AUE1601/201/1/2019

Tutorial Letter 201/1/2019

Legal Aspects in Accountancy

AUE1601

Semester 1

Department of Auditing

This tutorial letter contains the suggested answers to and comments on

Assignment 01.

BARCODE
The purpose of the following table is to indicate the correct alternative and references for
each question.

Reference to the MO001 (Study Guide), Companies Act,

Question Alternative
and Companies Regulations

1 3 Topic 3 (learning unit 3.3.3), Sections 58, 63 & 65

2 2 Topic 6 (learning units 3.1.6, 3.1.7), Sections 36, 38, 45, 46,
47
3 4 Topic 4 (learning unit 4.4.3), Section 78
4 1 Topic 2 (learning unit 2.1.2), Sections 29 & 30, Regulations
26–29(1)–(10)
5 4 Topic 2 (learning unit 2.1.2), Sections 29 & 30, Regulations
26–29(1)–(10)
6 3 Topic 1 (learning unit 1.2.1), Section 11
7 3 Topic 1 (learning unit 1.2.2), Section 21, Regulation 35
8 2 Topic 4 (learning unit 4.2.2, Section 73
9 4 Topics 1 & 3 (learning units 1.1.3 & 3.3.2), Sections 8 & 58–
64, Regulations 26 & 27
10 1 Topic 3 (learning units 3.3.1 & 3.3.2), Sections 37 & 57–64
11 2 Topic 4 (learning unit 4.1.2), Sections 67–71
12 4 Topic 1 (learning unit 1.2.3), Section 22
13 1 Topic 5 (learning units 5.2.1 & 5.4.1), Sections 86–89 & 94,
Regulation 42
14 3 Topic 1 (learning unit 1.2.2), Section 21
15 1 Topic 5 (learning unit 5.3.1 & 5.3.2), Sections 90-92
16 2 Topic 7 (learning unit 7.2.1), Section 129

MOI = Memorandum of Incorporation, Companies Act = Companies Act 71 of 2008, as

amended; and the Companies Regulations = Regulations.

COMMENTS ON ASSIGNMENT 01/2018

Specific comments

QUESTION 1

References: - Learning unit: 3.3.3

- Companies Act: sections 58, 63 & 65
Alternative 3 is a false statement according to the Companies Act. According to section 58 of
the Companies Act, a shareholder of a company may, at any time, appoint any individual,
including an individual who is not a shareholder of that company, as a proxy to participate in,
and speak and vote at, a shareholders’ meeting on behalf of the shareholder. Alternatives 1, 2
and 4 state the correct requirements pertaining to voting and shareholders’ meetings in terms of
the Companies Act (section 63).

2
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QUESTION 2

References: - Learning units: 3.1.6, 3.1.7

- Companies Act: sections 36, 38, 45, 46, 47

Alternative 2 is the correct answer. Solvency and liquidity tests are not done when a company
is issuing authorised shares. It is not required in terms of section 36 of the Companies Act.
Alternatives 1, 3 and 4 incorrectly indicate instances when solvency and liquidity tests need to
be performed in terms of the Companies Act (sections 38, 45, 46 and 47). Solvency and liquidity
tests are used for the following: financial assistance to directors; capitalisation of shares;
distribution of dividends; and share capital reduction.

QUESTION 3

References: - Learning unit: 4.4.3

- Companies Act: section 78

Alternative 4 is the correct answer. In terms of section 78 of the Companies Act, a company
may not indemnify (protect against loss or damage) a director against liability arising from the
following:
 Wilful misconduct or breach of trust by the director
 Director acting without the necessary authority
 Reckless trading
 Trading under insolvent circumstances
 Fraudulent acts of the director
 A fine relating to an offence committed by the director

QUESTION 4

References: - Learning unit: 2.1.2

- Companies Act: sections 29 & 30
- Regulations 26–29(1)–(10)

Alternative 1 is correct.

The following should be taken into account when determining the public interest score:

An entity’s public interest score is the sum of the following:

 a number of points equal to the average number of employees during the
financial year
 one point for every R1 million (or portion thereof) of turnover
 one point for every R1 million (or portion thereof) of third-party liability at year end
 one point for every individual who directly or indirectly has a beneficial interest
in any of the company’s shares

The options that include a, c, d and h are incorrect.

 Expenses should not be taken into account when calculating the public interest score.
 Assets held in a fiduciary capacity should not be taken into account
 When calculating the points for the employees, the average number of employees should be
taken, therefore:
Employees at the beginning of the year + Employees at the end of the year
2

QUESTION 5

References: - Learning unit: 2.1.2

- Companies Act: sections 29 & 30
- Regulations 26–29(1)–(10)

Alternative 4 is correct.

