Audit and the new Companies Act

With the implementation of the new Companies Act, many questions have been raised regarding the new audit requirements that were mandatory in the 1973 Companies Act.

Here are some of the questions raised regarding the new Companies Act as well as answers to these questions. Hopefully this will shed some light on what is now required.

1. What types of business entities are required to have a statutory audit?

The table below shows the requirements for an audit of the annual financial statements:

Category of company

Mandatory audit requirement

Companies Act No.71 of 2008 (“the Act”) requires audited financial statements

State owned company

The Act requires audited financial statements

An Audit is required only if it meets the requirements test as per the Regulations of the Act.

Personal liability company

An Audit is required only if it meets the requirements test as per the Regulations of the Act.

An Audit is required only if it meets the requirements test as per the Regulations of the Act.

The applicable definitions are as follows:

Private Company – means a profit company that:

1. Is not a public, personal liability, or state-owned company; and
2. Satisfies the following criteria:

• Its Memorandum of Incorporation prohibits it from offering any of its securities to the public and restricts the transferability of its securities.
• It is not state owned; and

Profit company – means any company incorporated for the purpose of financial gain to its shareholders

Public company – means a profit company that is not a state-owned company, a private company or a personal liability company.

State-owned company – means an enterprise that is registered in terms of the Act as a company and either:

1. Is listed as a public entity as per the Public Finance Management Act; or
2. Is owned by a municipality, as contemplated in Local Government: Municipal System Act, 2000, and otherwise similar to an enterprise referred to in paragraph (a)

Non-profit company – means a company:

1. Incorporated for a public benefit or other object as required; and
2. The income and property of which are not distributed to its incorporators, members, directors, officers or persons related to any of them.

1. What are the thresholds that trigger a required statutory audit for a company?

An audit is required in the case of:

• Any profit or non-profit company if, in the ordinary course of its primary activities, it holds assets in a fiduciary capacity for persons that are not related to the company, and the aggregate value of such assets held at any time during the financial year exceeds R5 million;
• Any non-profit company, if it was incorporated -
  • Directly or indirectly by the state, an organ if state, a state-owned company, an international entity, a foreign state entity or a company; or
  • 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 or direction of an organ of the state, a state-owned company, an international entity, or a foreign state entity, or for the purpose ancillary to any such functions; or
  • More than 350; or
  • At least 100, if its annual financial statements for that year were internally complied.

  A review is required:

  • In the case of a company whose public interest score for the particular financial year was at least 100, by a registered auditor, or a member of a professional body that has been accredited; or
  • In the case of a company, whose public interest score for the particular financial year was less than 100, by;
    • A person contemplated above; or
    • A person who is qualified to be appointed as an accounting officer of a close corporation.

    Unless the annual financial statements were internally prepared, the annual financial statements do not have to be subject to an audit or review, if all the directors are shareholders of the entity and no Regulation prescribes an audit or review.

    Calculation of public interest score (at the end of each financial year)

    • A number of points equal to the average number of employees of the company during the financial year;
    • A point for every R1 million (or portion thereof) in third party liability of the company, at the financial year end;
    • One point for every R1 million (or portion thereof) in turnover during the financial year; and
    • One point for every individual who, at the end of the financial year, is known by the company:
      • In the case of a profit company, to directly or indirectly have a beneficial interest in any of the company’s issued securities; or
      • In the case of a non-profit company, to be a member of the company or a member of an association that is a member of the company.

      2. What accounting framework are companies to use?

      Annual financial statements are required to be prepared in accordance with the financial reporting standards as follows:

      State owned and profit companies

      Category of company

      Financial Reporting Standard

      State owned companies

      International Financial Reporting Standards (“IFRS”), but in the case of any conflict with any requirement in terms of the Public Finance Management Act, the latter prevails.

