Auditing Fundamentals in a South African Context Graded Questions 3e Solutions Manual

QUESTION 8 LEVEL 2

King IVTM Code [10 marks]

Recommendations and/or requirements of King IV

Concerns
Report on Corporate Go

Board of directors

There are six executive directors The board should comprise a balance of power, with a
and only one non-executive majority of non-executive directors. (1)
director. (1) There are currently not a sufficient number of non-
executive directors on the board to comprise the
subcommittees of the board. (1)
D Masha fills the role of the The board should elect a Chairperson of the board who is
Chairperson of the board. (1) an independent, non-executive director. (1)
Currently, KLM does not have a The board should have a minimum of two executive
CFO. The position has also been Directors of which one should be the CEO and the other
vacant for the past nine months. preferably the director responsible for finance. (1)
(1)
The appointment of the new Furthermore, candidates nominated should first be
financial director will be handled approved by the board. (1)
by the CEO alone. (1) A brief profile of each candidate should accompany the
notice to the annual general meeting where the
appointment is to be approved. (1)
The ultimate appointment of a financial director should
be approved by a majority resolution. (1)
[Also refer to section on nomination committee below.]
Committees
The risk committee comprises A majority of the risk committee members should be
two executive and one non- non-executive directors. (1)
executive director. (1)
The previous nomination There should be a nomination committee to assist in the
committee was recently nomination and appointment of directors it is one of
dissolved, and the CEO and Mr the compulsory committees in terms of King IV . (1)
Makas currently handle issues The two persons handling appointment are executive
dealing with the appointment directors, whereas the nomination committee should
process. (1) comprise only non-executive directors. (1)
The company currently has only The following compulsory board subcommittees are
a risk committee. (1) required:
nomination committee (addressed above mark
awarded above);
remuneration committee; (1)
audit committee; (1)
social and ethics committee. (1)

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 Auditing Fundamentals in a South African Context Graded Questions 3e Solutions Manual

General
The number of breaches of the The company is to appoint a company secretary who is
governance principles in King responsible to inform the board of all applicable
IV detailed above indicates the legislation, including any contraventions. (1)
following:
The company either does not The b
have a company secretary, or applicable Acts and Codes. (1)
the incumbent is ineffectual.
(1)
The board does not meet
their responsibility for
compliance governance as
required by King IV . (1)

Communication skills logical argument, layout and structure (2)

Available marks [26]; maximum marks [10]

QUESTION 9 LEVEL 2

Corporate governance [21 marks]

Part A:
DIRECTOR TITLE/ POSITION INVOLVEMENT EXECUTIVE/ NON- INDEPENDENT/
NAME HELD IN IN THE AUDIT EXECUTIVE MEMBER NON-INDEPENDENT,
COMPANY COMMITTEE OF THE BOARD, PLUS PLUS MOTIVATION
MOTIVATION

Al Paccino Chairperson and Audit Executive, as he is

CEO committee also the CEO, thus in
chairperson full-time employ (1)

Joe Tick Inc. Secretary and N/A: not a director

auditors (1)

D. Preston Not in the Audit Non-executive (1) Not independent. (1)

employment of committee Employed in
P&L member executive capacity
within the preceding
three years. (1)

Joe Marciano Risk director Audit Executive in full-time

PhD Maths committee employ (1)
member

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 Auditing Fundamentals in a South African Context Graded Questions 3e Solutions Manual

DIRECTOR TITLE/ POSITION INVOLVEMENT EXECUTIVE/ NON- INDEPENDENT/

NAME HELD IN IN THE AUDIT EXECUTIVE MEMBER NON-INDEPENDENT,
COMPANY COMMITTEE OF THE BOARD, PLUS PLUS MOTIVATION
MOTIVATION

R. Balboa Not in the Non-executive (1) Independent. (1)

employment of The shareholding is
P&L immaterial to his
personal wealth. (1)

