meeting – refer to working paper A100:

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Entity name: Propco Ltd Year end: 30 June 2021

WP reference
Prepared by: Anne Accountant Date: 15 July 2021
A100
Reviewed by: Man Manager Date: 21 July 2021 1 of 2
Meeting: Extraordinary meeting of the board of directors held on
25 June 2021
Attendees

All board members were present at the meeting:

1. Peter Muloto
2. Dzhivu Walele
3. Naiema Kalam
4. Dr David Smith
5. Prof Matshego
6. Jimmy Hendricks
7. Steve Shapiro

1. Welcome by chairperson

• The chairperson welcomed all present and thanked them for making time to meet under
the extraordinary circumstances. He thanked all members for participating in the
Telegram group throughout the year (Telegram is a communication’s application). The
chairperson mentioned that the information flow was brilliant since the Telegram group
has started.

• The new decision to have board meetings once every six months is working well, as
every board member is able to attend then.

2. Apologies

• The chairperson noted that no apologies were received, as all board members were
present.

3. Matters arising

Actionable items from the meeting held on 30 March 2021 were tabled and the following was
noted:

• The auditor, Mr Thabo Mahlangu (CA)SA, performed a review of the business

operations, major contracts and company structure. No engagement letter was
necessary, as Propco has had a relationship of more than eight years with Mr
Mahlangu.

• Some board members were surprised to find out that the chairperson and the founders
owned 50% of ABC Solutions.

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Entity name: Propco Ltd Year end: 30 June 2021

WP reference
Prepared by: Anne Accountant Date: 15 July 2021
A100
Reviewed Man Manager Date: 21 July 2021 2 of 2
by:
Meeting: Extraordinary meeting of the board of directors held on
25 June 2021

• It was noted that Shapiro Properties was willing to reduce the rental per square metre, as
it was high anyway. Steve Shapiro confirmed that the rental would be reduced by 40%.
This will result in the rental amount being 10% above the market rate. He proposed that
this new offer be accepted, and all directors supported his suggestion.

• Dr David Smith was alarmed that she seemed to be the only one who was not aware that
the company was experiencing financial difficulties. The chairperson responded that
Naiema felt that investors would be frightened unnecessarily if they knew the true
situation. In terms of the agreement with the financiers, misrepresentation is a breach of
contract that will result in an increase of 10% in interest rates charged on debt.

• The community trust transaction was concluded, and shares transferred. Jimmy
Hendricks confirmed that his principals were now the proud owners of 19% of Propco.
Although the shares have no voting rights, they are happy that the management of
Propco recognises them as a critical stakeholder. The chairperson thus proposed that a
resolution be adopted ratifying the decision to provide a loan to the community trust for
purchasing shares in Propco. All board members were in agreement and the resolution
was adopted.

4. Non-disclosure of income – request by client

During the current financial year, one of the landlords asked Propco not to disclose any income
received from his property to SARS. He concluded that it has been an unusually difficult year
and he could not afford to pay the taxes at that time. Management concluded that the auditors
would be consulted with regards to the correct response to the landlord.

5. Closure

There was nothing more on the agenda to discuss and the meeting was adjourned.

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YOU NOW HAVE 60 MINUTES TO ANSWER THIS QUESTION.

REQUIRED Marks
1. With reference to the SAICA Code of Professional conduct, identify and discuss any
concerns that you may have and suggest appropriate safeguards regarding the
professional conduct of Thabo Mahlangu (CA)SA. 14
2. Identify and discuss in detail the statutory, corporate governance and ethical concerns
relating to Propco Ltd and its auditors for the year ended 30 June 2021. Limit your
answer to the requirements of the following: 20

(a) Companies Act no. 71 of 2008; and 13

(b) King IV Code on Corporate Governance. 7

You may assume that all requirements relating to meetings of shareholders as

well as any applicable resolutions have been complied with.

Communication skills: logical argument 1

3. With reference to working paper A100, draft a memorandum to the directors of
Propco Ltd discussing if the non-disclosure of income constitutes taxation evasion in
terms of the Income Tax Act. 4
Communication skills: memorandum format 1
Total 40

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QUESTION 3 40 marks

YOU HAVE 12 MINUTES TO READ THIS QUESTION.

You are an audit manager at Bright Light Incorporated (Bright Light), a firm of registered auditors. The
audit firm’s portfolio includes a number of companies listed on the Johannesburg Stock Exchange
(JSE), as well as unlisted companies in the education sector.

About three weeks ago you received a telephone call from Gregory Book, the newly appointed
Chief Financial Officer (CFO) of Fundisa Wise Ltd (Fundisa), a company that provides educational
services. You were pleased to hear from Gregory again, as you remembered him as being a friendly
and outgoing trainee accountant at Bright Light until four years ago and who were part of several
auditing teams for which you were responsible.

Given your experience and knowledge in the fields of auditing and corporate governance, Gregory
Book asked whether you would be willing to attend the audit committee meetings of Fundisa in an
advisory capacity. He also informed you that it is the intention of Fundisa to list on the JSE in the
medium term and the audit committee would therefore be in need of someone with your stature and
experience in this field.

After the telephonic conversation, Gregory Book emailed you Fundisa’s company profile and an
extract of the qualified audit report for the financial year-end 30 June 2019, which was issued by their
auditors reflecting the modifications listed below:

• A number of transactions were concluded between Fundisa and its Chief Executive Officer
(CEO), Lennord Result CA (SA) during the 2019 financial year. The board of directors
appropriately authorised these transactions, but these transactions were excluded from
Fundisa’s financial statements (Basis for Qualified Opinion).
• Some of the programmes offered by Fundisa’s tertiary education division are not accredited by
the relevant authorities, but with the knowledge of the board the marketing material reflected
these programmes as “fully accredited” (Emphasis of Matter).

After Gregory Book adequately addressed your queries, you agreed to attend Fundisa’s audit
committee meetings in an advisory capacity, and he then e-mailed you the minutes of the previous
audit committee meeting that was held on 3 April 2020 (Annexure A) as well as the agenda for the
next meeting scheduled for 10 July 2020. The points on the agenda that need to be addressed are the
following:

1. nomination for the appointment of the new registered auditors for the audit of the 2020 financial
statements.
2. internal audit reports dealing with the internal controls that relates to the designing of the online
learning programmes which are to be offered via Fundisa’s website; and
3. possible litigation against Wright & Wong, the previous auditors.

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ANNEXURE A

FUNDISA WISE LTD

MINUTES OF THE AUDIT COMMITTEE MEETING HELD ON 3 APRIL 2020

Present:

Members: Rodger Text (Chairperson of the audit committee/independent non-executive

director)
Elisabeth Write (Independent non-executive director/board chairman)

Non-members: Sam Control (Head: Internal Audit)

Lennord Result (CEO)

Apologies: Marcus Rhodes (Member of audit committee and member of the board/independent
non-executive director)

Approval of minutes of meeting of 29 November 2019

The minutes of the previous audit committee meeting held on 29 November 2019 were approved
subject to minor editorial corrections.

Circumstances surrounding the dismissal of previous CFO, Mr Figure Twist CA(SA)

Lennord Result explained that following a tip-off on the company’s whistle blower hotline, it was
discovered that Figure Twist had misappropriated R3.5 million in November 2019 by paying the
bonuses due to the company’s middle management to himself. After these bonuses were approved by
the remuneration committee, Figure Twist wrote a memorandum to all the middle management
personnel indicating that due to the “tough trading environment and the poor economy” no bonuses
would be paid. He subsequently transferred the approved bonus amounts via the company’s EFT
system into his own bank account.

Lennord Result added that he agreed to keep the matter quiet on the following conditions:

• Figure Twist resigns as CFO and leaves the company with immediate effect; and
• The R3.5 million misappropriated will be in full and final settlement of any amounts due to
Figure Twist by Fundisa.

Figure Twist accepted these terms and resigned.

The audit committee noted this information and commended Lennord Result on handling the difficult
situation so professionally.

Appointment of new CFO

Lennord Result explained that the process of filling the CFO vacancy commenced almost immediately.
A personnel agency was contracted to find a replacement, as there were no suitable internal
candidates to fill the position. However, Lennord Result was not satisfied with the candidates selected
by this personnel agency.

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Lennord Result coincidently noted that Gregory Book (his nephew), a recently qualified (CA) SA had
returned from London after being employed in the United Kingdom in various temporary financial
positions. He added that Fundisa would benefit from the experience of Gregory Book, who was
available to commence duties with immediate effect. The audit committee agreed that Gregory Book
should be invited for an interview to be conducted by Lennord Result and Margaret Paper, the Chief
Operations Officer (COO). If Gregory Book was found to be the suitable candidate for the position,
Lennord Result could proceed with the appointment.

Removal of Wright & Wong as Registered Auditors

Lennord Result explained that the fraud perpetrated by Figure Twist (which was discovered by
chance) brought into question the competence/diligence with which the audits are conducted by
Wright & Wong Registered Auditors. He therefore managed to persuade a number of shareholders to
vote against their reappointment as registered auditors for the 2020 financial year at Fundisa’s annual
general meeting which was held on 13 March 2020. As a result, he noted that there is currently no
registered auditor appointed for Fundisa.

Given Wright & Wong’s failure to detect Figure Twist’s fraudulent activities, Lennord Result proposed
that a formal investigation be launched into their possible negligence in the performance of the audit.
The audit committee resolved to approve Lennord’s Result’s proposal, and:

• Tasked the head of internal audit to use “whatever means necessary” to obtain a copy the
2019 audit working papers; and
• Any action to be taken against Wright & Wong will be decided at the next audit committee
meeting, based on the evidence gathered.

Internal audit report on statutory compliance

Sam Control noted the following findings which he regarded as significant (from the internal audit
report tabled):

1. The land to develop the new Reach for a Dream (Best for Success) College was purchased from
Marcus Rhodes, after he disclosed his interest in the contract to the board of directors, and he
recused himself from voting on the contract. What was not mentioned by Marcus Rhodes,
however, is that he had bought the land only a few months earlier, after the need to acquire the
site had been mentioned at the board meeting held in mid-2019.

2. A loan to Lennord Result to enable him to acquire a new house was approved by himself and
the authorised representative of Tertiary Capital, one of Fundisa’s major shareholders, without a
shareholders meeting being held and without the transaction being communicated to
shareholders.

In response to the findings, the audit committee resolved as follows on each of the matters listed
above:

1. That no further action would be taken for the following reasons:

• Marcus Rhodes is entitled to profit from property transactions.
• Given the time that Marcus Rhodes invests in board-related duties, it is only fair that he
gets ‘something’ back in exchange.

