The alternatives to audits

Should the Companies Act go ahead most companies will no longer require an audit, MoneywebTax looks at the alternatives.

The anticipated commencement date for the new Companies Act 2008 (Act No. 71 of 2008), is expected to be October 1 2010.

If the draft regulations are promulgated as they stand then most companies will no longer require an audit.

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 of the companies that do not fall into these categories? 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 amongst compilers, and, since only registered auditors are subject to regulation by IRBA, 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 in accordance with ISRE2400
A review under ISRE2400 requires that the auditor or independent profession accountant (IPA) properly 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 inquiries of management, high level balance sheet and income statement analytical procedures and limited high level substantive procedures (such as inspection of reconciliations, aged analysis's and review of minutes and company records).

So while the extent of the procedures might be less than those of an audit, the implicit cost savings are likely to be largely offset by the use of higher level resources by the auditor or IPA. Accordingly, it is not likely that there will be significant cost savings for companies subject to this type of engagement under the new Act, when compared with an audit.

Independent Review in accordance with ISRS4400
An ISRS4400 engagement will require typical audit type procedures, such as inquiry and analysis, observation, recalculation and obtaining confirmations and the scope of these procedures to be performed will be agreed upon between the auditor/IPA and client. As such, it is difficult to compare the cost thereof to an audit in general and such a comparison will have to be done on an individual engagement basis, depending on the scope of procedures agreed upon to be performed.

Whilst 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.

*Andrew Pitt, director at Moore Stephens South Africa