Confidential

COLLEGE OF ACCOUNTING SCIENCES

TEST 4/PAPER 2: 26 JULY 2022

AUE4862/NAU4862/ZAU4862

APPLIED AUDITING

TAX4862/NTA4862

APPLIED TAXATION

EXAMINATION PANEL AS APPROVED BY THE DEPARTMENT.

This AUE4862/NAU4862/ZAU4862 (APPLIED AUDITING) and TAX4862/NTA4862 (APPLIED

TAXATION) question paper consists of 8 (eight) pages and the Required 3 (three) pages. The total is
out of 100 marks.

THE USE OF A NON-PROGRAMMABLE CALCULATOR IS PERMISSIBLE.

PLEASE NOTE:

• The test is a limited open-book test: Students are allowed to use ONE COPY of the 2021/2022
version of the SAICA Student Handbook or any version published in one of the previous years.
Students should note that the taxation test is set and marked according to the legislation
contained in the 2021/2022 version of the SAICA Student Handbook.
• Ensure that you use the allocated time after completion of the test to scan your answer, check
that the file you would like to upload is the correct file and that it is complete. Further ensure that
you upload your answer to myUnisa timeously and make sure that the submission process is
complete since NO EMAIL OR LATE SUBMISSIONS WILL BE MARKED.
• It is your responsibility as a student to ensure that you have the necessary resources to
successfully complete the test. UNISA does not have control over load shedding and network
downtime and will therefore not be able to accommodate the remediation of these issues.
• Please ensure that you use the time allocation as stipulated i.e. 30 minutes reading time and
150 minutes writing time.
• If you are writing all five modules, please submit within the time stipulated i.e. by 12:10 for the
morning session and by 18:10 for the afternoon session.
• If you are not writing all five modules, (writing 1 or 2 modules) please submit immediately on the
Invigilator APP as per instructions provided on the communication directly sent to you.
• This test paper remains the property of the University of South Africa.
• Please ensure that you have completed your details in full i.e. name, surname, student number,
module code of paper and test number on your script before submission.
• All tests and examinations should be answered in ENGLISH only.
• Round off all amounts to the nearest Rand.

[TURN OVER]
 Page 2 of 16 AUE4862/ZAU4862/NAU4862
TAX4862/NTA4862
TEST 4/PAPER 2

UPLOADING INSTRUCTIONS PAPER 2:

• Please make sure that you correctly label each question on your answer sheet
• Include your student number on every page.
• This paper consists of two modules AUE4862 and TAX4862.
• You will submit your full answer scripts on myUnisa (click on myAdmin then on Assessment
admin and on the dropdown menu on assignment submission) on the Assignment 4 links
labelled AUE4862 and TAX 4862.

All the best.

 Page 3 of 16 AUE4862/ZAU4862/NAU4862
TAX4862/NTA4862
TEST 4/PAPER 2

QUESTION 1 100 marks

This question consists of two related parts, PART A and PART B.

PART A 91 marks

You are a CA(SA) and a senior audit manager at the firm of Noord Auditors Inc. (“Noord”). Noord is
conducting the audit of Danko Farming Ltd (“Danko Farming”). Danko Farming is an RSA registered
(resident) company that specialises in the manufacturing and retail of industrial farming equipment and
has a 30 June year end. Danko Farming is registered as a category C value-added tax (“VAT”) vendor.

Danko Farming was established on 1 July 2005 by Betty Bomb and Jon Kraga and they each hold 35%
of the issued shares. The rest of the issued shares are held by various shareholders. Danko Farming
was incorporated in Vereeniging and still has a factory in that area. Danko Farming rely on more than
15 years of experience and terabytes of precision data to know them and their businesses better than
anyone else. Their easy-to-use technology helps deliver results they see in the field, on the job site, and
on the balance sheet. Danko Farming ensures seamless access to parts, services, and performance
upgrades to trade-in by providing world-class support throughout the lifecycle of their equipment, with
productivity and sustainability always in mind.

