EXAM QUESTIONS (LIVE) 04 JUNE 2015 Section A: Summary Content Notes

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1 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 Unqualified Withheld/Disclaimer Different Types of Auditors Internal Auditors Bad Good Very bad 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

2 Section B: Exercises Question 1 COLUMN A (report) Qualified audit report Unqualified audit report Disclaimer report COLUMN B (opinion) A In our opinion, the annual financial statements present fairly, in all material respects, the financial position of Shabba Ltd as at 28 February B 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 C 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 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 authorised ordinary shares, 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 At the end of the financial year, 28 February 2014, 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 Retained income (1 March 2013) Trade and other receivables Trade and other payables? Bank Net profit after tax? Mortgage Loan (12% p.a.): OMS Bank?

3 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 ETHICS AND CORPORATE GOVERNANCE Read the following extract and answer the questions that follow: REQUIRED: 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 ] In your opinion, do you think that the Chief Financial Officer acted fairly in allegedly authorising a loan to himself? Explain. (2) Other than suspension, what else could Telkom have done, to address this matter? Provide TWO suggestions. (4)

4 Answer Book Question (a) Authorised SHARE CAPITAL ordinary shares Issued Share Capital Ordinary shares in issue at the beginning of the R (b) RETAINED INCOME Balance at the beginning of the year Net profit after tax

5 1.3.1 In your opinion, do you think that the Chief Financial Officer acted fairly in allegedly authorising a loan to himself? Explain Other than suspension, what else could Telkom have done, to address this matter? Provide TWO suggestions. Section C: Solutions Question C A B (a) Authorised SHARE CAPITAL ordinary shares Issued Share Capital Ordinary shares in issue at the beginning of the R Ordinary shares issued at R7.80 on 27 February Ordinary shares repurchased for R6.45 during the year ( ) Ordinary shares at the end of the year

6 1.2.1 (b) RETAINED INCOME Balance at the beginning of the year Net profit after tax (165/100 X ) Repurchase of ordinary shares ( X 1.55) (See a) (31 000) Dividends ( ) Paid ( x R0.60) Recommended ( X R0.80) Balance at the end of the year 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; 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;

LIVE: CASH FLOW & RATIOS 04 JULY 2014

ACCOUNTING LIVE: CASH FLOW & RATIOS 04 JULY 2014 In this lesson we: Question 1 Lesson Description Work through various questions and answers relating to Cash Flow & Ratios. Exam Questions (70 marks; 40