Governance and Control 2B 2018

FIRST ASSESSMENT OPPORTUNITY – Suggested Solution

12 MARCH 2018

Page 1 of 11
QUESTION 1 25 MARKS
(30 MINUTES)

a) Compose a professional response to Mcebo’s email. (25)

Make sure that you address all matters.

<NOTE TO MARKER>
 Make sure to indicate principle marks with a P
 Make sure to indicate the mark for the action with a A
 For the fundamental principles, please consider that they are only
required to discuss in their own words. Consider the gist of their
explanations

To: Lungelo
From: Mcebo
Subject: SAIPA Fundamental principles
<Email Format> (1P)

Hi Lungelo,

I trust this finds you well.

Wow! Thank you for the kind words. There is still much work ahead but I am thankful that my
investment in time paid off.

I am happy to help you.

If your manager uses the Professional Accountant (SA) designation, that should mean that
she is registered with SAIPA and that she is required to adhere to their code of ethics.

Required to adhere to code of ethics (1)

Professional Communication (1P)

Page 2 of 11
The fundamental principles, together with a layman definition are as follows:

Fundamental Principle Definition

Integrity (1) The obligation to be straightforward and
honest in professional and business
relationships (1)

So this would mean that no information

should be hidden in decision making (1)
Objectivity (1) Ensure that no bias, conflict of interest
or undue pressure from others would
override professional and business
judgements (1)

You have to be able to say that no

relationships or prior knowledge are
influencing your decisions. You have to
have a balanced consideration of
situations. (1)

Professional Competence and due (1) You have to maintain professional

care knowledge and skill at the level to
ensure competent professional service
based on current developments in
practice, legislation & techniques and;
act diligently in accordance with
applicable technical and professional
standards (1)

So really this means that your technical

knowledge needs to be up to date. (1)
Confidentiality (1) To respect the information acquired from
a personal or professional relationship
and to therefore not disclose such
information to third parties without proper
& specific permission (unless legal or
professional right to disclose)
Or to use this confidential information to
your personal advantage or the
advantage of third parties (1)

This is about making sure that you are

Professional Behaviour
asking yourself whether you are allowed
to disclose this information. (1)
(1) This basically asks you to comply with
relevant laws and regulations and avoid
actions that may bring discredit to the
profession. (1)

So this means consideration as to

whether my actions affect the reputation
of the profession. (1)

Page 3 of 11
It would appear that there is a self-interest and familiarity threat to objectivity and
integrity here.
You manager’s husband and indirectly herself will lose this business if the close relationship
is disclosed. Her judgement is impaired by the close relationship. The non-disclosure of this
relationship also puts her integrity at risk.
Self Interest Threat (1)
Familiarity Threat (1)
Objectivity (1)
Integrity (1)

You are also experiencing an intimidation threat to the principle of professional behaviour
and integrity.
Her threat of blocking any future opportunity for promotion puts at risk your ability to fully
disclose the situation and might lead to non-compliance with the fundamental principle
‘professional behaviour’.

Intimidation threat (1)

Integrity (1)
Professional Behaviour (1)

You might have to investigate the internal policies on how to approach her. I would suggest
a direct conversation after which you might have to respectfully communicate with your audit
committee.
Suggestion of other action (all actions considered unless completely illogical or (1)
extreme i.e. reported/discussed/etc)

I hope this gives you a better idea of how to deal with this.
Kind regards,
Mcebo

Professional closing (Kind regards will be enough this time round) (1P)

Precision & Interpretation Marks (2)

Total Available Marks (29)
Total Marks (including P&I) (25)

Page 4 of 11
QUESTION 2 25 MARKS
(30 MINUTES)
<NOTE TO MARKER>
I have provided you with a summary table (highlighted in yellow) after the solution for each
required. It covers the essential points that should be included in the students answer to
obtain the mark and for your ease in marking.

As majority of our students, do not speak English as a first language, please use your
discretion when marking i.e. If the concept is correct, award the mark.
PART 1

a) Explain to Uncle Tom, why it would not be possible for you to be his auditor from
the perspective of the Auditing Profession Act only.

