ITC JUNE 2023

PAPER 2 PART II SUGGESTED SOLUTION

Part (c) Describe the substantive audit procedures that Firehouse should
have performed on the disposal of the investment in Maastrict and
Marks
the corresponding transactions in the separate financial statements
of SAMP for FY2022.
Inspect the accounting policy as per the previous year’s financial statements and
confirm that the investment should be accounted for at cost price. 1
Obtain a schedule from management setting out all calculations relating to the
sale of the subsidiary/Investment in Maastrict (proceeds/consideration, cost price
of the investment and the calculation of the profit on disposal of the subsidiary). 1
Cast the schedule received from management to verify calculations for
mathematical accuracy (including profit on sale of subsidiary/Investment in
Maastrict) 1
Review the schedule for unusual items included or obvious omissions
Request and inspect a signed management representation letter relating to
relevant assertions in respect of the disposal of the investment. 1
Inspect the signed minutes of the board meeting where management discussed
the disposal of the subsidiary/Investment in Maastrict and 1

confirm that the sale was authorized by a majority (more than 50%) of the board
members and that quorum was reached. (No special resolution because the total 1
assets are not the majority to the group)

Realculate the % sale of the subsidiary to total assets to verify that it is not a
majority of assets. 1
Inspect the memorandum of incorporation (MOI) for any restrictions or
conditions attached to the sale of a subsidiary and corroborate whether these
restrictions were complied with. 1
1
Obtain the sales contract and through inspection confirm the following:
• The date on which Maastrict was disposed off i.e. 31 March 2022 (effective
date of transaction) to test accuracy / occurrence. 1
• Cash receipt on 31 March 2022 of EUR926 327; and Cash receipt on
31 March 2023 of EUR611 921.
• 100% of the subsidiary is to be disposed of which comprise of 60 000
shares to determine is accurately recorded. 1
• Parties to the contract is Samp and the buyer and it is Signed by both
parties to determine is a valid contract (occurrence). 1
• That there are not any other conditions that may result in contingent
liabilities or that was not considered in/or may affect the calculations/sale. 1
Inspect the schedule of managements’ calculation and confirm that Maastrict has
been disposed of at cost by agreeing the cost price of R3 905 508 (EUR376 616
x R10,370) to the prior year signed financial statements / previous years’
working papers (Converted to Rand) 1
Obtain the exchange rates from a trusted financial institution as at 31 March
2022 and recalculate the Rand value. (Given in the scenario) 1
Through inspection of the bank statement, confirm the receipt of the proceeds
amounting to EUR926 327 x 16,193 = R15 000 013 on 31 March 2022. 1
and recalculate the amount. ½
Recalculate the Deferred payment / Accounts receivable amount of R600 983 x
R16,193 = R9 731 718 1
Recalculate the profit on sale as R20 826 223 and compare to amount in schedule
to confirm accuracy. 1
ITC JUNE 2023
PAPER 2 PART II SUGGESTED SOLUTION

Recalculate the interest on the deferred payment (EUR10 938 x 9/12 x 16,533)
for 9 months taking into account the 1.82% = R87 988 to confirm mathematical
accuracy. 1
Agree the Interest to the presentation in the statement of comprehensive income/
receivable to the presentation in the statement of financial position. 1
Recalculate the remeasurement (forex adjustment) of the deferred payment /
accounts receivable balance at year end at closing rate (spot rate) as it is a
monetary item. 1
Inspect the notes to the financial statements to ensure that the disposal has been 1
adequately disclosed.
Inspect the journal entry, general ledger, trial balance and financial statements for
FY2022 to verify that the investment has been removed from the records and the 1
profit on disposal has been recorded.
Recalculate the % sale of the subsidiary to total assets to verify that it is not the 1
majority of the assets.
Recalculate the tax consequences of the transaction and compare to the tax 1
inclusion by the client taxation calculation to determine accuracy and completeness
of tax inclusion.
Available 25.5
Maximum 12
Communication skills – clarity of expression 1
Total for part (c) 13

Part (d) Describe the substantive audit procedures that Firehouse should
have performed on the fair value less cost to sell calculation of the Marks
land only for FY2022.
Obtain the calculation performed / schedule from management relating to the
Land and cast and cross cast for mathematical accuracy./Recalculate FV less
Cost to sell. 1
Obtain the appraiser’s valuation report and agree the amount to the schedule
obtained. 1
Assess the competence and capabilities and years’ experience of the
appraiser through inspection of curriculum vitae and other qualifications. 1
Verify through inspection of an appropriate website/requesting certificate that the
appraiser is a registered appraiser with SACPV. 1
Enquire with appraiser and management whether the valuer is independent and
follow through any of the following: 1
• Inspect share registers and related party listings / employee listing for
the surname “Ngidi” to ensure that the appraiser is not included to support
his/her independence. 1
• Obtain a signed declaration of independence from management/James
confirming that James Ngidi is independent from SAMP 1
Discuss with the appraiser / inspect appraiser's report and obtain an
understanding of the scope of the report, and how the valuation was
performed, data and models used, etc. 1

Compare the model used and data used with knowledge of similar entities /
compared to the international valuators standards in order to verify whether the 1
model and data are consistent with others in the industry and therefore reasonable.

