EXAM QUESTIONS (LIVE) 04 JUNE 2015

Section A: Summary Content Notes

The Audit Report
The auditor is appointed by the shareholders at the Annual General Meeting. The task of the auditor is to
study the financial statements and comment of its validity. Some of the more renowned auditing firms are:
KPMG; Price Waterhouse and Coopers and Deloitte.
The auditor’s report should contain a validating statement – namely that the auditor has examined the
annual financial statements and that in his/her opinion they fairly present the financial position of the
company as well as the results of its operations in the manner required by the Act. When the auditor finds
that all is in order in the books he/she will issue an unqualified opinion in the report. In the event of an
irregularity being depicted during an audit, the auditor needs to qualify his/her statement. This is thus
called a qualified opinion.

Different Types of Audit Reports

Qualified Bad
Unqualified Good
Withheld/Disclaimer Very bad

Different Types of Auditors

Internal Auditors
Appointed by the directors to monitor controls and financial information on a continuous basis

Independent auditors/ External auditor

Appointed by the shareholders at the AGM to express an opinion on the published financial statements

Components of the Audit Report

 To the shareholders - addressed to them

 We have examined - indicates their duty

 Pages x to y - limitation of their role

 Test basis - limitation of their role

 In our opinion - limitation of their liability

 Fairly present - not biased towards any particular group

 State of affairs - i.e. the Balance Sheet

 Results of operations - i.e. the Income Statement & Cash Flow Statement

 Companies Act - in accordance with the law

 IFRS - International Financial Reporting Standards

 GAAP - Generally Accepted Accounting Practice

Section B: Exercises
Question 1
COLUMN A (report) COLUMN B (opinion)
1.1.1 A
Qualified audit report In our opinion, the annual financial statements present fairly, in all
material respects, the financial position of Shabba Ltd as at 28
February 2013.
1.1.2 B
Unqualified audit report We have not been able to obtain sufficient audit evidence to provide
for an audit opinion. Accordingly, we do not express an opinion on
the financial statements of Khothule Ltd for the year ended 28
February 2013.
1.1.3 C
Disclaimer report In our opinion, except for the effect of the unauthorised interest-free
loan to the Chief Executive Officer, the annual financial statements
present fairly, in all material respects, the financial position of Dai Ltd.
1.2.1 Prepare the following notes to financial statements on 28 February 2014:
(a) Share capital (6)
(b) Retained Income (11)
INFORMATION:
A Share Capital
Of the 500 000 authorised ordinary shares, 400 000 were issued by the end Ofthe year. Three quarters
of these shares were issued for 600 cents each in 2009 while a quarter was sold for 780 cents per share
on 27 February 2014.
At the end of the financial year, 28 February 2014, 20 000 ordinary shares were repurchased for 800
cents per share. These shareholders were entitled to final dividends.
B The following balances appeared in the books on 28 February 2014:

Fixed assets ?

Fixed deposit: WKM Bank (7% per annum) 1 March 2013 300 000

Retained income (1 March 2013) 580 500

Trade and other receivables 308 006

Trade and other payables ?

Bank 324 494

Net profit after tax ?

Mortgage Loan (12% p.a.): OMS Bank ?

C Financial Indicators for the year ended 28 February 2014

Debt/equity ratio 0,16:1

Earnings per share 165 cents

Current ratio 1.9:1

D Dividends
An interim dividend of 60 cents per share was paid. The new shares issued did not qualify for the interim
dividend.
A final dividend of 80 cents per share was declared on 26 February 2014.

1.3 ETHICS AND CORPORATE GOVERNANCE

Read the following extract and answer the questions that follow:

SUSPENDED TELKOM EXECUTIVE FIGHTS BACK OVER LOAN ALLEGATIONS

Suspended Telkom Chief Financial Officer (CFO) is fighting back, claiming he received the
appropriate sign-off (approval) from his bosses for an interest-free loan of R6m he got from the
company.
He rejected the company’s allegation that he authorised it himself. He alleges that the
Company’s chairperson and the Head of Remuneration Committee supported the granting of
the loan. He further stated that the Company’s Chief Executive Officer (CFO) and Human
Resources (HR) Officials approved the loan, which was used to buy company shares in order to
boost investors’ confidence in the company’s shares.
The company said the loan breached corporate governance regulations and that the CFO had
overseen the provision of the loan to himself.
From [Business Day by Christopher Spillane Wednesday,29 January 2014 ]

REQUIRED:
1.3.1 In your opinion, do you think that the Chief Financial Officer acted fairly in allegedly authorising a
loan to himself? Explain. (2)
1.3.2 Other than suspension, what else could Telkom have done, to address this matter? Provide TWO
suggestions. (4)
Answer Book
Question 1
1.1
1.1.1
1.1.2
1.1.3

1.2.1
(a) SHARE CAPITAL
Authorised

500 000 ordinary shares

Issued Share Capital

300 000 Ordinary shares in issue at the beginning of the year @ R6.00
1 800 000

1.2.1
(b) RETAINED INCOME
Balance at the beginning of the year

Net profit after tax

 1.3.1 In your opinion, do you think that the Chief Financial Officer acted fairly in allegedly
authorising a loan to himself? Explain.

1.3.2 Other than suspension, what else could Telkom have done, to address this matter?
Provide TWO suggestions.

Section C: Solutions
Question 1
1.1
1.1.1 C 
1.1.2 A 
1.1.3 B 

1.2.1
(a) SHARE CAPITAL
Authorised

500 000 ordinary shares

Issued Share Capital

300 000 Ordinary shares in issue at the beginning of

the year @ R6.00 1 800 000
100 000 Ordinary shares issued at R7.80 on
27 February 2014 780 000
20 000 Ordinary shares repurchased for R6.45 
during the year (129 000) 
380 000 Ordinary shares at the end of the year 2 451 000 
1.2.1
(b) RETAINED INCOME
Balance at the beginning of the year 580 500
Net profit after tax (165/100 X 380 000) 627 000
Repurchase of 20 000 ordinary shares (20 000 X 1.55)
(See a) (31 000) 
Dividends (500 000)
Paid (300 000 x R0.60) 180 000
Recommended (400 000 X R0.80) 320 000

Balance at the end of the year 676 500

1.3.1 In your opinion, do you think that the Chief Financial Officer acted fairly in allegedly
authorising a loan to himself?
 Authorising an interest-free loan to himself is unfair (unfair to the shareholders and
other stakeholders) and unethical too;
 If the allegation is proven true, the CFO shall have acted fraudulently; (fraud)
 The CFO is misusing his position of trust to enrich himself;
 The amount of loan involved (R6m) is huge not to attract
any interest. This amount ,if invested, can/could
earn investors/shareholders a reasonable interest
or income; 

1.3.2 Other than suspension, what else could Telkom have done, to address this matter?
Provide TWO suggestions.
Any two suggestions:
 Demand that the CFO returns the loan;
 Must be made to sell all shares acquired with the loan and pay all proceeds to the
company and in the case of shortfall, be held liable for it;
 Demand that the CFO repays the full amount with interest with immediate effect;
 Institute disciplinary measures against the CFO;
 Open a case of fraud against the CFO;
 Dismiss the CFO and recover the loan amount
from his pension; 