2. The loan transaction be condoned. In reaching this decision, the following was noted:
• Lennord Result’s submission that he is entitled to have the company assist him in
financing his house given that he uses the property for entertaining company guests; and
• The loan was approved by more than 75% of the votes of shareholders entitled to vote on
the transaction (i.e. overwhelming majority).
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Date of next meeting: 10 July 2020

YOU NOW HAVE 60 MINUTES TO ANSWER THIS QUESTION.

REQUIRED Marks
(a) With reference to Annexure A:

Identify and discuss any concerns you might have with regard to the corporate
governance arrangements at Fundisa Wise Ltd as well as the professional conduct of
the directors (including Lennord Result). Your answer should be covered in terms of
the following: 28

• King IV report on Corporate Governance (Note: Detailed discussions

pertaining to the involvement of other committees are not required
reference should only be made where their involvement are required);
• Companies Act no 71 of 2008; (16)
(7)
• SAICA Code of Professional Conduct; and (4)
• Any other applicable legislation. (1)

Communication skills: clarity of expression and logical argument 2

(b) Discuss the matters that need to be considered in deciding whether the firm of
Wright & Wong Registered Auditors was negligent in failing to detect the R3.5 million
bonus fraud perpetrated by Figure Twist, the previous CFO of Fundisa Wise Ltd in
terms of the related auditing standards and the Auditing Profession Act no 26 of 2005. 10

Note: Assume the final materiality figure is R2 million when considering this matter.
Total 40

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QUESTION 4 40 marks

YOU HAVE 12 MINUTES TO READ THIS QUESTION.

You have recently been appointed as an audit manager at Best Price Practice Inc. (Best Price), a firm
of registered auditors. You were assigned to manage the audit of TechWise Services Ltd (TechWise)
for the financial year ending 30 June 2019. Best Price has been the registered auditors of TechWise
and its subsidiaries since 2014.

TechWise owns a number of companies in the information technology (IT) industry and is listed on the
Johannesburg Stock Exchange Limited (JSE) since 2011. All the companies in the group have
adopted the International Financial Reporting Standards as their financial reporting framework. The
Board of TechWise intends presenting the 2019 annual financial statements (both stand-alone and
consolidated) to its shareholders on 23 July 2019.

Information relating to the audit of TechWise

Upon auditing TechWise’s sales, you found that components were sold to InstantFix (Pty) Ltd
(InstantFix), a regular client of TechWise, to the value of R1 500 000 during February 2019. The
related invoice was not a printed invoice, but was written in the handwriting of Sam Technology, the
operations director of TechWise. Upon enquiry, Sam Technology indicated that they had a power
failure during the time the sale took place and that the handwritten invoice was mistakenly not
reversed. He further indicated that the invoice had since been replaced with a computer-generated
invoice. This however did not appear to be the case. The matter was discussed with Pierce Proud, the
audit partner. He then requested that InstantFix be included in the debtor circulation of TechWise. The
outcome was that the amount was paid in full, but both the sale and the receipt related to the invoice
in question did not reflect in the accounting records of TechWise. Upon further investigation it was
found that the bank account details on the handwritten invoice was not that of TechWise, but rather
that of Sam Technology. The partner discussed the matter with Sam Technology, who indicated that
he established TechWise and that he has a significant shareholding, so he could do as he wishes.

The following working paper is available for your perusal:

Working paper Reference number

Understanding of the group and its governance structures U100

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Company name: TechWise Services Ltd Year end: 30 June 2019

U100
Prepared by: A Leader Date: 2 July 2019
1 of 2
Reviewed by: Date:
Audit section: Understanding of the group and its governance
structures
The group structure of TechWise is as follows:

TechWise owns shares in:

• Microsoft Ltd – develops, manufactures, licenses, supports and sells computer software,
consumer electronics, personal computers and related services to a wide variety of IT
suppliers.

• Dell SA (Pty) Ltd – provides technology solutions, services and support to a wide spectrum of
clients.

• Custom Software Development (Pty) Ltd – develops custom made software for medium to
large companies according to clients’ needs.

• Components (Pty) Ltd – one of the largest suppliers of IT components on the continent of
Africa (acquired during the 2019 financial year).

Governance structures

TechWise’s Memorandum of Incorporation contains, amongst other, the following provisions:

• any investor with a shareholding in excess of 25% of the ordinary shares in issue is entitled to
appoint one director of the Board; and

• the chair of the Board is to be rotated annually to ensure that all directors have a turn in the
interest of fairness and equality.

The Board of TechWise is comprised as follows:

Executive directors Non-executive directors

Leonard Numbers CA(SA), financial Mike da Costa, independent chairman of the Board
director
Sam Technology, operations director Ruth Share (appointed by Dell SA (Pty) Ltd by virtue
of them holding 30% of TechWise’s issued shares)

TechWise’s Memorandum of Incorporation includes the following provisions:

• Any investor with a shareholding in excess of 25% of the ordinary shares in issue is entitled to
appoint one director on the board; and

• The Chair of the Board is to be rotated on an annual basis to ensure that all the directors have
a turn in the interest of fairness and equality.

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Company name: TechWise Services Ltd Year end: 30 June 2019

U100
Prepared by: A Leader Date: 2 July 2019
1 of 2
Reviewed by: Date:
Audit section: Understanding of the group and its governance structures
Linda Persist, an independent non-executive director, was removed by the Board in April 2019, due
to her strong objection against the investment in Components (Pty) Ltd. She was of the opinion that
the cash invested could have been utilised more efficiently. She reiterated it on every occasion where
matters relating to Components (Pty) Ltd were discussed. An amount of R300 000, which was
approved by the Board, was included in the draft financial statements under “other current liabilities”
to account for the amount that was still due to Linda Persist in terms of her contract with TechWise.
She still had to render five months of services to fulfil her commitment with TechWise.

Zakaria Process, who is responsible for the day to day management of TechWise, is effectively
TechWise’s operational director, but he indicated that he does not want to be burdened with the
directors’ duties as prescribed in terms of the Companies Act, 71 of 2008. He indicated that he
already has too much on his plate to be concerned with something like this and preferred that they
rather refer to him as a “Team Leader”. Irrespective of the fact that Zakaria Process attends all the
board meetings, he has no voting rights, as he is not officially appointed as a director.

The Board personally handles the process of nominating directors for possible appointment. This is
irrespective of the fact that TechWise has committees such as an audit, remuneration, risk and social
and ethics committee to deal with all the related matters. TechWise has an effective internal audit
department, which is also responsible for the internal audit function of the subsidiary companies.

Additional information relating to the audit firm

Best Price commenced as a very small firm. Strategic mergers and organic growth increased its
market share significantly. Best Price provides audit, tax and advisory services to clients within the
public and private sectors in South Africa. Best Price was previously known as Price and Partners Inc,
but the name was changed in November 2018 to Best Price Practice Inc. as part of their marketing
strategy. Best Price’s head office is situated in Johannesburg.

Best Price decided to afford its’ trainee accountants the opportunity to provide input on how to
increase its’ client base. The trainee accountant who provides the best ethically sound proposal will
receive a price of R5 000. Innocent Phase, one of the first-year trainee accountants, who is very vocal
about his career aspirations, submitted the following proposal:

Innocent Phase proposed that Best Price approach one of their existing audit clients, TechWise, who
provides domain registration and website maintenance services to a large number of private
individuals and businesses to assist with their marketing campaign. Innocent was assigned to audit the
automated controls of TechWise and noted that the company sends out automated emails monthly to
its’ numerous website customers with information on their website traffic (e.g. number of visits to the
customers’ website, bandwidth usage). Based on this observation:

1. Innocent indicated that he would ask his sister, Lindi, the IT manager of TechWise, whether it
would be possible to send a separate monthly marketing email from Best Price to all
TechWise’s customers using this bulk email facility. Lindi indicated that it would be possible,
should TechWise’s management agree to it. Innocent suggested further that Best Price pay a
nominal fee to TechWise for the use of its’ bulk e-mail facility.

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2. The marketing email would contain Best Price’s logo and provide a list of some of the services
offered by the firm.

3. Innocent further suggested that the email should contain a hyperlink to an online game on
Best Price’s website to attract more visitors to their website. This game would require players
to scan through a dummy set of financial information on which they would have to search for
obvious errors and “fraud”. A congratulatory message would be displayed when the player is
successful, accompanied with the following words:

“Contact Best Price Practice Inc. today so that we can act as your auditors and clean up YOUR
financial records from any errors and fraud!”

YOU NOW HAVE 60 MINUTES TO ANSWER THIS QUESTION.

REQUIRED Marks
(a) With reference to the information relating to the audit of TechWise:

Discuss whether Pierce Proud has a reporting responsibility with regards to the
unaccounted sales and receipts in terms of the Auditing Profession Act, 26 of 2005 for
the year ended 30 June 2019. 10

Note: Exclude any reporting requirements from your answer.

(b) With reference to working paper U100:

Based on the information provided, identify and discuss any corporate governance and
other statutory concerns for the year ended 30 June 2019. 15

Communication skills: clarity of expression and logical argument 1

(c) With reference to the additional information relating to the audit firm:

Discuss the concerns that you have with the proposal made by Innocent Phase to
increase Best Price’s client base in terms of the SAICA Code of Professional Conduct
(revised in 2018). Make appropriate references to safeguards addressing threats to the
fundamental principles, where applicable. 14
Total 40

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QUESTION 5 40 marks

YOU HAVE 12 MINUTES TO READ THIS QUESTION.

You are an audit manager at Auditors in Style Incorporated (AiS), a large auditing firm with offices in
all the major cities in South Africa as well as a few international offices. AiS has 50 audit partners that
are involved in various audits all over the world. AiS was appointed as the auditors of
Broad Based Investments Limited (Broad Based Investments) since their incorporation in 2000.
Broad Based Investments has a 31 December yearend. You commenced with the audit of
Broad Based Investments for the year ended 31 December 2017 on 16 January 2018.

BACKGROUND INFORMATION

Broad Based Investments is listed on the Johannesburg Stock Exchange (JSE) and was founded in
1994 by its executive directors, who are material shareholders of the company. Investo King is the
Chief Executive Officer of Broad Based Investments and he is also one of its founders. This ensures
alignment of the shareholders’ and executive management’s interests. Broad Based Investments is
one of the leading investment companies in South Africa, who holds investments in various companies
and provide clients with the best possible investment advice. They also manage their clients’
investment portfolios on their behalf.

Broad Based Investments has offices all over South Africa as well as in the Cayman Islands, with their
head office being situated in Sandton. As part of their investment structure, they also own additional
commercial buildings, which is leased to external parties. Broad Based Investments has two
subsidiaries, ExtraMile Investments Ltd (ExtraMile Investments) and Turn Money into Gold Limited
(TMIG), in which they keep 75% and 85% shareholding respectively. ExtraMile Investments is also
audited by AiS, but TMIG is audited by MRS Auditors, a medium sized auditing firm.

