dead ball foul

Question
Team A has no timeouts left.  They are down 14-13, it is in the 4th Quarter.  Team A has the ball on Team B's 2 yard line, it is 4th and goal.  The clock is ticking...12 seconds, 11 seconds...Team A is scrambling to get into a set position so the quarterback can spike the ball and stop the clock.  There is pure chaos on the field. Team A finally spikes the ball with 10 seconds on the clock...Team B is celebrating because they believe the ball is theirs on change of possession   Wait, there is a flag on the play. The referee throws a flag and calls illegal procedure on Team A-they were not set prior to them taking the snap and spiking the ball.  The referee walks the ball back 5 yards and instructs the clock to be reset to 10 seconds and to begin on the snap, and it is now 4th down and goal.  Meanwhile, Team A gets in a huddle and is able to call a play-they proceed to score a touchdown and win the game.
This seemed very odd to me because the referee really gave Team A a timeout for a 5 yard penalty.
Also, the coach from Team B was screaming, trying to decline the penalty with no luck.  Can you tell me if the referee made the right call please or if you need more information.  THANKS!

Answer
Greg,
I presume you are talking about a high school game since the foul was for illegal procedure;  if it were an NCAA game such a foul would be false start.

Under high school rules 3-3-3 & 3-6-3 A is entitled to an untimed down if the penalty is accepted, if declined the the clock starts on the ready.  This is similar to a Federation case book play where the National Federation advised that Team A is entitled to an untimed down if the penalty is accepted.

Under NCAA rules the referee would not have the discretion to invoke rule 3-4-3 to start the clock on the snap since there is no unfair time tactic taking place.  NCAA rule 3-2-5-4 requires the clock to start on the ready when the penalty enforcement has been completed.

The referee was correct for putting time back on the clock since the dead ball foul stopped the clock at 10 seconds. Under college rules the clock would start on the ready.
Under high school rules the would have started on the snap id the foul was accepted.  Please note, the referee in a high school game should have explained to the B team captain that if they declined the penalty the clock would rest on the ready.