AUE2601 Group A
Assignment 2 AUE2601 2023 – Semester 2
Question 1
1.1 Answer
The appointment of FGN as auditors of EL does not comply with Section 91 of the
Companies Act. Section 91 of the Companies Act in South Africa outlines the procedures
that should be followed to ensure compliance with the Act when appointing auditors. In this
case, it appears that the procedures were not followed.
Section 91 of the Companies Act requires the following procedures to be followed when
appointing auditors:
a) Board Resolution: The appointment of auditors should be made by a resolution passed at
a properly convened board meeting.
b) Notification to Registrar: After the appointment, the company is required to notify the
Companies and Intellectual Property Commission (CIPC) by filing the necessary
documentation to register the appointment of the auditors.
c) Notice of Appointment: The auditors are also required to notify the company of their
acceptance of the appointment. The company should receive written consent from the
auditors, and the auditors should also confirm their independence and compliance with
other regulatory requirements.
d) Disclosure to Shareholders: The appointment of auditors should be disclosed to the
shareholders of the company at the next annual general meeting (AGM) following the
appointment.
1.2 Auditing of financial statements is essential for EL to meet legal requirements, enhance
credibility, mitigate risks, support effective decision-making, and maintain positive
relationships with stakeholders, including investors and creditors. It ensures the accuracy
, and reliability of financial information, which is critical for the company's operations and
reputation.
Question 2
2.1 a) EL aspires to expand the business and start with exports to Europe soon.
• Reason: This risk indicator increases the risk of material misstatement because expanding
the business, especially internationally, can introduce complex financial transactions and
operations.
• International expansion may involve new accounting standards, foreign currency
transactions, and compliance with various international regulations.
• Such complexities can lead to errors or misstatements in financial reporting, especially if EL
lacks the necessary expertise or systems to handle international operations. Additionally, the
financial projections and estimates associated with the expansion can be subject to
management bias or error.
b) There are rumours that the financial director of EL might be involved in fraud, but the
investigations are still underway.
• Reason: Allegations of fraud involving a key member of management, such as the financial
director, are a significant red flag. Such allegations suggest the possibility of intentional
misstatements or irregularities in the financial statements.
• Fraudulent activities, if proven true, can result in manipulated financial figures, concealed
liabilities, or fictitious transactions. Auditors must carefully assess the validity of these
allegations and the potential impact on the accuracy of the financial statements.
c) The bank that handles the business account for EL requested a signed audit report by 30
April 2023 to re-negotiate the terms of the loan agreement, or for the loan to be paid-up
by 31 May 2023. EL would like to extend the repayment terms of the loan.
• Reason: This risk indicator highlights the financial pressure EL faces regarding its loan
agreement.
• The request from the bank suggests that the terms of the loan are contingent on the audit
report.
Assignment 2 AUE2601 2023 – Semester 2
Question 1
1.1 Answer
The appointment of FGN as auditors of EL does not comply with Section 91 of the
Companies Act. Section 91 of the Companies Act in South Africa outlines the procedures
that should be followed to ensure compliance with the Act when appointing auditors. In this
case, it appears that the procedures were not followed.
Section 91 of the Companies Act requires the following procedures to be followed when
appointing auditors:
a) Board Resolution: The appointment of auditors should be made by a resolution passed at
a properly convened board meeting.
b) Notification to Registrar: After the appointment, the company is required to notify the
Companies and Intellectual Property Commission (CIPC) by filing the necessary
documentation to register the appointment of the auditors.
c) Notice of Appointment: The auditors are also required to notify the company of their
acceptance of the appointment. The company should receive written consent from the
auditors, and the auditors should also confirm their independence and compliance with
other regulatory requirements.
d) Disclosure to Shareholders: The appointment of auditors should be disclosed to the
shareholders of the company at the next annual general meeting (AGM) following the
appointment.
1.2 Auditing of financial statements is essential for EL to meet legal requirements, enhance
credibility, mitigate risks, support effective decision-making, and maintain positive
relationships with stakeholders, including investors and creditors. It ensures the accuracy
, and reliability of financial information, which is critical for the company's operations and
reputation.
Question 2
2.1 a) EL aspires to expand the business and start with exports to Europe soon.
• Reason: This risk indicator increases the risk of material misstatement because expanding
the business, especially internationally, can introduce complex financial transactions and
operations.
• International expansion may involve new accounting standards, foreign currency
transactions, and compliance with various international regulations.
• Such complexities can lead to errors or misstatements in financial reporting, especially if EL
lacks the necessary expertise or systems to handle international operations. Additionally, the
financial projections and estimates associated with the expansion can be subject to
management bias or error.
b) There are rumours that the financial director of EL might be involved in fraud, but the
investigations are still underway.
• Reason: Allegations of fraud involving a key member of management, such as the financial
director, are a significant red flag. Such allegations suggest the possibility of intentional
misstatements or irregularities in the financial statements.
• Fraudulent activities, if proven true, can result in manipulated financial figures, concealed
liabilities, or fictitious transactions. Auditors must carefully assess the validity of these
allegations and the potential impact on the accuracy of the financial statements.
c) The bank that handles the business account for EL requested a signed audit report by 30
April 2023 to re-negotiate the terms of the loan agreement, or for the loan to be paid-up
by 31 May 2023. EL would like to extend the repayment terms of the loan.
• Reason: This risk indicator highlights the financial pressure EL faces regarding its loan
agreement.
• The request from the bank suggests that the terms of the loan are contingent on the audit
report.