Change of audit partners

Kevin Kline CA(SA) has been the audit partner of Danko Farming for the past 6 years during his
employment at Noord. Kevin Kline resigned from Noord and has accepted a new position as the Chief
Financial Officer at Danko Farming.

Zara Harris CA(SA) has been appointed as the audit partner for the audit of Danko Farming to replace
Kevin Kline. The following came to light during the handover meeting with Kevin Kline:

1. Noord accepted a large sum of money from Danko Farming in one of its bank accounts, which are
kept in a separate account. These funds are strictly off limits to Noord. Zara Harris will now be
responsible to manage this account on behalf of Danko Farming until Danko Farming requests the
amount to be transferred to their bank accounts.

2. One of the directors, who prefers to remain anonymous, requested the issuing of an unqualified
audit report for Danko Farming and should this be done, an additional fee of 2.5% over and above
the agreed upon audit fee will be paid to Noord and Zara Harris.

3. The same director (mentioned in 2 above), has further guaranteed that Noord will remain the
auditors of Danko Farming as long as Zara Harris is the engagement partner and keeps up the
good work.
 Page 4 of 16 AUE4862/ZAU4862/NAU4862
TAX4862/NTA4862
TEST 4/PAPER 2

4. The audit of the 2022 financial year has commenced. All the resources for the audit have been
finalised and the same audit team who conducted the audit in the previous year will be utilised for
the 2022-audit of Danko Farming. The team is competent and need very little guidance. Kevin
Kline is always available to assist should Zarra Harris need further clarity regarding any of the
allocated team members.

5. The audit register for the Danko Farming audit is complete, and no additional risks need to be
added to the risk register.

Governance structure

Current governance structure

No. Name Capacity on board Committees

1. Ben Diora Chief Executive Officer Chairperson of the risk committee
2. John Kraga Non-executive Director N/A
3. Tom Hiller Independent non-executive Director Chairperson of the nominations
committee
4. Ken Kors Independent non-executive Director Chairperson of the audit committee
5. Ralph Laury Independent non-executive Director N/A
6. Hugo Bason Independent non-executive Director Chairperson of the remuneration
and ethics committee

Danko Farming is currently expanding their current governance structure and the following candidates
are under consideration:

No. Name Capacity on board Qualifications and experience

1. Kevin Kline Chief Financial Officer CA(SA), over 10 years’ experience
in auditing listed companies
2. Tshepo Geans Independent non-executive Director LLB, over 20 years in the estate
planning
3. Thulas Indi Independent non-executive Director Registered engineer, over 3 years
in the construction industry

The above candidates are currently under consideration for the director position for the governing body.
One of the directors, not included above, was fired by John Kraga due to an unresolved personal conflict
between the two parties. As John Kraga fired the director, it is his responsibility to appointment a director
within the next 2 weeks to ensure that the governing body is adequately resourced. John Kraga, as
founder of Danko Farming, will consider all candidates. No other procedures were followed upon the
firing of the director by John Kraga.
 Page 5 of 16 AUE4862/ZAU4862/NAU4862
TAX4862/NTA4862
TEST 4/PAPER 2

John Kraga has scheduled private interviews with each of the candidates whereafter the appointment
will be made. No other processes and procedures will be performed before the selection of the
successful candidate as John Kraga’s choice will be final.

List of contracts:

Kevin Kline (refer above) provided you with the following detail in respect of contracts and agreements
applicable to Danko Farming Ltd’s 2022 year of assessment:

• The directors resolved that an eighteen (18) month contract be entered into with
Cleaning Services (Pty) Ltd (a company registered in South Africa and a value-added tax (“VAT”)
vendor) for providing cleaning services (that meet the requirements of section 11(a) of the Income
Tax Act) to Danko Farming at a total cost of R360 000 (including VAT). Services commenced on
1 September 2021, the date on which the R360 000 was paid.

