Question: You are an audit manager at CUSTENU O CU, a firm of registered auditors, based in Cape Tow... You are an audit manager at Costello & Co, a firm of registered auditors, based in Cape Town. You are currently conducting the audit of Nkosazana Hospitals (Pty) Ltd for its financial year ended 31 July 2017. You have established that, other than limited planning and attendance at the year-end inventory count, no audit work had yet been undertaken. Nkosozana Hospitals (Pty) Ltd trades as four private hospitals in Paarl, Stellenbosch, Somerset West and Wellington. The hospitals have well-equipped operating theatres and wards, but do not have emergency rooms. Patients who are members of medical aid schemes as well as private patients are treated. Patients are charged separately for services rendered by doctors, medicines issued by the Independent pharmacies and services rendered by the hospitals. As only the services provided by hospitals form part of the revenue of Nkosozana Hospitals (Pty) Ltd the company's revenue comprises the following: Ward fees for the patient's use of a bed in a hospital ward; or the time the patient spent in an operating theatre; and The amounts invoiced for consumables used by the patient while in hospital. Shareholders: The executive directors of Nkosozana Hospitals (Pty) Ltd hold 49% of the company's issued shares. The remainder of the shares are held by twenty (20) doctors who practice in the areas served by the hospitals. Accounting department: Most of the accounting functions are performed at the company's head office, which is located in a building adjacent to the hospital in Somerset West. The accounting department is headed by the financial manager, Bob Red, and he is assisted by ten staff members. Bob Red reports to the financial director, Ms M Greene. Each of the four hospitals has a small administration department that handles patient admissions and discharges and a limited number of other functions. Each hospital's computer system is connected via dedicated lines to the head office computer system. Internal audit function: The company has a small internal audit function, consisting of three people and headed by Bruce Morris as Chief Audit Executive. Mr Morris has a Law degree from the University of Cape Town. Special directors' meeting - 15 July 2017 The minutes of a special directors' meeting which took place on 15 July 2017 is attached COPIED FROM MINUTE BOOK NKOSOZANA HOSPITALS (PTY) LTD REGISTRATION NUMBER: 1993/000123/07 MINUTES OF A SPECIAL DIRECTORS MEETING HELD ON 15 JULY 2017 0000000OOOOOOOOOOOOOOOOOO0000000000000000000000000000000000000 OO In attendance: Mr B Brown (Executive Chairman) Mr R Felix (Managing Dr H Smit (Non-executive representative of doctors) Ms M Greene (Finance) Apologies: Dr B Abrahams (Operations) Dr D Cohen (Non-executive representative of doctors) "Turnaround strategy 2018" Ms Greene tabled the budgeted versus actual revenue and expenditure reports for the 11 months to 30 June 2017. In view of the adverse variances, and budgeted loss for the year, the following resolutions were approved (despite Dr Smit voting against these) to improve the financial performance of the hospitals from 2018: Llevels of staffing in hospital wards will be reduced by 10% during the day and by 20% after hours, with effect from 1 November 2017 to reduce overtime payments. The workloads of the administrative staff will also be re-evaluated and depending on the outcome, retrenchments may take place. 2.Felix Cleaning Services CC will be appointed to handle waste management for the hospitals with effect from 1 July 2017. Mr R Felix guaranteed that his dose corporation would not charge more than R600 000 per year for this service (compared to the approximately R900 000 charged annually by the current provider, whose contract terminated on 30 June 2017) Corporate Governance: King IV Report The Board discussed compliance with the King IV Report. It was resolved that the company would endeavour to fully comply with the King IV Report Feedback from the audit committee meeting held on 15 June 2017 Whistle blowing A report from the audit committee was noted regarding an allegation by a senior staff member at one of the hospitals which suggests that an amount of R100 000 was paid to an official at the Department of Health in order to influence the outcome of an investigation performed by the Department after nine babies died at the hospital during 2016, Report to be included in the Integrated report The Board noted the following report to be included in the integrated report of the company: Report of the audit committee We are pleased to present our report for the financial year ended 31 July 2017 The audit committee is an independent statutory committee appointed by the shareholders. Further duties are delegated to the audit committee by the board of directors of the company. This report includes both these sets of duties and responsibilities. 