Auditing 2 A

COAUA2
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 Eduvos and the Flipped Classroom

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3
 Warm up /Quiz
Which of the following entities does The Companies Act apply to ?

• Non Profit Organisations

• Private Companies
• Listed Companies
• SOE – State Owned Entity

4
 Thank you for preparing for this lecture

Let’s recap the myLMS learning activities that helped you prepare for this
lecture

Lesson 5 - Companies Act 5.1 – 5.3

The Companies Act:

5.1. Notes

5.2 Practice Activity

5.3 Case Study

What will be covered in the rest of today’s session?

What will be covered in the lecture-led session:

What will be covered in the rest of today’s session?

The following sections of the Companies Act are

relevant:
• Section 8: Categories of companies
• Sections 24–26: Company records
• Sections 27–28: Financial year and accounting
records
• Sections 29–30: Financial statements and Annual
Financial statements
• Sections 57–77: Shareholder and director
governance
• Sections 84–85: General requirements
• Sections 90–93: Auditors
• Section 94: Audit committees
Case Full Set of Financial Statements
Study Clicks Financial Statements for 31 Dec 2023

Source:

https://www.clicksgroup.co.za/iar2023/wp-
content/uploads/Clicks_IAR2023_download.pdf.
Accessed 20.05.24
Source: Clicks
website
Questions for Discussion
Companies Act
.
Why should the Companies Act be enforced on
listed companies?

Why is understanding the key provisions of the

Companies Act essential for individuals in the
corporate world?

In small groups, discuss the implications of the Act

and give feedback.
Categories Of Companies : Sec 8

• State owned enterprises

• Private companies - (Pty) Ltd
• Public companies - (Ltd)
• Personal Liability companies (Inc)
• Non-profit companies/organisations - (NPC/NPO)
Sec 24 to 26 – Company records

• In writing

• Retained for 7 years

• Must maintain:

• Copy of the MOI

• Records of directors (name, ID, occupation, appointment date, name & reg nr of
every other Pty he/she is a director)

• Copy of AFS

• Copy of all reports presented @ AGM

• MOM – shareholders & directors & committees

• Copies of any written communication sent to SH

• Accounting records as required by the Act

Financial Statements: Sec 29
Sec 29 – Financial statements
Refer to the Clicks Group AFS for 2023

Source: https://www.clicksgroup.co.za/iar2023/wp-
content/uploads/Clicks_IAR2023_download.pdf.
Accessed 20.05.24
Annual Financial Statements: Sec 30
Activity

Having just understood the requirements of financial statements, consider

whether the Clicks AFS are compliant with the requirements of the Companies

Act.

Please give reasons for your responses.

Sec 30 – Annual Financial Statements
Clicks 2023 AFS
Annual Financial Statements: Sec 30

A public interest score is calculated by assigning points based on:

✓ a company's number of employees,

✓ annual turnover,

✓ third-party liabilities,

✓ and the number of beneficial shareholders,

with each factor contributing one point for every R1 million (or part thereof) that falls within
its category - essentially, a higher score indicates a greater public interest in the company's
operations, often impacting whether an independent audit is required.
Annual Financial Statements: Sec 30
PIS Guidance from SAICA
Activity

King (Pty) Ltd manufactures & sells mattresses. The company employee on average 150 factory

workers, 20 administrative personnel and 10 cleaners. The turnover of the company has

decreased from R220 million for the 2021 financial year to 180 million for the 2022 financial year.

The company's debtors are valued at R52 million, while its third party liabilities amount to R12

million. The only known beneficial interest holder of the company are its seven shareholders.

State with reasons whether King (Pty) Ltd’s financial statements has to be audited.

Source: Graded Question 2.24, 3.9 adjusted

Activity Solution
Sec 61 – Shareholders meetings

• An AGM must be called for all public companies.

• The first AGM not later than 18 months after incorporation

• There after once a year but no more than 15 months apart

• AGM of public company MUST:

• Present directors report, audited AFS, audit committee report

• Election of directors as required by Act & MOI

• Appointment of:

✓ An auditor

✓ An audit committee

• Any other matters raised by shareholders

Meeting Quorum – Sec 64
Sec 62 - 65 Notice & Conduct of Meetings,
Quorums & SH Resolutions

Sec 62 – 63 Notice & conduct of meetings self study

Quorums

• A shareholders’ meeting needs 25% of all voting rights of shareholders to be

present

• For any company with > 2 SH – At least 3 SH must be present

SH resolutions (decisions)

• Ordinary resolution – 50% of voting rights to pass

• Special resolution – 75% of voting rights to pass

MOI can stipulate a different % for each resolution.