• Danko Farming signed an agreement with Renovations (Pty) Ltd, (a company registered in South
Africa and a VAT vendor) for the following work to be affected to the company’s retail building
during the period 1 June 2022 to 28 February 2023:
- R110 000 (excluding VAT) for the removal and replacement of the wooden floor tiles in the
building that were damaged during a flood.
- R190 000 (excluding VAT) to paint the roof tiles of the building. Although the roof tiles were
not damaged during the flood, management wanted to change the appearance of the
building, as the company hoped that the new bright look would attract more clients and
increase sales.

The total amount of R345 000 (including VAT) was paid to Renovations (Pty) Ltd on 1 June 2022.

• Danko Farming entered into a contract with Farmers (Pty) Ltd (a company registered in
South Africa and a VAT vendor) on 1 March 2022 for a contract price of R10 000 000 (excluding
VAT). In terms of the contract, Danko Farming must manufacture stronger and lighter agricultural
equipment with high-strength steel. The Senior Financial Costing Manager estimated that the
company would incur tax deductible costs of R6 800 000 (excluding VAT) to complete this project.
The contract determines that a deposit of R5 000 000 is receivable on 31 March 2022 and the
outstanding balance on completion of the project, which was estimated to be on 30 October 2022.
Danko Farming commenced with work on the contract on 10 April 2022 and incurred expenditure
of R2 000 000 (including VAT) on the contract during the company’s 2022 year of assessment.

Resignation of Steven Steel:

Steven Steel (“Steven”), aged 35, has been employed as a sales representative at Danko Farming. He
travelled extensively as he was required to visit farmers and attend agricultural exhibitions. He earned
a monthly salary of R60 000 until his resignation from Danko Farming on 31 October 2021.
 Page 6 of 16 AUE4862/ZAU4862/NAU4862
TAX4862/NTA4862
TEST 4/PAPER 2

Steven owns a motor vehicle that cost him R560 000 (including VAT but excluding any finance charges).
He paid all the costs in respect of maintenance and fuel. Steven received a monthly travel allowance
of R5 000 since the start of his employment. In addition, he is also reimbursed at R4,20 a kilometer for
actual business travel undertaken by him. Steven kept an accurate logbook and claimed 18 900km’s
for business travel. He travelled a total of 21 000km’s during his employment at Danko Farming for the
current year of assessment.

Steven’s total monthly medical scheme contributions amounted to R4 500, of which Danko Farming Ltd
contributed 60% for his benefit to the scheme, according to the rules of the scheme. The other 40%
was deducted from his monthly salary and paid to the medical scheme on his behalf. His wife was the
only other dependant on his medical scheme.

During May 2021, Steven had to attend the South African Agricultural Trade Show International
(NAMPO) in Bothaville, in the Free State. He spent 5 nights away from his home during which time
Danko Farming booked and paid for his accommodation in Bothaville. In addition, the company paid
him a subsistence of allowance of R5 000 for the period to cover his meals and other incidental costs.
He did not keep accurate records of his subsistence expenses while he was away.
 Page 7 of 16 AUE4862/ZAU4862/NAU4862
TAX4862/NTA4862
TEST 4/PAPER 2

PART B 9 marks

Part B(i) (3 marks)

Kevin Kline’s mother-in-law, Faith, is 67 years old and a retired nurse. Faith retired on 1 December 2020
and the last ITR12 income tax return that she submitted was for her 2021 year of assessment that ended
on 28 February 2021. Faith was not required to submit an ITR12 income tax return to SARS for the 2022
year of assessment. Faith will be moving to a retirement village and decided to declutter her home
before moving to the smaller space. She decided to get rid of most of her belongings and items that she
felt she no longer needed. One of the items that she disposed of a week before her move on
30 June 2022, was her “tax file” with documentation (including IT3 data certificates and her medical tax
certificate and other related tax records) pertaining to the 2022 year of assessment. Faith’s decision to
throw away all documentation pertaining to the 2022 year of assessment was based on the fact that her
taxable income for the 2022 year of assessment was below the tax threshold (refer to the extract below
from her 2022 IT3(a) certificate submitted by her employer to SARS), and the only other income she
received in respect of the 2022 year of assessment was a small amount of local interest (fully exempted
from normal tax) and income received from a tax-free investment fund, and she was therefore not
required to submit an ITR12 income tax return to SARS.