1. Audit committee terms of reference The audit committee has adopted formal terms of reference that have been approved by the board of directors. The committee has conducted its affairs in compliance with its terms of reference and has discharged its responsibilities contained therein. The terms of reference are available on the company's website at http://www.nkosozanahospitals.co.za and are also available on request 2 Audit committee members and assessment The audit committee consists of three directors. It meets at least twice per year as per its terms of reference. The chief executive officer, finance director, chief audit executive, external auditor and other assurance providers (legal compliance, risk, health and safety attend meetings by invitation only. The effectiveness of the audit committee and its individual members are assessed on an annual basis 2. Role and responsibilities 21 Statutory duties The audit committee's role and responsibilities include statutory duties per the Companies Act, 2008, and further responsibilities assigned to it by the board The audit committee executed its duties in terms of the requirements of King IV and instances where the king IV requirements have not been applied have been explained in the corporate governance statement, included elsewhere in the Annual Report External auditor appointment The committee has appointed Costello & Co as the external audit firm and B Blue as the designated auditor responsible for performing the functions of auditor, for the 2017 year. The audit committee has satisfied itself that the audit firm and designated auditor are accredited as such on the JSE list of auditors and the advisors Financial statements and accounting practices The audit committee has approved the financial statements for the year ended 31 July 2017. An audit committee process has been established to receive and deal appropriately with any concerns and complaints relating to the reporting practices of the company. No matters of significance have been raised in the past financial year. Internal financial controls The audit committee has overseen a process by which internal audit performed a written assessment of the effectiveness of the company's system of internal control and risk management, including internal financial controls. This written assessment by internal audit formed the basis for the audit committee's recommendation in this regard to the board, in order for the board to report thereon. The board report on the effectiveness of the system of internal controls is included elsewhere in the Annual Report. The audit committee supports the opinion of the board in this regard. 3.2 Duties assigned by the board In addition to the statutory duties of the audit committee, as reported above, and in accordance with the provisions of the Companies Act, 2008, the board of directors has determined further functions for the audit committee to perform as set out in the audit committee's terms of reference. These functions include the following: Integrated reporting The audit committee fulfils an oversight role regarding the company's integrated report and the reporting process. The audit committee considered the company's sustainability information as disclosed in the integrated report and has assessed its consistency with operational and other information known to audit committee members, and for consistency with the annual financial statements. The committee is satisfied that the sustainability information is reliable and consistent with the financial results. The audit committee is satisfied that the company has optimised the assurance coverage obtained from management, internal and external assurance providers in accordance with an appropriate combined assurance model Governance of risk The board has assigned oversight of the company's risk management function to the audit committee. Internal audit The audit committee is responsible for ensuring that the company's internal audit function is independent and has the necessary resources, standing and authority within the company to enable it to discharge its duties. Furthermore, the committee oversees co-operation between the internal and external auditors, and serves as a link between the board of directors and these functions The idrommittee considered and remmended the internal audit SO charter for approval by the board. The internal audit function's annual audit plan was approved by the audit committee. The internal audit function reports adequacy of the internal control environment across all of the company's the chief audit executive is responsible for reporting the findings of the internal audit work against the agreed internal audit plan to the audit committee on a regular basis. The chief audit executive reports to the finance director. The audit committee is also responsible for the assessment of the performance of the chief audit executive and the internal audit function. In February 2017, an external effectiveness review was performed by Costello & Co. reporting positive results and rating the internal audit function as "high quality". During the year, the committee met with the external auditors and with the chief audit executive without management being present. The audit committee is satisfied that it complied with its legal, regulatory or other responsibilities. B Brown (Chairman) 20 August 2017 REQUIRED: (a) Based on the information provided, discuss any concerns that you may have regarding the compliance of Nkosozana Hospitals (Pty) Ltd with the King Code on Governance SA 2009. Do not deal with any concerns regarding the functioning of the internal audit department of Nkosazana Hospitals (Pty) Ltd; and (30) (b) Discuss the attitude that you will adopt and the action, if any, that you will take as auditor regarding the alleged payment to a Department of Health Official as highlighted in the minutes of the Board meeting of 15 July 2017 (10) Question: You are an audit manager at CUSTENU O CU, a firm of registered auditors, based in Cape Tow... You are an audit manager at Costello & Co, a firm of registered auditors, based in Cape Town. You are currently conducting the audit of Nkosazana Hospitals (Pty) Ltd for its financial year ended 31 July 2017. You have established that, other than limited planning and attendance at the year-end inventory count, no audit work had yet been undertaken. Nkosozana Hospitals (Pty) Ltd trades as four private hospitals in Paarl, Stellenbosch, Somerset West and Wellington. The hospitals have well-equipped operating theatres and wards, but do not have emergency rooms. Patients who are members of medical aid schemes as well as private patients are treated. Patients are charged separately for services rendered by doctors, medicines issued by the Independent pharmacies and services rendered by the hospitals. As only the services provided by hospitals form part of the revenue of Nkosozana Hospitals (Pty) Ltd the company's revenue comprises the following: Ward fees for the patient's use of a bed in a hospital ward; or the time the patient spent in an operating theatre; and The amounts invoiced for consumables used by the patient while in hospital. Shareholders: The executive directors of Nkosozana Hospitals (Pty) Ltd hold 49% of the company's issued shares. The remainder of the shares are held by twenty (20) doctors who practice in the areas served by the hospitals. Accounting department: Most of the accounting functions are performed at the company's head office, which is located in a building adjacent to the hospital in Somerset West. The accounting department is headed by the financial manager, Bob Red, and he is assisted by ten staff members. Bob Red reports to the financial director, Ms M Greene. Each of the four hospitals has a small administration department that handles patient admissions and discharges and a limited number of other functions. Each hospital's computer system is connected via dedicated lines to the head office computer system. Internal audit function: The company has a small internal audit function, consisting of three people and headed by Bruce Morris as Chief Audit Executive. Mr Morris has a Law degree from the University of Cape Town. Special directors' meeting - 15 July 2017 The minutes of a special directors' meeting which took place on 15 July 2017 is attached COPIED FROM MINUTE BOOK NKOSOZANA HOSPITALS (PTY) LTD REGISTRATION NUMBER: 1993/000123/07 MINUTES OF A SPECIAL DIRECTORS MEETING HELD ON 15 JULY 2017 0000000OOOOOOOOOOOOOOOOOO0000000000000000000000000000000000000 OO In attendance: Mr B Brown (Executive Chairman) Mr R Felix (Managing Dr H Smit (Non-executive representative of doctors) Ms M Greene (Finance) Apologies: Dr B Abrahams (Operations) Dr D Cohen (Non-executive representative of doctors) "Turnaround strategy 2018" Ms Greene tabled the budgeted versus actual revenue and expenditure reports for the 11 months to 30 June 2017. In view of the adverse variances, and budgeted loss for the year, the following resolutions were approved (despite Dr Smit voting against these) to improve the financial performance of the hospitals from 2018: Llevels of staffing in hospital wards will be reduced by 10% during the day and by 20% after hours, with effect from 1 November 2017 to reduce overtime payments. The workloads of the administrative staff will also be re-evaluated and depending on the outcome, retrenchments may take place. 2.Felix Cleaning Services CC will be appointed to handle waste management for the hospitals with effect from 1 July 2017. Mr R Felix guaranteed that his dose corporation would not charge more than R600 000 per year for this service (compared to the approximately R900 000 charged annually by the current provider, whose contract terminated on 30 June 2017) Corporate Governance: King IV Report The Board discussed compliance with the King IV Report. It was resolved that the company would endeavour to fully comply with the King IV Report Feedback from the audit committee meeting held on 15 June 2017 Whistle blowing A report from the audit committee was noted regarding an allegation by a senior staff member at one of the hospitals which suggests that an amount of R100 000 was paid to an official at the Department of Health in order to influence the outcome of an investigation performed by the Department after nine babies died at the hospital during 2016, Report to be included in the Integrated report The Board noted the following report to be included in the integrated report of the company: Report of the audit committee We are pleased to present our report for the financial year ended 31 July 2017 The audit committee is an independent statutory committee appointed by the shareholders. Further duties are delegated to the audit committee by the board of directors of the company. This report includes both these sets of duties and responsibilities. 