But there should be < 10% difference between an OR & SR
Shareholders resolution – Sec 65
The Board – Sec 66
Sec 69 – Ineligibility & Disqualification of
Directors
Ineligible
• Juristic person
• Unemancipated minor
• Does not satisfy any qualification set out in the MOI

Disqualified
• Prohibited from acting as a director if they are declared delinquent by a court
• Unrehabilitated insolvent
• Prohibited in terms of any public regulation from being a director
• Removed from an office of trust for misconduct involving dishonesty (fraud) or
• Have been convicted in SA & imprisoned without the option of a fine for theft,
fraud, forgery, perjury or an offence involving fraud, misrepresentation or
dishonesty

Lifted after 5 years after the removal date/sentence

Activity

You are an audit manager at Westway Inc. and have met up with your good friend Vincent Great, an engineer, for
supper one night.

At supper, he informs you that he is purchasing the majority (75%) holding in a private company which
specialises in large-scale construction projects, mainly in the private sector. In addition, he will be the managing
director and there are two existing directors in the company, neither of whom are shareholders. There are four
other shareholders.

In another attempt to expand operations, Vincent wants to propose that the company opens a new division and
starts hiring out some of its large plant and machinery when that plant and machinery is not in use on a project.

To do this, the company will need to appoint a director to run this plant hire business. Vincent would like to
propose that the company hire his good friend, Thabo Mpande. Thabo has a background in finance which would
make him well suited to run this division. He also has a very lengthy curriculum vitae (CV) and has worked at
various companies in the last two years. He has recently been removed from his previous position as financial
director because he falsified company documents and the company considered this to be misconduct; however,
he is sure that the board will overlook this as Thabo is adamant that he is innocent and his CV is very attractive.
Also, Vincent is the majority shareholder and therefore has significant influence over the board.

You are required to advise the directors of the company on the procedures to follow in order to ensure
compliance with the requirements of the Companies Act.
Activity Solution
Election of directors

• In accordance with Section 68, each director must be elected by the shareholders (those with voting rights) and the election process is
conducted through a series of votes.
• A vacancy is filled when a majority of the voting rights are exercised to support that candidate.
• Vincent is making the proposal to the board to approve; however, it is the shareholders that need to elect the director.
• Vincent is; however, the majority shareholder, holding 75% of the voting rights, and therefore his vote would be sufficient to elect
Thabo into the position as director.
• It would be necessary to consider whether the director is eligible and not disqualified to be appointed as a director.

• In terms of Section 69(2), a person who is ineligible or disqualified must not be appointed or elected as a director of a company.

• In accordance with Section 69(8)(b)(iii) a person is disqualified from being appointed as a director if he has been removed from an office
of trust, on the grounds of misconduct involving dishonesty.
• Thabo has recently been removed from his previous position as financial director because he falsified company documents and
the company considered this to be misconduct.
• He has also worked at various companies in the last two years and this may also be an indication that this is not the first time he has been
removed from such an office for misconduct.
• Therefore, Thabo is disqualified from being appointed as a director.

• Therefore, Thabo should not be appointed as director of the new plant hire division.
Sec 71 – Removal of directors

• Removed by ordinary resolution of SH

• Before removal by SH a director:

• Must be given notice &
• Be awarded reasonable opportunity to present to meeting before voting

• If a SH / director alleges that a director has become:

• Ineligible / disqualified or
• Incapacitated or
• Neglected his duties as director

✓ The board must consider the allegations & may vote to remove the director.
✓ The accused director may not vote @ the meeting.
✓ Director removed by board may apply to court within 20 business days to
review.
✓ If a director is NOT removed – SH/director may apply to court to review.
Directors' meetings – Sec 73
Directors personal financial interest – Sec 75
Standards of Directors’ Conduct
Director's duties Sec 76
Liability of Directors - Sec 77
Sec 90-93 - Auditors

• Must be:
✓ RA
✓ Independent as per Audit committee(AC)
• Must not be:
✓ Director
✓ Employee/consultant engagement for <1 year in the maintenance of the
company’s records/preparation of any financial records
✓ Company secretary
✓ Person regularly performing bookkeeping duties or secretarial work
✓ Person who at any time during the preceding 5 years were any of the above
✓ Person relates to any of the above

• Appointed by shareholders @ AGM if not appointed within 40 business days of vacancy

• Board must propose at least 1 auditor for appointment to the audit committee within 15
business days
• Audit committee has to accept/reject proposed auditor within 5 business days
• Individual auditor may serve for 5 years only and may only be reappointed after a 2-year
period.
Sec 94 – Audit committees