J. Acker Financial Audit Executive in full-time

CA(SA) director committee employ (1)
member

B. Acker Self-employed Non-executive (1) Not independent. (1)

A significant supplier
of P&L cannot be
deemed to be
independent. (1)

J. Bolt MSc Production Executive in full-time

director employ (1)

M. Advert Marketing Executive in full-time

director employ (1)

Available marks [15]; maximum marks [13]

Part B:

Board of directors:
1. According to the King IV f directors should consist of
non-executive members, most of which should be independent. In the case of P&L:
a) only three out of the eight directors are non-executive directors (1)
b) only one out of the three non-executive directors is independent. (1)
2. According to the King IV
Al Paccino is, however, both the chairperson of the board and the CEO. (1)
3. According to the King IV
non-executive board member. Al Paccino is, however, an executive director. (1)
4. There is no indication of an independent, non-executive member being appointed as the
lead independent director to fulfil the specific duties as required in King IV (1)
5. By looking at the surnames of the board members it seems like the board of directors are
not diverse in terms of race, as required by the King IV (1)

Audit committee:
According to the King IV independent,
non-executive directors. The audit committee of P&L, however, consists of three executive
directors and one non-executive director, who is not independent. (1)

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 Auditing Fundamentals in a South African Context Graded Questions 3e Solutions Manual

According to the King IV three

members. There are, however, no valid members (independent, non-executive directors)
on the audit committee. (1)
According to the King IV
chairperson of the audit committee. Al Paccino is, however, both the chairperson of the
board and the audit committee. (1)
According to the King IV
Paccino is, however, both the CEO and a member of the audit committee. (1)
According to the King IV chairperson of the audit committee should be an
independent, non-executive director. Al Paccino is, however, an executive director. (1)
Available marks [11]; maximum marks [9]

QUESTION 10 LEVEL 2

King IV [15 marks]

1. The chairperson of the board is not a non-executive director who is

independent, as required by the King IV report. (1)

personal wealth, and will not be seen as independent. (1)

2. The company should appoint a lead independent member to strengthen
the independence of the board.
There is no indication of a lead independent board member. (1)
3. The chairperson of the board as well as the CEO should be appointed by
the board of directors.
It is a concern that the chairperson of the board was elected by the
shareholders and not by the board of directors in terms of the King IV report. (1)
The CEO was also appointed by the shareholders and not by the board of
directors, as required by the King IV report. (1)
4. The majority of the board members are not non-executive directors.
Mr Mofokeng assists with the day-to-day
therefore not be seen as non-executive. (1)
on-executive (only Ms Copper and
Ms Swanepoel are non-executive), therefore the entity does not adhere to this
principle. (1)
5. The majority of these non-executive directors are not independent, as
required by the King IV report. (1)
Neither Ms Copper nor Ms Swanepoel is independent.
Ms Swanepoel is remunerated based on the performance of the company and
therefore cannot be seen as independent. (1)

6. There should be an effective and independent audit committee. All the

members of the committee should be independent and it should be
chaired by an independent, non-executive director. The committee
should comprise at least three independent, non-executive directors.

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 Auditing Fundamentals in a South African Context Graded Questions 3e Solutions Manual

Only Mr Mofokeng and Ms Swanepoel serve on the audit committee (only two
directors). (1)
Mr Mofokeng is involved in the day-to-
means he is an executive director (mark awarded in point 4). (1)
Ms Swanepoel is remunerated based on the performance of the company and
cannot therefore be seen as independent (mark awarded in point 5).
She is the chairperson of the audit committee. (1)

7. The members of the audit committee as a whole should have the

necessary financial literacy, skills and experience to execute their duties
effectively.
Ms Swanepoel is a stay-at-home mom and there is no indication that she has
financial literacy, skills and experience. There is also no indication whether Mr
Mofokeng has the relevant financial literacy, skills and experience. (1)
8.
according to the King IV report:
Risk committee (1)
Nomination committee (1)
Remuneration committee (1)
Social and ethics committee (1)
9. The number of breaches of the governance principles in King IV detailed
above indicates the following:
The company either does not have a company secretary or the incumbent is
ineffectual. (1)
The board does not meet their responsibility for compliance governance as
required by King IV . (1)
Available marks [18]; maximum marks [15]

