QUESTION $1$

Best Motor Cars Limited $($BMC$)$ is listed on the Johannesburg Stock Exchange

$($JSE$)$ and manufactures vehicles. Due to strong customer demands, BMC has

experienced rapid growth over the years. BMC is renowned for its innovative

technology and ambitious expansion plans.

The Chief Executive Officer $($CEO$),$ Mike Linn, faced significant pressure to deliver

strong financial performance, driven by the need to increase market share and meet

investors' expectations for continuous growth. To achieve this, the CEO insisted that

the Chief Financial Officer $($CFO$),$ Phil Yen, ensure financial targets are met in the

annual financial statements. Additionally, the CEO and CFO will benefit from high

bonuses by meeting these targets.

The Financial Accountant, Paul Jack, prepared and provided the annual financial

statements to Phil Yen for review. However, upon reviewing the annual financial

statements, Phil Yen observed that the actual figures fell short of the targets.

Phil Yen then instructed Paul Jack to process journal entries that would reverse

expenses and incorrectly classify these expenses as assets in the statement of

financial position. These journals were processed into the accounting records for five

consecutive years, and the manipulated annual financial statements were submitted

to the JSE. Paul Jack did not report this to anyone, as he followed his senior$$s

instructions without question.

The disclosures of these journals as assets in the financial statements lacked

significant detail and transparency.

Although BMC Limited has an internal audit department, the Internal Auditor, Kim

Fisher, only discovered these journals after five years within the company and

promptly notified the Board of Directors $($BOD$).$ The rest of the BOD, excluding Mike

Linn and Phil Yen, were unaware of the fraudulent activities that had occurred over

the past five years. The internal audit department$$s earlier inability to detect the fraud

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HCGA$232-1-$Jul$-$Dec$2024-$FA$2-$TA$-$V$3-16072024$

ANNEXURE I: FORMATIVE ASSESSMENT $2$

was due to inadequate resources, which hindered their ability to effectively monitor

and report on financial practices within BMC Limited.

REQUIRED:

$1\mathrm{.}1$

$1\mathrm{.}2$

List the components of an internal control environment.

$(2\mathrm{.}5$ marks$)$

Discuss the components of the internal controls of BMC Limited that were not

adequate and provide reasons.

$(15$ marks$)$

$1\mathrm{.}3$

Discuss weaknesses in the internal controls of BMC Limited and provide

recommendations on how to address these weaknesses.

$(20$ marks$)$

Structure your answer using the table below:

Weaknesses in internal controls

Recommendations

xxxx

xxxx