Staying in compliance with the amended Companies Act No. 71 of 2008 requires businesses and industrial corporations to be reviewed. It would entail undergoing either an independent review or an audit review. Before this act, businesses had to have a qualified auditor review their financial statements annually. A review provides stakeholders, investors, and banks with assurance. But what’s the difference between these two reviews? And how do I know which is for me? We have the answers!
Independent review (IR) or Auditing: Which is for me?
In order to determine whether your company must undergo an audit or an IR, one must know their Public Interest Score (PIS). A PIS calculation is required by the Companies and Intellectual Property Commission (CIPC) at the end of every financial year.
Your PI score determines the degree of regulation required for transparency. It is the determining factor when deciding between either review.
Audits, having higher authority over an IR, apply to companies with a PIS of 350 or above while obtaining an IR will be enough for companies ranking below. If a company is not owner-managed, which is the case for businesses owned by trusts, they would require an independent review.
Scope of reviews: how it affects assurance
With audits having a bigger scope of work, it also provides a “reasonable assurance” while IRs provide “limited assurance” from material misstatements. A study conducted in 2002 by IAASB showed the level of assurance for audits to be between 55 to 98 percent, while IRs were between 10 to 88 percent.
Both entail inquiry and analytical procedures. This means accountants evaluate financial and non-financial documentation with trends & ratios. Auditors and independent reviewers conduct meetings with board members of a company regarding reporting, documentation, and so forth. This allows them to gain an understanding of the business.
Independent reviews require only a substantive approach, but audits can perform a combined approach if necessary. Other approaches could include a risk-based procedure-based approach. Their primary concern would be to check for irregularities, and secondly for instances of fraud.
Based on a risk assessment, verified financial documentation is sampled with a selection of transactions and other non-financial records. This allows cross-referencing with external factors at certain periods.
The audits must adhere to strict auditing standards, which is an assurance engagement within the entire process. They are more in-depth and detailed in comparison to an IR.
And lastly, the reporting.
The difference in reporting style
To finalise a review, auditors must produce a statement. For an IR, accountants report their opinion of the company in negative assertation. It’s the opposite with an audit; they conclude their report with a positive assertation.
Both would state any reportable irregularity in the instance of unlawful conduct which amounts to theft. The report would have to detail the irregularity in their respective assertation and mention any measures taken to rectify the misstatements.
Qualifications needed by auditors
A less obvious fact, before going on, yet an important factor to note when doing a review: the independent reviewer cannot be involved in compiling the documentation.
Audits need a strictly professional judgement and are conducted by members of the Independent Regulatory Board for Auditors (IRBA), an accredited professional body. IRs can be conducted by the same members or an accounting officer.
Cost & time considerations
Audit reviews are the more costly of the two reviews, because of the factors listed above. With a larger scope of tasks and a need for more proficient accounting judgment, the costs accumulate. Audits generally take more time, while it could differ since task completion is relatively indefinite for either review. Costs also affect the level of assurance with the factor of how thorough a search, at a set price, a client expects.
Audit reviews have a bigger scope providing a more detailed analysis of documentation in their statements. They require costly professionals to carry out the strict scope, and thus provide a “reasonable assurance” for future investors and stakeholders.
While an IR is also good for financial intervening measures, it is also required by the Companies Act if your company is not liable for an audit or is owner-managed. The scope of tasks is less than an audit and they report in a negative assertation, meeting the applicable financial reporting framework.
