TUESDAY: 6 December 2022. Morning Paper. Time Allowed: 3 hours.
Answer ALL questions. Marks allocated to each question are shown at the end of the question. Do NOT write anything on this paper.
GARI ENGINEERING SYSTEMS LIMITED (GSML)
Gari Engineering Systems Limited (GSML) is a water drilling, installation and purification company providing
comprehensive water solutions. The company was incorporated in Kenya in year 2010 and has operations in various
countries in East Africa. The initial founders of the company were all former employees of Katsmil Limited. The tenure
of the directors of GSML Board varies from two years to five years with an option of one term renewal.
Since 2018, the company has been diversifying its service-offering to non-water related operations including real estate,
transport services and sewerage treatment. This has necessitated mergers, acquisitions and takeovers in order to provide
the GSML with latest technology, capital and expertise for it to excel in new operations. The company has been of late
undertaking high value capital and labour intensive projects which regularly overrun their completion dates. Despite the
various mergers, acquisitions and takeovers, the company still has capital challenges and seven years ago, it was forced
to raise funds through a corporate bond. The bond issue was undersubscribed and realised Sh.2 billion, Sh.1 billion less
than the expected amount. Owing to the huge projects, many of which were being done simultaneously, the funds were
not adequate and many projects were not completed satisfactorily.
In early 2019, GSML entered into a strategic partnership with BbaHt Finance Pvty (BFP), an equity firm from South
Africa that injected a huge chunk of funds into GSML. The board of directors of GSML was confident that the injected
funds would help in completing all the ongoing projects and still have a surplus that could enable the company embark
on new projects. According to GSML Finance Director, Sh.5 billion was provided by BFP to GSML in exchange for
equity. It was agreed that BFP have a 30% of stake of GSML. According to valuation done during the bond issue, the
market value of the 30% stake was Sh.7 billion and not Sh.5 billion.
Despite the injection of fresh capital into the company, the overall performance of the company did not improve as
expected. This was largely attributed to poor performance of some branches. The poor performance of these branches
was caused by various factors among them an unstable political situation, erratic weather and other environmental
factors, economic factors as well as mismanagement.
Before GSML entered into the strategic alliance with BFP, its finance cost was very high. The company was highly
geared and depleted most of the money intended for the projects. It utilised most of the inflows to repay debts. The
strategic alliance, though attractive to the eye, was a poisoned chalice. Shareholders felt short-changed since they lost
value in the transaction. The directors also did not consult shareholders before the alliance was arranged. A forensic
investigation later revealed that BFP was owned by the directors of GSML and yet a conflict of interest was not declared
by the directors in the conflict of interest register.
In view of the foregoing, shareholders demanded for an extraordinary meeting with the sole aim of dismissing the
directors. It was argued that the directors should be personally held to account for issuing shares at a highly discounted
rate. Shareholders were also of the general view that there was poor leadership, selfishness and poor corporate
governance which had resulted to the deterioration of financial position and performance of the company. There was
consensus that a consultant who had expertise in corporate secretarial practice be hired to undertake a governance and
compliance audit of GSML.
All shareholders were eager to get the audit report within a short time and hoped their assertions would be supported. The
engagement letter was expected to be issued as soon as possible to facilitate commencement of the exercise. The task was
enormous given the operations of the company. However, as a good audit practice; audit sampling was expected to be
1. You have been engaged as the Corporate Secretary to carry out the governance and compliance audit for GSML.
Describe FIVE provisions you would recommended in the constitutive documents of GSML to ensure that the shareholders are protected from the arbitrary powers of the board of directors. (10 marks)
2. The consultant was expected to undertake governance audit sampling.
Explain FIVE benefits the consultant would gain by performing governance audit sampling. (10 marks)
3. Examine FIVE methods that the consultant might follow to gather governance audit evidence for GSML. (10 marks)
4. Shareholders were eager to get the governance audit report.
Describe FIVE disclosures in the GSML governance audit report that are of interest to shareholders. (10 marks)
(Total: 40 marks)
1. List THREE sources of audit criteria that are used in governance auditing. (3 marks)
2. Highlight FOUR professional responsibilities of a peer reviewer in governance audit process. (4 marks)
3. Discuss FOUR parameters that are evaluated in a governance audit. (8 marks)
(Total: 15 marks)
1. Highlight THREE ways a governance auditor could reduce exposure to liability under an audit. (3 marks)
2. State FOUR roles of a compliance officer in relation to governance and compliance audit. (4 marks)
3. Discuss FOUR issues that should be addressed in the audit engagement letter. (8 marks)
(Total: 15 marks)
1. Identify TWO types of governance and compliance audits. (2 marks)
2. Summarise FIVE uses of governance audit working papers. (5 marks)
3. Evaluate FOUR techniques a governance auditor might use to ensure the effectiveness of a governance audit. (8 marks)
(Total: 15 marks)
1. Highlight THREE ways in which governance awards promote good corporate governance. (3 marks)
2. Illustrate FOUR post governance audit review procedures. (4 marks)
3. Describe FOUR roles of Information and Communication Technology (ICT) in the conduct of a governance and compliance audit. (8 marks)
(Total: 15 marks)