1. Audit committee terms of reference The audit committee has adopted formal terms of reference that have been approved by the board of directors. The committee has conducted its affairs in compliance with its terms of reference and has discharged its responsibilities contained therein. The terms of reference are available on the company's website at http://www.nkosozanahospitals.co.za and are also available on request 2 Audit committee members and assessment The audit committee consists of three directors. It meets at least twice per year as per its terms of reference. The chief executive officer, finance director, chief audit executive, external auditor and other assurance providers (legal compliance, risk, health and safety attend meetings by invitation only. The effectiveness of the audit committee and its individual members are assessed on an annual basis 2. Role and responsibilities 21 Statutory duties The audit committee's role and responsibilities include statutory duties per the Companies Act, 2008, and further responsibilities assigned to it by the board The audit committee executed its duties in terms of the requirements of King IV and instances where the king IV requirements have not been applied have been explained in the corporate governance statement, included elsewhere in the Annual Report External auditor appointment The committee has appointed Costello & Co as the external audit firm and B Blue as the designated auditor responsible for performing the functions of auditor, for the 2017 year. The audit committee has satisfied itself that the audit firm and designated auditor are accredited as such on the JSE list of auditors and the advisors Financial statements and accounting practices The audit committee has approved the financial statements for the year ended 31 July 2017. An audit committee process has been established to receive and deal appropriately with any concerns and complaints relating to the reporting practices of the company. No matters of significance have been raised in the past financial year. Internal financial controls The audit committee has overseen a process by which internal audit performed a written assessment of the effectiveness of the company's system of internal control and risk management, including internal financial controls. This written assessment by internal audit formed the basis for the audit committee's recommendation in this regard to the board, in order for the board to report thereon. The board report on the effectiveness of the system of internal controls is included elsewhere in the Annual Report. The audit committee supports the opinion of the board in this regard. 3.2 Duties assigned by the board In addition to the statutory duties of the audit committee, as reported above, and in accordance with the provisions of the Companies Act, 2008, the board of directors has determined further functions for the audit committee to perform as set out in the audit committee's terms of reference. These functions include the following: Integrated reporting The audit committee fulfils an oversight role regarding the company's integrated report and the reporting process. The audit committee considered the company's sustainability information as disclosed in the integrated report and has assessed its consistency with operational and other information known to audit committee members, and for consistency with the annual financial statements. The committee is satisfied that the sustainability information is reliable and consistent with the financial results. The audit committee is satisfied that the company has optimised the assurance coverage obtained from management, internal and external assurance providers in accordance with an appropriate combined assurance model Governance of risk The board has assigned oversight of the company's risk management function to the audit committee. Internal audit The audit committee is responsible for ensuring that the company's internal audit function is independent and has the necessary resources, standing and authority within the company to enable it to discharge its duties. Furthermore, the committee oversees co-operation between the internal and external auditors, and serves as a link between the board of directors and these functions The idrommittee considered and remmended the internal audit SO charter for approval by the board. The internal audit function's annual audit plan was approved by the audit committee. The internal audit function reports adequacy of the internal control environment across all of the company's the chief audit executive is responsible for reporting the findings of the internal audit work against the agreed internal audit plan to the audit committee on a regular basis. The chief audit executive reports to the finance director. The audit committee is also responsible for the assessment of the performance of the chief audit executive and the internal audit function. In February 2017, an external effectiveness review was performed by Costello & Co. reporting positive results and rating the internal audit function as "high quality". During the year, the committee met with the external auditors and with the chief audit executive without management being present. The audit committee is satisfied that it complied with its legal, regulatory or other responsibilities. B Brown (Chairman) 20 August 2017 REQUIRED: (a) Based on the information provided, discuss any concerns that you may have regarding the compliance of Nkosozana Hospitals (Pty) Ltd with the King Code on Governance SA 2009. Do not deal with any concerns regarding the functioning of the internal audit department of Nkosazana Hospitals (Pty) Ltd; and (30) (b) Discuss the attitude that you will adopt and the action, if any, that you will take as auditor regarding the alleged payment to a Department of Health Official as highlighted in the minutes of the Board meeting of 15 July 2017