Governance and Control 2A 2018

GAC02A2 & GAC2B01

FIRST ASSESSMENT OPPORTUNITY – Suggested Solution

3 MAY 2018

Page 1 of 10
QUESTION 1 45 MARKS
(54 MINUTES)
<Be reminded of the 3 P&I marks to be awarded to each student without discretion on
Question 1>
<The marks for Question 1 should be captured on the class list inclusive of the 3P&I marks>

a) What is the definition of risk according to ISO 31000

NOTE TO MARKER <This is specific in ISO 31000 wording may vary
but principle not>
Effect of uncertainty on objectives (2)
Total Available Marks (2)
Total Marks (2)

b) Between the risk committee and the governing body, identify who
remains ultimately responsible for the management of risk of a
company and explain why.
Governing body remains ultimately responsible (2)
King IV indicates that the governing body remains responsible, therefore the
(1)
board of Perfect Pecans.
The Co Act requires that the company implement risk management
(1)
strategies.
Total Available Marks (4)
Total Marks (3)

c) Identify the four steps in the risk management process.

Risk Identification, Analysis & Evaluation
(1)

Risk Mitigation
(1)

Risk Reporting
(1)

Risk Monitoring
(1)

Total Available Marks (4)

Total Marks (4)

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 d) Evaluate the Risk Committee of Perfect Pecans and conclude
whether they are compliant with the Code of Corporate Governance
for South Africa (King IV)

<NOTE TO MARKER>
 Be reminded of the 1 mark available for the discussion on skills
and experience of all members

King IV recommends that the risk committee is composed of a balance

of executive and non-executive members with the majority being the (1)
non-executive members from the governing body.
Mr van der Vyver is an executive member of the risk committee as he is (1)
involved in the day to day running of Perfect Pecans.
Mr van der Vyver is an executive director and can therefore not be (1)
independent.
Mr Zulu is a full time member of the Agricultural Research Council of South (1)
Africa. He is not involved in the day to day running of Perfect Pecans and is
therefore a non-executive director.
He is not a member of the governing body of Perfect Pecans. (1)
Mr Zulu owns 15% of Perfect Pecans. This could influence his decision- (1)
making abilities. He is therefore not independent.
King IV recommends that each committee have a minimum of three (1)
members.
This committee only has two members. (1)
King IV recommends that at least one member from the audit
committee should form part of the risk committee if these committees (1)
are separate.
No audit committee members serve on the risk committee (1)
General consideration of skills, qualifications and experience. (1)
Conclusion : The governing body is not compliant with the Code of
Corporate Governance for South Africa (King IV)
(1)
( Please show this mark as C)
Total Available Marks (11)
Total Marks (9)

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E <NOTE TO MARKER>

 In AO2, you can consider marks even if they have the indicator in the “explanation”
column and vice versa.
 The “explanation” column needs a reference to a financial indicator to get the mark. If
in doubt, award the mark.

Risk indicator Explanation of risk

1 Perfect Pecans is listed on the (1) Risk that they might not continue to (1)
JSE. comply with the stringent listing
requirements leading to fines,
penalties or delisting.
Risk that they are not compliant with (1)
the requirement to adhere to the King
IV code, which might lead to fines,
penalties or delisting.

2 Exporter of pecan nuts. (1) Risk of fluctuating foreign currency (1)

exchange rate that might lead to less
income.

3 Farming/agriculture sector.
4 Prediction of temperatures that (1) Risk that many variables might lead to
are higher than the ideal
temperature for growing pecan
nuts.
5 Pecan nuts are traded as
commodities.
6 Risk committee composition.
7 Article on News24 about traces (1) Reputational damage as Perfect
of pesticides.
8 UN Sustainability Development (2) Risk that the national & international
Goals considered in general.
(1) Risk that many variables might lead to (1)
a bad crop. This would affect the
livelihood and cash flow of the
company as a whole.
Risks associated with land (1)
expropriation possibilities in the
current political climate.
(1)
a bad crop. This would affect the
livelihood and cash flow of the
company as a whole.
A crop with a lower yield could activate (1)
the penalty clauses with the Chinese
supplier.
(1) Risk of fluctuating commodity prices (1)
that could lead to less income/less
profit than anticipated.
(1) The composition of the risk committee (1)
is not in line with King IV. Risk of
fines/penalties/delisting due to non-
adherence to King IV.
Risk of poor risk management that (1)
might lead to other inefficiencies.
(1)
Pecans are known for their organic
products. This might lead to loss in
market share.
(1)
business climate does not support the
growth of new business.

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 Tabular Format (1)
Precision & Interpretation (3)
Maximum 17
(exclusive of presentation and
ranking marks)
Available (exclusive of presentation 20
marks)

f) Select the top 2 risks from your identified risks in (e), rank them and create a
Powerpoint slide as an aid to present to the Risk committee.

Make sure to add notes on the rationale you used to decide on the top two risks

Also, create a second slide with a short list of the top three risks in a South African
context.

<NOTES TO MARKER>

 Slide Format does not necessarily mean that it needs a block. Rather
penalise on this mark if it couldn’t be a slide at all.
 If slides are not concise and have too much information/words, no mark to
be awarded.
 The discussion on “impact” and “probability” have to be logical and make
sense but they do not have to be too technical.

Slide Format ( Please show this mark as F) (1)

Concise with limited words ( Please show this mark as C) (1)
Top two (1)
Impact discussion ( Please show this mark as I) (1)
Probability/Likelihood discussion ( Please show this mark as P) (1)
Top Three risks in SA (example: water shortage, corruption, credit status
(1)
ratings).
Total Available Marks (6)
Total Marks (6)

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QUESTION 2 12 MARKS
(14 MINUTES)

a) In terms of section 45 of the Auditing Profession Act, give the definition of a (5)
reportable irregularity?