Broad Based Investments, through ExtraMile Investments acts as asset managers for some of the
leading Retirement Funds Administrators assisting them to structure their Retirement Funds’ portfolios
in such a way that it is in compliance with the legislation and simultaneously ensuring that their
members get the optimal investment returns.

ADDITIONAL INFORMATION

Matter 1

Early in February 2018, there was a press release relating to AiS being possibly involved in irregular
practices of which the allegations were under investigation. The chairperson of
Broad Based Investments’ audit committee, Brilliant Campbell proposed that AiS should be discharged
with immediate effect and that new external auditors should be appointed, as they are not willing to put
their reputation on the line. He made reference to two auditing firms, PriceWise Auditors Incorporated
and Design-a-Tick Auditors Incorporated, which should be considered by the audit committee as a
replacement for AiS. He based his suggestions on his past professional experiences and relationships
that he had with these two auditing firms. Mr Campbell indicated that the directors would approve the
appointment of the new auditors at the next board meeting. The board requested Mr Campbell to
highlight all the factors that should be considered prior to replacing their auditors, since it is such a
contentious issue with AiS being under investigation.

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The following information relating to the two auditing firms (see below), which was proposed by
Mr Campbell was circulated to all the members of the audit committee for their consideration, together
with the agenda for the special audit committee meeting.

Audit firm 1: PriceWise Auditors Incorporated (PriceWise)

PriceWise is a firm with four audit partners and 12 audit clerks. One of the audit partners is Joe
Money, the husband of Lynn Money CA(SA), the financial director of Broad Based Investments. The
engagement partner on this audit will be Alli Baker CA (SA), Registered Auditor (RA), who has been
an audit partner at PriceWise for the last 10 years. Up to this point in time PriceWise was assisting
Broad Based Investments with all their tax related calculations (income taxation, deferred taxation,
VAT, dividend tax etc.), as well as the compilation of their financial statements. They also handle all
the directors’ private tax matters and has become very good friends with the directors over the years.

This audit would contribute towards a great financial benefit for PriceWise, as it would constitute at
least 55% of their total fee income. The income generated from being involved in Broad Based
Investments’ tax calculations as well as the compilation of their financial statements represents about
15% of the firm’s total income.

Audit firm 2: Design-a-Tick Auditors Incorporated (Design-a-Tick)

Design-a-Tick is a big auditing firm with offices in all the major cities in South Africa and international.
In order to promote their services, Design-a-Tick requested Mr Campbell to do a presentation at the
next audit committee meeting which was scheduled for 14 February 2018. This was the meeting
where the replacement of the auditors would be discussed. Design-a-Tick further requested that the
audit committee meeting be held at a luxury spa seeing that it is Valentine’s Day, where the managing
partner, Nancy Field presented each of the members with a top of the range tablet at the
commencement of the meeting. The presentation was pre-loaded on each of these tablets, and they
just had to press “start” for the presentation to commence. After the presentation, all members
received a nice and relaxing neck massage and was treated thereafter in the spa for the remainder of
the day. The members of the audit committee were also allowed to keep the tablets as a token of
appreciation for availing Design-a-Tick the opportunity to market their services to such a leader in the
market.

Lynn Money was one of the audit partners at Design-a-Tick until 31 December 2016 and decided to
make a career change by accepting the appointment as Broad-Based Investments’ financial director
from 1 January 2017.

Matter 2

Based on the outcome of the appointment of the new auditors, Lynn Money, will request the new
auditors to also take up the audit of TMIG in order to improve the efficiency of the group audit. In order
for the new auditors to make a decision whether they would like to tender for the audit of TMIG for the
year ended 31 December 2017, the following information (see Annexure A) was gathered:

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ANNEXURE A: INFORMATION RELATING TO THE UNDERSTANDING OF TMIG FOR THE YEAR

ENDED 31 DECEMBER 2017

1. Background information

TMIG was initially started by Shawn Goldman in 2007, as a small company that provides
investment advice for the average individual, managing their investment portfolios. TMIG has
experienced significant growth since 2015 when they became a subsidiary of
Broad Based Investments. TMIG’s revenue increased by 40% over the previous two financial
years.

2. Board of directors

TMIG’s board of directors are made up as follow:

Name of director Position at TMIG

Shawn Goldman Chief Executive Officer (CEO)
Tracy Foot (Note 1) Chief Financial Officer (CFO)
Grant Loon Chief Operations Officer (COO)
Wade Finance Independent chairperson of the board – appointed by the board of
directors
Mark Word (Note 2) Chief Marketing Officer (CMO) – appointed by the board of directors

Note 1: Tracy Foot was appointed as CFO during the current year by Shawn Goldman. Her
appointment was aimed at improving the financial performance of TMIG and to gather additional
capital in the form of shareholder loans. As a result of a court case that was instituted against
her by her previous employer, she had limited involvement into the business affairs of TMIG for
the last four months of the 2017 financial year. She was previously the financial director of
Dress for Success (Pty) Ltd (Dress for Success). The allegations against her is that she
provided a loan of R20 million to prevent Dress for Success from closing their doors and leaving
hundreds of factory workers without a job. One month before she left her employment at Dress
for Success, her loan was allegedly repaid to her with approximately 100% interest, while the
salaries of the factory workers remained unpaid. Upon discovery thereof by TMIG, she was
immediately suspended pending the outcome of these allegations. She is currently contesting
these claims and contends that these claims are without substance.

Note 2: The revenue of TMIG increased even a further 30% during the 2017 financial year and
they are expecting to show a profit for the first time since their incorporation. The increase in the
revenue is mainly attributable to a new contract that was entered into between TMIG and
Best Returns Ever (Pty) Ltd (Best Returns Ever). In terms of the contract, TMIG is the sole
provider of a new investment product, Tip-of-the-Iceberg, which avails low-to-medium value
clients the opportunity to also enter the investment market. Shawn Goldman was surprised
when he discovered that Mark Word was able to negotiate such a significant contract with such
a big company especially in the investment industry where the competition is very stringent.
Shawn Goldman praised Mark Word when he informed the board about the new contract that
was concluded for TMIG. However, when Shawn Goldman worked through the contract to make
sure that they comply with all the terms and conditions of the contract he discovered that
Mark Word signed the contract as a representative and director of Best Returns Ever.

General: No background checks were done on any of the directors that were employed at
TMIG.

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Matter 3

The directors of Broad Based Investments awarded a contract to Reliance-Networks (Pty) Ltd
(Reliance) on 1 April 2017 to upgrade and maintain their information technology (IT) systems as well
as to increase the security-levels of their networks. This was done to address the high volume of
complaints that were received from some of their clients in this regard. Some of these claims are
severe as some of the clients threatened to institute legal claims against Broad Based Investments. If
their concerns are not dealt with, they would move their investments to a more secure environment.

Broad Based Investments’ network expanded significantly over the years and it also contains sensitive
and financial information of all their investors. An upgrade of their IT systems and an increase in the
security-levels is therefore deemed necessary otherwise, they would lose of a lot of their clients in the
future as a result of these shortcomings. Chaira King, (Investo King’s wife) is a shareholder and the
managing director of Reliance. This is also a big financial breakthrough for Reliance as it would be the
first time that they would be responsible for the security of such a big website. They however do not
have the necessary finances and would need quite a substantial amount of capital in advance.
Broad Based Investments agreed to provide some of their office buildings as surety to enable
Reliance to obtain the required funding from Worldwide Bank, as they needed to upgrade their IT
systems as a matter of urgency.

YOU NOW HAVE 60 MINUTES TO ANSWER THIS QUESTION.

REQUIRED Marks
1. With reference to matter 1:

(a) Discuss with reference to the SAICA Code of Professional Conduct (CPC), the
ethical conduct issues that might arise with regard to the two proposed auditing
firms. 10

(b) Identify and discuss all the factors that Brilliant Campbell should present to the
board in relation to the dismissal of Auditors in Style Incorporated and the
appointment of the new auditors in terms of the Companies Act, 71 of 2008. 9

Communication skills: clarity of expression 1

2. With reference to matter 2:

Identify and discuss any non-compliance with the Companies Act, 71 of 2008 and the
King IV Code on Corporate Governance, which is evident from the information in
Annexure A with regard to the board of directors of TMIG. 10
3. With reference to matter 3:

Formulate the substantive audit procedures that you need to perform in order to
obtain sufficient and appropriate audit evidence with regard to the legality of the
Reliance-Networks (Pty) Ltd contract in terms of the Companies Act, 71 of 2008. 9

Communication skills: clarity of expression 1

TOTAL 40

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SELF-ASSESSMENT SOLUTIONS

QUESTION 1

Part a Marks

With reference to the change of audit partners:

Discuss your concerns and possible safeguards in terms of SAICA Code of

Professional Conduct.
SAICA CoPC
Kevin Kline is a chartered accountant and should therefore comply with the SAICA
Code of Professional Conduct (Part 1,3 and 4). 1
Danko Farming is a listed company and therefore is regarded as a public listed entity. 1
Employment with an audit client
1 Kevin Kline has moved from Noord to being the CFO of Danko Farming (client), 1
And had a long association with the client, 1
this creates a familiarity and/or intimidation threats to independence (objectivity). 1
1.1 This is created because Kevin Kline was the engagement partner of Noord and 1
appears that he still wants to be involved in the audit:
1.2 • Kevin indicated that he is always available to assist should any further assistance 1
be needed regarding the audit team members. (any other valid example given by
1.3 student) 1
• Kevin further indicates to the new audit partner that the audit risk register is
1.4 complete and no additional risks need to added 1
In terms of R524.6 an individual who was a key audit partner of a public interest entity
1.5 and who joins the client as an officer compromises independence. 1
Kevin Kline is now the CFO of the audit client, Danko Farming, and a significant
1.6 connection still exists 1
Furthermore, the entire audit team is the same as the prior year audit when Kevin Kline
1.7 was the engagement auditor therefore the: 1
1.8 threat to independence (objectivity) is significant as independence is compromised.
1.8a The appropriate safeguards to reduce the threat to an acceptable level would be to: 1
1.8b • Modify the audit plan. 1
• Assigning to the audit team individuals who have sufficient experience relative to 1
1.8c the individual who has joined the client
• Having an appropriate reviewer review the work of Kevin Kline
Custody of client assets
2 Due to the fact that Noord is keeping monies on behalf of Danko Farming, there is self-
interest threats to both objectivity and professional behaviour. 2
2.1 Keeping the monies of client can affect the professional judgement of the auditors,
especially if no appropriate measures have been taken. 1
2.2 In terms of R350.9 SA a professional account shall not accept custody of an audit
client’s assets unless the threat to independence can be eliminated 1
2.3 Although the monies are kept in a separate account and is separate from Noord, the
threat is still significant. 1
2.4 It is further suspicious that there is no timeline to when the monies will be utilised/paid
back to Danko Farming 1

