QUESTION 1 (35 marks) You are the audit manager assigned to the 2017 external audit of Simpsons Ltd, a company that assembles and distributes personal computers. The company has a June year-end and is listed on the JSE Securities Exchange South Africa. You have recently completed the interim audit fieldwork, which focused on updating your knowledge of the risks faced by the business and on validating the internal control processes implemented by the company to address those risks. During a meeting with Mrs Marge, the financial director, she indicated to you that she has decided to re-appoint your firm as auditors for the 2017 financial year. She also briefed you on a new corporate governance process being implemented by the board of directors in order to meet their obligations under the King Code. She inter alia indicated that the following were discussed during a recent meeting of the board of directors: 1. Internal audit The board decided to establish an internal audit department within the company. The function was previously outsourced to your firm of auditors. Mr Bart was appointed as the head of the internal audit department. He will report directly to Mrs Marge and his designation within the company will be "internal audit clerk". He was not appointed on any management level, mainly because of the fact that he does not have a lot of internal audit experience. The board requested Mrs Marge to review Mr Bart's position should he be able to prove that he can do the job. Mrs Marge also asked for advice on setting up the internal audit department. 2. Directors' responsibility statement During the meeting the directors expressed their concern with regard to the requirement under the King Report that directors should report in the annual report that: adequate accounting records and an effective system of internal controls and risk management have been maintained; the system is regularly reviewed for effectiveness; and there is an ongoing process for identifying, evaluating and managing the significant risks facing the company. Mrs Marge asked for advice on steps that can be taken by the directors in fulfilling their responsibilities under the King Code as required to be reported on in the annual financial statements. The directors also expressed their concern about all the new reporting and disclosure requirements of King". The chairperson, Mr Homer, expressed the view that less disclosure is sometimes better. 3. HIV/Aids The board of directors turned down a request from the labour union for the provision of free anti- retroviral drugs to employees who are HIV positive. Mr Homer was of the opinion that HIV/Aids is not the board's problem and that government can do something about it. According to him the company is there to make profits and to maximise shareholders' value, and he cannot see how the pandemic will have an effect on that objective. REQUIRED: (a) Write a memorandum to Mrs Marge in which you advise her department. Your memorandum should address the following: setting up an internal audit considerations when setting up an internal audit department; and what the company can do to enhance the status of the internal audit department. (11) (b) List other disclosures that the board of directors should make in the annual report as part of the directors' responsibility statement. (5) (c) Advise Mrs Marge on what the directors can do in fulfilling their responsibilities under the King Code as required to be reported on as part of a directors' responsibility statement (7) (d) List and explain any other corporate governance concerns apparent from the information provided. Also suggest how management or the directors could resolve each concern
