by Hlobisile Shoba, founder of Mafisa Chartered Accountants, South Africa
Many business owners are under the impression that their companies must be audited, which is not always the case. For some companies, a certain level of assurance can be provided through an independent review. This level of assurance is normally acceptable to funders, banks, etc.
Entrepreneurs get discouraged to apply for funding or get disqualified from funding opportunities due to the fact that their financial statements are not audited. Audits can be costly, while independent reviews offer an affordable alternative especially to small businesses.
An Independent Review is a limited assurance engagement. Assurance is the degree or level of trust that users can place on the credibility of the information contained in the annual financial statements. An external audit provides users with a higher level of confidence that management have disclosed all the necessary information in the annual financial statements for users to make informed business decision regarding the business.
The Companies Act provides further guidance on whether companies are required to be audited or have their financial statements independently reviewed.
Companies that fall within any of the following categories in any particular financial year are required to have its financial statements audited:
a) profit or non-profit company if, in the ordinary course of its primary activities, it holds assets in a fiduciary capacity for persons who are not related to the company, and the aggregate value of such assets held at any time during the financial year exceeds R5 million;
(b) Non-profit company, if it was incorporated––
(i) directly or indirectly by the state, an organ of state, a state-owned company, an international entity, a foreign state entity or a company; or
(ii) 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 initiation or direction of an organ of the state, a state-owned company, an international entity, or a foreign state entity, or for a purpose ancillary to any such function; or
(c) Any other company whose public interest score in that financial year is (i) 350 or more; or (ii) at least 100, but less than 350, if it’s annual financial statements for that year were internally compiled.
The PI score also determines the financial reporting standards that the company must adopt and also determines whether the company is required to appoint a Social and Ethics Committee
The PI score works in a way that a company is allocated points according to the number of its employees, its annual turnover, its stakeholders and the level of third party liabilities at the end of the financial year.
How is the PI score calculated?
a company is allocated points according to the number of its employees, its annual turnover, its stakeholders and the level of third party liability number of points equal to the average number of employees of the company during the financial year;
one 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 have a direct or indirect beneficial interest in the company. This will include shareholders, beneficiaries of a trust where a trust is a shareholder and other stakeholders.
Companies scoring 350 points or more are required to have an audit. Companies scoring between 100 - 350 points must have an independent review conducted by a registered auditor or a chartered accountant.
Companies scoring less than 100 points are required to have an independent review conducted by anyone who qualifies as an accounting officer, unless circumstances indicate otherwise.
I hope this helps,
Have a great entrepreneurial week!
Hlobisile Shoba is a well rounded finance professional with experience in Retail/FMCG as well as Oil and Mining sectors. She is registered with SARS as a Tax Practitioner, a qualified Chartered Accountant registered with the South African Institute of Chartered Accountants and a founder of Mafisa Chartered Accountants. She is passionate about entrepreneurship, education and youth development. You can contact Mafisa Chartered Accountants by email at firstname.lastname@example.org or email@example.com or you can visit www.mafisa.co.za