Auditor Explained for Dummies

Focus is on auditors in a South African context

What is an auditor?

Simply put, an auditor is an individual or firm, authorised to review and verify the financial records of a company or organisation, determining whether the financial statements of a company are in accordance with generally accepted accounting principles (GAAP) and ensuring that a company or organisation comply with applicable tax laws and regulations.

Put differently, an auditor is a person or firm assigned to perform an audit on a company or entity. An audit refers to a structured, methodical process in which a company’s or organisation’s accounting records, accounting system or books, and other documents are objectively examined, evaluated, and verified.

Types of auditors

Internal auditors

Internal auditors are employed by companies and other entities to, inter alia, execute the following duties:

• Audit procedures within a company/entity, such as recordkeeping.
• Provide independent and objective evaluations of a company’s business activities.
• Evaluate the corporate governance of a company.

Typically, internal auditors report to the senior management of a company or organisation.

External auditors

External auditors operate independently from the management of a company/organisation.

They will audit areas of a company, such as financial processes, risk management, and financial statements.

After the completion of an audit, the external auditor will include an auditor’s opinion in the auditor’s report, which will be included in the financial statements.

Government auditors

Government auditors are auditors employed by a government to perform activities to ensure that tax income received is spent by government departments and agencies according to the specific laws and regulations.

In South Africa, government auditors work under the authority of the Auditor-General (AGSA), conducting audits of national and provincial government departments, state-owned enterprises (SOEs), such as Eskom and SAA, and municipalities.

Forensic auditors

Forensic auditors investigate legal and financial documents, looking for possible fraudulent activities within a company or organisation. They specialise in crime investigations and are typically used by law enforcement agencies.

Auditors in a South African context

South African Acts describing auditors and audits

The Companies Act (Act 71 of 2008)

The Companies Act states that both the terms ‘registered auditor’[1] and ‘audit’ ‘has the meaning set out in the Auditing Profession Act.’

The Auditing Profession Act (Act 26 of 2005)

The Auditing Profession Act refers to ‘auditor’ and ‘audit’ respectively as follows:

• A registered auditor is ‘an individual or firm registered as an auditor with the Regulatory Board [for Auditors].’

• ‘Audit means the examination of, in accordance with prescribed or applicable auditing standards –

(a) financial statements with the objective of expressing an opinion as to their fairness or compliance with an identified financial reporting framework and any applicable statutory requirements, or

(b) financial and other information, prepared in accordance with suitable criteria, with the objective of expressing an opinion on the financial and other information.’

Excerpts regarding auditors from the South African Companies Act

The intend of this article is not to provide a detailed presentation of the regulations of the South African Companies Act (Act 71 of 2008), hereafter referred to as the Act, concerning auditors in South Africa. (The complete Companies Act is available on the website of the South African Government .)

Although, the following excerpts will provide a clear picture of what the Act requires from auditors and companies that are required to appoint auditors.

Registration of company auditor (section 85)

A company that appoints an auditor is required to maintain a record of its company auditors, including the name (including any former name) and the date of each appointment.

Appointment of an auditor (section 90)

Concerning the appointment of an auditor, section 90 of the Act regulates as follows:

A public company or state-owned company is required to appoint an auditor –

• upon its incorporation, and
• and each year at its annual general meeting (AGM).

To be appointed as an auditor of a company, a person or firm must meet, inter alia, the following requirements:

• Must be –
• a registered auditor, and
• acceptable to the company’s audit committee as being independent of the company.
• Must not be –
• a director or prescribed officer of the particular 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, or
• a person who, unaccompanied or with a partner or employees, habitually or regularly performs the duties of accountant or bookkeeper, or performs related secretarial work, for the company.

If a company that is required to appoint an auditor does not appoint one with the registration of the company, the board of directors is obliged to appoint the first director of the company no later than 40 business days after the date of incorporation of the company.

The first auditor of a company stays on as auditor until the conclusion of the first annual general meeting (AGM) of the company.