Assess whether the method used by James to revalue the land is consistent with
methods prescribed in IFRS13. 1
ITC JUNE 2023
PAPER 2 PART II SUGGESTED SOLUTION

Assess the reasonability of any assumptions and estimates used in performing

the valuation with reference to economic and market data. 1

Inspect the report to understand the source data used in te calculation to determine
if the data used appears reasonable. 1
1
Inspect the terms of reference/agreement prepared in advance of the valuation
undertaken, paying particular attention to:
• The nature, scope and objectives of James’s work as well as James’s and 1
management’s responsibilities.
• The extent of James’s access to appropriate records and files 1
(were there any scope limitations)
Reperform the calculations of the valuation (after the discussion of the data and
model used) for mathematical accuracy 1
Inspect the report to understand the source of data used in the calculation to
determine if the data used appears to be reasonable 1
Fair value less cost to sell (FV-CTS)
Inspect whether any information after year end has impacted on the estimates
used in the fair value calculation or if there have been any external factors (i.e.
change in interest rates, political issues impacting the viability of sales etc.) which
have impacted the value of land. 1
Inspect market listings for similar land in the same area (similar clients) and
compare to fair value included on the schedule for reasonability. 1
Inspect similar market listings for costs (e.g legal fees) related to in the sale of
such Land and agree to cost to sell included on the schedule. 1
Inspect supporting documents (e.g. quotations) regarding the disposal of the
property (i.e. from property agents/legal team) to ensure reasonability of the amount
estimated by James. 1
Inspect minutes of Directors meetings with regard to costs discussed, any costs
of conversion etc to assess reasonability of inclusion in the valuation. 1
Obtain a management representation letter for management to confirm that the
fair value less cost to sell’ is correct. 1
Available 23
Maximum 7
Communication skills – clarity of expression 1
Total for part (d) 8

Part (e) With reference to the information contained in section 4.3 – Marks
(i) critically evaluate the remuneration alternatives based on
good performance evaluation principles; and
The existing share options were issued two years ago, and management did have
a responsibility to consider beforehand the longer-term issues emerging in
the company market and the broader industry when they agreed to take these
options. 1
It could be argued that the conditions that resulted in the losses (especially the
Covid-19 pandemic impact) were outside of the control of these management, 1
especially over such a short time and their performance could have been much
better if you only focus on the financial implications.
• it can be argued that the share price change was not within the control of
management (changes due to Covid-19, etc.) and therefore the options
are not achieving the intended goal. 1
ITC JUNE 2023
PAPER 2 PART II SUGGESTED SOLUTION

The share options basically only take the share price into account and therefore
the focus is only on the financial aspects and no non-financial aspects are 1
incorporated within the incentive.
• Furthermore, it does not seem like the incentive may be aligned with the
strategy of the company. 1

The two alternatives that were put before the executive are also very extreme
and not goal congruent with the incentive that SAMP is seeking. 1

Cash incentives is not an affordable option for SAMP currently.

The housing allowances will lead to extra fringe benefit tax implications for the 1
staff and
9% salary increases are above the current inflationary increase that can be
expected in the current financial climate. 1

The second option of re-issuing at a lower strike price also does not seem like
the most ethically sound decision as it benefits the management during poor
performance / Only consider financial aspects. 1

Both alternatives could mean a permanent, long-term change to SAMP’s

remuneration policy and the affordability of these alternatives should be
considered in the light of SAMP’s deteriorating performance. 1
The sustainability goals (non-financial) are indeed not included in the share 1
options and would not have been measured and rewarded.
• The implementation of further measures should be considered, such
as a vesting-criteria based on other KPIs relating to sustainability
measures. 1
• In this context, a balanced scorecard approach that includes non-
financial measures would be appropriate to ensure that these objectives
are met. 1
• It could be argued that sustainability would be rewarded in the market
(through increased sales of SPPs which would lead to an increase in the
share price). 1
To move a company product offering dramatically in a and there is evidence that
the management has over the period begun the longer-term restructuring
activities to move the business operations. 1
The proposed remuneration schemes would encourage executives to remain in
employment with the company, given the easily attainable nature thus this
would achieve company objectives. 1
Both options appear not to have benchmarked the options against other 1
companies in the industry
The executives will be less motivated to increase the share price of the entity if 1
the exercise price is set lower than the current market price as already
receiving something of value i.e. targets are easy to achieve.
Valid conclusion 1
Available 19
Maximum 6
Total for part (e)(i) 6

