AUE1601 EXAM PACK.

AUE1601 EXAM PACK. Auditing. As the MO1 of the company states that the company is to be audited. The company has to be on compliance with its standards and rules set out in the memorandum of incorporation.  The company also has to comply with the companies act. In terms of regulations a company is to be externally audited if it has a public interest score of at least 100 and its financial statements were internally computed.  The memorandum of incorporation and the companies’ regulation both state that the company should be externally audited.  Painters Ltd should therefore comply with its memorandum of incorporation, as it is a requirement. Preference sec 94 3.2. An audit committee shall be appointed by a public company, state owned company or other company that is required by its memorandum of incorporation. Audit committee must comprise of at least three members of which must be:  A director of company  Non – executive director must not be involved in daily management of the business.  Independent, thus not a pervious employee for the past three years or be a material customer or supplier, and must not be related to the mentioned.  Must hold prescribed minimum qualifications and have adequate knowledge and experience. Duties of the audit committee included:  Nominate for appointment as auditor of company and ensure that auditor is independent. 7 LUCIANO SCHOOL OF LAW & SOCIAL SCIENCES [LSLSS]  Determine fees to be paid and the terms of the engagement.  Ensure that appointment of auditors complies with the act and legislation.  Determine nature and extent of any non – audit services that auditor may / must not provide.  Prepare a report to be included in the annual financial statement.  Any other valid points Refer sec 94 (7) 3.3. Removal of Director Sec 71 If a company has more than two directors and a shareholder or director has alleged that directors:  Is ineligible or disqualified  Is incapacitated and unlikely to regain capacity.  Has neglected functions or performance as director. Board other than director concerned must determine matter by resolution and director but only after during notice of meeting, including copy of proposed resolution and reasons. Must also give concerned director, reasonable time or opportunity to make a presentation. As Painter Ltd has six directors the above requirements must be followed: The concerned director (Ryan) is considered by another director (John) to be neglecting his performance thus complies with one of the requirements of being able to remove a director. Ryan could be removed as director, after notice has been given to him prescribed form and manner and reasonable opportunity has been given for him to make a presentation Removal is also done after approval of directors at meeting to be held. 3.4. Reference 590 (2) Lee Westwood cannot be appointed as auditor as be is not independent. He is related to one of the major shareholders of the client (Painters Ltd). 8 LUCIANO SCHOOL OF LAW & SOCIAL SCIENCES [LSLSS] Advisors Inc. cannot be auditors of Painters Ltd as one of the partners is not a registered auditor. 9 LUCIANO SCHOOL OF LAW & SOCIAL SCIENCES [LSLSS] OCTOBER / NOVEMBER 2012 Question 1 1.1. (a) calculation of public interest score Points One (1) point per employee 50 50 x 1 One point for every R1 million turnover 1.2 R1 200 000 ÷ R1 m One point for every R1 million in third party liability R500 000 ÷ Rm 0.5 One pant for every individual who has Direct or indirect beneficial interest In the securities of the company Kate has 51% = 1 person Michael 20% = 1 person 102 Remaining 100fans = 100 people Total public interest score 153.7 (b) reference: companies Regulations sec 28 (2) Master Chef is required to be audited as a public interest score of at least 100 (answer above : 153.7) as calculated. The financial statements of Matter Chief were internally compiled by Michael who was appointed by Kate. 10 LUCIANO SCHOOL OF LAW & SOCIAL SCIENCES [LSLSS] If a requirement that companies other than state owned or public companies with a public interest score of at least 100, of which its financial statements for that year were internally complied should be audited. 1.2. (a) requirements for Person / or firm to be appointed as auditor. Reference: sec 94 (2)  Must be a registered auditor.  Must be acceptable to the company’s audit committee as being independents of the company  Must not be  Director of the company  Employee of company  Director or employee of company secretary  Person who regularly performs duties of accountant or bookkeeper or secretarial work for the company.  Person who at any proceeding five years was person listed above.  Person related to any person listed above. (b) Michael Knife cannot be auditor as he is an employee of the company.  Adam Fork cannot be auditor as he is the director of the company.  Wife of Adam Fork cannot be and auditor to Master Chief as she is related to the director of the company in concern.  No repeat Incorporated can be the auditors as they meet the companies act requirements.  They are registered auditors and hence no direct or indirect relations to directors or employees of master chief and are considered to be independent as they are one of the biggest auditing firms in South Africa. 1.3. Reference sec 16 Memorandum of Incorporation may be amended by  Court order  Special resolution proposed by board or shareholders entitleds to at least 10% of voting rights on such resolution. 11 LUCIANO SCHOOL OF LAW & SOCIAL SCIENCES [LSLSS]  Special resolution may be adopted at a shareholders meeting. 1.4. Reference sec 25 (6) Memorandum of Incorporation and any Rules of the company are landing  Between the company and each shareholder.  Between or among shareholders.  Between the company and each director and or any other person serving company as board member in terms of master chef the memorandum of Incorporation and rules are binding on Kate (owner), Michael, (financial manager). Adam Fork (managing director) and Shareholders. Question 2 2.1. Related Party Reference sec: Reference: sec 2 (1) companies Act In terms of the companies Act an individual is related to another individual if: Married or Separated by no more than two degreed of natural or adopted consanguinity. Munnesh Crossing is related party of Wassem Crossing as he is son to Wassen crossing as he is a son to Wassen and couplies with the related party definition. 