You are currently employed at an auditing firm called Firmly Accountants. You have been scheduled to be part of the audit of Prime (Pty) Ltd (“Prime”), which has a June
financial yearend. Prime is a South African electric vehicle (“EVs”) manufacturer located in the Eastern Cape. Prime is in a fortunate position as the majority of raw materials such as steel, copper, nickel, etc. required to manufacture vehicles, whether referring to electric or fuel vehicles, are produced (i.e., mined) locally in South Africa.
You and the audit team are busy with the 2023 audit and have completed all the risk assessment procedures. The information that you have gathered during your first week of the engagement, has been provided below.
Prime has 4 shareholders, namely:
Server (Pty) Ltd 55%
Mr. L Smith 20%
Mr. R Beck 15%
Miss. T Ipland 10%
The board of directors currently consists of 2 independent non-executive directors, 1 non-executive director, and 4 executive directors. Mr. Smith is one of the current
directors, he is the CEO and the chairman of the board of directors. shareholders approved the below nominations for additional candidates to be members of the board of directors. No formal process was followed.
No other consideration was given besides what is listed below:
Mr. B Ruiters Mr. B Ruiters is the current Human Resources Manager of Prime. Mr. A Reed Mr. A Reed retired from employment at Firmly
Accountants. Mr. A Reed was the Managing Partner.
Mr. D Arendse Mr. D Arendse currently is the operations manager at Prime.
Mr. D Adams CA (SA) Mr. D Adams is a recently qualified CA(SA) and has been the Financial Manager of Horizon Group (an unrelated group of entities) for 10 years.
Once all the above additional board of directors were appointed, the following were disclosed:
• The governing body is satisfied or not that its composition of the board reflects the appropriate mix of knowledge, skills, experience, diversity, and independence.
• The categorization of each member as executive or non-executive.
• The qualification and experience of members.
• The age of each member.
The board of directors stated the following in regard to which responsibilities they would want to have and which they want to delegate:
• The oversight of technology and information management should be delegated to the risk committee.
• The board of directors will assume responsibility for the governance of compliance and applicable laws and adopted non-binding rules, codes, and standards by setting the direction for how compliance should be approached and addressed in the organisation.
• The exercise of ongoing oversight of risk management will be done by the risk committee.
• The performance and independence of the company secretary will be done every two years by the nomination committee.
• The audit committee will ensure that the internal audit provides an overall
statement annually as to the effectiveness of the organisation’s governance,
risk management, and control process. Audit Committee
There are two members on the Audit Committee, namely Mr. L Smith and Mr. BRuiters. Mr. B Ruiters is the chairman of the Audit Committee.
Internal Audit
The Internal Audit Department reviews the implementation of the risk management plan on an annual basis.
The Internal Audit Department identifies all the potential risks that Prime faces and makes decisions on how these risks will be mitigated.
The Internal Audit Department is responsible for the preparation of the financial
statements.
Mr. D Arendse
One of the directors – Mr. D Arendse - is also a majority shareholder of FlyHigh, a steel provider. M. D Arendse has held this interest in FlyHigh for the past 8 years. A board meeting was held on 7 May 2023 to appoint FlyHigh as the official steel supplier, and Mr. D Arendse did not disclose his interest at any time during the meeting. He is a dedicated director and was present for all matters during the meeting on the day and participated in all resolutions taken. He made no other disclosures of this interest.
REQUIRED:
Identify and discuss any contraventions of King IV by Prime (Pty) Ltd. Provide the section of the King IV. Structure your answer by using the following headings:
Nomination of the board of directors
Composition of the board of directors
Disclosure pertaining to the board of directors
Chairman of the board
Mr. D Arendse
Responsibilities of the board of directors
Audit Committee
Internal Audit