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Marks
2.5 The appropriate safeguards to reduce the threat to an acceptable level would be to:
Repay the monies to Danko Farming and to not keep any other monies on their behalf. 1
Contingent Fees
3 Due to the fact that the XYZ will be getting an additional fee based on the audit
outcome, there is a self-interest threat to independence (objectivity). 2
3.1 The firm has an additional financial interest in issuing an unqualified audit report and
this might impair the auditor’s judgement. 1
3.2 Although 2.5% might appear to be remote/insignificant 1
The threat is significant as this is an audit/assurance engagement 1
3.3 In terms of R410.10 a firm shall not charge directly a contingent fee for an audit
engagement 1
3.4 The only appropriate safeguard is to refuse the contingent remuneration 1
Or the threat is too significant and there are no possible safeguards that could remedy
the acceptance of the contingent fee.
Guaranteed appointment
4. Due to the fact that Noord are being assured by one of the directors that they will
remain the auditors, there is a self-interest and intimidation threat to independence
(objectivity) and professional behaviour. 2
4.1 This can also be viewed as inducement by the client as Danko Farming is giving a
guaranteed appointment to incite loyalty with the engagement partner. 1
4.2 Auditors are not supposed to have assurance that they will be re-appointed as they are
supposed to be reappointed in terms of the Companies Act requirements. 1
4.3 This comment ‘keep up the good work’ including the contingent fees arrangement,
independence is under threat. 1
4.4 The threat is significant as the independence of the engagement partner and that of the
4.5 firm. 1
4.6 The appropriate safeguard would be to:
4.7 • Communicate this those charged with governance at Danko Farming 1
• Appointing an objective external reviewer for the audit 1
• Resigning from the audit/decline the inducement 1
5. Based on the above points, Noord should consider if they are still independent in mind
and appearance and should their independence be under significant threat. 1
Noord should therefore consider terminating their assurance relationship with Danko
Farming. 1
Communication: clarity of expression 1
Available 40
Maximum 30

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Part b (1) Marks

With reference to the governance structure:

Discuss any corporate governance concerns that you may have in terms of the King IV
Report on Corporate Governance and Companies Act 71 of 2008.
KING
1
1.1 In terms of principle 7, recommended practice 9, the governing body should comprise
as a minimum the chief executive officer and at least one other executive should be
appointed to the governing body.
1.2 Danko Farming currently only has Ben Diora (CEO) as part of the governing body as 1
an executive director.
1.3 In terms of principle 7 recommended practice 31, the governing body should elect an
independent non-executive member as chair to lead the governing body.
1.4 All the chairpersons of the different committees has been named but no mention of the
chairperson of the governing body. This brings into question if the governing has an
elected chairperson of the governing body. 1
1.5 In terms of principle 7 recommended principle 32, the governing body should appoint
an independent non-executive member as lead independent to serve as a sounding
board for the chair.
1.6 No mention is made about a lead independent non-executive member being appointed 1
as Danko Farming does not have a chair for the governing body.
2 Appointment of director
2.1 In terms of principle 7, recommended practice 14 the nomination of candidates for
election as members of the governing body should be approved by the governing
body.
2.2 The vacancy on the board will be appointed solely by John Kraga and not the entire
governing body. 1
It is further highlighted that John Kraga’s choice will be final. 1
2.3 In terms of principle 7 recommended practice 15, the process for nomination, election
and ultimately, the appointment of the members of the governing body should be
formal and transparent.
2.4 As John Kraga in the one who is making the appointment, it is unlikely that the
process will be formal and transparent. 1

The fact that John Kraga will host private interviews with all the candidates also
emphasise the fact that the process is not formal and transparent. 1

As the appointment will be made in 2 weeks, which further suggests that the process
might not be formal and transparent as it would require more time to complete the 1
appointment process.
2.5 In terms of principle 7 recommended practice 18, a candidate for election as a non-
executive member of the board should be requested to provide the governing body
with details of professional commitments and a statement that confirms that the
candidate has sufficient time.

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Marks
2.6 It was noted that no other processes were performed, it is therefore doubtful that
Tshepo and Thulas supplied the required details 1
2.7 In terms of principle 8 recommended principle 60, the governing body should allocate
oversight to the nominations committee to manage the process of nominating,
electing and appointing members of the governing body.
2.8 Based on the fact that the nomination, electing and appointing of the director for the
vacancy was the sole responsibility of John Kraga, it is questionable if the
responsibility in substance is discharged by the nominations committee. 1\

This is further strengthened by the fact that Tom Hiller is the chairperson of the 1
nominations committee but he is not involved in the process of appointing the new
director.
Companies Act
3.1 In terms of section 71, despite anything in the MOI agreement, a director may be
removed by an ordinary resolution adopted at a shareholders meeting:
Before the shareholders of a company may consider a resolution:
• The director must be given notice of the meeting and resolution
• Afforded an opportunity to make a representation
3.2 Given the fact that the director was fired by John Kraga and no other procedures
were followed upon the firing of the director by John Kraga, 1
it is doubtful that a meeting was held for the resolution and that the director was
afforded an opportunity to make a representation. 1
3.3 In terms of section 70, a person ceases to be a director and a vacancy arises on the
board of the company if a person is removed by a resolution of the shareholders and
a company must file a notice within 10 business days after a person becomes or
ceases to be a director of the company.
3.4 The director was fired by John Kraga and no resolution of the directors is mentioned 1
to have taken place.
3.5 Danko Farming further did not file a notice as it was stated that no other procedures 1
were followed upon the firing of the director.
3.6 It therefore appears that there is no vacancy on the board. 1
4.1 In terms of section 77 a director may be held liable as result of a breach of the
director OR
In terms of section 76 the director must act in the best interest of the company
4.2 John Kraga fired the director without following the proper procedures and this could
lead to Danko Farming getting sued. 1
4.3 John Kraga can further be held liable for firing the director as the process he followed 1
was in contravention with the Companies Act.
Available 18
Maximum 13

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Part b (2) Marks

With reference to the governance structure:

In terms of the candidates under consideration for the director’s vacancy, discuss and
recommend whether the candidate should be appointed and if it would be in
compliance with King IV Report on Corporate Governance.
1 KING
1.1 In terms of principle 7 recommended principle 16 before nominating a candidate for
election, the governing body should consider the following:
• The collective knowledge, skills and experience required by the governing body
• The diversity of the governing body
• Whether the candidate meets the appropriate fit and proper criteria
1.2 Looking at the qualifications/experience:

Kevin Kline is a qualified CA(SA) with over 10 years’ experience of auditing listed
companies
1.3.1 • He will bring in his good financial background to Danko Framing. 1
1.3.2 • Danko Farming is a listed company and Kevin Kline experience would come in
handy on the board to assist with various issues 1

Tshepo Geans has a LLB degree with over 20 years’ experience in estate planning:
1.4.1 • His law degree might assist Danko Farming the with compliance issues 1
1.4.2 • It is however noted that his experience is in estate planning and Danko Farming
is in the agricultural industry which requires very little (if any) estate planning 1
considerations.

Thulas Indi is a registered engineer with over 3 years in the construction industry
1.5.1 • The engineering degree might come in handy when developing/evaluating
agricultural projects (science projects) 1
1.5.2 • He however only has 3 years’ experience which is quite low and would require
significant mentorship 1

1.6 Considering the fact that the governing body consists of only 6 directors of which five
(5) out of the six (6) directors are non-executive directors: 1

1.7 The governing body needs to appoint an executive director to assist Danko Faring to
ensure that they have more than one point of interaction with management. 1

1.8 Based on the above Kevin Kline would be a good candidate to appoint as he is the
only candidate under consideration who is an executive position. 1

1.9 Tshepo Geans and Thulas Indi will not assist Danko Farming the with achieving the
appropriate mix of executive management. 1
1.10 Based on the above considerations,
Kevin Kline should be appointed as a director of the governing body as he will 1
• Assist Danko Farming have more executive management involvement in the
governing body 1
• He also has the most appropriate qualification and experience to ensure that
governing body is sufficiently resourced. 1
Total 13
Maximum 8
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Part c

Assume that the VAT implication for the Cleaning Services (Pty) Ltd contract was not
recorded by Cleaning Services (Pty) Ltd to avoid payment obligations to SARS.
Compile a Compliance Checklist that will be used by the Cleaning Services (Pty) Ltd
engagement auditor to ensure compliance with Section 45 of Audit Professional Act
no.26 of 2005.
Compliance Checklist Marks
No. Section 45 Yes/No
1. Is the non-recording of the VAT implications on the Cleaning Services (Pty) 1
Ltd contract an unlawful act or an unlawful omission?
2. Was this act of non-recording of the VAT implications committed by Cleaning 1
Services (Pty)’s management?
3. Does the non-recording of the VAT implications on the Cleaning Services 1
(Pty) Ltd contract cause or is it likely to cause a material financial loss?
4. Does the non-recording of the VAT implications on the Cleaning Services 1
(Pty) Ltd contract result in fraud or does it amount to theft?
5. Does the the non-recording of the VAT implications on the Cleaning Services 1
(Pty) Ltd contract represent a material breach of fiduciary duty?
6. A reportable irregularity exists if:
• Points no.1-2 are yes and
• One of the points for point no.3-5 is yes. 1

Any other case, a reportable irregularity does not exist 1

7. The following should be adhered to when a Reportable Irregularity exists:
8. Was the written report for the reportable irregularity sent, without delay, to 1
IRBA?
9. Were Cleaning Services (Pty)’s board of directors notified in writing within 1
three days of sending the report to IRBA?
10. Did the notice to Cleaning Services (Pty)’s board of directors include a copy 1
of the report that was sent to IRBA?
11. Within 30 days of having sent the report to IRBA:
12. Did the engagement partner discuss the report with Cleaning Services (Pty)’s 1
board of directors?
13. Did engagement partner afford Cleaning Services (Pty)’s board of directors 1
an opportunity to make representations?
14. Has engagement partner sent another report to IRBA, 1
• informing if no reportable irregularity is taking place or has taken place;
or
• the suspected reportable irregularity is no longer taking place, or
• if the reportable is continuing?
Communication skills: layout and logical argument 1
Available 14
Maximum 9

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QUESTION 2

(a) With reference to the SAICA Code of Professional conduct, identify and discuss any
concerns that you may have and suggest appropriate safeguards regarding the
professional conduct of Thabo Mahlangu (CA)SA.

