SAPA 11: Financial Reporting and Audit Requirements
This guide clarifies how SAPA 11 interprets the Companies Act, defining financial reporting and assurance obligations for South African companies and their auditors.
The financial reporting and assurance requirements in South Africa are primarily governed by the Companies Act of 2008 and the Auditing Profession Act of 2005. These laws establish the mandates for financial statement preparation, assurance engagements, and the duties of directors and auditors. This legal framework defines the responsibilities that arise from the legislation to ensure transparency and accountability in the corporate environment.
Applicability of Audit and Review Requirements
The application of assurance requirements hinges on a company’s Public Interest Score (PIS), a metric used to gauge a company’s social and economic impact. This score dictates the level of external assurance a company must obtain for its annual financial statements.
The PIS is calculated annually based on a points system across four categories:
- One point for each employee, based on the average number during the financial year.
- One point for every R1 million (or portion thereof) in third-party liabilities.
- One point for every R1 million (or portion thereof) in annual turnover.
- One point for each person holding a beneficial interest in the company’s securities.
For instance, a private company with 60 employees, R25.5 million in third-party debt, R120 million in turnover, and 15 shareholders would have a PIS of 221 (60 + 26 + 120 + 15).
The PIS determines whether a company requires a statutory audit or an independent review. Companies with a PIS of 350 or more must have their statements audited. An independent review is required for companies with a score between 100 and 349, unless their financial statements are compiled internally, which mandates an audit. Companies with a PIS below 100 do not require an audit or review, unless they are not owner-managed, which requires an independent review. Public and state-owned companies must undergo a statutory audit regardless of their PIS.
Key Financial Reporting and Assurance Requirements
The Companies Act places responsibility on directors to ensure annual financial statements are prepared according to the Act and applicable standards, fairly presenting the company’s financial position and performance. Management must maintain adequate accounting records and internal controls to support the reliability of this information.
A statutory audit provides reasonable assurance that financial statements are free from material misstatement. To achieve this, the auditor assesses risks of material misstatement, tests internal controls, and conducts detailed substantive testing of transactions and account balances.
In contrast, an independent review provides limited assurance. Its scope is narrower, consisting primarily of inquiry and analytical procedures to identify items that may indicate a misstatement. The conclusion is expressed in a negative form, stating that nothing has come to the reviewer’s attention to suggest the financial statements are not fairly presented.
The Companies Act also mandates specific disclosures, including detailed reporting on directors’ remuneration and any financial assistance provided to directors or related parties. These rules ensure stakeholders have clear insight into the financial relationships between a company and its leadership.
The Auditor’s Report and Other Reports
The auditor’s report must comply with the Companies Act and professional standards. It identifies the financial statements that were audited and outlines the respective responsibilities of management and the auditor.
The core of the report is the opinion paragraph, stating the auditor’s conclusion on whether the financial statements are presented fairly. A “Basis for Opinion” paragraph confirms the audit was conducted according to International Standards on Auditing and references the auditor’s independence. An “Emphasis of Matter” paragraph may be included to draw attention to a specific disclosure without modifying the opinion.
Auditors may also produce other reports, such as reports to a company’s audit committee with detailed findings about internal controls or accounting issues. For companies with a social and ethics committee, auditors may be engaged to report on matters related to the committee’s statutory duties.
Reportable Irregularities
Auditors must address “Reportable Irregularities” (RIs), defined by the Auditing Profession Act as an unlawful act or omission by a person in management. An act qualifies as an RI if it has caused or is likely to cause material financial loss, is fraudulent or amounts to theft, or represents a material breach of a fiduciary duty. Examples include misappropriating company assets or intentional misrepresentation in financial reporting. The auditor must have “reason to believe” an RI occurred based on information from the audit.
Upon identifying a potential RI, the auditor must send a written report to the Independent Regulatory Board for Auditors (IRBA). Within three days of this report, the auditor must notify the company’s management board, providing a copy of what was sent to the IRBA. The auditor then has 30 days from the initial report to discuss the matter with management and conduct any further necessary investigations.
Following this 30-day period, the auditor submits a second report to the IRBA. This report states the auditor’s opinion on whether an RI occurred and if it is ongoing or resolved. If the RI is continuing, the IRBA must report the matter to an appropriate regulator, such as law enforcement.