Extract from Faith’s 2022 employee income tax certificate - IT3(a):

INCOME SOURCES
AMOUNT
CODE DESCRIPTION (R)
3603 PENSION – TAXABLE ****82994

GROSS REMUNERATION
AMOUNT
CODE DESCRIPTION (R)
3696 GROSS NON-TAXABLE INCOME
3697 GROSS RETIREMENT FUNDING EMPLOYMENT INCOME
3698 GROSS NON-RETIREMENT FUNDING EMPLOYMENT INCOME
3699 GROSS EMPLOYMENT INCOME (TAXABLE) ****82994

DEDUCTIONS
AMOUNT
CODE DESCRIPTION (R)
4493 MEDICAL CONTRIBUTIONS IRO RETIRED EMPLOYEE ****14582
4497 TOTAL DEDUCTIONS ****14582

REASON FOR NON-DEDUCTION OF EMPLOYEES' TAX

CODE DESCRIPTION
02 EARNED LESS THAN THE TAX THRESHOLD
 Page 8 of 16 AUE4862/ZAU4862/NAU4862
TAX4862/NTA4862
TEST 4/PAPER 2

Part B (ii) (6 marks)

Faith’s twin sister, Joyce, is a physiotherapist with her own private practice. Joyce is a provisional
taxpayer. All her IRP6 (provisional tax) returns were submitted to SARS and her provisional taxes paid,
but Joyce failed to submit her 2021 ITR12 income tax return to SARS that was due on 31 January 2022.
Failure of the obligation to submit her 2021 ITR12 income tax return is Joyce’s first incidence of non-
compliance. Apart from the outstanding 2021 ITR12 income tax return, all Joyce’s tax affairs are up to
date. Joyce’s 2022 IRP6 returns were also submitted on time, and the provisional tax payments were
timeously made. Hertax@2022
2022 ITR12 income tax return is not yet due for submission to SARS.

Joyce’s assessed taxable income for her 2020 year of assessment was R481 900 and it was R520 800
for her 2021 year of assessment.

Extract from Public Notice 1531, which lists incidences of non-compliance, issued by the Commissioner
in Government Gazette 45540 on 26 November 2021:

2.1 Failure by a natural person to submit an income tax return as and when required under a tax Act, for years
of assessment commencing on or after 1 March 2006, where that person has, with effect from
1 January 2022—

2.1.1 two or more outstanding income tax returns for years of assessment commencing on or after 1 arch
2006 but ending on or before 29 February 2020; or
2.1.2 one or more outstanding income tax returns for years of assessment commencing on or after
1 March 2020.

2.2 Failure by a natural person to submit an income tax return as and when required under the Income Tax Act,
for years of assessment commencing on or after 1 March 2006, where that person has, with effect from
1 December 2022, one or more outstanding income tax returns.
 Page 9 of 16 AUE4862/ZAU4862/NAU4862
TAX4862/NTA4862
TEST 4/PAPER 2

This required consists of two related parts, PART A and PART B.

