(a) Determine the type of assurance engagement SET requires in FY2017. Justify your
determination.
Hint: Use and explain the Public Interest Score set out by the Companies Act 2008
1.
Number of average employees
123
2.
R 1 mil Turnover
157
3.
R 1 mil Third party liability
63
4.
Number of Shareholders at FY 2017
5
5.
Total (method mark for adding up)
348
A public interest score is the sum of the points allocated to certain attributes or a company
or close corporation e.g. one point is allocated to every one million rand or part thereof, of
6.
turnover. The Companies Act 2008 requires that each company (and close corporation)
calculate its public interest annually.
The public interest score is used as a gauge of the interest the public at large (society) has
7.
in the company or close corporation.
The following are the three ranges that the PI score can attain
Below 100 points.
Equal to 100 or above, but less than 350 points.
8.
Equal to or above 350 points
NOTE TO MARKER: one mark for listing all 3 ranges no mark if less than 3 are mentioned.
If the PI Score is between 100 and less than 350 we need to determine if the AFS are
9.
internally prepared or externally prepared if they are internally prepared than a full audit
is performed but if they are externally prepared than a review can be performed
CTZ helped with the establishment of a finance department, and this department prepares
10.
the AFS,
Therefore, because the AFS are internally prepared, and the PI Score is more than 100 and
11.
less than 350, a full audit is required.
Available
Maximum
(a) Discuss how the fundamental principle of independence affects the acquisition of
Shandu’s wheels (Pty) Ltd.
Hint: Use the SAICA Code of Professional Code 2012.
Communication mark- logical argument.
Section 120: The overriding requirement is that our firm (and the audit team) should be
1.
“independent in mind” and “independent in appearance” (be independent and be seen
to be independent)
The fact that a close family member of the manager of the audit team is a shareholder (of
2.1.
the audit client) gives rise to a potential self-interest threat.
The value of Phakamile Shandu sister’s shareholding could be affected (positively or
2.2. negatively) by decisions of opinion taken on the audit by Phakamile Shandu. As the senior
manager, she is influential to the audit opinion and outcome.
This may influence her professional judgement when dealing with audit issues. OR She
2.3. may make decisions to protect her father’s interests (self-interest) rather than making the
appropriate decisions from an audit perspective
The fact that the audit manager’s sister is a director of the audit client gives rise to a potential
3.
familiarity/intimidation threat due to the family relationship.
Neither of the above would appear to be clearly insignificant and therefore appropriate
4.
safeguards must be applied
In respect of 2.1 above, the Code suggests that a possible safeguard may be to “provide an
5.1 additional independent review of the work done by the manager (Phakamile Shandu) on
the audit”
Nonetheless taking into account 2.1. and 5.1 the MOST appropriate safeguard would be
5.2.
the removal of Phakamile Shandu from the audit team (see pt 1 above).
1n respect of 3 above, the Code suggests that this family relationship will be a real threat if
Phumi Shandu (the senior audit manager’s sister) is “in a position to exert direct and
6. 1
significant influence over the subject matter of the assurance engagement”, in this case,
the financial statements.
However, Phumi Shandu is unlikely to apply influence on the financial reporting. As she is
6.2. the operations director of only a division and is unlikely to have anything to do with the
financial records of the group etc.
In any event if Phakamile Shandu is removed as suggested in 5.2. above, the threat posed
7.
by the family relationship disappears OR the threats returns to an insignificant level.
Communication mark – logic argument.
NOTE TO MARKER: Students were taught to answer by:
1. Explaining the principle (pt 1)
2. Identifying significant threats (pt 2-4)
3. Determining the most appropriate safeguard to use (pt 5 and 6)
If there is evidence this method is used than these marks are allocated
Available
Maximum
(c) Discuss, with reference to the SAICA Code of Professional Conduct
the ethical conduct of Pearl Thusi, regarding her interactions with the new accountant of SET.
1.
Section 140: Confidentiality Not disclose or use confidential information for gain
Self-interest threat has arose. She is intending to use the information to gain a personal
2.1. advantage as he shared such information with the new accountant to gain recognition from
the new accountant (whom he wants to impress for personal reasons)
Pearl has breached the SAICA Code with respect to the following:
2.2. She shared confidential information that was in her possession as a result of her involvement
in the audit of a competitor of SET, without proper or specific authority (140.1).
