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Solution: Question 2

M.2.1 logical flow and communication.

Board of directors

In terms of the king code on corporate governance:

The board should comprise a majority of non-executive directors . The

majority of non-executive directors should be independent.
 There are six executive directors and two non-executive directors ,
and therefore not a majority of non-executive directors.
 The two non-executive directors are also not independent , and this
does not comply with the King IV code.
o Minette Olivier is the chief legal advisor of Emergicare
o Zanele Ndumisani’s remuneration is based on profits

The chairman of the board should be an independent non-executive

director
 This is not the case as Allen Meiring is the CEO (exec) and the
chairperson

The board should assume responsibility to evaluate its own performance

 This is not the case as the audit committee evaluates the
performance of the board

The lead independent non-executive director should evaluate the

chairperson and the board should evaluate the chairperson.
 This is not the case as there is no mention of the lead independent
non-executive director in the scenario
 This is not the case as the audit committee evaluates the
Chairperson
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The board should ensure that every alternate year it reflects on the
performance of itself, its committee, its chair and its members as a whole
 The performance evaluations are only performed every 3 years

Internal audit

In terms of the king code on corporate governance:

The board should be responsible for the review of the company's risk
management plan
 This is not the case as internal audit is responsible for the
company’s risk management plan

Internal audit should report administratively to the CEO and functionally to

the audit committee.
 At Royale, Sherwin reports to Christa Witfield, the finance director

Internal audit must also have access to the chairperson of the board and
audit committee respectively
 It is not clear as to whether Sherwin has access as he reports only to
Christa (The FM)

Internal audit should possess the necessary skills and competence

 The head of internal audit is the marketing director and therefore it is
unlikely that he possesses the sufficient experience and knowledge

Management should be responsible for the preparation of the annual

financial statements (AFS) ,
 This is not the case as internal audit is responsible for the preparation
of the annual financial statements.

Audit committee
In terms of the king code on corporate governance:
IIE BAcc AUDI7312 Previous assessment questions

All members should be independent non-executive directors

 two members of the committee are executive directors, as they are
involved in the day-to-day running of the business.
 Zanele Mdumisani is an executive director but is not independent as
her remuneration is based on profits
 As part of risk management, the audit committee cannot make
decisions on the acquisition of shares in Ambulance Assist Limited .
This should be the responsibility of the board (with the approval of
shareholders).

The chair of the audit committee should be an independent non-executive

director
 There is no mention of who is the chair of the audit committee

Risk committee
The risk committee should consist of a minimum of three members
 The composition of the risk committee does not comply with sound
corporate governance, as it only has two members.

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:
 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.
 Part of this is commenting on the major risks facing the company and
explaining how to deal with these risks.

King IV requires that the company establish audit, risk, remuneration,

nomination, social and ethics committees.
 The company did not comply with this requirement, as it only had an
audit committee and dismissed the risk committee.
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M.2.2.1 Matter 1

 Section 45 states that financial assistance under this section

excludes lending money in the ordinary course of business and an
accountable advance to meet legal or anticipated expenses
concerning or on behalf of the company .
 The loan granted to Jenna was for neither of these exceptions but
rather for personal reasons, and therefore section 45 applies .
 The board may not authorise financial assistance unless:
o It is pursuant to an employee share scheme , which this is
not as it is for the purchase of a home for Security ; OR
o Pursuant to a special resolution that the shareholders
adopted in the previous 2 years , this loan was approved by
the directors with no mention of a special resolution ; AND
o The board is satisfied that immediately after granting he
financial assistance the company would satisfy the solvency
and liquidity test . The liquidity and solvency test was not
conducted and it is doubtful that the company would pass
the solvency and liquidity test as they are experiencing
cash flow issues and they may need to pay back a current
loan immediately due to a breached covenant .
 As the above conditions were not met:
o The approval of the loan will be void ;
o All the directors will be held personally liable .

 In terms of section 76 and 77, the board of directors may be held

liable for any loss, damages or costs sustained by the company as a
consequence of any breach by the directors of a duty contemplated
in section 45, and for not acting in the best interest of the
company .

Matter 2
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 The contract with Custom Drive (Pty) Ltd amounts to a contract in

which a director has a personal financial interest .
 Allen is a director and his father is the CFO of Custom Drive (Pty)
Ltd .
 Section 75 of the Act states that if a director has a personal financial
interest in a company, the directors must:
o Disclose the interest and its general nature before the matter
is considered at the meeting . Allen did not disclose the
personal financial interest before the matter was considered
at the meeting as he only mentioned it at the meeting when
Muhammed requested more information ;
o Must disclose to the meeting any material information she
has relating to the matter/may disclose any
observations/insights related to the matter. Allen did not
disclose any material information or observations/insights
related to the matter since he only declared his interest and
mentioned that he will negotiate a good deal ;
o Must not take part in the consideration of the matter . Allen
did take part in the consideration of the matter as all the
directors deliberated on the matter and he convinced the
board to enter into the contract since she will be able to
negotiate a good deal for both parties ;
o May not be included in the voting quorum . Allen voted on
the matter since all the directors approved this decision ;
o May not execute any documentation regarding the
transactions on behalf of the company ; Allen will execute all
the documentation relating to the contract .
 The contract will only be valid if ratified by an ordinary resolution
of the shareholders following disclosure of that interest or it has
been declared valid by a court .
 In terms of section 76 of the Act, a director must not use his
position of director to gain an advantage for him/herself or any
IIE BAcc AUDI7312 Previous assessment questions

other person other than the company . Allen will benefit from the
purchase from Custom Drive (Pty) Ltd .
 Section 76 further requires that directors exercise their powers and
functions: in good faith; in the best interest of the company and
with the degree of care, skill and diligence reasonably expected by
a director .
Allen did not exercise his powers and functions as director as
required by section 76 since he is not acting in the best interest of
the company but looking after his own personal interest .
 In terms of section 77, Allen may be held liable for any loss,
damages or costs sustained by the company as a consequence of
any breach by the directors of a duty contemplated in section 75,
76 (2) or 76 (3)(a) or (b) . Allen may be held liable since he did not
comply with section 75 and 76 of the Act as discussed above .

M.2.2.2
 Inspect the purchase invoice from the supplier to confirm the
following:
o The invoice is made out the company and signed for acceptance
of the vehicles
o The amount of the invoice excluding VAT is included correctly as
the cost of the vehicles and VAT has been treated correctly
o The correct capitalization of the import duties, shipping charges,
insurance (if applicable)
o The correct capitalization of installation and commissioning of
the item (if applicable)
o The date the purchase was made to ensure it has been recorded
in the correct period
 Inspect the minutes of the directors meeting and the capex budget, to
confirm that the purchase was authorized
 Inspect the bank statements to ensure that the item is paid for
 Any other valid point (Max 1)