PART A 91 marks

MARKS
Sub- Total
Total
(a) With reference to the change of audit partners:

Discuss your concerns in terms of the SAICA Code of Professional

Conduct. Include safeguards in your answer. 29

Communication skills: clarity of expression 1 30

(b) With reference to the governance structure:

1. Discuss any corporate governance concerns that you may have

in terms of the King IV Report on Corporate Governance and
Companies Act 71 of 2008. 13
2. In terms of the candidates under consideration for the director’s
vacancy, discuss and make a recommendation on which director
should be appointed in compliance with King IV Report on
Corporate Governance. 8 21
(c) Assume that the VAT implication for the Cleaning Services (Pty) Ltd
contract was not recorded by Cleaning Services (Pty) Ltd to avoid
payment obligations to SARS. Compile a Compliance Checklist that will
be used by Cleaning Services (Pty) Ltd’s engagement auditor to ensure
compliance with Section 45 of Audit Professional Act no.26 of 2005. 8

Communication skills: layout and logical argument 1 9

(d) With reference to the information under the heading list of contracts,
discuss, supported with calculation and reference to legislation the income
tax implications for the 2022 year of assessment of the contracts listed. 20

Communication skills: layout and presentation 1 21

(e) Calculate the employees’ tax that Danko Farming Ltd withheld from
Steven for the year of assessment ending 28 February 2022. 10 10
Total for Part A 91
 Page 10 of 16 AUE4862/ZAU4862/NAU4862
TAX4862/NTA4862
TEST 4/PAPER 2

PART B 9 marks

Marks
Sub- Total
Total
(i) Consider the information under part B(i) and briefly discuss whether Faith
acted within the law by throwing away her tax-related documentation for
the 2022 year of assessment. Refer and motivate your answer in terms of
the relevant legislation. 3
(ii) Considering the information under part B(ii), explain the possible
consequences for Joyce under the Tax Administration Act, No. 28 of 2011
(“TAA”) regarding her failure to submit her 2021 ITR12 income tax return.

In your answer, refer to, and evaluate, the application of the relevant
provisions of the TAA, without considering any remedy or remedies that
may be available to Joyce. Also, ignore any amount(s) or calculation(s) in
your answer. Marks will be awarded for references to legislation. 5

Communication skills – clarity of expression 1 6

Total for Part B 9
TOTAL FOR THE QUESTION 100
 Page 11 of 16 AUE4862/ZAU4862/NAU4862
TAX4862/NTA4862
TEST 4/PAPER 2

QUESTION 1 – SUGGESTED SOLUTION

Part a Marks

With reference to the change of audit partners:

Discuss your concerns and possible safeguards in terms of SAICA Code of

Professional Conduct.
SAICA CoPC
Kevin Kline is a chartered accountant and should therefore comply with the SAICA
Code of Professional Conduct (Part 1,3 and 4). 1
Danko Farming is a listed company and therefore is regarded as a public listed entity. 1
Employment with an audit client
1 Kevin Kline has moved from Noord to being the CFO of Danko Farming (client), 1
And had a long association with the client, 1
this creates a familiarity and/or intimidation threats to independence (objectivity). 1
1.1 This is created because Kevin Kline was the engagement partner of Noord and 1
appears that he still wants to be involved in the audit:
1.2• Kevin indicated that he is always available to assist should any further assistance be 1
needed regarding the audit team members. (any other valid example given by student)
1.3• Kevin further indicates to the new audit partner that the audit risk register is complete 1
and no additional risks need to added
1.4 In terms of R524.6 an individual who was a key audit partner of a public interest entity 1
and who joins the client as an officer compromises independence.
1.5 Kevin Kline is now the CFO of the audit client, Danko Farming, and a significant 1
connection still exists
1.6 Furthermore, the entire audit team is the same as the prior year audit when Kevin Kline 1
was the engagement auditor therefore the:
1.7 threat to independence (objectivity) is significant as independence is compromised. 1
1.8 The appropriate safeguards to reduce the threat to an acceptable level would be to:
1.8a• Modify the audit plan. 1
1.8b• Assigning to the audit team individuals who have sufficient experience relative to the 1
individual who has joined the client 1
1.8c• Having an appropriate reviewer review the work of Kevin Kline
Custody of client assets
2 Due to the fact that Noord is keeping monies on behalf of Danko Farming, there is self-
interest threats to both objectivity and professional behaviour. 2
2.1 Keeping the monies of client can affect the professional judgement of the auditors,
especially if no appropriate measures have been taken. 1
2.2 In terms of R350.9 SA a professional account shall not accept custody of an audit
client’s assets unless the threat to independence can be eliminated 1
2.3 Although the monies are kept in a separate account and is separate from Noord, the
threat is still significant. 1
2.4 It is further suspicious that there is no timeline to when the monies will be utilised/paid
back to Danko Farming 1
2.5 The appropriate safeguards to reduce the threat to an acceptable level would be to:
• Repay the monies to Danko Farming and to not keep any other monies on their 1
behalf.
 Page 12 of 16 AUE4862/ZAU4862/NAU4862
TAX4862/NTA4862
TEST 4/PAPER 2