2.2. Reference se 45 Legality of granting loan The companies act provides that except to the extent that the memorandum of incorporation of a company provides otherwise, the board may authorize company to provide financial assistance to a director or related person to the director. Further on, despite any provision despite any provision of the memorandum of incorporation the board may not authorize financial assistance unless  Assistance is in terms of an employee since scheme or  Pursuant to a special resolution of shareholders adopted within previous two years and board must be satisfied that immediately after financial assistance the company would 12 LUCIANO SCHOOL OF LAW & SOCIAL SCIENCES [LSLSS] meet solvency and liquidity test and that the terms of the financial assistance are fair and reasonable to the company. The board must also ensure that any conditions or restrictions out in the memorandum of incorporations with regards to granting of financial assistance are satisfied. When board adopts resolution they must provide written notice of that resolution to all shareholders unless every shareholder is a director. The resolution must be provided:  Within 10 business days after board adopts resolution if total value of loan being given exceeds one tenth of 1% of the company’s net worth or  Within 30 days after end of financial year. Application  The directors were in compliance with companies act requirements as they ensured that the conditions and restrictions set out in the memorandum of incorporation were satisfied. The directors did not comply with the companies act with regards to the authorization a no special resolution by shareholders authorized the transaction and there was no mention that the directors considered the solvency and liquidity test and did not consider the fairness of the loan terms to the company. The liquidity ratio calculated as follows: Current assets R5m = 2 Current liabilities R2.5. Recommended Ratio = 2 From the above the company would satisfy the solvency and liquidity ratio / test as fall within the recommended ratio. 13 LUCIANO SCHOOL OF LAW & SOCIAL SCIENCES [LSLSS] With regards the notice of adopted resolution. A was sent to all shareholders 15 business days after the day the resolution was made. Calculation 190 x R5m = R50 000 X 1/10 = R5000 The loan is R1m and therefore exceeds R5000 In terms of the Act the notice should have been sent to all shareholders within 10 business days after board adopts the Resolution. Conclusion : The granting of the loan was not legal as not incompliance with companies act, in terms of authorization and notice requirements. 2.3. Process and requirements to remain a director Reference s . 71  Removal way be approved by an ordinary resolution of shareholders adopted at shareholders meeting.  Before considering resolution, director must be given notice of meeting and the resolution. Must also be given reasonable opportunity to make presentation.  If a company has more than two directors and a director / shareholder has alleged that the direction has neglected functions of director.  The board, other than director concerned (Bonolo Avenue) must determine matter by resolution and may remove director, but before doing so the board must :  Given director concerned, notice of meeting and resolution and statement providing reasons for resolution.  Give director concerned, reasonable opportunity to make presentation.  The board determines that director is ineligible or disqualified the director concerned may apply within 20 business days to a court to review determination of Board.  Person removed from office as director may apply to court for damages or other compensation for  Loss of office as director or  Loss of any other office as consequence of being removed as director. 14 LUCIANO SCHOOL OF LAW & SOCIAL SCIENCES [LSLSS] Question 3 Matter 1 Reference se 36 36 and sec 38. The issuing of s hares (30 000) will comprise of the 20 000 unissued authorized shares and 10 000 shares that are to be authorized. Items of sec 38 (1) the board may issue shares but only within classes and to the extent that shares have been authorized in the memorandum of Incorporation of the company. The authorization an classification of shares the numbers may be changed only by:  Amendency memorandum of Incorporation by special resolution of shareholders or  By board, to the extent the memorandum of Incorporation provides. Board may increase or decrease number of authorized shares. If board issues shares not authorized or in excess of the authorized shares. The shares may be retroactively authorized by special resolution of shareholders within 60 business days. Consideration of shares sec 40 Board may issue shares only for adequate consideration. Thus must be determined by board be company issues shares issue of shares must be approved by special resolution of shareholders if issued to  Director or  Related or interrelated persons to the company Issue of shares requires approval by special resolution. Voting power of the class of shares issued or issuable as a result of transaction equal to or exceed 30 % of voting power of all shares before transaction. Calculation = 30 000 80 000 = 37.5% = greater than 30% 15 LUCIANO SCHOOL OF LAW & SOCIAL SCIENCES [LSLSS] Application The shares being issued require a special resolution of shareholders as shared are being issued to a related company.  The issue was not appropriately authorized as was authorized by directors. In noncompliance with the companies act.  The shares being issued also exceed 30 % in voting power of shares before share issue and therefore there is need for special resolution of shareholders to approve the issue.  The shares were issued at current market value and are considered to be an adequate consideration. Conclusion The issue of shares to Animalia is not in compliance with the companies Act requirement, therefore is not a legal transaction as if was not appropriately approved. MATTER 2 3.2.1. Reference sec 48 Board of company may determine that company will acquire a number of own shares. Board may determine that it will acquire shares of its holding company but not more than 10% in aggregate of the number of issued shares and no voting rights to those shares may be exercised and if remain a sub ordinary. Company may not acquire its own shares and a subsidiary of a company may not acquire shares of that company if as a result of that acquisition there would no longer be any shares of the company in issue. Other than;  Shares held by one or more sub ordinaries of the company or  Convertible or redeemable shares. 3.2.2. Acquisition of shares Solvency requirements sec 4 At the tune of transaction and after transaction. 16 LUCIANO SCHOOL OF LAW & SOCIAL SCIENCES [LSLSS]  Assets of the company fairly valued must exceed liabilities as fairly valued.  Company must be able to meet debt as if becomes due 12 months after test has been satisfied.  Assets do not exceed liabilities therefore the solvency test is not met.  Liquidity test =