Before 2008, all companies had to be audited – irrespective of size, shareholding, etc. The Companies Act 2008 is more flexible. It may be more complicated in the sense that it doesn’t prescribe a “one size fits all” attestation level, but it does give companies options that are better aligned with their own needs as well as the needs of the users of their financial information.
Companies (and Close Corporations, with a few modifications) can essentially be subject to any of three different requirements as far as their annual financial statements are concerned:
- A full audit of the financial statements
- An independent review of the financial statements
- No attestation by an outside party
Companies can obviously still choose to either have their financial statements independently prepared or to prepare it themselves. This process is called the compilation of the financial statements and provides another level of independent corroboration if an independent professional is chosen to carry out the work.
Not all of the above are free choices, and companies in the higher bracket in terms of size or public responsibility may well find that their regulatory requirements are unchanged from the old Companies Act regime.
However, where there is a choice, the most common is where no attestation is required and a voluntary audit or review is opted for. Or there are many cases where a review is the minimum requirement but management and / or directors decide to volunteer for an audit.
Whether or not to involve an outside specialist (as either reviewer or auditor) will not be discussed here. Suffice to say, with the many duties and obligations businesses must comply with, it takes a very brave businessman/woman to go it alone!
What we need to explain slightly further is the difference between an independent review and an audit (also independent, but not referred to as such by the Act). The easiest way to understand the difference is to look carefully at the wording of the “opinion” that the auditor issues and compare it to the “conclusion” issued by an independent reviewer:
|Audit Opinion||Review conclusion|
|We are satisfied that the financial statements are fairly presented in terms of …||Nothing has come to our attention that has caused us to believe that the financial statements are not fairly presented in terms of …|
The difference is subtle but noticeable. Read the two sentences in the above table again and consider the level of assurance (or lack thereof) provided by each of the above. After reading it again, it will become clearer that a review offers far less assurance than an audit, therefore an audit is said to provide users with “reasonable assurance” while a review only provides “limited” assurance.
Concerning the work effort in order to arrive at the above opinion/conclusion, the approach is also completely different. In an audit, the audit team carries out many different types of procedures to obtain positive evidence about the fairness of the presentation in the financial statements. In contrast, a reviewer relies only on analytical review procedures and enquiries, i.e. no tests of detailed transactions and documents. These tests may still be carried out if deemed necessary, and nobody can stop a reviewer from doing it, but they are less common in a review than in an audit.
The effect on costs is that less work is done in a review than in an audit, but at a much higher level of skill and experience. The net result is that costs do not decrease in the same ratio as the decrease in assurance provided.
It is the duty of all company directors to assure that they comply with the Companies Act requirements relating to the attestation of their financial statements as well as make prudent decisions in the interests of the company. You are invited to discuss your options with any of our partners or staff members who will gladly assist you in making the best informed decision.
Audit Partner, Johannesburg