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.
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.
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
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
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
COPlED FROM MINUTE BOOK
NKOSOZANA HOSPITALS (PTY) LTD
REGISTRATION NUMBER: 1993/000123/07 MINUTES OF A SPECIAL DIRECTORS’
MEETING HELD ON 15 JULY 2017
Mr B Brown (Executive Chairman)
Mr R Felix (Managing)
Dr H Smit (Non-executive representative of doctors)
Ms M Greene (Finance)
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
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
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
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
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
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
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
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 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.
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
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
B Brown (Chairman)
20 August 2017
(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
(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.