Part (e) With reference to the information contained under section 4.3 – Marks
(ii) discuss any business ethics and corporate governance
concerns you may have.
ITC JUNE 2023
PAPER 2 PART II SUGGESTED SOLUTION

Governance concerns (including ethical considerations)

It is a concern that Charl (the CRIO and head of the task team) would put these
proposals to the Shareholders as he does not seem to be part of the
Remuneration committee./ As an executive he should not be part of the
committee and should not be part of this decision. 1
The governing body (through the remuneration committee) is responsible for setting
the direction and approving the remuneration policy of the company (P14RP26) it
appears as if the suggestions made by the CRIO were not evaluated by the
remuneration committee / board before being presented to the shareholders. 1
KING IV principle 1 (Good for self and others)
• Directors: The CRIO possibly would have a conflict of interest here as he
would also be benefiting from this and therefore may not be acting in the best
interest of the company but for personal gain. (good for self)( Breach of 1
Integrity)
• Knowingly breaking the law also displays a lack of integrity 1
• It appears that the CRIO is focusing only on the remuneration of the directors
without considering the losses of the shareholders and the possibility of
losses of jobs of the employees which does not constitute a stakeholder-
inclusive approach (King principle 16). 1
• Company: It should be considered whether their performance in the
context does warrant a performance reward and whether they are now
receiving remuneration for no results which is not good toward the company. 1
• Shareholders: The reward may be good for others if the actions to date have
minimised the losses of the company but the shareholders are absorbing
the losses. Or
• Shareholders – If the view is taken that the management did not succeed
in mitigating losses, then the additional cost, reduction in profit, and resulting
dilution would not be good for others. 1
• Shareholders - The shareholders have suffered the loss as raised, and it
would be unfair to reward management as a stakeholder when their actions
resulted in destroying this value. 1
• Employees – One should also consider whether the directors have performed
well in minimising job losses for employees. If they managed to save many
of their jobs and retrenching only a few, that would overall be good for others.
Or
Employees – If management actionsdid not result in a saving of overall jobs,
and instead in the loss of jobs through possible retrenchment, the reward
would be unwarranted. 1
• Other stakeholders - Should the directors be motivated and consequently
restructure the company effectively, the other stakeholders would benefit
with the directors, for it would address the context of the whole company. 1
• The CRIO is failing to act with accountability as required by Principle 1
because they are proposing a new remuneration policy as the current
performance targets are not being met, as opposed to working more
effectively to achieve those targets. 1
King IV principle 14, remunerates fairly, responsibly, and transparently
• Currently it can be argued that for alternative 1 all the alternatives are only
focused on short term incentives and this will not adhere to having a
combination of incentives. 1
• alternative 2 would then possibly focus on the long-term goals, as well but it
does not incorporate an element of non-financial performance and this
does not align with the strategic objectives of this company and may have
some negative outcomes. 1
ITC JUNE 2023
PAPER 2 PART II SUGGESTED SOLUTION

• It does not seem that the incentives / policy focuses on economic, social
and environmental contexts. 1
As a majority percentage of shareholders objected, the board must record in
the remuneration policy the steps it will take in good faith to address the issue by
means of a stakeholder engagement process and by addressing the concerns
through amendments to the remuneration policy. 1
Principle 14 is not adhered to as it is clearly stated that our executives feel
demotivated, and they have little incentive to stay with the group and manage
the restructure. 1
The value of the cash bonus, housing allowance, and the lower strike price have
not been disclosed; thus the remuneration policy may not be transparent as
required by King IV Principle 14 1

In terms of the KING IV the Governing body should govern compliance with
applicable laws and adopted, non-binding rules, codes and standards in a way
that supports the organisation being ethical and a good corporate citizen. This is
not the case as can be seen by the breaches of the companies act. 1
• In terms of the Companies Act (s66(9)) (read with P14RP37) the
remuneration policy and implementation report of the directors must be
approved by a non-binding advisory votes by the shareholders and if more
than 25% of the voting rights exercised voted against it, the board must
address the matter through engagements and in view of the comments of
the majority of shareholders this does not appear to be possible. 1
A potential governance expectation gap needs to be considered – what would be
reasonable expectation of directors’ performance in economic downturn times
such as COVID19 and these need to be taken into account when determining fair 1
remuneration and performance incentives.

It is unclear if the long-term financial impact of each of the alternatives on SAMP

financial performance and cash flows were considered in order to ensure proposing
a sustainable alternative, which is a concern. 1

• These actions will not be considered in the best interest of the company
as per s76. 1
• No consideration was given that a special shareholders resolution is
required to approve executive remuneration. 1
Available 23
Maximum 14
Total for part (e)(ii) 14
Communication skills – logical argument 1
Total for part (e) 21
TOTAL FOR PART II 42
TOTAL FOR THE QUESTION 100