Before an individual can act as an auditor, there must be compliance with the requirements
in the Auditing Profession Act (1)
This is because non-compliance with the Auditing Profession Act is tantamount to breaking
the law as it is a statutory requirement (1)

Before act as auditor, must comply with APA 1

Non-compliance with APA is breaking the law 1

Section 37: Registration of individuals as registered auditor

This section requires an individual to first register as an auditor with the IRBA (1)
To be eligible to register as an auditor, the applicant must demonstrate the following:
1. Comply with prescribed education, training and competency requirements (1)
2. Arrange for continuing professional development if the member is not a member of a
professional body. (1)
3. Be a resident in the Republic; and (1)
4. Be a fit and proper person to practice the profession (1)
As I do not comply with the first two requirements above, I cannot register as an auditor (1)

First register as an auditor with IRBA 1

Comply with education, training and competency requirements 1
Arrange for CPD if not a member of a professional body 1
Resident in Republic 1
Fit and proper person 1
I cannot register as an auditor, as I do not meet the requirements 1

Page 5 of 11
Section 38: Registrations of firms as registered auditors:

This section allows a registered auditor to register an audit firm as either a sole proprietor,
partnership or company. (1)
As I cannot register as an auditor in terms of section 37, I will not be able to register an audit
firm with the IRBA in terms of this section (1)

Register an audit firm as a sole proprietor, partnership or company 1

I cannot register a firm (Section 37 requirements not met) 1

Section 41: Practice

This section among other things states that a person who is not registered in terms of this
Act may not:
1. Perform any audit (1)
2. Give himself/herself out as an accountant or auditor or use the designation to create
such an impression; and (1)
3. Use the name of a registered auditor or any title referred to above (1)

Perform any audit 1

Use the designation to create an impression that you are an auditor 1
Use the name of a registered auditor 1

Conclusion
As I do not comply with the requirements of the Auditing Profession Act, I am not able to act
as the auditor for your business (1)

I cannot be your auditor 1

b) Additionally explain why it would not be possible for you to be his auditor from the
perspective of Section 90 of the Companies act.

In order to qualify for appointment as an auditor, the person or firm must:

1. Be a registered auditor (1)
And not be disqualified from acting as an auditor, which is not being:
2. A director of the company (1)
3. An employee or consultant of the company (1)
4. A director, officer or employee of the person appointed as company secretary (1)
5. A person who at any time during the five financial years immediately preceding the
appointment was a person contemplated in (2) to (4) above (1)
6. A person related to a person in (2) to (5) above (1)

Page 6 of 11
Conclusion
As I am not a registered auditor and; (1)
As I am related to you Uncle Tom, a director of the company (1)
I cannot be your auditor based on the requirements of the Companies Act (1)

To qualify for appointment the auditor:

Must Be Must not be:
A registered auditor 1 A director 1
Employee or consultant 1
Director, officer or employee of person
appointed as company secretary 1
Person during five financial years 1
preceding appoint, any person above
A person related to those above 1
Conclusion
I am not a registered auditor 1
I am related to you, 1
I cannot be your auditor 1

c) As it appears, uncle Tom does not know much about auditors; provide him a
definition as to what the auditor does.

Auditors of all types provide assurance pertaining to information prepared or presented

by one party (Directors) to another party (Shareholders, stakeholders) with the
intention of inspiring confidence in the “Fairness” of the information, which is being
prepared or presented (3)

Provide assurance /confidence 1

Information prepared by one party( directors) to another party(shareholders) 1
Inspire confidence in the fairness of the information 1

Page 7 of 11
PART 2

a) Discuss your concerns regarding the information contained on the AGM

notice in light of the Companies Act

b) Discuss your concerns regarding the information contained on the AGM notice
in light of the Companies Act
Notice of meetings is covered in section 62 of the companies act.
1) The notice must include:
 The date, time and place of the meeting (1)
The date and time has not been communicated (1)
 Provide copies of the proposed resolutions (1)
Shareholder meetings should deal with ordinary and special resolutions and not
director resolutions (1)
It is clear that proposed ordinary or special resolutions are not provided (1)
 A copy, summary or directions for obtaining the financial statements (1)
No information has been provided to the shareholders regarding the financial
statements (1)
 State the purpose of the meeting (1)
The notice states that it is for the AGM (1)
 A statement that shareholders may appoint proxies (1)
No statement regarding proxies has been made. (1)

2) The notice period for Public companies is 15 days days (1)

The notice period given is 10 days (1)

3) An AGM should be held within 15 months of the previous one (1)

