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:
- The corporate governance issues in this scenario include conflict of interest, lack of disclosure, and potential fraudulent activities. Sandra, as the CFO of Nissan and wife of a significant shareholder in Bruce Wayne(Pty) Ltd, had a conflict of interest in negotiating the loan and assisting her son to buy shares at a lower price. This lack of disclosure in the financial statements regarding her benefits raises concerns about transparency and integrity within the company.
Scenario 2:
- The corporate governance issues in this scenario involve inaccurate disclosure of carbon emissions, potential bribery or corruption with government officials, and misuse of company funds. The discrepancy in carbon emissions highlights a lack of transparency and accuracy in reporting important environmental impact factors. The expenditure to the Bahamas documented as directors' travel allowance, but spent by Paul, raises red flags about potential misappropriation of company funds.
(b)
In addressing these issues, it is important to refer to professional codes of conduct, ethics, South African legislation, and King codes to provide recommendations and guidance. This may include ensuring compliance with the Companies Act, promoting transparency and accountability in financial reporting, and upholding ethical standards in business practices. Recommendations may include implementing stronger internal controls, disclosing conflicts of interest, and conducting thorough investigations into potential fraudulent activities.
(c)
For Tony Stark, it is important to advise him to disclose the potential conflict of interest involving Sandra and Bruce Wayne(Pty) Ltd, as well as the undisclosed benefits in the financial statements. Additionally, he should report the attempted bribery and any other unethical behavior to senior management.
For Hunter Biden, he should report the inaccurate carbon emissions disclosure to senior management and recommend a review of the measurement processes to ensure accuracy. He should also investigate the expenditure to the Bahamas and the potential misuse of company funds by Paul.
(d)
Audit Engagement Strategy:
1. Planning Phase: Review the audit plan, assess the risks associated with the scenarios, and determine the necessary audit procedures to address these risks.
2. Execution Phase: Conduct detailed audit testing and procedures to verify the accuracy and completeness of financial information, including examining source documents, conducting interviews, and reviewing relevant policies and procedures.
3. Reporting Phase: Communicate any findings related to corporate governance issues, conflicts of interest, fraudulent activities, or non-compliance with regulations to senior management and make appropriate recommendations for action.