The Short Version
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The Long Version
When should an audit, independent review or compilation be performed?
This can be established when you have calculated the PI score for your company.
Please note that the following companies are always subject to an audit (regardless of their PI Score):
• State-owned companies;
• Public companies (listed and non-listed);
• Companies holding fiduciary assets > R5,000,000;
• Any company with a Memorandum of Incorporation (MOI) that requires an audit.
A Public Interest Score (PI Score) is a mechanism introduced by the Companies Act that determines:
• Type of engagement that needs to be performed (Audit, Independent Review or a Compilation);
• Accounting framework that needs to be adopted (IFRS, IFRS for SME’s or SA GAAP); and
• Corporate governance should be complied with.
The PI Score is calculated by allocating points to certain key factors and figures of that company in order to determine whether the company must be audited or independently reviewed. These key aspects include average number of employees, annual turnover, holders of beneficial interest and third-party debt.
Between 100 and 349 points means non-owner managed companies will be reviewed if their statements are independently compiled, and they will be audited if internally compiled. Owner managed companies with 100 points or less will be exempt completely from an audit or review but should still prepare financial statements. Any other company can obviously also choose to be audited or independently reviewed if they so desire. These requirements apply equally to Close Corporations.
Compilation:
A compilation is defined as an engagement in which the professional applies his accounting and financial competence to assist management to prepare financial statements in accordance with the appropriate accounting framework based on information provided by management.
Independent Review:
An independent review is a limited assurance engagement where the practitioner performs primarily inquiry and analytical procedures to obtain sufficient appropriate evidence as the basis for a conclusion on the financial statements as a whole, expressed in accordance with the requirements of ISRE 2400. ISRE 2400 explains that the objective of a review of financial statements is to enable a practitioner to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, if anything has come to the practitioner’s attention that causes the practitioner to believe that the financial statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework (negative assurance).
The reviewer cannot prepare the financial statements and review these financial statements, meaning these financial statements must be independently compiled. Independent reviews are not required for owner managed profit companies but can be performed voluntarily if the public interest score is less than 350 and the financial statements are independently compiled. An independent review can also be performed voluntarily for CC’s but the cost versus benefits needs to be considered.
Audit:
An audit is the examination of the financial statements of a company who is independent of that company. The financial statement includes a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and notes comprising a summary of significant accounting policies and other explanatory notes.
The main purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. In the case of most general-purpose frameworks, that opinion is on whether the financial statements are presented fairly, in all material respects, or give a true and fair view in accordance with the framework. An audit conducted in accordance with ISAs and relevant ethical requirements enables the auditor to form that opinion (reasonable assurance).
Summary of an audit, independent review and a compilation:
The different types of engagement offer different levels of assurance to the users of the financial statements:
Compilation: Basic level of assurance
Independent review: Limited level of assurance
Audit: Highest level of assurance
