SECTION A [100 MARKS] Read the case study below and answer the questions that follow. Company Name: CapeTown Essentials (Pty) Ltd Background CapeTown Essentials (Pty) Ltd. is a South African-based company headquartered in Cape Town. Founded in 2015 by Thabo Mokoena and Lerato Nkosi, the company specializes in sourcing, packaging, and distributing premium quality local teas and spices. The company prides itself on promoting South African heritage by offering a range of products that are both authentic and representative of the diverse cultures and flavors of the region. Business Model CapeTown Essentials operates on a direct-to-consumer model, primarily selling its products online through its ecommerce platform. The company sources raw materials (teas and spices) from local farmers and suppliers, ensuring that they adhere to sustainable and ethical farming practices. Once sourced, the raw materials are processed, packaged, and stored in their warehouse in Cape Town. The company has also established partnerships with a few select boutique stores across major cities in South Africa, allowing for a physical retail presence. Operations The company's operations can be broken down into four main stages: Sourcing: Building relationships with local farmers and suppliers to ensure a steady supply of high-quality teas and spices. Regular quality checks are conducted to maintain consistency. Processing: The raw materials are cleaned, dried, and processed as required. Teas might be blended with other ingredients to create unique flavors, while spices might be ground or mixed. Packaging: Products are packaged in eco-friendly materials, with labels that highlight their South African origin. Each package has a unique QR code that provides information about the source of the raw materials, ensuring traceability. Distribution: Orders from the e-commerce platform are processed at the warehouse, packaged for shipment, and dispatched through a reliable courier service. The company also supplies its products in bulk to its partnered boutique stores. Financials CapeTown Essentials has seen steady growth since its inception. In the last fiscal year, the company reported a revenue of ZAR 5 million with a net profit margin of 20%. The company reinvests a significant portion of its profits into research and development, aiming to expand its product range and explore new markets. Employees: The company employs 50 individuals, including those in sourcing, processing, packaging, sales, marketing, and administration. Regular training sessions are conducted to ensure that employees are well-versed with the company's quality standards and operational procedures. Recent Developments In the past year, CapeTown Essentials (Pty) Ltd. engaged the services of Mr. Siyabonga Khumalo, a Chartered Accountant, to oversee their financial operations and ensure compliance with accounting standards. However, several concerns have arisen: Undisclosed Financial Interests: An internal audit revealed that Mr. Khumalo has a significant undisclosed financial interest in one of CapeTown Essentials' major suppliers. Despite this conflict of interest, he has been directly involved in awarding contracts to this supplier, often sidelining other suppliers who offered better quality products at more competitive prices. Financial Statement Manipulation: A junior accountant in the team raised concerns about certain adjustments Mr. Khumalo made to the financial statements. These adjustments seemed to present a more favorable financial position, ostensibly to attract potential investors for the company's expansion plans. Confidentiality Breaches: Confidential financial data, which was under Mr. Khumalo's purview, was leaked to a competitor. While the source of the leak is still under investigation, the fact that such sensitive information was not securely managed has raised eyebrows. Misleading Representations: Mr. Khumalo, in his capacity as the company's CA, made presentations to stakeholders where he exaggerated the company's projected growth based on the manipulated financial statements, potentially misleading them about the company's future prospects. Governance Concerns at CapeTown Essentials (Pty) Ltd Recently, stakeholders have raised concerns about the governance practices at CapeTown Essentials. The company's board of directors consists primarily of family members, with no independent non-executive directors. Board meetings are infrequent, often only convened when there's a crisis. There's a lack of transparency in the company's operations, with stakeholders not receiving comprehensive reports on financial performance, risks, or strategies. Additionally, there's no formal stakeholder engagement process in place, leading to a growing disconnect between the company and its investors, employees, and customers. The company also lacks a clear policy on technology and information governance, leaving it vulnerable to potential cyber threats. Financial Transactions and Control Environment at CapeTown Essentials (Pty) Ltd After years of using a manual system, CapeTown Essentials embraced modernization by transitioning to a new comprehensive financial software system. This system promised to seamlessly manage everything from sales and inventory to procurement and payroll. The transition was driven by the company's desire to streamline operations and improve efficiency. In the initial months, the staff at CapeTown Essentials noticed a series of unexpected events. Some inventory records didn't match the physical stock, and a few employees raised eyebrows when their salary slips showed unexpected changes. On another occasion, the finance department was taken aback when a shipment of goods arrived, a result of an order that no one in senior management recalled approving. Customers, who were once very appreciative of the company's billing accuracy, started calling in with concerns about their invoices. The finance team, already swamped, found it challenging to address these concerns promptly. They were also juggling multiple roles, from entering data to approving transactions, all within the same system interface. The IT team, while ensuring that employees had passwords to access the system, hadn't yet rolled out additional security measures they had been considering, like multi-factor authentication. They were also in the midst of discussions about setting up alerts for significant system activities and how best to maintain a log of all user activities. Amidst all these operational challenges, the topic of data backup and disaster recovery was tabled for a future