The auditors’ report – what’s it based on and does it reduce my liability?

We all know how important the audit report on our financial statements is. Bankers rely on it to advance loans or provide overdraft facilities, SARS and other stakeholders such as investors, creditors and debtors also place reliance on it. This is primarily due to the fact that the external auditor is independent, professionally competent and provides a professional report. It is worth knowing how such an important document is derived.  More importantly, does all the assurance work done by our external auditors have any impact on our personal liabilities as directors/members?  What is the audit report based on?  Local audit requirements are prescribed by the Independent Regulatory Board for Auditors (IRBA), and the question of which entities then require an audit is determined by the legislation which governs them such as the 2008 Companies Act, industry-specific legislation etc. The IRBA complies with international standards (there are many foreign investors in South Africa), bearing in mind local law. The IRBA aims to protect the public so that they get assurance that auditors act professionally, and with integrity, and add value to the stakeholders who read and rely on audit reports relevant to their needs. What does your auditor do?  Your auditor determines what tests and verification procedures need to be carried out in order that the audit report can be issued. Once the auditor has performed these tests (including both substantive and internal control tests), the auditor gives an opinion as to whether or not the financial statements fairly present the state of affairs of the business. Thus, the auditor gives an opinion – not a statement of fact. This opinion gives readers of the financial statements “reasonable” assurance which is of more value to these stakeholders than if an independent review is performed on the financial statements. The independent review only provides limited assurance. That this opinion is relied upon by so many stakeholders indicates that in the vast majority of cases, this opinion has credibility both locally and internationally. It should be borne in mind that a separate report (called the management report) is issued to management which highlights internal control weaknesses identified in the audit, and recommendations to rectify these weaknesses. This is a valuable tool for management. What is the opinion on?  The opinion covers the income statement, the balance sheet, cash flows, changes in equity plus the notes and the accounting policies. In addition to the audit opinion, the Companies Act also requires that the auditors comment on the directors’ report and the company secretary’s report (if applicable). These latter two reports are scrutinised by the auditor to ensure there is no inconsistency between the financial statements and these two reports. As a business owner does this reduce my liability?  At face value the answer to this is no – the Act clearly stipulates that the information in the financial statements is the responsibility of the directors or members (if a close corporation) and this is clearly set out in the financial statements.  The auditor expresses an independent opinion to outside stakeholders of the business but that does not relieve you of your responsibilities. In practical terms however, the management report referred to above adds value to the business being audited, plus the tests auditors perform ensure legal compliance with existing laws – and this reduces the liabilities the business faces. It is worth remembering that our auditors are rated the best in the world and thus their opinions carry considerable weight. © DotNews, 2005-2013. This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein.  Always contact your financial adviser for specific and detailed advice.

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