CAS3701 Assignment 11 (ANSWERS) 2024 - DISTINCTION GUARANTEED

Well-structured CAS3701 Assignment 11 (ANSWERS) 2024 - DISTINCTION GUARANTEED. (DETAILED ANSWERS - DISTINCTION GUARANTEED!)..QUESTION 1 1. BACKGROUND LearnCo. Limited (LearnCo.) is a top training provider that offers skills development training solutions to businesses and government institutions in South Africa. The company is based in Gauteng, South Africa and has a 30 June 2024 year-end. LearnCo. offers a wide variety of courses in health and safety, leadership and managerial skills, occupational health and even on emerging technologies like machine learning, robotics, coding and artificial intelligence. The company conducts the training at the client’s workplace premises. LearnCo. employs 250 facilitators permanently. The facilitators come from a diverse range of fields in line with the courses offered by the company. The facilitators spend majority of their time travelling to clients throughout the country and consequently, LearnCo. incurs a high amount of expenditure related to travel claims. You have recently been appointed as the Financial Manager (FM) of LearnCo. The Chief Financial Officer (CFO) is orientating you about the company and its payroll system. The payroll system is outlined below. 2. PAYROLL SYSTEM LearnCo. uses a payroll software called Revolve X. Revolve X is highly advanced and is powered by artificial intelligence (AI). Revolve X automates the majority of routine payroll-related transactions. These include screening CVs submitted online, shortlisting candidates, performing monthly reconciliations, filing electronic reports, computing the monthly payroll expense, and validating and processing input data for the payroll. Any valid employee of LearnCo. has login access. LearnCo. has a limited Human Resource (HR) unit in place. The HR unit currently consists of the HR manager and two payroll clerks. The HR manager is currently responsible for conducting interviews, completing the recruitment process and retirements. The CFO explained that other than the screening of CVs and shortlisting of candidates against pre-determined criteria, Revolve X also assists the HR manager by providing pre-populated templates for employee contracts. The payroll clerks are responsible for capturing approved rates for travel claims, medical aid, provident fund and other applicable expenditures. Revolve X also houses the employee database. As the FM, you will approve and sign off the employee contracts on behalf of the company, ensure that applicable rates are up to date and that the schedules produced by the system are correct prior to authorisation for payment. 2.1 Dismissals and resignations Dismissals and resignations occur seldomly at LearnCo. The HR manager is currently overloaded with his duties, so management decided to move the handling of dismissals and resignations solely to the CFO. You were busy reviewing the payroll and noted details of two employees, with employee numbers 452901 and 370213, who were dismissed in September 2023 and December 2023, respectively, but were still included in the payroll. Fortunately, no payments have been made to the employees since their dismissals. When you followed up on this matter with the CFO, he indicated to you that he has a practice of removing such employees from the payroll at the company’s year-end. 2.2 Employee expense Employees are paid salaries on the last working day of the month. LearnCo. has no set salary structure for its employees. Employees can secure a higher pay-rate upon their appointment and during their performance reviews based on performance, experience and negotiation skills. Revolve X retrieves input data for the payroll payment from the employee database (which contains a list of employees, their annual approved salary and benefits) and PAYE, medical aid and provident fund tables. Revolve X is programmed to use AI to ensure that only the latest tax rates for individuals, rates for UIF and medical tax credits are used. Revolve X also automates the generation of payslips which are e-mailed to employees. Two days before the pay date, the FM receives an email notification that the payroll is ready for review. Revolve X uses biometric access technology for the FM and CFO to access the system. Biometric access includes the use of fingerprints and passwords and One Time Pins. Once the FM approves the payroll schedules, it goes to the CFO, who will review and authorise payment. If there are any errors, the CFO will reject the payroll instruction, which is then rerouted back to the FM electronically for follow up and fixing. The CFO must input a unique password and a One Time Pin to release payments. Revolve X reconciles the payroll payments captured in the payment module to the payroll control account at month-end. The CFO is alerted of any discrepancies through the generation of exception reports, for further investigation. Once payment has been made, Revolve X generates a schedule which contains the employees’ number, employee name, banking details and net income paid. The system also generates a deductions schedule for PAYE, the medical aid and the provident fund. The CFO will agree the deductions per the schedule to the payments loaded on the banking system and will then authorise that the payments to employees and third parties such as SARS, medical aid providers and provident fund providers be made. LearnCo. policy dictates that the CFO must pay these third parties by the 7th of the following month to avoid any late penalties or fines. 2.3 Non-facilitator payroll At the end of your first month at LearnCo. prior to approving the payroll expense, you compared the schedule of employees’ expenses produced by Revolve X to the list of payments that must be authorised. You noted five bank account payments that could not be traced to the schedule. Upon further follow-up, you traced those accounts to the general expenses schedule. You enquired about the discrepancy from the CFO, and he informed you that those five bank accounts belong to five full-time employees who work at the LearnCo. office building and are non-facilitators. The workers consist of three cleaners and two gardeners. They work five days a week from 8 am till 4 pm. The CFO explained that these employees work full-time for LearnCo. and are paid every month but are not registered as official employees of the company nor are included in the employee’s database. Each employee earns a gross salary of R15 000 per month. The CFO further explained the reason for accounting for the salaries as general expenses as follows: “Look, I know where you are coming from, but please understand that these people do not have a lot of disposable income. It has been a tough economic environment in South Africa, with a high unemployment rate, high