Marks
Contingent Fess
3 Due to the fact that the XYZ will be getting an additional fee based on the audit
outcome, there is a self-interest threat to independence (objectivity). 2
3.1 The firm has an additional financial interest in issuing an unqualified audit report and
this might impair the auditor’s judgement. 1
3.2 Although 2.5% might appear to be remote/insignificant 1
The threat is significant as this is an audit/assurance engagement 1
3.3 In terms of R410.10 a firm shall not charge directly a contingent fee for an audit
engagement 1
3.4 The only appropriate safeguard is to refuse the contingent remuneration 1
Or the threat is too significant and there are no possible safeguards that could remedy
the acceptance of the contingent fee.
Guaranteed appointment
4. Due to the fact that Noord are being assured by one of the directors that they will
remain the auditors, there is a self-interest and intimidation threat to independence
(objectivity) and professional behaviour. 2
4.1 This can also be viewed as inducement by the client as Danko Farming is giving a
guaranteed appointment to incite loyalty with the engagement partner. 1
4.2 Auditors are not supposed to have assurance that they will be re-appointed as they are
supposed to be reappointed in terms of the Companies Act requirements. 1
4.3 This comment ‘keep up the good work’ including the contingent fees arrangement,
independence is under threat. 1
4.4 The threat is significant as the independence of the engagement partner and that of the
4.5 firm. 1
4.6 The appropriate safeguard would be to:
4.7 • Communicate this those charged with governance at Danko Farming 1
• Appointing an objective external reviewer for the audit 1
• Resigning from the audit/decline the inducement 1
5. Based on the above points, Noord should consider if they are still independent in mind
and appearance and should their independence be under significant threat. 1
Noord should therefore consider terminating their assurance relationship with Danko
Farming. 1
Communication: clarity of expression 1
Available 40
Maximum 30
 Page 13 of 16 AUE4862/ZAU4862/NAU4862
TAX4862/NTA4862
TEST 4/PAPER 2

Part b (1) Marks

With reference to the governance structure:

Discuss any corporate governance concerns that you may have in terms of the King IV
Report on Corporate Governance and Companies Act 71 of 2008.
KING
1
1.1 In terms of principle 7, recommended practice 9, the governing body should comprise
as a minimum the chief executive officer and at least one other executive should be
appointed to the governing body.
1.2 Danko Farming currently only has Ben Diora (CEO) as part of the governing body as an 1
executive director.
1.3 In terms of principle 7 recommended practice 31, the governing body should elect an
independent non-executive member as chair to lead the governing body.
1.4 All the chairpersons of the different committees has been named but no mention of the
chairperson of the governing body. This brings into question if the governing has an
elected chairperson of the governing body. 1
1.5 In terms of principle 7 recommended principle 32, the governing body should appoint
an independent non-executive member as lead independent to serve as a sounding
board for the chair.
1.6 No mention is made about a lead independent non-executive member being appointed 1
as Danko Farming does not have a chair for the governing body.
2 Appointment of director
2.1 In terms of principle 7, recommended practice 14 the nomination of candidates for
election as members of the governing body should be approved by the governing body.
2.2 The vacancy on the board will be appointed solely by John Kraga and not the entire
governing body. 1
It is further highlighted that John Kraga’s choice will be final. 1
2.3 In terms of principle 7 recommended practice 15, the process for nomination, election
and ultimately, the appointment of the members of the governing body should be formal
and transparent.
2.4 As John Kraga in the one who is making the appointment, it is unlikely that the process
will be formal and transparent. 1