QUESTION 11 LEVEL 2

King IV [25 marks]

Requirements/recommendations of
Concerns
King VI report
The chairperson of the board (Mrs Gold) The CEO should not also act as the
is also the chief executive officer (CEO) of chairperson of the board. (1)
the company. (1)
Three of the members of the audit All the members of the audit committee
committee are executive directors (Mrs need to be independent, non-executive
Gold, Mr Black and Mr Green), with only directors. (1)
one independent director. (1)
Taking into account the above, the The audit committee should consist of at
membership number is too low only one least three members. (1)
member qualifies. (1)

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 Auditing Fundamentals in a South African Context Graded Questions 3e Solutions Manual

Mrs Gold, the chairperson of the board, is The chairperson of the board is not
also the chairperson of the audit allowed to serve on the audit committee. (1)
committee. (1) The CEO is not allowed to serve on the
audit committee. (1)
Mrs Gold is the chairperson of the audit Furthermore, the chairperson of the audit
committee as well as the CEO of BRU. (1) committee should be an independent,
non-executive director. (1)
There seems to be doubt concerning the The audit committee as a whole must
knowledge and competence of the audit have the necessary financial literacy, skills
committee as a whole, in particular: and experience to exercise their duties
Mr Black, who is the marketing effectively. (1)
director, and Mr Green, who is human
resources director (1)
Mr Red, who was a professional singer
for seven years and did not stay up to
date with the latest developments in
auditing/accounting. (1)
The audit committee assists the The audit committee needs to be an
nomination committee with the (1) independent committee and by assisting
appointment of a company secretary. with the appointment of the company
secretary, their independence will be
compromised. (1)
The appointment of the company
secretary is to be approved by the board. (1)
The nomination committee is to deal with
matter regarding the nominating, election
and appointment of board members. (1)
The audit committee appoints or renews The external auditor is to be appointed by
the appointment of the external auditors. (1) the shareholders. (1)
The audit committee should assist the
board of directors in the appointment of
the external auditors through the
following:
Nominating a registered,
independent auditor
Determining the audit fees (1)
and terms of engagement
Ensuring that legislation (1)
regarding the appointment is
adhered to
(1)
The audit committee was requested to The internal audit department should
investigate suspected instances of fraud. (1) assist management in ensuring that proper
procedures and processes are in place to
identify and prevent fraud in any
circumstance. (1)

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 Auditing Fundamentals in a South African Context Graded Questions 3e Solutions Manual

The audit committee was requested to The audit committee should never audit
conduct the audit of the interim financial any form of financial statements as it
results. (1) compromises independence. (1)
The audit committee should perform an
independent review of the combined
assurance model and processes (which
involves, among others, the internal and
external auditors). (1)
Part of combined assurance may be that
the external auditors are requested to
audit the interim financial statements. (1)
The number of breaches of the The company is to appoint a company
governance principles in King IV detailed secretary who is responsible for
above indicates the following: informing the board of all applicable
c) The company either does not have legislation, including any contraventions. (1)
a company secretary or the
incumbent is ineffectual. (1)
compliance with applicable Acts and
d) The board does not meet their
Codes. (1)
responsibility for compliance
governance as required by
King IV . (1)

Available marks [32]; maximum marks [25]

QUESTION 12 LEVEL 1

King IV [18 marks]