food and fuel prices which have put a strain on low-income earners. We did not want to bother these employees by asking them to get tax numbers, deduct tax from their already low income and put a strain on their finances. We are only trying to help them.” 2.4 Performance Reviews According to the Performance Management policy of LearnCo., employee performance reviews take place annually in July. Employees must sign a performance agreement before the performance period starts, which is usually in June. The performance agreement outlines the objectives, terms, goals, and standards of performance expected from each employee during the performance period. It was noted that out of the 250 facilitators, only three facilitators (employee numbers: 321684, 458001 and 332791) did not sign their performance agreements for the 2023/2024 performance period. The line managers for the three employees signed and approved the performance agreements but the applicable employees did not sign. You followed up with the HR manager and he explained that this was an oversight on his part and the agreements should have been signed. According to the HR manager, the three facilitators had been travelling during the contracting period and did not return the signed performance agreements. Subsequently, the HR manager did not follow up with the employees or their line managers. TASK 1 You disagree with the CFO’s position on the accounting for the non-facilitator’s payroll expenses. However, you cannot request that the amounts be corrected unless you are able to substantiate that the treatment is incorrect. You are required to: a) Discuss, with reference to the Income Tax Act and Tax Administration Act, whether the five non-facilitator employees must be registered as taxpayers. b) Recommend to the CFO how the treatment of the employees' salaries should be corrected in the financial and non-financial records of LearnCo. TASK 2 The CFO has requested that you review the payroll system that has been outlined above. You are required to analyse and explain the possible internal control weaknesses in the payroll system. Propose recommendations in the form of internal controls, including application controls, to improve the payroll system. Limit your solution to the information presented. QUESTION 2 Radiant Beauty Limited, is a company that specialises in the production of premium skincare and cosmetic products. The company has been experiencing steady growth over the past five years. The company's product lines include anti-aging creams, serums, moisturisers, and makeup, all renowned for their quality and effectiveness. Radiant Beauty's products are in high demand across various markets, including major retail chains and online platforms. The company has a 31 March year-end. Radiant Beauty's current manufacturing facilities are operating at full capacity, creating a bottleneck that risks delaying deliveries and losing market share to competitors. To meet the increasing customer demand and maintain its competitive edge, the management team is considering investing in a new high-tech manufacturing line. This new production line, valued at R5 million, is expected to significantly enhance the company's manufacturing capabilities by incorporating advanced automation technologies to improve production efficiency. Radiant Beauty Limited Statement of financial position at 31 March 2024 Note 2024 2023 R R ASSETS Non-current assets Property, plant and equipment Intangible assets 1 813 000 1 631 700 Investments 1 437 000 1 221 000 Current assets Inventory 3 574 000 2 459 000 Trade receivables 2 088 000 1 774 000 Cash and cash equivalents 7 284 000 5 556 000 9 789 000 TOTAL ASSETS EQUITY AND LIABILITIES Share capital 3 000 000 3 000 000 Retained earnings LIABILITIES Non-current liabilities Interest-bearing debt 3 900 000 2 034 000 Lease liabilities 1 528 000 1 754 700 5 428 000 3 788 700 Current liabilities Interest-bearing debt 1 075 000 943 000 Trade and other payables 5 621 000 4 987 000 Lease liabilities 631 000 824 000 Taxation payable 156 000 143 000 7 483 000 6 917 000 Total liabilities Total equity and liabilities Radiant Beauty Limited Statement of profit or loss for the year ended 31 March 2024 2024 2023 Revenue Cost of sales () (9 490 000) Gross profit 4 259 000 2 758 000 Interest received 187 435 149 900 Other income 201 344 161 075 Operating expenses (1 287 600) (1 032 000) Operating profit before interest expense 3 360 179 2 036 975 Interest expense (467 654) (213 880) Profit before tax 3 827 833 1 823 095 Income tax expense 987 254 (789 805) Profit for the year 2 840 579 1 033 290 The management team at Radiant Beauty Ltd favour a balanced approach to risk. While they are not averse to taking calculated risks to drive growth and innovation, they prioritise maintaining a healthy capital structure. The company has a history of prudent financial management, avoiding excessive leverage, and ensuring that any significant investments are backed by thorough market analysis and financial projections. To finance the R5 million investment in the new high-tech manufacturing line, Radiant Beauty Ltd is considering obtaining a long-term loan of R3 million. Interest on the proposed loan will be levied at 12% per annum. The loan will be obtained on 1 April 2024 and a bullet payment of the capital amount will be repaid after 7 years. The company intends to fund the remaining R2 million using cash from its retained earnings. The investment in the new production line is expected to result in an increase of 12% in revenue. Based on past experience, it is evident that the management of Radiant Beauty Ltd prefers to maintain key financial ratios within specific levels. Management aims to ensure that the following levels are maintained: Current ratio: A minimum ratio of 1.2:1 Quick ratio/Acid-test ratio: The target ratio is 1:1 or higher. Debt to Equity Ratio: A target ratio of 85:15. Debt Ratio: The company aims for a debt ratio below 50% Interest cover ratio: The target interest cover ratio is 5 or higher. Return on Assets (ROA): The target ROA is 8 - 10% (industry average). Return on Equity (ROE): Radiant Beauty aims for an ROE of 15 - 20% (industry average) You are the financial manager of Radiant Beauty Ltd. You have been tasked to analyse, evaluate and recommend to the board of directors whether the proposed investment in the new high-tech manufacturing line is feasible based on the financial information provided and the liquidity, leverage and profitability levels that management aim to maintain. You may assume the following: • Interest on the loan for the first-year amounts to R218 924. • Profit before tax will increase by 10% if we assume the investment will be made. Note: • Comparatives are not required. • 2023 figures/amounts are provided for completeness.