Solution 1.14

School: International Training College Lingua - Course: ECONOMICS 1068 - Subject: Accounting

SUGGESTED SOLUTION TO EXERCISE 1.14 1 Page only 1.1.1With regard to whether the company must appoint an external auditor, you will first have to calculate your company's public interest score.Without going into too much detail this is the sum of points which are allocated to 4 "characteristics" of your company as follows: *one point is allocated for the average number of employees (28 points) *one point for every R1m (or portion thereof) of turnover (24 points) *one point for every R1m (or portion thereof) of liability to 3rdparties (1 point) *one point for every individual who has a direct or indirect interest in the shares of the company (5 points) 1.2If your company's public interest score is below 100 there is no requirement that your AFS be audited.Your PIS will be around 56 points. However with this PIS it will be necessary for your company to appoint a registered auditor to independently review your financial statements. 1.3It is also possible that the company's Memorandum of Incorporation has a clause which requires that the company appoint an external auditor but this would be a requirement created by the shareholders.If this clause exists, your company would have to comply, but as you will own 75% of the shares you could remove this clause if you wanted to. 1.4As regards an internal auditor, there is no requirement which makes it obligatory for a private company to appoint one. 2.2.1The company may retain its existing auditor, provided the existing auditor is available for re-appointment. 2.2Whilst there is nothing in the Companies Act which prevents you from appointing me as your auditor, I would not be in a position to accept such an appointment. 2.3For any audit opinion to be worthwhile (reliable) it must be given by someone who is independent of the company about which the opinion is being expressed. 2.4As you and I are close friends, I would not be, or be seen to be independent, and would therefore be in breach of the requirement explained in 2.3 as well as my profession's Code of Professional Conduct. 2.5If you end up only having to be independently reviewed (not audited) you could appoint the existing auditor to conduct the review. 3.3.1The shareholders would appoint the auditor by general resolution.As the other directors are not shareholders they have no say in the appointment. 3.2As you hold 75% of the shares, it will be your decision.The MOI (if this is relevant) may lay down some additional requirements for appointment of the auditor. 4.Benefits: Overall having your financial statements audited adds to the credibility of your company in its business dealings. 4.1For the company *It is essential that the other shareholders know how the company is performing and audited annual financial statements are an important mechanism for reporting to them. *Whoever prepares the company's statements may make errors (or even hide frauds) which the audit may detect.Thus the auditor's opinion on the fair presentation of the annual financial statements gives management greater assurance on the accuracy of the company's results. *Having the accounting records audited acts as a deterrent to employees attempting to defraud the company. *The company will also benefit inasmuch as lenders of money e.g. your bank, will be far more inclined to extend credit.They will almost certainly require audited financial information from you when considering your financial needs. *The company will benefit from the advice on such matters as systems and tax that the auditor can offer.This kind of advice becomes a positive by- product of the audit. 4.2For you *Even though you are the majority shareholder and managing director it is still possible for your fellow directors or employees to "pull the wool over your eyes", particularly as, being an engineer, you know little about financial matters. *The audit will give some assurance that this is not happening as it provides you with an independent "view" of the state of your company, and you will receive reports on weaknesses in your company's controls from the auditor. 4.3A review engagement which is like a "watered down" audit does not provide the same level of independent assurance that an audit does.This will be explained in the review report given by the registered auditor carrying out the review so users of your financial statements may not be as confident about them as they would have been with an audited set of financial statements.