• Elected at each AGM

• Public companies & state-owned entities must appoint unless the company is subsidiary of the
company that has an AC that will perform AC duties for the subsidiary
• Must consist of > 3 independent nonexecutive directors
• Must not be involved in day-to day management any time during the previous year, full time
executives, employee of the company or related / interrelated company, or held such position
within the previous 3 years, or material supplier/customer of the company
• Board must fill vacancy within 40 days
• Duties of the Audit Committee are IMPORTANT and include:
✓ NOMINATE AN INDEPENDENT AUDITOR FOR APPOINTMENT
✓ Determine audit fees
✓ Determine & pre-approve non audit services performed by auditors
✓ Prepare a report to include in AFS on how functions of AC was carried out and
independence of auditor
✓ Deal with concerns regarding accounting practices & internal audit of the company as
well as content & auditing of AFS
Case Read the scenario below and answer the
questions that follow:
Study Thando Motsephe, a commercial lawyer at TMC Attorneys Inc., was invited to a podcast
interview on the ‘Commercial Corner’, where various aspects of corporate governance,
compliance and regulations are discussed. In this episode, the topic of discussion focused on
violations of the Companies Act.

Host : Welcome back to Commercial Corner. I’m your host, and today we’re going to talk
about some of the violations of the Companies Act of 2008. This is an important area to
explore, and joining us today is our expert guest, Thando Motsephe, a commercial lawyer
specialising in company law. Welcome, Thando!

Thando : Thank you for having me.

Host : Let’s dive right in. Could you provide our listeners with an overview of the Companies
Act of 2008 and its significance?
Case Thando : Absolutely. The Companies Act of 2008 is a comprehensive piece of legislation that governs the
formation, operation, and management of companies in our jurisdiction. It’s main objective is to promote

Study transparency, accountability, and fairness in the corporate sector. Furthermore, the Companies Act requires all
companies to be audited. Violations of this Act can result in severe penalties, fines, or even imprisonment.

Host : That sounds serious. Can you give us some examples of common violations of the Companies Act of
2008?

Thando : Certainly. There are several violations ranging from minor administrative offenses to more serious
fraudulent activities. A common violation is a failure to maintain complete and accurate accounting records.
Another major concern is that the required annual financial statements are not filed within the prescribed time
frame. These can lead to significant penalties for companies who do not adhere to the Act.

Host : What are some other violations that companies should be mindful of?

Thando : We sometimes find dishonest or misleading conduct by directors, such as intentionally filing false
financial statements. This is a serious offense under the Act. Additionally, deliberate non-disclosure of
information, such as conflicts of interest or related party transactions, is a violation that can have legal
consequences.
Case Host : It seems like transparency and accountability are key here. What about breaches of directors’ duties?

Thando : Great question. Directors have a fiduciary duty owed to the company and its shareholders. I have encountered a few
cases where directors misappropriated company assets, or used company resources for personal gain, such as lavish overseas

Study trips or purchasing expensive cars for personal use. These violations can result in directors being held personally liable and be
disqualified from holding office in other companies.

Host : How are violations typically discovered, and what actions are taken by regulators?

Thando : Violations can be discovered through various means. Regulators may conduct routine audits, receive complaints from
whistleblowers, or investigate suspicious activities. Once a violation is uncovered, regulators have the power to take legal action.
This can include imposing fines, ordering restitution, or even pursuing criminal charges against individuals involved in serious
violations.

Host : That sounds like a significant risk for companies. What advice can you offer to ensure compliance with the Companies A ct
of 2008?

Thando : In a nutshell, companies should establish robust systems and processes to ensure compliance with all legal
requirements.

Host : Thank you, Thando, for shedding light on Companies Act of 2008 violations and the importance of compliance. It’s been a
pleasure having you on the show.

Thando : Thank you for having me. It was my pleasure to contribute to this important discussion.
Case Required:

Study a) Discuss whether you agree with Thando’s statement that all
companies, according to the Companies Act of 2008, need to be
audited? (6 marks)

b) Identify the requirements/provisions of the Companies Act that apply

to Thando’s observations? (You do not need to cite the section
numbers.) (3 marks)

c) Suggest steps that companies could take to ensure compliance with

all legal requirements. (3 marks)

Source: Graded Questions on Auditing 2024

 What Happens Next?

To be completed before the next lecturer-led session

(self-directed learning and assessments):
Case Study - The Companies Act
Learning Outcomes Post Assessment
Learning Material Feedback

What will be covered in the next lecturer-led session:

• Week 3: The Audit Process and Internal Controls

• Read the notes and prepare for your lesson.