most recent Board meeting – (i) the aspects that should be considered by the audit team with regard to the decisions taken in terms of the Auditing Professions Act, Act 26 of 2005

Question 1

It would be reasonable to expect that Katherine (or at least her audit team) to have read the minutes of the
Board meetings of DMG, and hence they would be aware that Harry voted in favour of the PackFast
agreement.

Answer 1

It would reasonable be expected by the audit team to perform procedures to identify related party
transactions and as such reviewing the register/schedule of directors shareholdings (identified Harry’s
shareholding) and accordingly his interest in the contract with PackFast

Question 2

Sally is a related party to Harry (sister and CEO) and accordingly in terms of the Companies Act, Harry is
conflicted and should have declared his interest and not have voted on the matter

Answer 2

The contract with Packfast is a significant contract for DMG and accordingly the auditors should have
inspected the contract and the parties thereto, which would have disclosed Harry’s shareholding and/or
relationship to his sister (could possibly be seen as onerous contract in terms of ISA 37)

Question 3

s considerations to determine whether an RI exists are as follows section 1 of AP Act)

Answer 3

Whether an unlawful act or omission has occurred:

Harry contravened section 75 of the Companies Act by not declaring his interest in, and voting on the
contract with Packfast.

Question 3

Whether the unlawful act has been committed by someone responsible for management of the entity:

 The unlawful act was commited by Harry, a director of DMG

Answer 3

Whether the unlawful act could result in a material financial loss to any partner, member, shareholder,
creditor or investor:

Question 4

The contract is void as Harry did comply with the requirements of section 75 (section 75(7) and unless ratified
by the shareholders or the court, and;
 Could result in penalties to DMG levied by PackFast if the contract is declared void

or

Financial loss to PackFast in the contract is cancelled.
 Considerations should be given to the fact that the shareholders of DMG would probably ratify the contract
as it appear very beneficial for DMG (e.g. best quality at cheapest price) and accordingly would not result in
financial loss to any party

Answer 4

Whether it relates to fraud or theft:
The unlawful act does not seem to relate to fraud or theft as it may not be intentional and the contract terms
are being very beneficial to DMG (contarct negotiated at a significant discount to MBG)/

Harry intentionally
not disclosing to ensure PackFast is selected.

Question 5

Whether the unlawful act constitutes a material breach of fiduciary duty:

Answer 5

 Non-compliance with section 75 is a significant breach of the companies act, which would be considered a
material brach of a diretors duty of care, skill and diligence (refer IRBA guide or RI)

orr

 If the agreement was indeed the best available option for DMG (e.g. best quality at cheapest price), it could
be argued that this does not amount to a material breach of his fiduciary duty as Harry acted in the best
interst of DMG

Question 6

Based on the above, Katherine will need to report a reportable irregularity to the IRBA

Answer 6

In terms of Sec 44 of the APA, If a reportable irregularity exists, it has an impact on the auditor’s report which
should include a section on ‘ Other Legal and Regulatory Requirements’ noting that an RI has been reported
and the details thereof.
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6. In terms of Sec 44 of the APA, the accounting treatment should be considered if the contract is not
ratified;and if not correctly accounted for in terms of IFRS, the audit report may need to be qualified.

7. S52 of the APA states that should an auditor fail to report a RI i.t.o S45, he/she will be guilty of an offense,
   leading to possible fine (liability) or imprisonment.