      Public companies listed on an exchange

      Public companies not listed on an exchange

      (b) IFRS for SME’s, provided that the company meets the scoping requirements outlined in the IFRS for SME’s

      Profit companies, other than state-owned or public companies, whose public interest score for the particular financial year is at least 350

      (b) IFRS for SME’s, provided that the company meets the scoping requirements outlined in the IFRS for SME’s

      Profit companies, other than state-owned or public companies –

      (a) Whose public interest score for the particular financial year is at least 100 but less than 350; or

      (b) Whose public interest score for the particular financial year is less than 100, and whose statements are independently complied

      (b) IFRS for SME’s, provided that the company meets the scoping requirements outlined in the IFRS for SME’s

      Profit companies, other than state-owned or public companies, whose public interest score for the particular financial year is less than 100, and whose statements are internally complied

      The financial reporting standard as determined by the company for as long as no financial reporting standard is prescribed.

      Non-profit companies

      Category of company

      Financial Reporting Standard

      Non-profit companies that are required in terms of the Regulations to have their annual financial statements audited

      IFRS, but in the case of any conflict with any requirement in terms of the Public Finance Management Act, the latter prevails.

      Non-profit companies, other than those contemplated in the first row above, whose public interest score or the particular financial year is at least 350

      (b) IFRS for SME’s, provided that the company meets the scoping requirements outlined in the IFRS for SME’s

      Non-profit companies, other than those contemplated in the first row above –

      (a) Whose public interest score for the particular financial year is at least 100 but less than 350; or

      (b) Whose public interest score for the particular financial year is less than 100, and whose statements are independently complied

      (b) IFRS for SME’s, provided that the company meets the scoping requirements outlined in the IFRS for SME’s

      Non-profit companies, other than those contemplated in the first row above, whose public interest score for the particular financial year is less than 100, and whose statements are internally complied

      The financial reporting standard as determined by the company for as long as no financial reporting standard is prescribed

      1. Does the firm responsible for the statutory audit have dual ability?(Can they prepare the financial statements AND perform the statutory audit?) An auditor appointed by a company may not perform any services for the company –
      1. That would place the auditor in a conflict of interest as prescribed or determined by the Independent Regulatory Board for Auditors in terms of the Auditing Professions Act; or
      2. As may be determined by the company’s audit committee.

      An audit committee of a company has the duty to determine the nature and extent of any non-audit services that the auditor may provide to the company, or that the auditor may not provide to the company.

      An auditor and the audit firm may not be currently involved, nor in the five years preceding their appointment, in the maintenance of a company’s financial records or the preparation of its financial statements or in performing of accounting or bookkeeping duties.

      1. Is financial statement information for private companies publicly available?

      A person who holds or has a beneficial interest in any securities issued by a profit company, or who is a member of a non-profit company, has a right to inspect and copy, without any charge for such inspection or upon payment of no more than the prescribed maximum charge for any such copy, the information contained in the following records of the company:

      1. The company’s Memorandum of Incorporation
      2. The records in respect of the company’s directors
      3. The reports to annual meetings, and annual financial statements
      4. The notices and minutes of annual meetings
      5. The securities register of a profit company or the members register of a non-profit company that has members.

      A person no contemplated above has a right to inspect or copy the securities register of a profit company or the members’ register of a non-profit company that has members, or the register of directors of a company, upon payment of an amount not exceeding the prescribed maximum fee for such inspection.

      In addition to the above, a person who holds or has a beneficial interest in any securities issued by a company, is entitled –

      1. Without demand to receive a notice of the publication of any annual financial statements of the company required by the Act, setting out steps required to obtain a copy of these statements; and
      2. On demand to receive without charge one copy of any annual financial statements of the company required by the Act.

      If a judgement creditor of a company has been informed, by a person whose duty it is to execute the judgement, that there appears to be insufficient disposable property to satisfy that judgement, the judgement creditor is entitled within five business days after making a demand, to receive without charge, on copy of the most recent annual financial statements of the company.

      Trade unions must, through the Commission and under conditions as determined by the Commissions, be given access to company financial statements for purposes of initiating a business rescue process.

      A company that is required to have its annual financial statements audited must file a copy of the latest approved audited financial statements on the date that it files its annual return.

      Michael Steenkamp

      Audit Partner, Johannesburg