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26 February

Financial statement and accompanying reports: An overview

03BThe commencement of the Companies Act No 71 0f 2008 created more awareness amongst company directors, shareholders, investors and other users of financial statements, of the different types of financial statements that exist. The following brief overview attempts to place these instruments in some perspective.

There are, amongst others, financial statements with an audit report, financial statements with a review report, financial statements with a compilation report, provisional financial statements, and management statements. The type of financial statement to be drawn up depends on several factors, namely the requirements of the Companies Act No 71 0f 2008 together with the memorandum in the case of acompany or close corporation, the trust deed in the case of a trust, the constitution in the case of a non-profit organisation, the investors in the entity, and other users of the financial statements. If, in terms of the provisions of the Companies Act No 71 of 2008, only a review report or a compilation report is required, the directors, shareholders, investors or any other user of the financial statements may require a voluntary audit.

What is the difference between an audit report, a review report and a compilation report?

An audit report provides the user of the financial statement with assurance that the financial statement is in all essential respects a reasonable account of the entity’s financial state. An audit comprises an in-depth investigation of the entity’s controls, and the execution of validation tests and analytic tests to obtain applicable and adequate proof that the financial statements are in all essential respects a reasonable account. An audit report can be modified in one of three ways: the auditor may qualify the report, he may hold back his opinion or he may express a negative opinion about the financial statements. A qualified audit report means that the financial statements are in all essential respects a reasonable account except for certain audit areas that are pointed out. If the auditor holds back his opinion it means that he does not express assurance about the financial statements and has not found applicable and adequate audit proof to support an unmodified audit opinion. If the auditor expresses a negative opinion about the financial statements it means that he wishes to warn the user of the statements that the statements are faulty.

An audit report may only be issued by a registered auditor.

A review report provides limited assurance to the users of the financial statements. A review mainly involves obtaining proof by means of enquiries made to management, and the execution of analytic procedures.

The number of procedures executed are fewer than in the case of an audit. A review report may only be issued by a registered auditor or a chartered accountant. A compilation report is issued for entities which are not subject to an audit or a review. A compilation report provides no assurance that financial statements are free of misrepresentation in all essential respects.

When is an entity obliged to be audited?

In the case of a company or a close corporation, the provisions of the Companies Act No 71 0f 2008 apply. A Public Interest Score is calculated based on the company or close corporation’s number of employees, its turnover, its third party debt, and the number of individuals who have a direct or indirect interest in the entity. If the Public Interest Score exceeds 350 the company/close corporation must be audited. If the score is less than 350 but more than 100, a review report is required, while only a compilation report is required if the score is less than 100. Regardless of the size of the Public Interest Score an audit must be done if required by the company’s deed, or if the directors are not the shareholders, or if the company holds assets of more than R5 million in a fiduciary capacity on behalf of third parties.

A trust deed may require that the trust be audited, and the constitution of a non-profit entity may likewise require that an audit be done.

In terms of an announcement by the Estate Agency Affairs Board (EAAB) on 21 June 2011, the trust accounts and business accounts of all estate agencies must be audited. The Attorneys Act 87 of 1989 determines that the trust accounts of attorneys must be audited.

What is the difference between a provisional financial statement and a management statement?

A provisional financial statement is one that has been drawn up but is not yet complete and is therefore subject to change. It is not accompanied by a report. A management statement is drawn up by an entity’s accountant or financial manager as required by the user of the statement (usually the management of the entity). It is usually done monthly. Management statements are simply an indication of the financial state and performance in the review period and do not provide any assurance.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

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