Summary of regulations relating to audit and review

Last Updated Tuesday, January 26, 2010 12:58:39 PM

Summary of DRAFT regulations with regards to audit and review

The Companies Act Regulations, released for comment on 22 December 2009, include requirements for companies to be either audited or reviewed.

  1. Categories of Companies to be audited
    The Act and Regulations require the following categories of companies to be audited:
    1. Public Companies
    2. State owned companies (with possible exemption at the discretion of the Minister of Finance)
    3. Private company holding assets in a fiduciary capacity for a broad group of 3rd parties or caught up by section 65(2) of the Consumer Protection Act, 2008. (Section 65(2) attached for your information- Appendix 1).
    4. Non-profit company
      1. that is an organ of the State or a "subsidiary" of an international entity
        OR
      2. that solicits donations from the general public and
      1. its assets exceed R60 million
        OR
      2. its current expenditure as reported in its annual financial statements for the preceding year exceeded R120m
    5. Any company issued with a compliance notice requiring an audit.
  2. Independent reviews
    Independent reviews apply to companies that -
    • Are not required to be audited
    • Are not voluntarily audited
    • Are not exempt by virtue of being "owner managed".
    An owner-managed company is defined as a private company where:
    • one person has all of the beneficial interest in all of the issued securities, or
    • every person who is a holder or has a beneficial interest in securities issued is also a director.
    Personal liability companies would generally fall within the definition of owner managed companies as in most instances the holders of securities would also be directors.

    Private companies and Non-profit companies that do not take donations would fall within the following table:

    TYPE Assets   Turnover Standard to be used
    Independent review >R100m OR >R200m p.a. ISRE2400 - Engagement to review financial statements
    Agreed upon procedures R5m1 < assets < R100m AND R20m¹ < Turnover < R200m ISRS4400 - Engagement to perform agreed upon procedures regarding financial information
    Independent compilation < R5m AND < R20m No set standard

    1. If only one lower threshold is breached the company would still fall within this category

    Non-profit companies that do take donations would fall within the following table:
    TYPE Assets   Turnover   Expenses Standard to be used
    Independent compilation < R60m AND > R200m p.a. AND < R120m ¹ ISRE2400 - Engagement to review financial statements
    Agreed upon procedures < R60m AND R20m> AND < R120m ¹ ISRS4400 - Engagement to perform agreed upon procedures regarding financial information ²
    Independent compilation < R5m AND < R20m AND < R120m p.a. No set standard

    1 This is unlikely to apply in reality due to the turnover/expense relationship at a "charity organisation"
    2 If only one lower threshold is breached the company would still fall within this category
  3. Other issues
    There is certain other issues which also needs to be addressed including:
    • Rotation of reviewers - Section 30(4) of the Regulations states that the reference to an auditor must be regarded as referring to an independent accounting professional. Therefore, the section referring to the rotation of auditors will also apply to independent reviewers.
    • The Financial Reporting Framework for Non-public Entities has not been included in the Financial Reporting Standards hierarchy.
    • No professional qualifications / standards have been set for reviewers. IRBA members are not included as reviewers.
    • Turnover has been defined as per the Competition Act, 1998. The section in the Competition Act is attached for your information - Appendix II.
    SAICA encourages members to comment on the summary provided as we are compiling a comment letter for the dti due by 1 March 2010.

Appendix 1
Consumer Protection Act 68 of 2008

Lay-bys 62.

  1. If a supplier agrees to sell particular goods to a consumer, to accept payment for those goods in periodic instalments, and to hold those goods until the consumer has paid the full price for the goods-
    1. each amount paid by the consumer to the supplier remains the property of the consumer, and is subject to section 65, until the goods have been delivered to the consumer; and
    2. the particular goods remain at the risk of the supplier until the goods have been delivered to the consumer.
  2. If a supplier is unable to deliver any goods contemplated in subsection (1) when the consumer has paid the full price for those goods, the supplier must either, at the option of the consumer-
    1. supply the consumer with an equivalent quantity of goods that are comparable or superior in description, design and quality; or
    2. refund to the consumer-
      1. the money paid by the consumer, with interest in accordance with the Prescribed Rate of Interest Act, 1975 (Act No. 55 of 1975), if the inability to supply the goods is due to circumstances beyond the supplier's control; or
      2. double the amount paid by the consumer, as compensation for breach of contract in any circumstances not contemplated in subparagraph (i).
  3. Without limiting the generality of subsection (2)(b)(i), a failure to supply the goods is not ''due to circumstances beyond the supplier's control'' if the shortage results partially, completely, directly or indirectly from a failure on the part of the supplier to adequately and diligently carry out any ordinary or routine matter pertaining to the supplier's business.
  4. If a consumer contemplated in subsection (1) terminates the agreement before fully paying for the goods, or fails to complete the payment for the goods within 60 business days after the anticipated date of completion, the supplier-
    1. may charge a termination penalty in respect of those goods, subject to subsections (5) and (6); and
    2. after deducting any such termination penalty, must refund to the consumer any amount paid by the consumer under that agreement.
  5. A cancellation penalty contemplated in subsection (4) may not be charged-
    1. if the consumer's failure to complete payment was due to the death or hospitalisation of the consumer; or
    2. in any other case, unless the supplier informed the consumer of the fact and extent of the penalty before the consumer entered into the lay-by agreement.
  6. The Minister may prescribe a basis for calculating the maximum amount of a cancellation penalty contemplated in subsection (4).



Appendix II
Calculation of annual turnover as per the Competition Act of 1998

  1. For the purpose of section 6 of the Act, the annual turnover of a firm at any time is the gross revenue of that firm from income in, into or from the Republic, arising from the following transactions and events as recorded on the firm's income statement for the immediately previous financial year, subject to the provisions of sub-items (2), (3) and (4):
    1. The sale of goods;
    2. The rendering of services; and
    3. The use by others of the firm's assets yielding interest, royalties and dividends.
  2. In particular-
    1. When calculating turnover the following amounts may be excluded:
      1. any amount that is properly excluded from gross revenue in accordance with G.A.A.P.;
      2. taxes, rebates, or any similar amount calculated and paid in direct relation to revenue, as for example, sales tax, value added tax, excise duties, and sales rebates, may be deducted from gross revenue;
    2. revenue excludes gains arising from non current assets and from foreign currency transactions; and
    3. for banks and insurance firms revenue includes those amounts of income required to be included in an income statement in terms of generally accepted accounting practice, but excluding those amounts noted in 3(2)(b).
  3. If, between the date of the most recent financial statements being used to calculate the turnover of a firm, and the date on which that calculation is being made, the firm has acquired any subsidiary company, associated company or joint venture not shown on those financial statements, or divested itself of any subsidiary company, associated company or joint venture shown on those financial statements--
    1. the turnover generated by those recently acquired assets must be included in the calculation of the firm's turnover if this turnover should in terms G.A.A.P. be included in the turnover of the firm; and
    2. the turnover generated by those recently divested assets in the immediately
    previous financial year may be deducted from the firm's turnover if this turnover was included in the turnover of the firm. If the financial statements used as a basis for calculating turnover or the turnover included in terms of sub-item 3(a) are for more or less than twelve months, the values recorded on those statements must be pro-rated to the equivalent of twelve months.