Your Responsibility

If you are in business, regardless of the business entity you choose (e.g. Sole Proprietor, (Pty) Ltd Company or Close Corporation) you need to prepare Annual Financial Statements.  This is because the Companies Act and the tax man, also known as The South African Revenue Services (SARS), says so!

It should be obvious in any event that the only way to really know what is going on in your business is by keeping complete and accurate books and records of your trading transactions.  It is best practice to prepare financial statements, also known as management accounts, on a monthly basis so that you can use them to make ongoing and sound business decisions.  Annually however, you MUST prepare, or have an accountant help you prepare, a set of Annual Financial Statements.

The preparation of Annual Financial Statements for a (Pty) Ltd is governed by the new Companies Act No. 71 of 2008, which came into effect on 1 May 2011.

But not all Financial Statements are equal!

Depending on the business entity that you trade in, the level of detail required to be included in your Annual Financial Statements will vary greatly.

In terms of the Act, there are 3 possible processes that have to happen in order to prepare the Financial Statements.  They are:

  • A statutory audit
  • An Independent Review
  • Compilation
From a cost perspective, a statutory audit costs by far the most, followed by an independent review and then a compilation.

Without trying to dazzle you with accounting mumbo jumbo, an auditor expresses an opinion on the Annual Financial Statement at the end of the audit.  The goal is to express an unqualified opinion as to whether the Annual Financial Statement fairly present the financial position of the Company.

The auditor is trying to ensure that there is no “Material Misstatement” in the Annual Financial Statement and in order to do this, he will have to perform an involved set of audit procedures that are designed to detect such material misstatements.

The best way to try and explain this is by way of example:

Let us say that your bookkeeper prepares your Annual Financial Statement and it shows a net profit after tax of say R5 million, which you present to a bank because you have asked for a R1 million overdraft.  The bank then grants this overdraft based on your Annual Financial Statements.

Now let’s assume that you made a few errors and that the actual net profit after tax is only R4,8 million and not R5 million…

Would the bank now make a different decision?  Would they still give you the R1 million overdraft once they discover this R200k error?  In most cases, the answer would probably be yes.

Let’s now assume that the actual net profit after tax was only R2 million because we now discovered a R3 million error…would the bank grant the R1 million overdraft now?  Probably not.  This is because the size of the error was big enough to result in them making a different decision.

In essence the error resulted in a material misstatement of your Annual Financial Statements

When do you require an Audit or an Independent Review?

This is a very technical question and is based on something known as your public interest score.  This is beyond the scope of this discussion.

Please call us to discuss this with you.

Just be aware that the law prescribes in certain circumstances that a statutory audit is required.  Even if an audit is not required, you can voluntarily elect to have an audit at any time.  For example, if a bank insisted on an audit before they would consider granting additional finance or in preparation for the sales of a business.

How we can help you

If you really cannot afford an independent review or an audit and you are looking for a very low cost solution to just meet your statutory requirements, and if your public interest score allows for this, then this option may be for you.  You can also decide what level of financial statements you want.  For example, they could consist of just an income statement and a balance sheet or they could be a full set with appropriate notes.  As a rule, banks and creditors feel more comfortable with a full set of Annual Financial Statements.

We can compile your Annual Financial Statements in terms of IFRS or IFRS for SME’s (essentially the statutory rules that govern the preparation of Annual Financial Statements).

We will prepare monthly management accounts.  We can even discuss these with you monthly if you wish.

Sometimes you may need a special purpose set of financials done.  For example before year end if required by the bank to grant you finance.

Any other financial information that you may need for any purpose what so ever, for example cash flow projections and forecasts.

An independent review gives a higher level of assurance than a compilation but a much lower level of assurance compared to an audit because the procedures are limited to inquiry, analytical review and discussions with management and staff.

We will compile your Annual Financial Statements in terms of IFRS or IFRS for SME’s (essentially the statutory rules that govern the preparation of Annual Financial Statements).

We will perform a comprehensive audit on your accounting records designed to detect material misstatement.

We will prepare a full set of Annual Financial Statements for you in terms of IFRS or IFRS for SME’s.

We will give you a management report of all weaknesses we identify in your business and any areas that we find that we believe can be improved.

We will have a comprehensive discussion with you to explain everything contained in these Financial Statements.