Marks
1 Thabo has been the audit partner for the last eight years. According to s92 of the
Companies Act, the designated auditor must be rotated after serving as auditor for five 1
consecutive years.
• This is a threat to Thabo’s objectivity because of his close relationship with the 1
Chief Financial Officer, and long association with the client.
• It is a familiarity threat that affects Thabo’s objectivity as the auditpartner. 1
• This is significant as Thabo’s long association with the client and relationship
may cause him to overlook certain issues. 1
• The auditor partner should be rotated (safeguard). 1

2 Thabo and his family and the family of Naiema Kalam go on holiday together
which indicates a relationship outside of the business environment: 1
• This is a familiarity threat that affects Thabo’s objectivity as the audit partner as
he might compromise her professional judgement because ofbias. 1
• This is significant as Naiema Kalam is the Chief Financial Officer and thus
involved in the preparation of the financial statements. 1
• Thabo should not perform the audit and he should be removed from the audit
(safeguard). 1
3 There is a request to drastically reduce audit fees: 1
• This may be seen as an intimidation threat to 1
objectivity and as a result affect Thabo’s objectivity. 1
• Professional competence and due care is also threatened if the fee quoted is
so low that it may be difficult to perform the engagement in accordance with
applicable technical and professional standards for that price. 1
• The threat is significant as it impacts what work is necessary to obtain adequate
audit evidence during the audit. 1
• The request to drastically reduce the audit fee must be turned down
(safeguard). 1
4 Propco is a significant client of Auditco. 1
• There is a self-interest threat to objectivity 1
• The threat is significant as the fees from the audit client represent a large 1
proportion of the total fees of Auditco.
• A safeguard is to reduce the reliance of Auditco on the fees of Propco. 1
Available 20
Maximum 14

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(b) Identify and discuss in detail the statutory (except for matters relating to business
rescue), corporate governance and ethical concerns relating to Propco (Pty) Ltd and its
auditors for the year ended 30 June 2021. Limit your answer to the requirements of the
following:

(a) Companies Act

Shares issued to the Community Trust

In terms of Section 37 (2), every share, irrespective of its class, has associated with it
one voting right, subject to the provisions of the Companies Act and the
Memorandum of Incorporation (MOI) (1)

Shares issued to the Community Trust have no voting rights, this is contravention of the
Companies Act. (1)

Financial assistance for purchase of shares

Section 44 provides that to the extent that the MOI of a company does not provide
otherwise, and any conditions or restrictions respecting the granting of financial
assistance set out in the company’s MOI have been satisfied; (1)

The board may authorise Propco to provide financial assistance by way of a loan to any
person (which will include the Community Trust), for the purpose of the purchase of any
securities of the company, subject to the following requirements: (1)

• the board may not authorise any financial assistance, unless the particular
provision of financial assistance is pursuant to a special resolution of the
shareholders, (1)

• adopted within the previous two years, and which relates to the specific recipient,
or generally for a category of potential recipients, and the recipient falls within that
category; and (1)

• the board is satisfied that immediately after providing the assistance, the company
would satisfy the solvency and liquidity test; and (1)

• the terms under which the assistance is proposed to be given are fair and
reasonable to the company. (1)

Peter Muloto proposed that a resolution be adopted to ratify the decision - the
requirement that a special resolution is adopted within the previous two financial years
has not been adhered to. (1)

Propco will satisfy the solvency requirements after providing the assistance considering
all reasonably foreseeable financial circumstances of the company, as the assets of the
company fairly valued, exceed the liabilities of the company fairly valued (solvency ratio
of 1.8). (1)

Propco is however, not liquid, since its current liabilities exceed its current assets and
might therefore not be able to pay its liabilities as they become due, in the ordinary
course of its business (Liquidity ratio of 0.6). (1)

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Based on the information, the financial assistance provided is illegal; since it does not
meet the liquidity requirement and a special resolution/board resolution were not
obtained, thereby constituting a breach of section 44 of the Companies Act, 2008, as
amended. (1)

Directors could be held liable in terms of section 77 as a result of the non-compliance

with section 44. (1)

Reckless trading

Section 29 requires that the company’s financial statements fairly present the state of
affairs and business of the company etc. (1)

In terms of Section 22 a company must not carry on business recklessly, with gross
negligence, with intent to defraud any person or for any fraudulent purposes. (1)

The directors of Propco traded recklessly as Naiema Kalam’s statement indicates that the
company’s financial records were misstated in order to mislead financiers. (1)

The lease agreement does not seem to be in the best interest of the company as Propco
was being overcharged by Shapiro Properties. (1)

Propco ’s current assets do not exceed current liabilities. Thus, the company is not liquid.
This amounts to trading recklessly as per Section 22. (1)

Directors’ fiduciary duty and liability

In terms of section 77 the directors of Propco may be held liable because - (1)
they did not act in the best interest of Propco (section 76) by trading recklessly. (1)

Audit Partner Rotation

The auditor has not been rotated for five years, which is in contravention of Section 92
of the Companies Act - (1)

which states that the audit partner may not be the auditor for more than five
consecutive years. (1)

Director’s personal interests in contracts

It appears that the executive chairman did not disclose his financial interests in ABC
Solutions. (1)

This is direct financial interest since he owns shares in ABC Solutions. (1)

Failure to declare their financial interest in the contract amounts to contravention of the
Section 75 of the Companies Act. (1)

According to Section 75 of the Companies Act,

the executive chairman should have disclosed his interest in the contract and not
participate in the decision relating to the contract. (1)

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It appears that Steve Shapiro did not excuse himself from the meeting when the revised
rental was voted on. (1)

This is contravention of Section 75 of the companies Act which states that the director
with financial interest must leave the meeting immediately after making any
disclosure and must not take part in the consideration of the matter. (1)
Available 28

(b) King IV

Ethical leadership

The Board should lead ethically and effectively (principle 1). (1)

It appears that this not the case at Propco as the board is maintaining inaccurate financial
records to mislead the financiers, as well as various other instances of non-compliance
with the Companies Act. (1)

The Board should act in good faith and in the best interest of the company (principle 1,
recommended practice 1(a)(i)). (1)

Members of the governing body should avoid conflicts of interest (principle 1,

recommended practice 1(a)(ii)) (1)

Conflicts of interest arising from Steve Shapiro’s company and Peter Muloto’s interest in
ABC Solutions do not appear to be compliant with this principle. (1)

Composition of the Board

The board should comprise a majority of non-executive directors. The majority of non-
executive directors should be independent (principle 7, recommended practice 8). (1)

The King Code defines an independent non-executive director as a director who:

• is not a significant provider of financial capital, or ongoing funding to the

organisation, or is an officer, an employee or a representative of such provider of
financial capital or funding (principle 7, recommended practice 28(a)); (1)

• does not receive remuneration contingent upon the performance of the company. (1)

It would appear that Steve Shapiro does not qualify as an independent non-executive
director as he is Propco’s landlord receiving rent based on the revenue of the company.
This may interfere with his capacity to be independent. (1)

Dr David Smith and Mr Jimmy Hendricks do not qualify as independent as well as they
are representatives of shareholders who have the ability to significantly influence
management. (1)

It thus appears that only one of the seven board members are independent non-
executive directors. (1)

The board should elect a chairman of the board who is an independent non-executive
director. The CEO of the company should not also fulfil the role of chairman of the board
(principle 2.16). (1)

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Mr Muloto acts as the CEO and chairman and is also not independent due to his 20%
shareholding in the company. (1)

Where the guidelines in the principle are not applied, a lead independent director should
be appointed, and disclosure provided in the integrated report. (1)

Compliance with laws and regulations

The board should ensure that the company complies with applicable laws and considers
adherence to nonbinding rules, codes and standards (principle 13). (1)

There are various instances of non-compliance (Co Act) which would suggest that the
principle above is not adhered to. (1)
Communication skills: logical argument (1)
Available 19
Maximum 21

(c) With reference to working paper A100, draft a memorandum to the directors of Propco
discussing if the non-disclosure of income constitutes taxation evasion in terms of the
Income Tax Act.

To: The directors of Propco (Pty) Ltd

From:
Date: 27 July 2021
Subject: Tax evasion in terms of the Income Tax Act.

Tax evasion refers to illegal activities deliberately (wilfully) undertaken by a taxpayer to free himself
from a tax burden. An example is the non-payment of a tax that would be chargeable if the taxpayer
made a full disclosure of income and allowable deductions. (1)

Tax evasion is usually characterised by fraud and deceit. (1)

Tax avoidance means a situation in which a taxpayer has arranged his affairs in a legal or lawful
manner with the result that he has either reduced his income or has no income on which tax is
payable (1)

SARS incorporate specific impermissible tax arrangement into the Act. (1)

Section 80L of the Income Tac Act defines the term “impermissible avoidance arrangement” by
referring to tis meaning described in section 80A. (1)

The requirements of an “impermissible avoidance arrangement” in the context of business in terms of

section 80A are:
• that the sole or main purpose is to obtain a tax benefit and (1)
• the avoidance arrangement was entered into or carried out by means or in a manner which
would not normally be employed for bona fide business purpose, other than obtaining a tax
benefit, or … [(ii) – but excluded from syllabus]. (1)

Section 80G creates a presumption of purpose with regard to the sole or main purpose – an
avoidance arrangement is presumed to have been entered into or carried out for the sole or main
purpose of obtaining a tax benefit, unless and until the party obtaining a tax benefit proves that,
reasonable considered in light of the relevant facts and circumstance, obtaining tax benefit was not
the sole or main purpose of the avoidance arrangement. (1)
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Therefore, it is wrong to believe that the onus (burden) of proof is on the Commissioner, because the
onus (burden) is on the taxpayer. (1)

Based on the discussion as highlighted above, I would conclude that non recording of income
constitutes tax evasion. (1)
Communication skills – memo format (1)
Available 11
Maximum 4

QUESTON 3

(a) With reference to Annexure A:

Identify and discuss any concerns you might have with regard to the corporate
governance arrangements at Fundisa Wise Ltd as well as the professional conduct of
the directors (including Lennord Result). Your answer should be covered in terms of the
following:

• King IV report on Corporate Governance (Note: Detailed discussions

pertaining to the involvement of other committees are not required reference
should only be made where their involvement are required); (16)
• Companies Act no 71 of 2008; (7)
• SAICA Code of Professional Conduct; and (4)
• Any other applicable legislation. (1)

1. Elizabeth Write is the board chairman and a member of the company’s audit committee.
In terms of the King Code’s recommended practice, the chairman of the board should not
be a member of the audit committee. (1)

