Should your Business be audited?

should your business be audited

Exclusion of Annual Financial Audit for South African Owner-Managed Businesses

Most South African owner-managed businesses may now exhale a sigh of relief, as they are now formally excluded from the requirement to undergo an annual financial audit.

Companies Act Requirements and Compliance

Companies, whether private or public are registered in terms of the Companies Act of South Africa. Therefore, all companies, including Close Corporations and Non-Profit Companies, need to comply with the requirements of the Companies Act. Compliance with the act is administered and regulated by the Companies and Intellectual Property Commission (CIPC). In accordance with the Companies Act, companies need to keep accurate and complete accounting records to enable them to prepare financial statements. The Act details how the financial statements must be prepared. The financial Statements are required for submission of the annual return to the CIPC and for annual Corporate Income Tax returns to SARS.

Calculation of Public Interest Score for Audit Determination

To determine if your company is required to be audited, you need to calculate your public interest score. This is the first time that a public-interest point system has been used in South Africa, and it is intended to determine to what extent the South African public, other than the companies’ owners, has an interest in the company.

There is one point given to a corporation for every employee, one point given for every 1 million in revenue, one point given for every 1 million in third-party debt, and one point given for every shareholder. The below example shows how this can be determined:

Category Year -ended Feb 2023 (example) Points
Number of Shareholders 2 2
Revenue Generated 56,000,000 56
Third Party Debt 15,000,000 15
Number of Employees 24 24
Public Interest Score 97

It is always better to be conservative in these calculations, that is, rounding off to the nearest million to ensure accuracy or better, ask your accountant to assist with the calculation.

The calculation is the same for a Non-Profit Company except that the number of shareholders or those with a beneficial interest will be replaced with the number of the members of the NPC. However, it is prudent for NPC to get regulatory audit for funding purposes, even if they do not meet the minimum score to get audited.

Threshold for Audit Requirement Based on Public Interest Score

To determine if a regulatory audit of the financial statements is needed, a consideration is also made as to how the financial statements are prepared. Externally prepared financial statements provide a level of independence that gives limited assurance when the risk is low.

Public Interest Score Audit Required?
<100 points Audit/Review not required
100 to 349 Points AFS Internally Prepared Audit Required
100 to 349 Points AFS Externally Prepared Audit Review required but audit recommended
>350 Audit Required

The barrier is set at the lowest possible level for businesses that perform their accounting functions in-house. In other words, they hire their own accountant rather than having their accounts handled by a independent accountants. If a company receives at least 100 points for public interest, the company’s financial records must be reviewed. Companies that hire external accountants to prepare their financial statements are only required to undergo yearly audits if they receive 350 points for serving the public interest.

Please Note:

  • Regardless of the public interest score, if the memorandum of incorporation requires an annual audit, an audit needs to be performed.
  • Personal liabilities companies have different requirements, that is, if the assets held in respect of others exceeds R5 million anytime during the financial year, an audit is required.

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