When determining whether an audit or review is required, the public interest score and how the
annual financial statements have been compiled have to be taken into account.

An entity’s public interest score is the sum of Applicable to the question

the following:
Chocolate (Pty) Ltd Strawberry (Pty) Ltd

 one point for every R1 million (or portion 98 27

thereof) of turnover
 a number of points equal to the average (132 + 116) ÷ 2 = 124 (32 + 48) ÷ 2 = 40
number of employees during the
financial
year
 one point for every R1 million (or portion 55 23
thereof) of third-party liability at year end
 one point for every individual who directly 15 4
or indirectly has a beneficial interest in any
of the company’s shares
Total 292 94

Chocolate’s annual financial statements have been compiled internally; that is, they are not
independently compiled. Strawberry (Pty) Ltd has had its annual financial statements
independently compiled.

Alternative 4 is thus correct, based on the public interest score of 292 for Chocolate (Pty) Ltd
and because it has compiled its own annual financial statements, it has to be audited.

Alternatives 1, 2 and 3 are incorrect. As Strawberry (Pty) Ltd has a public interest score of 94, it
only has to be reviewed, irrespective of whether its annual financial statements are internally or
externally compiled.

QUESTION 6

References: - Learning unit: 1.2.1

- Companies Act: section 11

Alternative 3 is the correct answer.

1. Government Suppliers (Pty) Ltd is not permissible owing to the following:
According to section 11(2)(c)(ii) of the Companies Act, the name of a company must not
falsely imply or suggest, or be such as would reasonably mislead a person to believe
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incorrectly, that the company is an organ of state or is operated, sponsored, supported or

endorsed by the state or by any organ of state.

2. Xenophobic Contractors Limited is not permissible owing to the following:

According to section 11(2)(d) of the Companies Act, the name of a company must not
include any word, expression or symbol that, in isolation or in context within the rest of the
name, may reasonably be considered to constitute propaganda for war; incitement of
imminent violence; or advocacy of hatred based on race, ethnicity, gender or religion; or
incitement to cause harm.

3. Mobile Group (Pty) Ltd is permissible. According to section 11(2)(b)(i) of the Companies
Act, the name of a company may not be confusingly similar to another business name
unless each company bearing a similar name is a member of the same group of
companies.

4. Bling Bling Company is not permissible owing to the following:

According to section 11 (3)(c) of the Companies Act, a company name, irrespective of its
form or language, must end with one of the following expressions, as appropriate for the
category of the particular company the …
(i) the word “Incorporated” or its abbreviation “Inc.”, in the case of a personal liability
company.
(ii) the expression “Proprietary Limited” or its abbreviation, “(Pty) Ltd”, in the case of a
private company.
(ii) the word “Limited” or its abbreviation, “Ltd”, in the case of a public company.
(iv) the expression “SOC Ltd” in the case of a state-owned company.
(v) the expression “NPC”, in the case of a non-profit company.

QUESTION 7

References: - Learning unit: 1.2.2

- Companies Act: section 21
- Regulation 35
Alternative 3 is the correct answer. If the company, in whose name the pre-incorporation
contract has been entered, is not subsequently incorporated, the director who has entered into
the contract on behalf of the company will be liable for any liabilities as a result of the pre-
incorporation contract. Alternatives 1, 2 and 4 state the correct requirements pertaining to pre-
incorporation contracts in terms of the Companies Act (section 21).

QUESTION 8

References: - Learning unit: 4.2.2

- Companies Act: sections 73
Alternative 2 is the correct answer. Section 73 (5)(b) requires a majority of the directors to be
present at a meeting before a vote may be called at a meeting of the directors. The majority of
11 directors is 6 directors, as stated in alternative 3.

QUESTION 9

References: - Learning units: 1.1.3 & 3.3.2

- Companies Act: sections 8 & 58–64
- Regulations 26 & 27
Alternative 4 is the correct answer. Alternatives 1, 2 and 3 are not in compliance with the
requirements of the Companies Act. In alternative 1 a public company cannot only have two
directors. In alternative 2 the notice period should have been 15 days. In alternative 3 a public
company must convene an annual general meeting of its shareholders initially, no more than 18
months after the company’s date of incorporation; here it is more than 18 months since 30 May
2015 (section 61(7)(a)). Alternative 4 is in compliance with the requirements of the Companies
Act. According to section 64 of the Companies Act, a shareholders’ meeting may not begin until
sufficient persons are present at the meeting to exercise, in aggregate, at least 25% of all of the
voting rights that are entitled to be exercised in respect of at least one matter to be decided at
the meeting. A voting quorum of persons holding 30% of all the voting rights that are entitled to
be exercised in respect of the matter was present; therefore, it exceeds the required 25%.