2. The following may undermine the audit committee’s ability to meet its responsibilities in
terms of section 94 of the Companies Act and the King Code:

2.1 The absence of an acting CFO or anyone else representing the finance department
at the audit committee meeting. (1)
2.2 Whilst the audit committee meets at least twice a year, the agenda does not appear
to cover all the items which the audit committee is required to deal with. (1)

3. Lennord Result, the company’s CEO, appears to play a very dominant role in the audit
committee, which further undermines the effectiveness/independence of the audit
committee. (1)

3.1 Specifically, much of what happened at the 3 April 2020 audit committee was tabled
by Lennord Result (e.g. removal of previous CFO, appointment of new CFO,
removal of previous registered auditors). (1)

4. Lennord Result, in agreeing to keep the circumstances surrounding Figure Twist’s

removal quiet, and treating the amount stolen as a full and final settlement of the amount
due to Figure Twist, acted beyond his delegated authority as CEO. (1)

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4.1 In terms of section 34 of PRECCA (Prevention and Combating of Corrupt Activities

Act), any person in a position of authority (e.g. the CEO) who knows that any
person has committed an offence of theft or fraud involving an amount of R100,000
or more must report such knowledge to any police official – this was clearly not
done.[bonus mark] (1)
4.2 The R3.5 million settlement amounts to be paid to Figure Twist, should have been
determined in terms of the company’s remuneration policy and approved by the
board – this cannot be done unilaterally by the CEO. (1)
4.3 The secrecy surrounding the fraudulent conduct of Figure Twist, which was
supported by the audit committee, is not consistent with the governing body
discharging its duty to govern the ethics of the organisation in a way that supports
the establishment of an ethical culture (principle 2 of the King Code). (1)
4.3.1 If the board/its committees assist in (or otherwise condone the) covering up
the fraudulent conduct, and do not ensure that appropriate action is taken,
this will undermine the creation of an environment in the company where
unethical conduct is not tolerated. (1)

5. The audit committee merely noted Lennord Result’s submission regarding the removal of
the previous CFO, and commended him on handling the matter so professionally,
despite:

5.1 Lennord Result’s actions contravening applicable legislation and the King Code
(see point 4 above). (1)

5.2 The audit committee having specific oversight of internal financial controls and IT
risks relating to financial reporting. As Figure Twist could perpetrate the EFT fraud
described by Lennord Result, controls over payments must be deficient, yet this
was not followed up at the audit committee meeting. (1)

6. Lennord Result and Margaret Paper were granted the authority by the audit committee to
proceed with the appointment of the new CFO.

6.1 In terms of recommended practice 15, linked to principle 7, of the King Code, the
processes for nomination, election and appointment of directors should be formal
and transparent – and the backgrounds of those nominated for election
should be independently investigated (practice 19). This process should not be
left to the executive directors alone. (2)
6.1.1 The apparent lack of ethics on the part of Figure Twist, Lennord Result and
Marcus Rhodes further reinforces the concern around the adequacy of the
background and reference checks that are done before directors are
appointed. (1)

6.2 Lennord Result acted in circumstances where he had a conflict of interest, and this
was not adequately managed. (1)
6.2.1 In terms of King recommended practice 1a, linked to principle 1, conflicts of
interest should be disclosed to the board in full at the earliest opportunity and
proactively managed – no disclosure of the conflict was made to the board. (1)
6.2.2 In terms of section 120 of the SAICA Code, the principle of objectivity
imposes an obligation on all chartered accountants (including Lennord Result)
not to compromise their business judgment because of bias or conflicts of
interest. (1)
6.2.2.1 There is a possibility that Lennord Result acted without the requisite
objectivity in appointing his nephew whose limited experience is
unlikely to make him the best person for the CFO position. (1)

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6.3 Moreover, it is questionable whether two executive directors will have the authority
to appoint a new director in terms of section 66 (4) of the Companies Act. (1)
The audit committee, by approving the manner in which Gregory Book should be
interviewed, has assumed authority which falls outside of its typical mandate (in
terms of the King Code and Companies Act). (1)

7. Should Lennord Result’s motive in removing Wright & Wong as registered auditors of
Fundisa Wise Ltd be because they reported the related party transactions between
himself and the company in their auditor’s report, this will bring into question his
adherence to the fundamental principle of integrity (in terms of section 111 of the
SAICA Code). (1)

8. Wright & Wong were removed as registered auditors of Fundisa Wise Ltd at the
company’s February 2020 AGM. In terms of Sec 90 of the Companies Act, the directors
of the company must fill the vacancy within 40 business days after the date of the
meeting. (1)
From the agenda for the 10 July 2020 audit committee meeting, it is evident that this was
not done. (1)

9. The audit committee resolved to use “whatever means necessary” to obtain a copy of the
2019 audit work papers.

9.1 In terms of practice 1a, linked to principle 1, of the King Code, the board members
should set the tone for an ethical organisational culture and act ethically (beyond
mere legal compliance) – by the directors who serve on the audit committee
resolving that internal audit should act in the manner described above, it is
questionable whether this practice has been implemented. (1)

10. The internal audit report on statutory compliance reinforces that the directors are failing to
implement practice 1a, linked to principle 1, of the King Code (i.e. that the board and its
directors should act in good faith and in the best interests of the company). (1)

10.1 In terms of section 76 (2) of the Companies Act, a director must not use the position
of director, or any information obtained while acting as a director to gain an
advantage for the director. (1)
10.1.1 Marcus Rhodes, failed to act in good faith, and contravened this section as
he used information gathered in a board meeting to earn a profit for himself.
(1)
Note: The audit committee’s resolution that Marcus Rhodes is entitled to the profit
as a ‘payment’ for his time invested in board matters, suggests that this could be
viewed as a director’s emolument. If this is the case, the required approval in terms
of section 66 of the Companies Act was neither sought nor obtained. (1)

10.2 Lennord Result granted a loan to himself in a manner that is contrary to the
requirements of section 45 of the Companies Act. (1)
10.2.1 In terms of section 45 (2) of the Companies Act, the board is to authorise
such loans – however, the matter appears never to have been tabled at a
meeting of the board of directors (1)
Hence the solvency and liquidity requirements were also never considered).
(1)
10.2.2 In terms of section 45(3) of the Companies Act, the financial assistance
must be pursuant to a special resolution of the shareholders, adopted within
the previous two years. While Lennord Result and Tertiary Capital hold
sufficient votes to approve a special resolution, no shareholders meeting
appears to have been convened to consider the resolution. (1)
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10.2.3 If the loan to Lennord Result is approved (in terms of section 45(5) of the
Companies Act) the company must provide written notice of the resolution to
the shareholders, and every trade union representing its employees. As the
transaction was not “communicated to shareholders” this requirement was
also not satisfied. (1)

11. Lennord Result, by conducting himself in a manner that is contrary to the applicable
legislation or recommendations of the King Code, may fail to adhere to the following
fundamental principles of the SAICA Code:

11.1 Integrity/professional behaviour – should he knowingly have acted in an

inappropriate manner; or (1)
11.2 Professional competence and due care – should he have acted in circumstances
where he lacks expertise and he failed to seek the required expertise (section 113
of SAICA Code). (1)
11.2.1 Moreover, in terms of section 113 of the Code a chartered accountant, such
as Lennord Result, should maintain his professional knowledge and skill at
the required level to ensure that his employers receive a competent
professional service – it does not appear that Lennord Result has done so.
(1)

12. Given the numerous contraventions of law mentioned above, it is questionable whether
the board has exercised ongoing oversight of compliance with applicable laws and
regulations (practice 21, linked to principle 13, of the King Code). (1)
Communication skills: clarity of expression and logical argument (2)
Available 40
Maximum 30

(b) Discuss the matters that need to be considered in deciding whether the firm of
Wright & Wong Registered Auditors was negligent in failing to detect the R3.5 million
bonus fraud perpetrated by Figure Twist, the previous CFO of Fundisa Wise Ltd in terms
of the related auditing standards and the Auditing Profession Act no 26 of 2005.

Note: Assume the final materiality figure is R2 million when considering this matter.

1. As it does not appear that Wright & Wong detected the fraud, it must be considered
whether they performed the audit in terms of the International Standards on Auditing,
including ISA 240. (1)

2. In terms of their responsibilities in terms of ISA 240, they should specifically have:

2.1 Appropriately identified and assessed the risk of material misstatement in the
financial statements due to fraud; and (1)
2.2 Obtained sufficient appropriate audit evidence regarding the assessed risks of
material misstatement due to fraud, through designing and implementing
appropriate responses. (1)
2.3 In evaluating the evidence gathered, applied appropriate professional scepticism,
and considered whether possible misstatements have arisen. (1)

3. As the amounts involved in salaries and wages appear to be large (i.e. just one
component – bonuses – is larger than the final materiality figure of R2 million) and as
management integrity appears questionable, the risk of material misstatement for
the occurrence and accuracy assertions should have been assessed as “high” –
was this the case? (2)

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4. If so, consideration should then be given to whether the nature, timing and extent of the
further audit procedures performed by Wright & Wong were appropriate to reduce audit
risk to a sufficiently low level. (1)

4.1. A mitigating factor may be that the gross amounts of salaries and wages were not
misstated by the fraud (i.e. the bonuses of R3.5 million were approved by the
remuneration committee). (1)
4.2. However, as the “bonus” was ultimately paid to a director, this should have been
detected by Wright & Wong – as separate disclosure of total directors’ emoluments
is required in terms of section 30 of the Companies Act. (1)

5. A further consideration is section 46 of the Auditing Profession Act no 26 of 2005 whether

the opinion expressed by Wright & Wong registered auditors in the ordinary course of
performing their duties does not incur liability to a client or third party unless it is
proved that the opinion was expressed maliciously, fraudulently or pursuant to
negligent performance of Wright & Wong’s duties only if could be proved that the
opinion was expressed pursuant to a negligent performance of the registered
auditor’s duties and that Wright & Wong knew of the fraud that were committed by
Figure Twist. From the information it is not clear whether the auditors were aware of
the fraud, but it seems that they were not aware of it as Lennord Result only
discovered it by chance. (3)
Available 12
Maximum 10

QUESTION 4

(a) With reference to the information relating to the audit of TechWise:

Discuss whether Pierce Proud has a reporting responsibility with regards to the
unaccounted sales and receipts in terms of the Auditing Profession Act, No 26 of 2005,
for the year ended 30 June 2019.
Note: Exclude any reporting requirements from your solution.