1.
a) Yes (1)
b) Yes (1)
c) Yes (1)
2.
a) nominate an independent registered auditor, and (1)
b) in determining whether the auditor is independent:
i. ensure that the auditor does not receive direct or indirect remuneration or other
benefits from the company, except as auditor or for rendering other services to the
company as permitted by the audit committee (1)
ii. consider previous appointments as auditor (1)
iii. consider the extent of any consulting, advisory or other work delivered to the
company (1)
iv. consider compliance with independence requirements set by the IRBA and the
Auditing Profession Act (1)
c) determine the fees to be paid and the terms of audit engagement (1)
d) ensure that the appointment of the auditor complies with the provisions of the
Companies Act and any other relevant legislation (1)

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 Auditing Fundamentals in a South African Context Graded Questions 3e Solutions Manual

e) determine the nature and extent of any non-audit services delivered by the auditor (1)
f) pre-approve the proposed engagement with the auditor for the provision of non-audit
services (1)
g) prepare a report, to be included in the annual financial statements which:
i. describes how the audit committee carried out its functions (1)
ii. states whether the audit committee is satisfied that the auditor is independent (1)
iii. contains comments about the financial statements, accounting practices and internal
financial control of the company (1)
h) receive and deal with any concerns or complaints relating to:
i. the accounting practices and internal audit of the company (1)
ii. the content and auditing of the company (1)
iii. internal financial controls of the company, or (1)
iv. any related matter (1)
i)
policies, financial control, records or reporting (1)
j) perform other oversight functions as determined by the board. (1)
Available marks [18]; maximum marks [15]

QUESTION 13 LEVEL 2

Companies Act 71 of 2008 [10 marks]

1. In order to be able to be registered as a private company, a company's memorandum of

incorporation (MOI) should contain the following requirements:
a) A company is prohibited from offering its securities to the public; AND (1)
b) The transferability of the securities of the company is restricted. (1)
c) Both of these requirements should be included in the MOI. (1)
d) If one of the requirements is not included, the company will be deemed to be a public
company and will need to comply with all the requirements applicable to public
companies. (1)
e) ny
will be seen to be incorporated as a public company and not a private one. (1)
Available marks [5]; maximum marks [4]

2.
interest score (PIS) needs to be determined. This score is calculated as follows: (1)

TURNOVER (1 POINT FOR EVERY R1 MILLION OR PORTION THEREOF) POINTS

(R40 million × R7 = R280 million) 280 (1)
Average number of employees (1 point per person) 40 (1)
Liabilities (1 point for every R1 million or portion thereof) 20 (1)
Shareholders (1 point per individual) 20 (1)
Public interest score 360

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 Auditing Fundamentals in a South African Context Graded Questions 3e Solutions Manual

Even though Seals (Pty) Ltd is registered as a private company, the PIS of the company is above
350. According to Regulation 28, all companies with a PIS of more than 350 need to undergo an
annual audit. (1)
Therefore, Seals (Pty) Ltd needs to undergo an annual audit. (1)
Available marks [7]; maximum marks [6]

QUESTION 14 LEVEL 2

Companies Act 71 of 2008 [10 marks]

1. Giddy Fellows (Pty) Ltd is not eligible. (1)

a) The company cannot be registered with the Independent Regulatory Board
for Auditors. (1)
b) Although in terms of section 21 of the Auditing Profession Act 26 of 2005 auditing
firms may incorporate, one of the more important requirements is that all the
shareholders and the directors must be public accountants. (1)
c) As Thabo Mzini has a BCom degree, he could not be registered with the
Independent Regulatory Board for Auditors as a public accountant. (1)

2. Apple Cruise CA(SA) is not eligible. (1)

a) In terms of section 90(2)(b)(iii) of the Companies Act 71 of 2008, a director of a
company is not allowed to perform the duties of the auditor of the same company. (1)
b) If Apple Cruise were to resign immediately and wait for a period of five years,
she could then be appointed as the auditor. (1)

3. Badrep is not eligible. (1)

a) However, in terms of section 90(b)(iii) of the Companies Act 71 of 2008, any person
who habitually performs the duties of secretary of a company may not be appointed
as an auditor. (1)
b) Badrep has performed this service for many years. (1)
c) If Badrep were to cease to provide secretarial services immediately, the firm could
accept the appointment if it were to resign and wait for a period of five years, as it
is registered with the Independent Regulatory Board for Auditors. (1)

