LESSON 11:

Company auditors

1 Introduction
Compulsory disclosure of financial information concerning the company plays a key role in protecting
the interests of shareholders, investors and creditors. To undertake certain projects, companies
usually depend on capital investments made by members of the public. For example, members of the
public may purchase shares or debentures in the company or advance loans to the company.
Investors and financiers are usually not willing to invest or lend money unless there is proper financial
reporting and disclosure of how the company’s funds are applied. The availability of reliable financial
information regarding the company’s affairs is conducive to a healthy economic climate. The whole
aim of a company’s financial statements is to inform the existing shareholders, as well as prospective
investors in the company, of its financial standing. The financial statements reflect the general financial
state of the company. They disclose whether its assets exceed its liabilities, whether it has sufficient
liquid funds, and the extent of the company’s working capital (liquid assets as well as credit facilities).

You will know that you understand this lesson if you are able to answer the following key
questions:
• Which companies are obliged to appoint an auditor?
• Who may be appointed as an auditor?
• Which people are disqualified from becoming an auditor?
• At which meeting must an auditor be appointed?
• How frequently must an auditor be appointed?
• Which companies are obliged to appoint an audit committee?
• For how long may the position of auditor remain vacant in a company?
• Explain the procedure for the appointment of an auditor to fill a vacancy.
• For how many consecutive years may the same auditor compile a company’s financial
statements?
• What rights do company auditors enjoy?
• How is the audit committee appointed?
• What are the duties of the audit committee?

2 Registered office and records

Prescribed study material

Textbook: chapter 2 paras 8 and chapter 9 paras 1.1–1.6
o Companies Act: sections 24–30

The accounting records must be kept in the prescribed manner and form and must be kept at, or be
accessible from, the company’s registered office. The type of accounting records that must be
maintained by a company depends on factors such as the type of company, its purpose, and the
nature and extent of its activities.
The annual financial statements that must be placed before the annual general meeting consist of the
following:
• a balance sheet
• an income statement
• a statement of cash flow information
• a directors’ report
• an auditor’s report
The law regulating the disclosure of financial information and the auditing profession is incorporated
in the Companies Act and the Auditing Profession Act 26 of 2005 as amended. The Companies
Act contains sections which regulate a company’s financial disclosures and its maintenance of
accounting records. The Companies Act imposes certain minimum financial disclosure requirements
on all companies, and more stringent disclosure requirements on public companies and certain private
companies. Section 24(3) of the Companies Act sets out a number of records that must be maintained
by the company, including copies of all accounting records for the current and previous seven financial
years. In terms of section 28, a company is required to keep accurate and complete accounting
records, in one of the official languages, as necessary to enable the company to satisfy its obligations
under the Companies Act and any other law with respect to the preparation of financial statements
(see the definition of ‘financial statements’ in section 1).
Section 29 states that the financial statements of a company must satisfy the financial reporting
standards, must present fairly the state of affairs and business of the company, and must explain the
transactions and financial position of the business of the company.
The financial statements must also show the company’s assets, liabilities, and equity, as well as its
income and expenses and any other prescribed information. Section 30 of the Companies Act requires
all public or state-owned enterprises to prepare annual financial statements within six months after
the end of their financial year. The annual financial statements must include an auditor’s report (section
30(5)).
In terms of section 44 of the Auditing Profession Act 26 of 2005, it is the duty of an auditor to examine
a company’s financial statements and accounting records and to express an opinion as to the truth
and fairness, in all material respects, of the statements and the accountant’s adherence to financial
reporting standards. Section 1 of the Auditing Profession Act states that an “audit” means the
examination, “in accordance with prescribed or applicable accounting standards, [of] (a) financial
statements with the objective of expressing an opinion as to their fairness or compliance with an
identified financial reporting framework and any applicable statutory requirements; or (b) financial and
other information, prepared in accordance with suitable criteria, with the objective of expressing an
opinion on the financial and other information”. By attesting that the financial statements fairly present
the financial condition and past performance of a company, an auditor plays a vital function in
reinforcing the reliability of financial information.