A company is allowed to automatically reappoint a retiring auditor at an AGM without approving any resolution, unless –

• the retiring auditor is –
• no longer qualified for appointment, or
• no longer prepared to accept the appointment, and has notified the company accordingly, or
• required to cease performing as auditor because of the rule about the rotation of auditors (section 92 of the Act), or
• an audit committee of the company appointed by the company in terms of the Act objects to the reappointment, or
• the company has notice of an intended resolution to appoint some other person or persons in place of the retiring auditor.

If an auditor is not reappointed or appointed at an AGM, the directors are required to appoint an auditor within 40 days after the date of the AGM.

Resignation of auditors (section 91)

The resignation of an auditor is effective when the notice is filed.

If a vacancy occurs in the position of an auditor of a company, its board of directors –

• is required to appoint a new auditor within 40 business days, if there is only one incumbent auditor of the company, and
• may appoint a new auditor at any time, if there was more than one incumbent auditor but while such a vacancy continues, the surviving or continuing auditor may act as auditor of the company.

However, the board of directors is obliged to propose to the audit committee of the company, within 15 business days after the vacancy arises, the name of at least one registered auditor to be considered as new auditor of the company.

Rotation of auditors (section 92)

The same person is not allowed to serve as the auditor or designated auditor of a company for more than five consecutive years.

Rights and restricted functions of auditors (section 93)

The auditor of a company has the right of access at all times to the accounting records, all the books, and documents of the company, and is entitled to require from the directors or prescribed officers of the company any information and explanations necessary for the performance of the auditor’s duties.

The auditor of a holding company has the right of access to all current and former financial statements of any subsidiary of the particular holding company. Directors or officers of the holding company or subsidiary are required to provide any information and explanations regarding the statements, accounting records, books, and documents of the subsidiary as deemed necessary for the auditor to perform his/her duties.

Concerning general shareholders meetings, the auditor of a company is entitled to –

• attend any shareholders meeting,
• receive all notices of and other communications regarding any shareholders meeting, and
• be heard at any general shareholders meeting on any part of the business of the meeting that is relevant to the auditor’s duties or functions.

An auditor appointed by a company is prohibited to perform any services for that company that would place the auditor in a conflict of interest –

• as prescribed or determined by the Independent Regulatory Board for Auditors (IRBA) according to section 44 (6) of the Auditing Profession Act, stating: ‘A registered auditor may not conduct the audit of any financial statements of an entity, whether as an individual registered auditor or as a member of a firm, if, the registered auditor has or had a conflict of interest in respect of that entity, as prescribed by the Regulatory Board,’ or
• as may be determined by the audit committee of the company.

Duties of the audit committee of a company regarding a company’s auditor (Section 94)

The audit committee of a company, consisting of directors of the company, has, amongst others, the following duties concerning the company’s auditor:

• To nominate, for appointment as auditor of the company, a registered auditor who is independent of the company.

However, a company is allowed to appoint an auditor other than one nominated by the audit committee. Although, such an appointment is valid only if the audit committee is satisfied that the proposed auditor is independent of the company.

• To determine the auditor’s fees and the auditor’s terms of engagement.

• To make sure that the auditor’s appointment complies with the provisions of the Act and any other related legislation.

• To pre-approve any proposed agreement with the auditor regarding the provision of non-audit services to the company.

• To formulate a report, to be included in the annual financial statements for the specific financial year, declaring whether the audit committee is satisfied that the auditor was independent of the company.

• To receive and deal appropriately with any concerns and complaints concerning the auditing of the financial statements of the company.
• To make sure that the company’s auditor only receives remuneration (direct or indirect) or any other benefit –

as auditor, or

for rendering non-audit services as permitted by the audit committee.

• To determine whether the independence of the company’s auditor may have been prejudiced as a consequence of any previous appointment as auditor.

The Independent Regulatory Board for Auditors (IRBA)

The Independent Regulatory Board for Auditors (IRBA), was established in terms of the Auditing Profession Act (Act 26 of 2005), replacing the Public Accountants and Auditors Board (PAAB) in 2006.