Marks
1. In terms of section 45 (5) of the Auditing Profession Act, Pierce Proud must have
regard to all the information which comes to his attention from any source – this would
include information he obtained as an accounting officer of another entity. 1
2. Before a “reportable irregularity” may be reported to the IRBA, the conditions giving
rise to this duty must be evaluated – this is done below: 1

• Pierce Proud is a registered auditor appointed by an entity (TechWise) to

perform an audit. 1

• He is “satisfied or has reason to believe” as:

- You could not find any evidence of the sales to InstantFix (Pty) Ltd and the
resulting receipts was also not recorded in the accounting records of
TechWise; 1
- Sam Technology’s reaction to Pierce Proud’s question appears to
corroborate Pierce Proud’s suspicion. 1

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Marks
• It would appear that “an unlawful act or omission has been committed” as:
- By failing to record the sales, TechWise’s taxable income is understated.
Sam Technology is therefore guilty of tax evasion, which is an offence in
terms of the Income Tax Act.
- By failing to record the business receipt in the TechWise’s accounting 1
records, Sam Technology is stealing from TechWise, and he is also guilty
of a breach of his fiduciary duty towards TechWise.
1
• The act appears to be committed “by any person responsible for the
management of an entity” as:
- Sam Technology, the operations director, appears to be responsible (e.g. 1
the invoices in question were in his handwriting)

• This act “has or is likely to cause a financial loss to:”

- The undertaking – TechWise provided components to InstantFix (Pty) 1
Ltd, but never received any consideration for it.
- Any creditor – The South African Revenue Service would not receive the 1
full amount of tax due from TechWise, because of possible tax evasion.

• In addition to above, the failure to record sales and receipts is also “fraudulent
or amounts to theft”, as well as being “a material breach of any fiduciary duty 1
owed by such person” to the company and its shareholders.
3. Based on the information provided, all the conditions appear to have been satisfied,
and Pierce Proud has a duty to report an irregularity in terms of section 45 of the
Auditing Profession Act to IRBA. 1
Available 12
Maximum 10

(b) Identify and discuss any corporate governance and other statutory concerns for the
year ended 30 June 2019, based on the information provided.

Marks
1. Per the recommended practice of the King Code IV, a nomination committee, rather
than the full Board, should assist with the process of identifying suitable members of
the Board. 1
2. The practice of rotating the Chair of the Board on an annual basis is also
questionable, as it will mean that for some years directors other than independent
non-executive directors will be appointed as chair – contrary to principle 2.16 of
the King Code IV. 2
• There is no lead independent non-executive director appointed at TechWise. 1
3. In terms of principle 2.18, the majority of non-executive directors should be
independent – at TechWise Ltd, only the chairman of the Board is potentially an
independent non-executive director. 1

3.1 Ruth Share is not independent by virtue of her being appointed by a major
shareholder of TechWise. 1

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Marks
4. The manner in which Linda Persist was removed from the board is potentially
contrary to the Companies Act (section 71), as it does not appear that she was
“ineligible, incapacitated or neglected the functions of a director”- the only
instances where the Board of directors can pass a resolution to remove the 2
director.
5. The provision of R300 000 in respect of the amount due for the remainder of Linda
Persist’s service contract is of concern as:

5.1 The magnitude of the amount due to terminate the appointment of the non-
executive director contract brings into question whether the director is being
remunerated fairly and responsibly – principle 2.25. 2
• After all, in terms of recommended practice 2.25.4, non-executive fees
should comprise a base fee, as well as an attendance fee per
meeting. 1

5.2 Moreover, in terms of the Companies Act, 71 of 2008, unless the MOI provides
otherwise, the company may only remunerate directors for their services as
directors if such payments are in accordance with a special resolution
approved within the previous two years – it is not clear whether such
approval for the termination benefit has been obtained from
shareholders. 2
6. Zakaria Process’ appointment as “Team Leader” is unlikely to enable him to avoid
the directors’ duties in terms of the Companies Act, as sections such as section
76 apply not only to directors, but also to “prescribed officers” – given Zakaria
Process’s managerial role in the company, he is likely to be a prescribed
officer. 2
7. Every board should have a minimum of two executive directors of which one
should be the CEO and the other the director responsible for finance
(Recommended Practice 2.18.5) – however, no CEO has been appointed at
TechWise. 2
8. With there only being four directors on the Board and only one who is a non-
executive independent director, it will not be possible to appropriately constitute
the Board committees per the requirements of the King Code and the Companies
Act. 1

8.1 Each member (independent non-executive directors) and should have the
necessary skills of the audit committee must not be involved in the day-
to-day-management are required per section 94 of the Companies Act, 71 of
2008 – there are not enough independent non-executive directors on the
Board to satisfy this requirement. 1
• Moreover, the chairman of the Board (who is independent) should not
be the chairman or member of the audit committee (per King Code IV
Recommended Practice 3.2.3). 1
• As per King Code IV p8 RP57 – all members should be independent non-
executive members, which is not the case at TechWise. 1

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Marks
8.2 Per King Code IV (Recommended Practice 2.23.7), committees, other than the
risk committee, should comprise a majority of non-executive directors of
which the majority should be independent. 1
• With only two non-executive directors, this will not be possible – unless
the committee consists of one member (but this may undermine the
effectiveness of the committee). 1
Communication skills: clarity of expression and logical argument 1
Available 24
Maximum 16

(c) Discuss the concerns that you have with the suggestions made by Innocent Phase to
increase Best Price’s client base in terms of the SAICA Code of Professional Conduct
(revised in 2008). Make appropriate references to safeguards addressing threats to the
fundamental principles, where applicable.

Marks
1. According to the Code (section R115.2), any advertising by a firm should be done in
a manner that does not bring the profession into disrepute. 1

1.1 A professional accountant should further be honest and truthful and shall not
make exaggerated claims for services offered by, or the qualifications or
experience of the professional accountant. 1

1.2 The medium through which the advertising is communicated should be

consistent with the dignity of the profession. 1

1.3 Advertising which does not comply with 1 above, could present a threat to the
fundamental principle of professional behavior. 1

1.4 If a professional accountant is in doubt whether a form of advertising or

marketing is appropriate, the professional accountant is encouraged to consult
with the Institute (SAICA). 1
2. Given the above, advertising by bulk email directly to various parties for the purpose
of marketing is unlikely to be in line with the dignity of the accounting profession and
may be considered unprofessional (some recipients may consider the email “spam”).
1
2.1 In addition, advertising by means of bulk email could be considered unsolicited
and may thus constitute illegal/improper communication – despite the approval
of the management of TechWise;
1
2.2 resulting in a breach of the fundamental principle of professional behaviour,
which requires professional accountants to comply with all the related
legislation. 1

2.3 See 1.4 for the safeguard.

3. The medium through which prospective clients are encouraged to consider the
services of the firm (playing an on-line game and winning redeemable “points”) is not
in good taste. 1
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Marks
4. The medium through which prospective clients are encouraged to consider the
services of the firm (playing an on-line game and winning redeemable “points”) is not
in good taste. 1

4.1 The on-line game appears to have little informational value and seems
extravagant in nature, which is in contravention of the requirements of section
115 of the Code. 1

4.2 The catchphrase “…so that we can act as your auditors and clean up YOUR
financial records of errors and fraud!” may create a false expectation with
prospective clients as to the nature of assurance services. 1
• This constitutes dishonest marketing, which is in contravention of section
115 of the Code, as prospective clients may think that an audit firm will
detect all errors and fraud in financial records, which is contrary to the
professional scope (objective) of an audit. 1

3.3 See 1.4 for the safeguard.

5. There are also familiarity and intimidation threats to the objectivity of the audit team
involved in the testing of computerised controls at TechWise Ltd. 1

5.1 Innocent Phase, a trainee accountant on the audit team, audits IT-related
internal controls of TechWise Ltd. Responsibility for ensuring the operating
effectiveness of these controls is likely the responsibility of his sister (Lindi),
TechWise’s IT manager. 1

5.2 Should deficiencies in the controls be detected, Innocent Phase may feel
obliged, in his personal capacity, not to disclose the weaknesses in order to
protect his sister. 1

5.3 The safeguard would be to consider whether applying safeguards would

contribute towards eliminating circumstances such as the relationship between
Innocent Phase and his sister by removing Innocent Phase from the audit. The
other alternative is to not make use of TechWise’s website for Best Price’s
marketing purposes and to rather explore other marketing strategies. 1
6. A familiarity and intimidation threat to Best Price’s objectivity would arise from the
proposed use of the email facility. 1

6.1 Best Price may become reliant on the audit client for a marketing activity, which
may in turn result in the audit client intimidating the firm into complying with
unreasonable requests during the audit engagement. 1

6.2 In addition, the use of the service may be considered as a gift to the auditor, as
only a nominal fee is paid to TechWise Ltd, further threatening the objectivity of
the firm (section 340). 1

6.3 The safeguard would be not to make use of TechWise’s website for marketing
services, as the lower fee could jeopardise Best Practice’s objectivity.
Alternatively, Best Price should resign from being TechWise’s auditors should
the firm still wish to make use of TechWise for marketing purposes. 1
Available 20
Maximum 14
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QUESTION 5

1. With reference to matter 1:

(a) Discuss with reference to the SAICA Code of Professional Conduct (CPC), the
ethical conduct issues that might arise with regard to the two proposed auditing
firms.

PriceWise Auditors Incorporated (PriceWise)

Broad Based Investments is a Public Interest Entity (PIE) as defined by the SAICA
CPC as it is listed on the JSE.
In terms of section 320, before a registered auditor may accept a client they must
determine if they can comply with the fundamental principles. 1
In terms of section 601, a company shall not prepare an audit client’s financial
statements, as it will create a self-review threat when the company is subsequently
audited by the firm. 1
In terms of section R604.5 to R604.7, a company may not perform any taxation
calculations with regards to the preparation of accounting entries that may be material
to the entity. 1
The assistance with the income and deferred tax calculations of Broad Based
Investments will amount to a self-review threat to the auditor’s independence
(objectivity) (section R604.5 to R604.7). 1
As Broad Based Investments is a prospective audit client of PriceWise, the taxation
services cannot be provided should the engagement be accepted due to the
significance thereof. 1
As Alli Baker will be the engagement partner, should this audit be awarded to PriceWise
there might be a self-interest and/or familiarity threats with PriceWise being responsible
for all their tax related calculations as well as the compilation of Broad Based
Investments financial statements. 1
In terms of paragraph 521.8, self-interest, familiarity and intimidation threats to the
auditor’s independence (objectivity) may be created by the relationship of Joe Money
and his wife, the financial director (Lynn Money). 1
Should the engagement be accepted, the significance of the relationship in terms of
the audit should be evaluated based on the roles that the two individuals will play in the
audit engagement. 1
Safeguards will have to be implemented for example the proper structuring of the two
individual’s roles and responsibilities to reduce any potential influence over the audit
engagement. 1
In terms of 410.3 the relative size of the audit fees from a client may create concerns
relating to self-interest and intimidation threats to the auditor’s independence
(objectivity). 1
The significance of the threat should be evaluated and will for example depend of the
operating structure of the firm etc. 1
Safeguards will have to be implemented should Broad Based Investments be
accepted, for example to reduce the dependency on the client. 1
In addition, PriceWise Auditors is a small audit firm that wants to take on an audit of a
listed company such as Broad Based Investments. 1

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PriceWise Auditors Incorporated (PriceWise)

This may create a threat to professional competence and due care in terms of 1
section R113.4 SA.
Design-a-Tick Auditors Incorporated (Design-a-Tick)
Giving tablets and treating the members of the audit committee at a luxury spa can lead
to a third person making the conclusion that the gifts were given to influence the
professional judgement of the members. 1
The significance of the tablets and the treatment at a luxury spa should be evaluated as
well as the impact that it would have on the decision relating to the possible 1
appointment as auditors.
This is not professional behaviour in terms of section 115 of the CPC and the
safeguard would be not to accept the gift. 2
Available 17
Maximum 10

1. (b) Identify and discuss all the factors that Brilliant Campbell should present to the
board in relation to the dismissal of Auditors in style Incorporated and the
appointment of the new auditors in terms of the Companies Act, 71 of 2008.