4. Brainwaves Inc. is eligible. (1)

The company, which is registered with the Independent Regulatory Board for Auditors,
is not disqualified in any way by section 90 of the Companies Act 71 of 2008. (1)
Available marks [13]; maximum marks [10]

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 Auditing Fundamentals in a South African Context Graded Questions 3e Solutions Manual

QUESTION 15 LEVEL 2/3

Companies Act 71 of 2008 and King IV [16 marks]

1. At year-end, only two of the five non-executive directors are independent and the King IV
report requires that the majority of the non-executive directors should be independent. (1)
2. The King IV -
executive director and Mr Archibald is not described as being independent. (1)
a) There is also no indication that a lead independent director has been appointed. (1)
3. Looking at the surnames, it appears that the company has no African board member after
the departure of Mr Mlambo. The King IV
regard to the board of directors. (1)
4. Audit, risk and compliance committees:
a) According to the King IV
non-executive directors only, and Mr Franken, an executive director, is a member. (1)
b) The King IV the CEO should not be member of the audit
committee while Mr Franken is a member of the audit committee. (1)
c) The King IV -executive directors
on the audit committee. As Mr Franken is a committee member, there are only two
independent, non-executive directors. (1)
5. Remuneration committee:
a) Mr Archibald, being the board chairperson, should not chair this committee. (1)
b) According to the King IV
should be an independent, non-executive director. Mr Archibald is, however, not
independent. (1)
c) Per the King IV
members, given that they are not board members. (1)
d) According to the King IV rd subcommittees should consist of at least
three directors. In this case, only one director is a member of the remuneration
committee. (1)
e) Per the King IV -executive
directors, of which the majority should be independent, which is not the case here
Mr Archibald, the only director on the remuneration committee, is a non-independent,
non-executive director. (1)
6. Social and ethics committee:
a) According to the King IV onsist of at least
three directors. In this case, only two directors are members of the social and ethics
committee. (1)
b) According to the King IV
executive and non-executive directors, with a majority being non-executive. This is not
the case as the two directors on this committee are both executive directors. (1)
7. Performance evaluation:
a) According to the King IV
take place every two years and should be done by an independent, non-executive
member in the case where there is no lead independent director. The performance
evaluation of the chairperson is, however, done:
i. every third year and (1)
ii. by the CEO. (1)

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 Auditing Fundamentals in a South African Context Graded Questions 3e Solutions Manual

b) According to the King IV eport, the performance evaluation of the CEO should take
place every year and should be done by the board of directors. The performance
evaluation of the CEO is, however, done:
i. every second year and (1)
ii. by two of the board members and not the board as a whole. (1)
8. Other:
a) The company either does not have a company secretary, or the incumbent is
ineffectual. (1)
b) The board does not meet their responsibility for compliance governance as
required by King IV (1)
Available marks [20]; maximum marks [16]

QUESTION 16 LEVEL 2

Companies Act 71 and Auditing Profession Act 26:

Reportable irregularity [24 marks]
Companies Act 71 of 2008 and Auditing Profession Act 26 of 2005
1. The loan to Mr Green was approved without the necessary authorisation in terms of
section 45 of
be granted if:
a) the board of directors approved the loans and it is satisfied that:
i. immediately after providing the financial assistance the company will
satisfy the solvency and liquidity requirements, and (1)
ii. the terms on which the loan is to be granted are fair and reasonable to the
company; and (1)
b) a special resolution is obtained within the previous two years, approving the
loan to the recipients/category of potential recipients. (1)
The loan was also allocated to debtors without any disclosure that the loan was to a
(1)
The loan was incorrectly classified to non-current liabilities and should form part of
current liabilities (bank overdraft). (1)
This will result in the company not being liquid after the granting of the loan (current
liabilities exceed current assets after inclusion of the R6 million). (1)
The terms of the loan are also not fair to the entity as no interest is charged. (1)
No special resolution was obtained from shareholders. (1)
Therefore, Mrs Pink acted in contravention of section 45 of the Companies Act. (1)