The fact that John Kraga will host private interviews with all the candidates also
emphasise the fact that the process is not formal and transparent. 1

As the appointment will be made in 2 weeks, which further suggests that the process
might not be formal and transparent as it would require more time to complete the 1
appointment process.
2.5 In terms of principle 7 recommended practice 18, a candidate for election as a non-
executive member of the board should be requested to provide the governing body with
details of professional commitments and a statement that confirms that the candidate
has sufficient time.
 Page 14 of 16 AUE4862/ZAU4862/NAU4862
TAX4862/NTA4862
TEST 4/PAPER 2

Marks
2.6 It was noted that no other processes were performed, it is therefore doubtful that
Tshepo and Thulas supplied the required details 1
2.7 In terms of principle 8 recommended principle 60, the governing body should allocate
oversight to the nominations committee to manage the process of nominating, electing
and appointing members of the governing body.
2.8 Based on the fact that the nomination, electing and appointing of the director for the
vacancy was the sole responsibility of John Kraga, it is questionable if the responsibility
in substance is discharged by the nominations committee. 1

This is further strengthened by the fact that Tom Hiller is the chairperson of the 1
nominations committee but he is not involved in the process of appointing the new
director.
Companies Act
3.1 In terms of section 71, despite anything in the MOI agreement, a director may be
removed by an ordinary resolution adopted at a shareholders meeting:
Before the shareholders of a company may consider a resolution:
• The director must be given notice of the meeting and resolution
• Afforded an opportunity to make a representation
3.2 Given the fact that the director was fired by John Kraga and no other procedures were
followed upon the firing of the director by John Kraga, 1
it is doubtful that a meeting was held for the resolution and that the director was
afforded an opportunity to make a representation. 1
3.3 In terms of section 70, a person ceases to be a director and a vacancy arises on the
board of the company if a person is removed by a resolution of the shareholders and
a company must file a notice within 10 business days after a person becomes or
ceases to be a director of the company.
3.4 The director was fired by John Kraga and no resolution of the directors is mentioned 1
to have taken place.
3.5 Danko Farming further did not file a notice as it was stated that no other procedures 1
were followed upon the firing of the director.
3.6 It therefore appears that there is no vacancy on the board. 1
4.1 In terms of section 77 a director may be held liable as result of a breach of the director
OR
In terms of section 76 the director must act in the best interest of the company
4.2 John Kraga fired the director without following the proper procedures and this could
lead to Danko Farming getting sued. 1
4.3 John Kraga can further be held liable for firing the director as the process he followed 1
was in contravention with the Companies Act.
Available 18
Maximum 13
 Page 15 of 16 AUE4862/ZAU4862/NAU4862
TAX4862/NTA4862
TEST 4/PAPER 2

Part b (2) Marks

With reference to the governance structure:

In terms of the candidates under consideration for the director’s vacancy, discuss and
recommend whether the candidate should be appointed and if it would be in
compliance with King IV Report on Corporate Governance.
1 KING
1.1 In terms of principle 7 recommended principle 16 before nominating a candidate for
election, the governing body should consider the following:
• The collective knowledge, skills and experience required by the governing body
• The diversity of the governing body
• Whether the candidate meets the appropriate fit and proper criteria
1.2 Looking at the qualifications/experience:

Kevin Kline is a qualified CA(SA) with over 10 years’ experience of auditing listed
companies
1.3.1 • He will bring in his good financial background to Danko Framing. 1
1.3.2 • Danko Farming is a listed company and Kevin Kline experience would come in
handy on the board to assist with various issues 1

Tshepo Geans has a LLB degree with over 20 years’ experience in estate planning:
1.4.1 • His law degree might assist Danko Farming the with compliance issues 1
1.4.2 • It is however noted that his experience is in estate planning and Danko Farming
is in the agricultural industry which requires very little (if any) estate planning 1
considerations.

