QUESTION 1
You are a senior trainee accountant in your audit firm’s technical department. Your
responsibility is to advise fellow staff members, conducting an audit, on statutory and
corporate governance matters.
One of the firm’s clients is the Tesla Group. All companies in the group manufacture retail
or wholesale electronic vehicles and related accessories. T Tesla, Inc. is an American
multinational automotive and clean energy company headquartered in Austin, Texas,
which designs, manufactures and sells electric vehicles, stationary battery energy
storage devices from home to grid-scale, solar panels and solar shingles, and related
products and services.
The group is structured as follows: Tesla Ltd holds 60% of Volkswagen, 80% of Ford(Pty)
Ltd and 70% of Nissan. Ford(Pty) Ltd holds 100% of the shares in Porche Ltd.
Your firm Thanos Ltd holds the appointment, as auditors of all companies in the group
and the various audit teams are currently engaged in the 31 August year end audit.
You have received the following details about your trainees:
Scenario 1
Tony Stark on the audit of Nissan found that an amount of R 1,6 million in trade creditors
owed to Bruce Wayne(Pty) Ltd. This represents the purchase during August of a machine
that manufactures electronic vehicle, specifically, SUVs that can travel 400 km on a single
charge. Bruce Wayne(Pty) Ltd is fully owned by Jordan Peterson and two of the four
directors of Nissan who have no shareholding at Nissan.
Tony also found out the CFO at Nissan is Jordan Peterson’s wife Sandra. She had
negotiated the loan on behalf of Nissan. Moreover, she had assisted her son Derek to
buy shares at Nissan at a lower price. After all she assisted in solving Nissans liquidity
issues.
Tony was offered R250 000 as a gift at the beginning of the audit engagement. Tony used
half of the money to support a nearby orphanage and donated the rest for war victims in
Palestine. Tony found that all the source documents including purchase documentation,
for example, a purchase order, delivery note, invoice and entries in the records, were
correct. However, the Sandra’s benefits were not disclosed in the notes to financial
statements.
Scenario 2
Hunter Biden, was selected to lead the audit of Ford (Pty) Ltd. He found out the carbon
emission in Ford was 60% above what they disclosed. The CEO stated that this minor
deviance was because of measurement errors. He also mentioned that he was close
friends with government officials. He casually mentioned the disappearance of an auditor
who ‘did not know how to do business ‘. Furthermore, the company has made a number
of loans during the past year. Several bank transfers were made
One was a R150 000 expenditure to the Bahamas which was documented as directors
travelling allowance. This was spent by Paul, the managing director of Porche Ltd who
also serves on the board of Ford(Pty) Ltd.
REQUIRED
(a) Elaborate on the corporate governance issues mentioned in each of the scenarios
(20)
(b) Synthesis all the information learnt from the professional codes of conduct, ethics,
South African legislation and King codes to give recommendations and guidance
to the above scenarios (10)
(c) How would you advise each of the trainees under your supervision?(6)
(d) Share your audit engagement strategy justifying each phase (9)
(a)
Scenario 1:
- Conflict of interest: Sandra Peterson, the CFO of Nissan, has a conflict of interest as she is also a shareholder in the supplier company, Bruce Wayne(Pty) Ltd. This could potentially lead to biased decision-making.
- Lack of disclosure: Failure to disclose Sandra Peterson's benefits and her relationship with Jordan Peterson in the financial statements could lead to a lack of transparency and misrepresentation of financial information.
Scenario 2:
- Misrepresentation of carbon emissions: Ford(Pty) Ltd misrepresenting their carbon emissions could be a violation of environmental regulations and standards.
- Fraudulent expenditure: Falsely documenting personal expenses, such as the expenditure to the Bahamas as directors' travel allowance, is a form of fraud and misappropriation of company funds.
- Threats towards auditors: Mentioning the disappearance of an auditor who did not comply with the company's practices is a form of intimidation and coercion.
(b)
From the professional codes of conduct, ethics, South African legislation, and King codes, the following recommendations and guidance can be given:
- A thorough investigation should be conducted into the various conflicts of interest, lack of disclosure, misrepresentation of information, and fraudulent activities mentioned in the scenarios.
- All relevant laws and regulations should be adhered to, and any violations should be reported to the appropriate authorities.
- Proper independence and objectivity should be maintained by the auditors at all times, and any attempts at bribery, coercion, or intimidation should be firmly rejected.
(c)
I would advise Tony Stark to disclose all relevant information regarding Sandra Peterson's benefits and relationship with Jordan Peterson in the financial statements. He should also report any potential conflicts of interest and unethical behavior to the firm's management.
I would advise Hunter Biden to thoroughly investigate the misrepresentation of carbon emissions, fraudulent expenditures, and threats towards auditors. He should report any illegal activities to the appropriate authorities and ensure the company complies with environmental regulations and disclosure requirements.
(d)
Audit Engagement Strategy:
- Planning Phase: Identify key risks, such as conflicts of interest, lack of disclosure, misrepresentation of information, and fraudulent activities. Develop a detailed audit plan to address these risks.
- Execution Phase: Conduct thorough audit testing to verify the accuracy of financial information and compliance with laws and regulations. Investigate any potential red flags or unethical behavior.
- Reporting Phase: Communicate findings to management and recommend necessary actions to address any identified issues. Provide clear and transparent reporting to stakeholders on the audit process and outcomes.