The alternatives to audits under new Companies Act

The anticipated commencement date for the new Companies Act is expected to be 1 October 2010. If the draft regulations are promulgated as they stand, then most companies will no longer require an audit, writes Andrew Pitt, director at Moore Stephens South Africa.

The new Act distinguishes between two types of companies, namely profit and non-profit companies, with the former comprising public, private and state-owned companies, and with a few exceptions, only public, state-owned, certain non-profit and private companies holding assets in a fiduciary capacity will be subject to an annual audit.

But what alternatives are there to a mandatory audit?

Companies which do not fall into the above-mentioned categories would be subject to either an independent compilation, independent review in accordance with ISRE 2400 (International Standard on Review Engagements) or an independent review in accordance with ISRS4400 (International Standard on Related Services).

Independent Compilations

The Draft Regulations give no guidelines as to the scope of procedures for an independent compilation, nor do they specify a formal financial reporting framework (such as IFRS for SMMEs). Accordingly, there is concern that this will result in inconsistencies among compilers and, since only registered auditors are subject to regulation by the Independent Regulatory Board for Auditors, there will be little regulation as to the standards and quality of financial statements prepared in terms of an independent compilation outside of those prepared by registered auditors.

Independent Review – ISRE2400

A review under ISRE2400 requires that the auditor or independent profession accountant (IPA) plans the engagement and obtains sufficient knowledge of the business so as to determine the extent and nature of the review procedures. The procedures performed would typically include management inquiries, high level balance sheet and income statement analytical procedures and limited high level substantive procedures (such as inspection of reconciliations, aged analyses and review of minutes and company records).

Independent Review – ISRS4400

An ISRS4400 engagement will require typical audit type procedures, such as inquiry and analysis, observation, recalculation and obtaining confirmations. The scope of these procedures to be performed will be agreed upon between the auditor/IPA and client.

While there has been no indication yet that these and other key aspects of the Act itself will be reviewed before being affected, there have been a number of submissions made to address what appear to be onerous elements of the Draft Regulations. How this will be addressed and the final outcome, remains to be seen.