Thulas Indi is a registered engineer with over 3 years in the construction industry
1.5.1 • The engineering degree might come in handy when developing/evaluating
agricultural projects (science projects) 1
1.5.2 • He however only has 3 years’ experience which is quite low and would require
significant mentorship 1

1.6 Considering the fact that the governing body consists of only 6 directors of which five
(5) out of the six (6) directors are non-executive directors: 1

1.7 The governing body needs to appoint an executive director to assist Danko Faring to
ensure that they have more than one point of interaction with management. 1

1.8 Based on the above Kevin Kline would be a good candidate to appoint as he is the
only candidate under consideration who is an executive position. 1

1.9 Tshepo Geans and Thulas Indi will not assist Danko Farming the with achieving the
appropriate mix of executive management. 1
1.10 Based on the above considerations,
Kevin Kline should be appointed as a director of the governing body as he will 1
• Assist Danko Farming have more executive management involvement in the
governing body 1
• He also has the most appropriate qualification and experience to ensure that
governing body is sufficiently resourced. 1
Total 13
Maximum 8
 Page 16 of 16 AUE4862/ZAU4862/NAU4862
TAX4862/NTA4862
TEST 4/PAPER 2

Part c

Assume that the VAT implication for the Cleaning Services (Pty) Ltd contract was not
recorded by Cleaning Services (Pty) Ltd to avoid payment obligations to SARS.
Compile a Compliance Checklist that will be used by the Cleaning Services (Pty) Ltd
engagement auditor to ensure compliance with Section 45 of Audit Professional Act
no.26 of 2005.
Compliance Checklist Marks
No. Section 45 Yes/No
1. Is the non-recording of the VAT implications on the Cleaning Services (Pty) 1
Ltd contract an unlawful act or an unlawful omission?
2. Was this act of non-recording of the VAT implications committed by Cleaning 1
Services (Pty)’s management?
3. Does the non-recording of the VAT implications on the Cleaning Services 1
(Pty) Ltd contract cause or is it likely to cause a material financial loss?
4. Does the non-recording of the VAT implications on the Cleaning Services 1
(Pty) Ltd contract result in fraud or does it amount to theft?
5. Does the the non-recording of the VAT implications on the Cleaning Services 1
(Pty) Ltd contract represent a material breach of fiduciary duty?
6. A reportable irregularity exists if:
• Points no.1-2 are yes and
• One of the points for point no.3-5 is yes. 1

Any other case, a reportable irregularity does not exist 1

7. The following should be adhered to when a Reportable Irregularity exists:
8. Was the written report for the reportable irregularity sent, without delay, to 1
IRBA?
9. Were Cleaning Services (Pty)’s board of directors notified in writing within 1
three days of sending the report to IRBA?
10. Did the notice to Cleaning Services (Pty)’s board of directors include a copy 1
of the report that was sent to IRBA?
11. Within 30 days of having sent the report to IRBA:
12. Did the engagement partner discuss the report with Cleaning Services (Pty)’s 1
board of directors?
13. Did engagement partner afford Cleaning Services (Pty)’s board of directors 1
an opportunity to make representations?
14. Has engagement partner sent another report to IRBA, 1
• informing if no reportable irregularity is taking place or has taken place;
or
• the suspected reportable irregularity is no longer taking place, or
• if the reportable is continuing?
Communication skills: layout and logical argument 1
Available 14
Maximum 9