Audit or review – Which is applicable?

The Companies Act No 71 of 2008 (“the Act”) has made provision for significant changes for companies with regards to the requirement to be audited or reviewed.

This requirement is mainly determined by the Public Interest Score (“PI Score”) of the company which is calculated by allocating points to certain key factors and figures of the company in order to determine whether or not the company has to be audited or independently reviewed. These key aspects include the average number of employees, the annual turnover of the company, and holders of beneficial interest and third-party debt.

What are Independent Reviews

A review is a limited assurance engagement where the accounting practitioner performs certain procedures to obtain sufficient evidence to reach a conclusion regarding the financial statements as a whole, expressed in accordance with the requirements of ISRE 2400 (as revised). An Independent Review is a review engagement performed by an accounting practitioner who was not involved in the preparation of the financial statements.

In terms of Regulation 29(4) of the Act, an Independent Review of a company’s annual financial statements must be carried out:

• In the case of a company whose public interest score for the particular financial year was at least 100, by a registered auditor, or member in good standing of a professional body that has been accredited in terms of section 33 of the Auditing Professions Act;
• In the case of a company whose public interest score for the particular financial year was less than 100, by:
• A person as described in the paragraph above; or
• A person who is qualified to be appointed as an accounting officer of a close corporation in terms of section 60 (1), (2) and (4) of the Close Corporation Act, 1984 (Act No 69 of 1984).

Independent reviews are not required for owner-managed for-profit companies but can be performed voluntarily if their PI Score is less than 350 and the financial statements are independently compiled, or if their PI Score is less than 100. An independent review can also be performed voluntarily for CC’s but the cost-versus-benefits needs to be considered.

 When will a company need to appoint an auditor?

Not all companies require the appointment of an auditor, in terms of section 90 of the Act. Only public or state-owned companies are required to appoint an auditor upon its incorporation and each year after that at the company’s annual general meeting.

The regulations of the Act provide that companies which are not public or state-owned must have their financial statements audited if it is in the public interest to do so, and if the company meets the criteria prescribed in the Regulations. Regulation 28 states that any company that falls within the following categories in any particular financial year must have its annual financial statements audited by an auditor:

• Any for-profit or non-profit company if, in the ordinary course of its primary activities, it holds assets in a fiduciary capacity for persons who are not related to the company, and the aggregate value of such assets, held at any time during the financial year, exceed R5 million;
• Any non-profit company which was incorporated:
• Directly or indirectly by the state, an organ of state, a state-owned company, an international entity, a foreign state entity or a foreign company;
• Primarily to perform a statutory or regulatory function in terms of any legislation, or to carry out a public function at the direct or indirect direction of an organ of the state or state-owned company.
• Any other company whose public interest score in that financial year is 350 or more than or is at least 100 (but less than 350) and whose annual financial statements for that year were internally compiled.

Any “non-public” company (in this case a private, personal liability or non-profit company) may also voluntarily elect, either by board or shareholder resolution, to have its annual financial statements audited or to include an audit requirement in the company’s memorandum of incorporation (“MOI“). In the event that the company voluntarily elects, by resolution, to have its annual financial statements audited, such company will not automatically be required to comply with the enhanced accountability requirements contained in Chapter 3 of the Act dealing with auditors, audit committees and company secretaries, unless the MOI of the company provides otherwise by specifically requiring Chapter 3 compliance.

It is important to note that if the MOI of any company requires compliance with certain or all of the provisions in Chapter 3 of the Act, then that company will be required to comply with the enhanced accountability requirements to the extent that the company’s MOI requires.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. (E&OE)