Available marks [9]; maximum marks [7]

2. A reportable irregularity has taken place as it meets the definition of a reportable

irregularity, as documented below: (1)
any unlawful act or omission committed by any person responsible for the
management of an entity, (1)
Mrs Pink approved the loan in contravention of the Companies Act. (1)

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 Auditing Fundamentals in a South African Context Graded Questions 3e Solutions Manual

a) which has caused or is likely to cause material financial loss to the entity or to
any partner, member, shareholder, creditor or investor of the entity in respect
of his, her or its dealings with that entity; (1)
The loan is likely to cause material financial loss as:
i. the loan causes the entity to be illiquid (1)
ii. in light of the financial problems of the entity, there is a risk that directors
will not be receiving bonuses and therefore the director will default on the
payment of the loan (1)
iii. no interest is charged on the loan, where the entity could have used the
cash to settle debt/earn interest. (1)
b) OR which is fraudulent or amounts to theft; (1)
i. Mrs Pink intentionally disclosed the loan as non-current liability/debtor
in order to conceal it. (1)
ii. Mrs Pink is a financial accountant and should be aware of the
requirements of IFRS. (1)
c) OR which represents a material breach of any 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. (1)
The auditor therefore needs to report the reportable irregularity in terms of section
45 of the Accounting Professions Act. (1)
The auditor must therefore, without delay, send a written report to the Regulatory
Board about the reportable irregularity. (1)
Within three days of sending the report to the Regulatory Board, the auditor must
notify management that a report was sent to the Regulatory Board in terms of section
45 of the APA. (1)
Within 30 days of sending the report to the Regulatory Board, the auditor must: (1)
a) discuss the report with management (1)
b) afford management the opportunity to make representations in respect of the
report (1)
c) send another report to the Regulatory Board, which includes a statement with
proof, that: (1)
i. no reportable irregularity has taken place or is taking place, or (1)
ii. the suspected reportable irregularity is no longer taking place and that
adequate steps have been taken for the prevention or recovery of any loss
as a result thereof, if relevant, or (1)
iii. the reportable irregularity is continuing. (1)
Available marks [21]; maximum marks [17]

QUESTION 17 LEVEL 2/3

Companies Act 71 of 2008 and King IV [28 marks]

Composition of the board and its subcommittees:

1. The King IV report requires a board of directors that reflects an appropriate mix of
diversity and companies must set specific targets for gender representation. Only two of the
nine directors are, however, female. (1)

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 Auditing Fundamentals in a South African Context Graded Questions 3e Solutions Manual

