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Audits and independent reviews: Which one does your company need?

by , 03 October 2013
In terms of the Companies Act, companies have a choice of having audits, independent reviews or nothing performed. Read on to discover if your company needs to have an audit or an independent review performed.

The Companies Act applies to all companies in South Africa, from one-man companies to large multinationals.

According to the Practical Accountancy Loose Leaf, your company needs to have either an audit or an independent review, unless it's exempt because all the shareholders are directors. Even then, some companies may still require an audit according to the Act.

So what's an audit?

An audit is a process where a registered auditor states if a company's financial statements are fairly presented. The auditor has to be satisfied your financial statements are fair and reasonable.

Your auditor can NEVER say your financials are correct. He can only say that in his opinion, based on the evidence he's found, your financials are fair and reasonable.

To do this, he has to investigate your financial statements. He does this by, for example:

  • Checking on your records at your bank; and
  • Going through your receipts.

For example, Warren Brown opens a real estate agency – Warren's Properties (Pty) Ltd and needs to have an audit done. On his financials, Warren declares that the only furniture he owns is two desks and three chairs.

His auditor has to get evidence that:

  • Warren actually owns these two desks and three chairs – he hasn't put them down as collateral on a loan;
  • He owns only the two desks three chairs that he's put on his financial statements;
  • The desks and chairs are fairly valued.

Warren's auditor does this by looking at his receipts (to see if he actually bought the desks and tables and for what price) and inspecting his premises to see if Warren still owns the desks and chairs.

What's an independent review?

According to the Practical Accountancy Loose Leaf, during an independent review, the reviewer needs to conclude that nothing has come to his attention that proves the financial statements aren't fairly presented.

Here's an example of how an independent review works: If Warren were to get an independent review, the reviewer wouldn't necessarily go through his receipts and financials to find out if he owned the furniture he said he does.

His reviewer would discuss and go through his financial statements with him, and if everything looked reasonable, the reviewer would sign Warren's financials off.

So which one does your company need between an audit and an independent review?

The Companies Act says not all companies need to be audited:

  • Some need to have an independent review; and
  • Some don't need anything at all.

Basically, you need to calculate your Public Interest Score (PIS) to determine if you need an audit or review.

The PIS equates to the amount of responsibility the company has to the public. The higher the score, the more the responsibility to either perform an audit or an independent review.

So how do you calculate your PIS score?

The company gets 1 point for every:

  • Shareholder or partner;
  • Staff member over the entire year.
  • Every R1 million rand of turnover (or part thereof); and
  • Every R1 million of outside debt.

For example, let's say Anthony Small has been running a construction business, Anthony Civils Pty (Ltd), for the past seven years. He knows that under the Act he has to work out his PIS score.

He has:

  • Eight shareholders;
  • 100 staff members;
  • A R100 million annual turnover;
  • No outside debt.

Anthony's PIS score will be: 8 + 100 + 100 + 0 = 208. Based on this score, Anthony will have to choose between performing a review or an audit.

Well there you have it. Knowing whether or not you should conduct an audit or independent reviews or nothing at all will help ensure you comply with the Companies Act.

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