A reportable irregularity means:

Any unlawful act or omission;
Committed by any person responsible for the management of an entity, which
Has caused or is likely to cause material financial loss to the entity or any partner, shareholder,
creditor or investor of the entity in respect of his, her or its dealings with that entity or
Is fraudulent or amounts to theft or
Represents a breach of a fiduciary duty owed by such person to the entity or any partner,
member, shareholder, creditor or investor of the entity under any law applying to the entity or
the conduct or management thereof.

Any unlawful act or omission (1)

Any person responsible for management (1)
Has or likely to cause material financial loss (1)
Fraudulent or amounts to theft (1)
Breach of a fiduciary duty (1)
Total 5
Max 5

b) Assume that the information contained in the AGM notice, are the only
actions that occurred at the actual AGM. Discuss your concerns regarding (7)
this in light of the minimum requirements that should be actioned at an AGM.

The agenda for the upcoming AGM does not as a minimum deal with the following
business:
 The presentation of the directors’ report (1)
 The presentation of the audited financial statements (1)
 The presentation of the audit committee report (1)
 The election of directors (1)
 The appointment of an auditor for the ensuing year (1)
 The appointment of an audit committee (1)
 Matters raised by shareholders with or without advance notice (1)
Conclusion: The companies Act requirements have not been complied with (1)
Total 8
Max 7

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QUESTION 3 43 MARKS
(52 MINUTES)
PART 1

a) Define the term Internal control (2)

Internal controls is a process designed, implemented and maintained by those charged

with governance , management and other personnel to provide reasonable assurance
about the achievement of an entity’s objectives.

 Process designed by those charged with governance/management (1)

 Provide reasonable assurance about the achievement of an entity’s (1)
objectives
Total 2
Max 2

b) Following from the definition above, List the objectives that those charged (6)
with governance wish to achieve with internal controls

 The reliability of the entity’s financial reporting (1)

 The effectiveness and efficiency of its operations (1)
 Its compliance with applicable laws and regulations (1)
 Safeguarding of assets (1)
 Prevention and detection of fraud (1)
 Adherence to management policies (1)
Total 6
Max 6

c) Name and describe the function within the revenue and receipts cycle that (5)
will assist Glamour to ensure that all customers that purchase on credit are
creditworthy. Your answer should include documents used within this
function.

Name Description Documents

Credit  Evaluating creditworthiness (1)  Monthly statements (1)
Management  These activities are carried out  Age analysis (1)
Function to determine whether credit can  Credit bureau information (1)
(1) be extended to a customer (1)
 and if so, what the terms and
limits will be (1)
 Collecting amounts owed (1)
o these are activities carried
out to ensure amounts
owed by the debtors are
paid (1)

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 o when they are due. (1)
Markers: If the description is in-line with the concepts, award the mark. Total 10
Max 5

d) Name and describe the function within the payroll cycle that will assist (5)
Glamour to ensure that all hired staff will have the required experience. Your
answer should include documents used within this function

Name Description Documents

Human  There must be an individual or department  Payroll amendment
Resource which looks after the human resource aspects form (1)
Function (1) of the labour force (1)  Employee’s file (1)
 E.g. maintaining personnel records, assisting  List of employees/
with appointments/dismissals, etc. (1) employee register (1)
Markers: If the description is in-line with the concepts, award the mark. Total 6
Max 5

e) What are the characteristics of the inventory and production cycle? (5)

 Heart of the business (the organization is shaped around its inventory). (1)
 An internal cycle (no direct interface with entities outside the organization). (1)
 Diversity: (1)
o Nature: vehicles vs precious stones vs animals. (1)
o Location: multiple locations or goods in transit. (1)
o Permanence: Fresh produce vs technology. (1)
o Stage of development: RM vs WIP vs FG. (1)
Markers: For the points dealing with diversity of the inventory, award the Total 7
mark if the students answer is in-line with the concept Max 5

f) What are the main activities in the investment cycle? (3)

 Additions of fixed assets. (1)

 Disposals of fixed assets. (1)
 Repair and maintenance of assets. (1)
Total 3
Max 3

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 g) Name the general controls that you would expect to be present in the business (5)

1. System development and implementation controls. (1)

2. System maintenance controls. (1)
3. Organisational and management controls. (1)
4. Access controls to data and programs. (1)
5. Computer operating controls. (1)
6. System software controls. (1)
7. Business continuity controls. (1)
Total 7
Max 5

h) What are the programmed controls that the company should implement over (5)
the terminal

 Limited access to system (to specific applications). (1)

 Automatic log off after 5 minutes of inactivity. (1)
 Shut down after 3 unsuccessful login attempts. (1)
 Limited to 1 workstation log on. (1)
 Investigation into each disconnection. (1)
 Used during specific hours (1)
Total 6
Max 5

i) What is an online computer system? (1)

and
What are its characteristics? (4)

What is an online computer system?

Data is captured as a transaction occurs and is immediately edited, processed (1)

and written to a computer file.
Total 4
Max 4

What are its characteristics?

 Online entry of data. (1)

 Validation tests with input. (1)
 Online access to system. (1)
 No visible audit trail. (1)
Total 4
Max 4

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j) What are the disadvantages, when using a batch processing system? (2)

 Slow. (1)
 Files are not up to date. (1)
Total 2
Max 2

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