Study unit 10: Auditors and audit committees

1. Which companies are obliged to appoint an auditor?

Public companies and state-owned companies have to. 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).
2. Who may be appointed as an auditor?
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.
3. Which people are disqualified from becoming an auditor?
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.
4. At which meeting must an auditor be appointed?
At the annual general meeting
5. How often must an auditor be appointed?
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 also 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 so as 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.
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

1
who resigns within 40 business days after the filing of his or her resignation.
6. Which companies are obliged to appoint an audit committee?
Public and state-owned companies are required to have an audit committee.
7. For how long may the position of auditor remain vacant in a company?
A new auditor must be appointed to replace an auditor who resigns within 40 business days
after the filing of his or her resignation.
8. Explain the procedure for the appointment of an auditor to fill a vacancy.
Before 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.
9. For how many consecutive years may the same auditor compile a company’s
financial statements?
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.
10. What rights do company auditors enjoy?
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.
11. How is the audit committee appointed?
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.
12. What are the duties of the auditing committee?
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

2
 of policy in order 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
Activity 1

Suppose that Given is appointed as auditor of Moonblue Ltd to replace Daniel. Having
served as auditor of Moonblue Ltd for three consecutive years, Given decides to take
a six month holiday through Europe and resigns from his position as auditor. On his
return from Europe, Given re-applies for the position as auditor of Moonblue Ltd. Can
Given be reappointed?

The Companies Act provides that if an individual has served as an auditor of a company for
two or more consecutive financial years and then ceases to be the auditor, that individual may
not be re-appointed as auditor of that company until after the expiry of at least two further
financial years. Given would therefore not be able to be re-appointed as auditor of Moonblue
Ltd after a six month period.

Activity 2

Suppose Hamid is appointed as auditor of Moonblue Ltd after Given resigns. For the
purpose of preparing the audit report, Hamid requests certain company documents
from Barney the financial director of Moonblue Ltd. Barney refuses to furnish Hamid
with the documents. Advise Hamid of his legal rights, as auditor, under the Companies
Act.

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. An auditor
may require from the directors or officers such information and explanations as are necessary
for the performance of his or her duties.

The auditor is further entitled to apply to court for an order to enforce the above rights and the
court may make any order that is just and reasonable to prevent frustration of the auditor’s
duties by the company, directors, prescribed officers or employees (section 93(2)). The court
may further make a costs order against any director or prescribed officer whom the court has
found to have wilfully and knowingly frustrated, or attempted to frustrate, the performance of
the auditor’s functions (section 93(2)(b)).

Hamid is therefore entitled to have access to the documents requested from Barney, and may
apply to court if necessary for an order that the documents be furnished to him. The court may
make a costs order against Barney in his personal capacity.

Examples of questions from a previous exams dealing with this topic:

QUESTION 1:

The Companies Act 71 of 2008 provides for the establishment of certain committees
in companies, one of which is the audit committee.
(a) Which companies are obliged to appoint an audit committee? (2)

Public and state-owned companies are required to have an audit committee.

3
(b) List three of the duties of the audit committee. (3)

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 in order 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
QUESTION 2:

Explain how it is determined whether a corporation is required to audit its financial

statements. Indicate four of the factors that are considered in doing so. (5)

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 or not 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

4
• 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).