meeting. The leadership at CapeTown Essentials, while optimistic about the potential of the new system, began to realize that their heavy reliance on it came with its own set of challenges. They understood that any oversight or glitch could ripple through their financial and operational reports, potentially affecting the company's reputation and bottom line. Expansion and New Ventures at CapeTown Essentials (Pty) Ltd In the past year, CapeTown Essentials embarked on an ambitious expansion plan, opening three new retail outlets in regions previously unfamiliar to the company. To fund this expansion, the company secured a substantial loan, the terms of which are contingent on maintaining certain financial ratios. The finance department, already stretched thin, has been under pressure to ensure timely repayments and compliance with the loan covenants. Simultaneously, the company ventured into online sales, partnering with a third-party logistics provider for deliveries. This new sales channel, while promising, introduced complexities in revenue recognition, especially with the rise in product returns and exchanges. The company also entered into a few barter transactions with suppliers, exchanging products for advertising services, a practice not previously common for CapeTown Essentials. The rapid changes and the drive for growth have led to a dynamic environment. The senior management, eager to showcase the success of their strategies to stakeholders, has set aggressive financial targets, leading to a performancedriven culture. There have been whispers among the staff about the pressure to achieve these targets, sometimes even if it means cutting a few corners. Sales Transactions at CapeTown Essentials (Pty) Ltd In the past fiscal year, CapeTown Essentials introduced a new promotional campaign to boost its online sales. This campaign offered varying discounts to customers based on their purchase history and loyalty status. Additionally, a new partnership was formed with a third-party logistics provider to expedite deliveries for online orders. As a result, the company saw a significant surge in online sales, especially during the last quarter. However, the finance department faced challenges in tracking and recording these sales due to the complexities introduced by the varying discount rates and the involvement of the third-party logistics provider. Some customers reported discrepancies in their invoices, especially related to the calculated discounts and VAT charges. Furthermore, there were instances where sales made at the end of the month were recorded in the subsequent month. The company also introduced gift cards, leading to situations where sales were recognized upon the purchase of the gift card rather than its redemption. The sales team, eager to meet their aggressive targets, occasionally offered custom deals to big clients, which were not always documented in the standard sales system but were instead recorded manually. Property, Plant, and Equipment at CapeTown Essentials (Pty) Ltd Over the past year, CapeTown Essentials has made significant investments in upgrading its infrastructure to support its growing operations. The company acquired a new warehouse facility to store its expanding inventory, which is equipped with modern security systems and climate control features. Additionally, to support its administrative and sales teams, CapeTown Essentials procured a fleet of 200 high-end laptops, each tailored with software suites essential for their daily operations. The finance department also noted the acquisition of specialized machinery for the production department, aimed at enhancing product quality and reducing manufacturing time. All these assets were capitalized and are being depreciated over their useful lives. However, there have been instances where some laptops were reported missing or damaged within a few months of procurement, and concerns were raised about the maintenance and handling of the newly acquired machinery. Answer ALL the questions in this section.

QUESTION 1 (10 Marks) Given the recent developments concerning Mr. Siyabonga Khumalo, a Chartered Accountant overseeing the financial operations at CapeTown Essentials (Pty) Ltd.: a) Identify which of the fundamental principles belonging to the SAICA Code of Professional Conduct Mr. Khumalo may not have complied with. (5 Marks) b) For each identified principle, provide a brief justification based on the provided scenario. (5 Marks) QUESTION 2 (15 Marks) CapeTown Essentials (Pty) Ltd. has recently come under scrutiny for its governance practices. As an external consultant, you have been tasked with evaluating the company's governance structures and practices in light of the KING IV report on corporate governance for South Africa. Based on the provided information: a) Identify specific governance concerns at CapeTown Essentials (Pty) Ltd. (5 Marks) b) For each identified concern, link it to the relevant principle from the KING IV report and explain what the principle requires. (5 Marks) c) For each identified concern, provide ONE (1) recommendation on practices that could be implemented to achieve compliance with the KING IV report. (5 Marks) QUESTION 3 (24 Marks) Given the financial transactions and control environment described for CapeTown Essentials (Pty) Ltd: a) Identify the potential risks associated with the challenges mentioned in the scenario. (8 Marks) b) Explain the impact of each risk on the organisation. (8 Marks) c) For each identified risk, recommend an appropriate control that the company should implement to mitigate the risk. (8 Marks) QUESTION 4 (12 Marks) CapeTown Essentials has recently implemented a new financial software system, and while they have taken steps to establish certain internal controls, they are aware that no system is foolproof. Based on your understanding of the limitations of internal controls, explain why, despite the company's best efforts, they might still face challenges in achieving their objectives. Specifically, discuss the potential limitations that could hinder the effectiveness of their internal control system. QUESTION 5 (10 Marks) CapeTown Essentials (Pty) Ltd has recently undergone a comprehensive review of its internal control system. The review highlighted various components of internal controls. Given this recent review of internal controls: a) Identify the components of internal controls that wouldve been included in this review. (5 Marks) b) Explain the significance of each component in ensuring the effectiveness of CapeTown Essentials' internal control system. (5 Marks