3 Audit requirements under the Companies Act

Prescribed study material

Textbook: Chapter 9 paras 1.7 and 1.8

Public companies are required to audit their annual financial statements (section 30(2) of the
Companies Act). The Companies Regulations of 2011 include a Public Interest Score (PIS) calculation
which determines what the reporting duties of other categories of companies are. If a company holds
assets in a fiduciary capacity with an aggregate value of over R5 million, an audit is required. The
Companies Regulations of 2011 provide for both activity and size criteria to determine whether
companies require audited financial statements.
The Regulations state that every entity is required to calculate its PIS at the end of each financial year.
The score is calculated as the sum of the following:
• a number of points equal to the average number of employees (as determined by the Labour
Relations Act 66 of 1995) of the company during the financial year;
• one point for every R1 million (or portion thereof) in third-party liabilities at year-end (these
exclude shareholder loans and intercompany loans with common shareholdings);
• one point for every R1 million (or portion thereof) in turnover during the financial year; and
• one point for every individual who, at the end of the financial year, is known by the company to
 directly or indirectly have a beneficial interest in the business.

Furthermore:
• For companies with a score below 100, an independent review is required if such companies
are not owner managed.
• If the company has a score below 100 and is owner-managed, there is no requirement for
outside professional assistance.
• “Owner-managed” means that all shareholders are directors, or, in the case of a trust, that at
least one of the trustees is a director.
• If the company is not owner-managed, and obtains a PIS score of 100 to 350, an audit is required
if reports are internally compiled or an independent review if they are externally compiled
• If the company is owner-managed with a score of 100 to 350, no professional intervention is
required if reports are externally compiled, but an audit will be needed if the reports are internally
compiled.
• If a company scores over 350 points, an audit is required regardless of whether the company is
owner-managed or not.
• A company can subject itself to audits by choice (voluntarily).

4 Appointment of an auditor

Prescribed study material

Textbook: chapter 9 para 2.2.1
o Companies Act: sections 34, 84, 85, 90–91
o Auditing Profession Act: section 37

Public companies, state-owned companies and certain types of private companies are required to
appoint an auditor every year at the annual general meeting (see sections 34, 84, 85, 90 and 91 of
the Companies Act).
Other companies such as private companies, personal liability companies or non-profit companies
need not comply with the extensive accounting requirements set out in Chapter 3, except to the extent
that the company’s Memorandum of Incorporation provides otherwise (section 34 of the Companies
Act).
Section 85 of the Companies Act requires that every company that appoints an auditor must file a
notice of the appointment with the Registrar within ten business days after the appointment. The notice
must reflect the name of the auditor and the date of appointment. Section 85(4) requires that the
incorporators of a company file a notice of the appointment of the company’s first auditor as part of
the company’s Notice of Incorporation. The auditor may be an individual person or a firm and is
appointed by a company by way of a contract. In companies with an audit committee, the audit
committee is required, in terms of section 94(7) of the Companies Act, to nominate for appointment a
registered auditor who is independent of the company and to determine the auditor’s fees and terms
of engagement.
Only a registered auditor may be appointed as auditor of a company. In terms of section 37 of the
Auditing Profession Act, only a person who has complied with the prescribed education, training and
competency requirements, who has made arrangements regarding his or her continued professional
development where that individual is not a member of an accredited professional body, who is a “fit
and proper person” to act as an auditor, and who is resident within South Africa, may be registered as
an auditor.
The Auditing Profession Act states, further, in section 37(3) that any person who has been removed
from an office of trust as a result of misconduct, who has been convicted of theft, fraud or forgery or
other act of dishonesty or corruption, or who has been declared by a court to be of unsound mind and
unable to manage his or her own affairs, may not be registered as an auditor.
To ensure a required level of skill and that the auditor is independent of the company it is auditing;
 section 90(2) of the Companies Act disqualifies certain persons from being appointed as the auditor
of a company. Such persons include: a director or prescribed officer of the company; an employee or
consultant of the company who was or has been engaged for more than one year in the maintenance
of any of the company’s financial records or the preparation of any of its financial statements; a
director, officer or employee of a person appointed as company secretary; a person who, alone or with
a partner or employees, habitually or regularly performs the duties of accountant or bookkeeper, or
performs related secretarial work, for the company; a person who, at any time during the five financial
years immediately preceding the date of appointment, was a person contemplated above or is a
person related to a person contemplated above.

