Annual Audit Or Review? Which Is Right For Your Company?

auditWith the 2011 change in the Companies Act, 80 to 90% of companies in South Africa, namely PTY Ltds, do not require an annual audit. Rather the new Act allows for an independent review – an alternative form of ‘auditing’ a company’s financial statements. Will a review do for your company? Or would an annual audit mean much more?

First off, it’s important to understand the difference between an audit and an independent review:

  • Audit: An audit involves the examination of a company’s financial report (part of the annual report) by an independent party (a qualified individual outside the company). The financial report includes the following documents: balance sheet, income statement, statement of changes in equity, cash flow statement, and notes comprising a summary of significant accounting policies, any other necessary explanatory notes. What’s the point of an audit? To give an opinion, in the form of a written report, of whether the information presented in the financial report, taken in its entirety through a process of selective testing, reflects the financial position of the company at the given date.
  • Independent Review: This is also an external, independent assurance of a company’s financial statements but not to the same extent as an audit and not necessarily performed by an auditor. This kind of assessment is limited to inquiry and analytical procedures related to the information that the company’s management team supplies to the reviewer. It does not require the gathering of supporting evidence or an assessment of internal control, as in an audit. A review requires less work (and often costs much less than an audit) but it can increase the risk of errors and fraud going unnoticed. This risk is acknowledged in the form of a negative assurance report. What’s the point of an independent review? To enable a practitioner to state whether, based on an analysis of the given information, anything has come to their attention that causes them to believe that the financial statements have not been prepared in accordance with the applicable financial reporting framework. This is negative assurance.

While a more complicated process, there are advantages to an audit:

  • Providing third parties with the security that the company is dedicated to transparent business practices and strong business ethics.
  • Audited financial statements go a long way when applying for significant funding or tenders.
  • Regular audits can prevent a severe burden on the company’s cash flow. In the case where an audit is required after one hasn’t be done for years, each year accounted for could significantly raise the audit fee.
  • Making sure the company is in good financial health, keeping fraud detection high on the agenda.

However, an annual audit can be expensive and onerous. And, in terms of the law, they are not strictly necessary. So, unless you are looking to apply for the kind of finance that requires audited financial records or are considering selling your business in the near future, an independent review might be just what you need.

As explained, one of the major advantages of a review rather than a full audit is cost saving. Under the new Companies Act, only public companies are obliged to be audited – about 90% of all companies that were previously required to obtain an audit report will now be exempt while the remaining 10% will be subject to either an independent review or an audit. This is a big win for small to medium sized businesses that have serious cash flow concerns.

But that doesn’t mean your business isn’t accountable for maintaining proper financial records.  All companies are required to prepare annual financial statements while regulations will determine the financial reporting standard to be followed.

Need help managing and reviewing your business’s finances? Contact us – we’ll make sure your books are in order. Need an audit? We work closely with Tony Lund and Associates to provide superior auditing services to our clients.