As an audit trainee, Pearl must comply with the SAICA Code of Professional Conduct for
2.3. Chartered Accountants and the quality control procedures that are put in place by the audit
firm.
Pearl seems to disagree with the treatment of the acquisition. As a result, she believes that
2.4.
she has a better way of threating this transaction. This is an advocacy threat.
She did not consider whether the person to whom the information being disclosed was
3.1.
appropriate.
3.2.
Based on the circumstances it would seem it was not appropriate to disclose such
information to the new accountant (140.8).
Pearl and you should report this matter the management of the audit firm so that the
appropriate action may be taken.
CTZ must educate all the trainees on the confidentiality policy. The company should also
4.2.
ensure that trainees are not auditing two direct competitors.
4.3. Pearl should be removed from this engagement to avoid further breaches of confidentiality.
The fact that Pearl is trying to use the information for her own recognition is an indication
5.1 that he is not acting with integrity. She makes it seem like she picked the implication up
herself.
4.1.
5.2. Section 110: Integrity - This requires the trainees to be Straight forward Honest, Fair and
Truthful in their actions
Section 150; Professional behaviour, the trainee must act in a way that obeys the laws of
6.
this country and does NOT bring the profession into distribute.
7.1
Pearl has also made the statement that she could assist SET with the tax implications to
ensure a positive tax outcome for the company
7.2.
This offer is contrary to professional behaviour and creates a self-review threat to
independence also see 2.4
7.3. The threat is significant as SET is an audit client therefore CTZ should not provide
additional services to the entity. (Please see postulates)
7.4. There are no safeguards to reduce this threat to an acceptable level.
7.5. The provision of tax advice can therefore not be provided by Auditco.
Section 130: Professional competence Act diligently in line with technical and professional
8.1.
standards
Pearl want to offer tax advice yet she is not a tax expert. She does not have the correct skills
8.2.
and therefore would not be competent to offer such advice.
Communication mark – Clarity of expression and logical argument
Available
Maximum
(d) In preparation for her meeting with the directors of SET about listing requirements,
PK has asked you to prepare notes that she can utilise during the meeting when
discussing The King IV Report on Corporate Governance for South Africa 2016. She
requires these notes to focus particularly on:
(i) Composition of the governing body
The purpose of the GB is to direct and approve the processes for attaining an appropriate
1.
composition
Consider an appropriate size for itself, with reference to the optimal mix of
knowledge, skills, experience, diversity, independence (i.e. executive, nonexecutive and
2.
independent non-executive members), sufficiency in numbers for its committees, quorum
requirements, regulatory requirements and diversity targets
Comprise of a majority of non-executive members, most of whom should be
3.
independent
4.
Appoint as a minimum the CEO and one other executive to the governing body
Promote diversity in its membership (age, culture, race, gender and fields of
5.
expertise) and set targets for race and gender representation in its composition
6.
Arrange for periodic and staggered rotation of its membership
7
Establish a succession plan for its membership
(ii)
Establishment of Audit committee
Must in terms of KING establish an audit committee for SET (and should consider
establishing one for those that issue audited financial statements) that has as its role to
8.
provide independent oversight of the assurance functions and on the integrity of the annual
financial statements and other external reports
GB may delegate (in addition to any statutory duties where applicable) other governance
9.
responsibilities such as approval of annual financial statements and risk governance (whilst
ensuring sufficient time for the latter) but remains accountable
10. the audit committee oversees risks that may affect the integrity of external reports
The audit committee as a whole has to have the necessary financial literacy, skills and
11. experience, and that all members are independent non-executive members of the governing
body
12. AC must have an independent non-executive chair
13. the audit committee meets annually with external and internal auditors without management
AC must disclose all the above general matters relating to AC plus a statement on the
14. independence and specific particulars thereof for the external auditor; significant annual
financial statement matters and how addressed; views on quality of external audit,
effectiveness of the chief audit executive and internal audit; effectiveness of the design and
implementation of internal financial controls….; effectiveness of the CFO and finance
function and on combined assurance and the effectiveness thereof
Available
Maximum