Anonymous
timer Asked: Apr 17th, 2020

Question Description

QUESTION 3 (40 MARKS)

You are an audit manager at Costello & Co, a firm of registered auditors, based in

Cape Town. You are currently conducting the audit of Nkosozana 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;

 theatre fees for 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.

COPlED FROM MINUTE BOOK

NKOSOZANA HOSPITALS (PTY) LTD

REGISTRATION NUMBER: 1993/000123/07 MINUTES OF A SPECIAL DIRECTORS’

MEETING HELD ON 15 JULY 2017

oooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooo

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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:

1.Levels 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 close

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.

3. Role and responsibilities

3.1 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 their

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 audit committee considered and recommended the internal audit

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

centrally with responsibility for reviewing and providing assurance on the

adequacy of the internal control environment across all of the company’s

operations. 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.

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