The current AGM (February 2018) appears to be held in excess of 15 months of the
previous AGM (April 2016) (1)
Conclusion: The information contained in the notice does not conform with the
requirements of the Companies Act (1)
Companies Act Application
 Date, time and place of meeting 1 Date and time not communicated 1
 Copies of proposed resolutions 1 Deal with ordinary and special resolutions
and not director resolutions 1
Ordinary or special resolutions not provided 1
 Copy, summary or directions for No information about the AFS is provided 1
obtaining the AFS 1
 Purpose of meeting 1 It is for the AGM 1
 Shareholders may appoint proxies 1 No statements made about representation
of shareholders by proxy 1
 Notice period 15 days 10 day notice given
 AGM held within 15 months of AGM held in excess of 15 months
previous
Conclusion: Notice does not comply with the requirements of the Companies Act 1

Page 8 of 11
QUESTION 3 25 MARKS
(30 MINUTES)

a) Define ‘corporate governance’.

Exercise of ethical & effective leadership towards Ethical Culture, Good
Leadership, Effective Control & Legitimacy – King IV; or
(2)
Corporate governance is the system of rules, practices and processes by
which a company is directed and controlled.
Total Available Marks (2)
Total Marks (2)

b) Name the four outcomes of good corporate governance as per King

IV. Also, explain each outcome in your own words.
<NOTE TO MARKER>
Please consider any relevant explanation of these outcomes
Legitimacy (as per King IV) (1)
Adherence to legislation (1)
Good performance (as per King IV) (1)
A company that performs well and is growing (1)
Effective Control (as per King IV) (1)
Ensure that processes and procedures support business activities (1)
Ethical Culture (as per King IV) (1)
Have a culture of transparent decision making (1)
Total Available Marks (8)
Total Marks (8)

c) Identify and explain an example of failed corporate governance in the

South African context.
Identify any valid example of failed corporate governance (1)
Explain any valid example of failed corporate governance (1)
Total Available Marks (2)
Total Marks (2)

Page 9 of 11
 d) Evaluate the governing body of and conclude whether they are
compliant with the Code of Corporate Governance for South Africa
(King IV)

<Note to marker : No mark for executive/non-executive or independence if

they simply state this and do not explain why>
<Note to marker: Please note the first point on the memo. It is a theory
statement for 2 marks and you may award it no matter where the student
notes this theory>
<Note to marker: “Conclusion” is a principle mark>
King IV recommends that the governing body is composed of a
balance of executive and non-executive members. The majority of the (2)
non-executive members should be independent
The CEO, COO & CFO’s are executive members as they are part of the
(1)
day-to-day running of the business.
Executive member are not independent. (1)
Carter Kholedi is a non-executive board member of ScreenTime as he is
not involved in the day to day running of the company due to being (1)
employed by GoLive.
Carter Kholedi does not appear to have any relationships that compromise
(1)
his independence. He is therefore independent.
Ms Yvette Labuschagne is a non-executive board member of
(1)
ScreenTime as she is a freelance consultant.
Ms Yvette Labuschagne appears to be a significant and ongoing
professional advisor to ScreenTime which would compromise her (1)
independence. She is therefore not independent.
Ms Mpumelelo Dikgale is a non-executive board member of ScreenTime
as she is not involved in the day to day running of the company due to (1)
being a full time consultant.
Ms Mpumelelo Dikgale’s family appears to be a significant shareholder and
(1)
can therefore not be considered to be independent.
Thomas Lathi is employed at ScreenTime as part of the day to day
running of the company but only half of his time. It is therefore tricky to
(1)
decide whether he is an executive or non-executive member. We
would need more information.
If he is an executive director, he will not be considered independent. (1)
If he is considered to be a non-executive director, the overlapping services
(1)
of his own company might affect his judgement.
King IV recommends that, as a minimum, the chief executive officer
(CEO) and at least one other executive should be appointed to the
(1)
governing body.
In addition to appointing A CEO, Screen Time has also appointed a COO
(1)
and CFO, and thus in compliance with this recommended practice.
King IV recommends that, the governing body should elect an
independent non-executive member as Chair. (1)

Page 10 of 11
From the information provided, it does not appear that Screen Time has
(1)
appointed a Chair.
Consideration of demographic representation (male/female/race/etc) (1)
Conclusion : The governing body is/is not compliant with the Code of
(1)
Corporate Governance for South Africa (King IV)
Total Available Marks (19)
Total Marks (13)

Page 11 of 11