South Africa

Details

  • Service: Audit, Financial Statement Audit
  • Type: Business and industry issue
  • Date: 2010/09/28

Technical Accounting Advisory Services

Growing numbers of countries are adopting International Financial Reporting Standards (IFRS). The benefits of the new standards include enhanced comparability and improved transparency of financial reporting.

To audit or not to audit? The question remains 

The long awaited and much anticipated draft Regulations to the Companies Act 71 of 2008 (the Act) in South Africa were published on 22 December 2009.

Many of us breathed a sigh of relief at what we thought would be the demystification of the audit requirements stipulated in the Act. However, this relief was short-lived as the draft Regulations have raised more questions than perhaps the Act did itself.

 

As stated in the Act, all public companies and state-owned companies require an audit. The Act also states that the Minister may determine through Regulations which other companies would require an audit based on whether it would be in the public interest because of the economic or social significance of the company as indicated by:

 

  • its annual turnover
  • the size of its workforce
  • the nature and extent of its activities.

 

The Regulations also stipulate that for-profit companies holding assets in a fiduciary capacity for a broad group of third parties or bound by section 65(2) of the Consumer Protection Act, 2008 (which only becomes effective in October 2010) would require an audit. This determination will be conducted on an annual basis which also poses a problem since an audit cannot be ‘switched’ on and off on an annual basis. There is no indication of the thresholds relating to annual turnover or size of workforce which would determine whether a company requires an audit.

 

A further consideration for a private company is that the South African Generally Accepted Accounting Practice is not an applicable financial reporting standard in terms of the Regulations. This means that a for-profit company requiring an audit would need to prepare its financial statements in terms of International Financial Reporting Standards (IFRS) or IFRS for Small and Medium Enterprises (SMEs) for the period for which an audit is required.

 

The Regulations have also introduced the following ‘independent review’ requirement for companies:

 

  • Independently compiled and reported – for companies with assets worth less than R5 million and a turnover of less than R20 million. There are no prescribed financial reporting standards
  • Independent review in terms of ISRS 4400 – is applicable to companies with assets between R5 million and R100 million or turnover between R20 million and R200 million. This represents an agreed-upon procedures engagement and provides no assurance. The prescribed financial reporting framework is IFRS for SMEs
  • Independent review in terms of ISRE 2400 – is applicable to companies with average assets worth more than R100 million or average turnover more than R200 million. The prescribed financial reporting framework is IFRS or IFRS for SMEs.

 

All three of the above may be performed by an independent member in good standing with a professional body that is a member of the International Federation of Accountants.

 

There is also an overall exemption from the audit and review requirements where all shareholders are also directors or the company only has one shareholder.

 

It should be noted that companies can still voluntarily opt to have an audit. From the above, it is not yet clear as to how the statutory audit and independent review requirements are going to be applied in practice.