2. The chairperson of the board is not an independent, non-executive director, which is

required by the King IV
company had been, by the year-end date, without an independent chairperson for about six
months. (1)
3. There is no indication of a lead independent director, which is a requirement of the King IV
report. (1)
4. According to the King IV
a) Mr Appleton is, however, both joint CEO and the chairperson of the board. (1)
b) According to the King IV
years after resigning as CEO. (1)
5. The board does not have more independent, non-executive directors than non-independent,
non-executive directors, as required by the King IV rt. (1)
6. Mr Appleton appears to be too powerful a figure in the company, being the chairperson, the
joint CEO (together with someone who held a relatively unimportant exec
position before his elevation), and the chairperson of three of the four committees, including
the audit committee, which is supposed to play an important oversight role. The King IV
report, however, requires a balanced distribution of power, with no individual being able to
dominate decision making. (1)
7. Audit and risk committees:
Per the King IV
committees, but some issues arise:
a) This committee consists of one executive and two independent, non-executive members,
as well as Ms Ludd, who is not a director.
i. According to the King IV
independent, non-executive directors only. (1)
ii. According to the King IV dit committee should consist of at least three
members. There are, however, only two independent, non-executive members and
therefore insufficient members. (1)
b) According to the King IV
or the chairperson of the audit committee. The chairperson, Mr Appleton, is, however,
the chairperson of the audit committee. (1)
c) According to the King IV
independent, non-executive director. In this case, the chairperson is an executive
director. (1)
d) According to the King IV ld not be a member of the audit
committee. Mr Appleton, joint CEO with Mr Brundyn, is, however, a member of the audit
committee. (1)
e) ecutive should not be a member, because:
he is not a board member (as required by the King IV report); and (1)
the committee is supposed to exercise oversight over the internal audit function,
thus the head of internal audit should not be a committee member. (1)
8. Social and ethics committee:
a) According to the King IV committee should consist of both
executive and non-executive members, with a majority being non-executive. The social
and ethics committee of Diversified, however, consists of only executive members. (1)
b) According to Regulation 43(4) of the Companies Act, the social and ethics committee
should include at least one director who is not involved in the day-to-day management
nvolved in this capacity within the previous

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 Auditing Fundamentals in a South African Context Graded Questions 3e Solutions Manual

three financial years. This is, however, not the case here, as all three members are
executive directors. (1)
c) The four senior managers should not be members of this committee, because they are
not board members as required by the King IV (1)
9. Nomination committee:
a) According to the King IV t, the nomination committee should consist of only non-
executive members, of which the majority should be independent. However,
the nomination committee of Diversified consists of both executive and non-
executive members; and (1)
the majority of the non-executive members are not independent as there are only
two non-executive members, one of which is independent. (1)
According to the King IV not be a member of the nomination
committee. Mr Appleton, joint CEO with Mr Brundyn, is, however, a member of the
nomination committee. (1)
b) Mr Langa should not be a member, because he is not a board member as required by the
King IV (1)
c) According to the King IV
three members. There are only two non-executive members on this committee and
therefore an insufficient number of valid members as per the King IV (1)
10. Remuneration committee:
a) According to the King IV
should be an independent, non-executive director. Mr Franks is, however, a non-
independent, non-executive director. (1)
b) Mr Langa should not be a member, because he is not a board member as required by the
King IV (1)
c) According to the King IV
three board members. The remuneration committee of Diversified, however, consists of
only two board members. (1)
d) According to the King IV
non-executive members, of which a majority should be independent. The remuneration
committee of Diversified, however, consists of two non-executive members, one of
which is independent. (1)
11. Financial assistance to directors for the purchase of shares:
a) No notice was sent to the directors before the board meeting held on 1 December 2015.
The Companies Act requires notice to be given to the directors as determined by the
memorandum of incorporation. (1)
b) According to sections 44 and 45 of the Companies Act, the following approval process
had to be followed, which was not done in this case:
i. A board resolution is required, which means that the majority of the directors have
to vote in favour of
nine directors had to vote in favour of the loan. It was, however, approved by only
two of the directors. (1)
ii. There is no indication that the following was done, as required by sections 44
and 45 of the Companies Act:
The granting of loans to directors in order to purchase shares was not
approved by means of a special resolution in the preceding two years. (1)
The granting of loans to directors in order to purchase shares did not form
part of an employee share scheme. (1)

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 Auditing Fundamentals in a South African Context Graded Questions 3e Solutions Manual

The directors did not indicate that they were satisfied that, immediately after
providing the loans, the company would satisfy the solvency and liquidity
test. (1)
The directors did not indicate that the terms under which the loans were
provided were fair and reasonable. (1)
12. The number of breaches of the governance principles in King IV
indicates that the company either does not have a company secretary or the incumbent
is ineffectual. (1)
13. Diversified Ltd is not complying with the Companies Act. According to the King IV
the board of directors should ensure compliance with relevant laws, which is not done in
this case. (1)
Available marks [34]; maximum marks [28]

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