Termination of AiS services

(i) The audit committee should deal with the removal of the auditors, which was in line
with the action taken by Brilliant Campbell. (1)

(ii) Alternatively, they could be removed at the next AGM by a majority shareholder
vote (section 90(6)). (1)

(iii) The termination of AiS services will only be effective when the notice has been filed
(section 91(1). (1)

Appointment of new auditors

(iv) A company, which is required to have its annual financial statements audited, must
appoint an auditor (section 90(1A).
(a) The auditor must be appointed at the annual general meeting, at which the
requirement first applies to the company. The new auditors should thus be
appointed at the upcoming AGM by the shareholders of Broad Based
Investments, and not by management of Broad Based Investments. (2)
(b) To be appointed as an auditor of a company, a person or firm must not be:
• an employee or consultant of the company, who was or has been
engaged for more than one year in the maintenance of any of the
company’s financial records or the preparation of any of its
financial statements (section 90(2b(ii)); (1)
• a person who, alone or with a partner or employees, habitually or
regularly performs the duties of accountant or bookkeeper, or
performs related secretarial work, for the company (section
90(2b(iv)); and (1)
• all of these functions were performed by PriceWise, which would
disqualify them from being employed as the auditors of Broad Based
Investments. (1)

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(v) The new auditors would thus not be able to prepare the financial statements of
Broad Based Investments, while also performing the duty of auditor- this would be
the case if they decide to appoint PriceWise who is currently preparing their
financial statements and they also deal with all their tax related matters. PriceWise
can therefore no longer perform the ad- hoc services should they be considered for
appointed and they can also not be appointed before the five-year period has
lapsed for rendering prohibited services (compilation of the financial statements). (1)

(vi) In terms of section 29 and 30 Broad Based Investments must still prepare annual
financial statements that complies with all the relevant financial reporting
standards and would remain the responsibility of the board. In terms of regulation
26 and 27 it can be done internally or independently, the board must just ensure
that it is done as PriceWise could no longer perform this function for a period of five
years, should they be considered as the new auditors. (2)

(vii) It must be acceptable to Broad Based Investments as well as their audit committee
that they would be independent from the auditing firm. (1)

(viii) If a vacancy arises in the office of auditor of a company, the board of that company:
(a) must appoint a new auditor within 40 business days; (1)
(b) must propose to the company’s audit committee, within 15 business days
after the vacancy occurs, the name of at least one registered auditor to be
considered for appointment as the new auditor; and (1)
(c) may proceed to make an appointment of a person proposed in terms of
section 91(3(a), if, within five business days after delivering the proposal, the
audit committee does not give notice in writing to the board rejecting the
proposed auditor. (1)

(ix) In terms of the Companies Act, nothing precludes the appointment by a company
at its annual general meeting of an auditor other than one nominated by the
audit committee, but if such an auditor is appointed, the appointment is valid
only if the audit committee is satisfied that the proposed auditor is
independent of the company. (2)

(x) The audit committee is responsible for recommending the appointment of the
external auditor and overseeing the external audit process (section 94(7)(a)).
(1)
Available 18
Maximum 10

2. With reference to matter 2:

Identify and discuss any non-compliance with the Companies Act, 71 of 2008 and the
King IV Code, which is evident from the information in Annexure A with regard to the
board of directors of TMIG.

Companies Act, 71 of 2008

(a) Section 66(4) requires that 50% of the directors should be appointed by the
shareholders, but it does not appear that this is considered when appointing directors.(1)

(b) In terms of section 68(1), each director of a profit company, other than the first director
etc., must be elected by the persons entitled to exercise voting rights in such an election,
to serve for an indefinite term, or for a term as set out in the MOI. (1)

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(c) Tracy Foot was appointed by Shawn Goldman, the CEO, and Wade Finance and
Mark Word were appointed by the Board of Directors (3/5). Therefore 60% of the
directors were appointed by directors - without any involvement from the
shareholders. (2)

(d) Shawn Goldman appointed Tracy Foot without the other 3 directors voting on the matter.
(They are entitled to vote) (1)

(e) Section 69 disqualifies a person who has been removed from an office of trust, on the
grounds of misconduct involving dishonesty from being a director. (1)

(f) It appears that Tracy Foot’s conduct at Dress for Success may have disqualified her to
be appointed as a director because it appears that she did not fulfil her fiduciary
duties towards the shareholders and the employees of Dress for Success. (2)

(g) Section 75 requires a director with a personal financial interest to disclose the interest
and its general nature before the matter was considered at the Board meeting. (1)

(h) Mark Word has a personal financial interest (related party company) in the contract
entered into with Best Returns Ever because he signed the contract and
consequently, he did not declare this interest. (1)

(i) Shawn Goldman only discovered this after the contract was signed when reviewing
the terms and conditions thereof which was signed by Mark Word as representation and
director of Best Return Ever. (1)

(j) The directors of TMIG are not acting in the best interest, as they are not complying with
laws and regulations, OR Tracy Foot, the CFO had limited involvement with TMIG
during the last three months of the financial year due to spending her time defending the
court case. (1)

King IV
(k) The processes for nomination, election and ultimately, the appointment of members to
the governing body should be formal and transparent. KING IV P7.RP15 (Nomination
committee / appointment practices of appointing directors). (1)

(l) TMIG does not appear to have a nomination committee as required by King IV, to govern
the appointment of directors, as Shawn Goldman appointed Tracy Foot. (1)

(m) Tracy Foot was appointed as the Chief Operating Officer by Shawn Goldman. The
shareholders were not involved in his appointment. This is not in line with the provisions
of King IV. (P7.RP15) (1)

(n) Tracy Foot and Mark Word are either involved in illegal practices or has financial
interests in contracts. No background checks were performed on these individuals
before they were appointed to verify that they are honest individuals. (2)

(o) Conflicts should be disclosed in good time and in full detail to the Board and then
appropriately managed (P1.RP1aii and P7.RP25 to 26). (1)

(p) Mark Word did not disclose his involvement in the Best Returns Ever contract and the
Board was not aware of it. (2)

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(q) The board should comprise a balance of power, with a majority of non-executive
directors. The majority of the non-executive directors should be independent (PR7.R8).(1)

(r) There are five directors, four executives and one non-executive, i.e. there is not a
majority of non-executive, independent directors. (1)
Available 20
Maximum 10

3. With reference to matter 3:

Formulate the substantive audit procedures that you would perform in order to obtain
sufficient and appropriate audit evidence with regard to the legality of the
Reliance-Networks (Pty) Ltd contract, in terms of the Companies Act, 71 of 2008.

Financial assistance
(a) Inspect Broad Based Investments’ MOI to ensure that it includes no provision that
prohibits the financial assistance and review it for any restrictions or conditions
concerning the granting of financial assistance. (1)

(b) Enquire from the directors if they are satisfied that any conditions or restrictions regarding
the granting of the financial assistance, as set out in the MOI, have been met. (1)

(c) Inspect the minutes of the board meeting to ensure that this has been minuted. (1)

(d) Obtain the board resolution that relates to the granting of the financial assistance and
inspect that the board approved the financial assistance. (1)

(e) Obtain the shareholders' special resolution that relates to the granting of this financial
assistance:
(i) Inspect it to ensure that general or specific approval was granted. (1)
(ii) Inspect the date of the approval to ensure that it was approved within the previous
two years. (1)

(f) Perform procedures to ensure that Broad Based Investments satisfied the solvency and
liquidity test requirements, subsequent to the granting of the financial assistance:
(i) Inspect the financial records and cash flow forecasts to ensure that at the date at
which the financial assistance was granted, assets fairly valued equal or exceed
the liabilities fairly valued; and (1)
(ii) the company will be able to pay its debts as they become due in the ordinary
course of business for 12 months. (1)
(iii) Recalculate the solvency and liquidity ratios of the company at the date at which
the financial assistance was granted. (1)

(g) Consider whether the terms under which the financial assistance was proposed, are fair
and reasonable to Broad Based Investments, by comparing the terms to relevant market
indicators (i.e. fair interest rates and reasonable repayment terms). (1)

(h) Enquire from the directors if written notice of the board resolution was distributed to all
shareholders and to any trade union representing the employees of Broad Based
Investments. (1)

Director’s personal financial interest

(i) Inspect the relating board resolution, to ensure that the agreement was duly approved. (1)

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(j) Inspect the register of directors' interest in contracts to confirm whether Investo King
disclosed the nature and extent of his financial interest in the web-security contract
before the contract was authorised by the board. (1)

(k) Inspect any written notice that was given by Investo King in advance, with regard to his
financial interest, and inspect whether the nature and extent of his financial interest was
disclosed in this written notice. (1)

(l) Inspect the minutes of the board meeting where the contract was authorised, and confirm
whether:
(i) Investo King disclosed any material information, observations or pertinent insights
concerning the contract at the meeting; (1)
(ii) left the meeting immediately after making such a disclosure (did not form part of
quorum); and (1)
(iii) did not take part in the consideration of the matter (did not vote). (1)

(m) If Investo King’s interest was not declared:

(i) inspect the ordinary resolution of shareholders to ensure that the matter was
approved (ratified); or alternatively (1)
(ii) inspect the court declaration to ensure that the matter have been declared valid in
terms of the Act. (1)
Communication skills: clarity of expression (1)
Available 20
Maximum 10

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