5 Resignation and vacancies

Prescribed study material

Textbook: chapter 9 para 2.2.4
o Companies Act: section 91

An auditor may resign at any time during his or her period of office. The resignation is effective when
the notice of resignation is filed. A new auditor must be appointed to replace an auditor who resigns
within 40 business days after the filing of his or her resignation. Public and state-owned companies
are required to have an audit committee.
Prior to making an appointment, the board must propose to the audit committee, within 15 business
days after the vacancy occurs, the name of at least one registered auditor to be considered to replace
the auditor who resigned. The board of directors may appoint the person proposed if, within five
business days of making the proposal, the audit committee does not give notice in writing to the board
rejecting the proposed auditor.

6 Rotation of auditors

Prescribed study material

Textbook: chapter 9 para 2.2.1
o Companies Act: section 92

Section 92 of the Companies Act makes provision for the rotation of auditors. In terms of this section,
the same individual may not serve as the auditor or designated auditor of a company for more than
five consecutive financial years. This rotation requirement applies to individual auditors only and not
to firms and does not apply to private companies. If a company appointed two or more joint auditors,
the company is obliged to manage the rotation requirement in a way to ensure that all of the auditors
do not stop acting as auditors within the same year.
If an auditor has served for two or more consecutive years and then ceases to be an auditor of the
company, he or she will not be permitted to return before the expiry of at least another two financial
years.
7 Rights and restricted functions of auditors

Prescribed study material

Textbook: chapter 9 para 2.2.2
o Companies Act: section 93
o Auditing Profession Act: sections 21(2)(a) and 44(6)

Section 93 of the Companies Act provides that the company auditor has a right to access, at all times,
the accounting records and all books and documents of the company. The auditor may attend any
general meeting held by the company.
Section 44(6) of the Auditing Profession Act provides that a registered auditor may not conduct the
audit of any financial statements of an entity, whether as an individually registered auditor or as a
member of a firm, if the registered auditor has or had a conflict of interest in respect of that entity, as
prescribed by the Independent Regulatory Board for Auditors (IRBA).The IRBA is required to
define in the Code of Professional Conduct (see section 21(2)(a) of the Auditing Profession Act) which
non-audit services an auditor is prohibited from rendering to the company it is auditing.

8 Audit committees

Prescribed study material

Textbook: chapter 9 para 2.3
o Companies Act: section 94

Section 94 of the Companies Act requires that, at each annual general meeting, a public company, a
state-owned enterprise, and any other company which has voluntarily decided to have an audit
committee, must appoint an audit committee for every financial year. The audit committee must have
at least three members and consist only of non-executive directors of the company who have not been
involved in the day-to-day management of the company in the preceding three financial years.
The audit committee must, for the year it is appointed, perform the following functions:
• nominate and appoint a registered, independent auditor
• determine the fees to be paid to the auditor and the auditor’s terms of engagement,
• ensure that the appointment of the auditor complies with the Companies Act and other legislation
• determine the nature and extent of non-audit services that the auditor may provide or must not
provide
• pre-approve any proposed agreement with the auditor for the provision of non-audit services.
• prepare a report to be included in the annual financial statements
– describing how the audit committee has performed its functions
– indicating that the audit committee is satisfied that the auditor was independent of the
company
– stating that accounting practices have been complied with in the company and that
internal financial control has been exercised by the company
• receive and deal with complaints pertaining to the accounting practices and internal audit of the
company or related matters
• make submissions to the board on accounting policies, financial control, records, and reporting
• perform other functions as determined by the board, including the development of policy to
 improve governance
• consider whether the auditor’s independence may have been prejudiced
• consider compliance with other criteria relating to independence or conflict of interest as
prescribed by the IRBA.

➔ Reflection

Certain companies are obliged to appoint auditors. The Companies Act requires auditors to be
independent. A rotation period is prescribed. Public companies and state-owned companies are also
required to appoint an audit committee to oversee the appointment of an auditor, the performance of
the functions of the appointed auditor, and the terms of his or her engagement.