QUESTION 10

References: - Learning units: 3.3.1 & 3.3.2

- Companies Act: sections 37 & 57–64

Alternative 1 is the correct answer. If there is more than one class of share, the MOI must
provide that at least one class of share must have voting rights in respect of all matters on
which can be voted (section 37(4)(a)). The statement is therefore false. Alternatives 2, 3 and 4
state the correct requirements pertaining to preferences, rights, limitations and other share
terms in terms of the Companies Act (section 37).

QUESTION 11

References: - Learning unit: 4.1.2

- Companies Act: sections 67–71

Alternative 2 is the correct answer. Alternatives 1, 3 and 4 are not in compliance with section 69
of the Companies Act. In alternative 1 an unemancipated minor is ineligible to be a director of a
company (section 69(7)(b)). In alternative 3 a person involved in dishonesty is disqualified to be
a director of a company (section 69(8)(b)(iv)(aa). Alternative 2 is in compliance with section 69
as the person is a rehabilitated insolvent, not an unrehabilitated insolvent (section 69(8)(b)). Ms
Merida was found guilty of not paying her fines and was fined R700; this will not prevent her
from being eligible to be appointed as she was offered the option of paying the fine (section
69(8)(b)(iv).

QUESTION 12

References: - Learning unit: 1.2.3

- Companies Act: section 22

Alternative 4 is the correct answer. Alternatives 1 to 3 can constitute reckless trading in terms of
section 22 of the Companies Act. In all three scenarios the company’s financial position will
worsen, without any prospect to recover losses or to settle outstanding debt.

QUESTION 13

References: - Learning units: 5.2.1 & 5.4.1

- Companies Act: sections 86–89 & 94
- Regulation 42
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Alternative 1 is the correct answer as it is one of the duties of an audit committee and not of the
company secretary. Alternatives 2, 3 and 4 are all duties of a company secretary in terms
section 88 of the Companies Act.

QUESTION 14

References: - Learning unit: 1.2.2

- Companies Act: section 21

Alternative 3 is a false statement according to the requirements of the Companies Act 71 of

2008, as amended. According to section 21 of the Companies Act a person may enter into a
written agreement in the name of an entity that is contemplated to be incorporated in terms of
this Act, but does not yet exist at the time. This person will be jointly and severally liable for
liabilities created as provided for in the pre-incorporation contract while so acting, if the
contemplated entity is not subsequently incorporated. Therefore, Bruce Wayne will be liable for
the rental agreement if Robin Limited is never incorporated. Alternatives 1, 2 and 4 are all true
statements in terms of section 21.

QUESTION 15

References: - Learning unit: 5.3.1 & 5.3.2

- Companies Act: section 90-93

Alternative 1 is the correct answer. Alternatives 2, 3 and 4 are not in compliance with the
requirements of the Companies Act. In alternative 2, the new auditor (GMPK Inc.) was not
appointed within 40 business days of the vacancy arising (section 91(2a)). The resignation of an
auditor is effective when a notice is filed (section 91(1)), which would be on 31 March 2017. In
alternative 3, public and state-owned companies should each year at its annual general meeting
appoint their auditors (section 90(1)), not at a board meeting. In alternative 4 the person to be
appointed as an auditor, is related to a director of the company, as Mr Slazenger is the brother
of the financial director, which is not allowed in terms of the Companies Act (section 90(2)(b)(i)
& (vi)). Alternative 1 is in compliance with the requirements of the Companies Act. According to
section 92(2) of the Companies Act, if an individual has served as the auditor or designated
auditor of a company for two or more consecutive financial years and then ceases to be the
auditor or designated auditor, the individual may not be appointed again as the auditor or
designated auditor of that company until after the expiry of at least two further financial years. At
least two financial years have passed before Mr Frodo was re-appointed as the designated
auditor of Ola Ltd.

QUESTION 16

References: - Learning unit: 7.2.1

- Companies Act: section 129

Alternative 2 is the correct answer, the statement is false. According to section 129(1) of the
Companies Act, the board of a company may resolve that the company voluntarily begin
business rescue proceedings if the board has reasonable grounds to believe that:
• the company is financially distressed [sec 128(1)(f)]
• there is a reasonable prospect that the company can be rescued