The IRBA is a statutory body with a strategic focus ‘to protect the financial interests of the public by ensuring only suitably qualified individuals are admitted to the auditing profession and that registered auditors deliver services of the highest quality and adhere to the highest ethical standards.’

The IRBA declares that its function is ‘to help create an ethical, value-driven financial sector.’

According to the IRBA’s website, this function is executed by, amongst others, the following actions:

• ‘Developing and maintaining auditing and ethical standards that are internationally comparable.
• Providing an appropriate framework for the education and training of properly qualified auditors and their ongoing competence.
• Registration of auditors who meet the registration requirements.
• Monitoring registered auditors’ compliance with professional standards.
• Investigating and taking appropriate action against registered auditors in respect of improper conduct.’

The path to travel to become a registered auditor (RA) in South Africa

Figuratively speaking, a person who wants to become a registered auditor (RA) in South Africa is required to pass numerous milestones in order to reach the desired destination.

The milestones on the way are:

• Secondary education

The first milestone is to complete secondary education with the necessary requirements. According to SAICA (the South African Institute of Chartered Accountants), the minimum requirements to be admitted to a SAICA-accredited university are:

• A Level 5 pass in Mathematics. (Pure Mathematics, not Mathematical Literacy).
• A National Senior Certificate (NSC), commonly referred to as a matric certificate, with matriculation exemption.
• A good grounding in English.

• Obtain the right university qualification

You must be enrolled for a SAICA-accredited qualification (an Accountancy Degree or equivalent) at a SAICA-accredited university.

After the successful completion of the specific degree, you will be eligible to register for a post-graduate course.

The undergraduate qualification can either be done on a part-time basis or a full-time basis.

• Obtain a Certificate in the Theory of Accounting (CTA) or an equivalent qualification

Normally, the post-graduate course takes at least one year and must also be completed at a SAICA-accredited university.

The qualification can either be a Certificate in the Theory of Accounting (CTA) or an Honours Degree in Accounting, such as a Bachelor of Commerce in Accounting.

Individuals who complete the post-graduate course may present themselves for the Initial Test of Competence (ITC).

• Complete articles (training contract)

Individuals who hold a National Senior Certificate (NSC) and study on a part-time basis are allowed to immediately enter into a training contract with a registered training office. The duration of the training contract is five years.

The alternative is to complete the undergraduate qualification at a SAICA-accredited university on a full-time basis and enter into a training contract with a registered training office for a period of three years.

• Pass the examinations set by SAICA

The Initial Test of Competence (ITC)

To qualify to take the ITC examination, a person is required to obtain the CTA or an equivalent qualification.

There are opportunities in January and June of each year to write the ITC exam. Candidates are allowed to sit for the ITC exam for a period of three years, meaning candidates can attempt the ITC exam six times.

The Assessment of Professional Competence (APC)

The following are the requirements for a candidate to enter the APC exam:

• Pass the ITC exam.
• Complete a minimum of 20 months of a registered training contract with a registered training office, by the beginning of the month in which the APC is written.
• Successfully complete the Professional Competence Development Programme with a registered provider. The development programme is valid for three years. Failing to pass the APC during the three years implies that a candidate will be required to complete the training programme again.

The APC exam is written only once a year – in November of each year.

• Registering as a member with the South African Institute of Chartered Accountants (SAICA)

After successfully passing the APC, a person is now a qualified professional accountant, entitled to register as a member with the SAICA, allowing him or her to use the CA (SA) designation.

• Complete the Audit Development Programme (ADP) of the IRBA

As a qualified professional accountant, a person is entitled to register for the ADP of the IRBA. The IRBA describes the ADP as ‘a period of work experience undertaken by a qualified professional accountant [CA (SA)] that is relevant to the work of a Registered Auditor (RA).’

The following requirements are set by the IRBA to complete its ADP:

• A minimum of eighteen months in an audit and assurance environment.
• A minimum of 1 500 productive hours in audit and assurance.
• Successful demonstration of the competencies outlined in the competence framework prescribed by the IRBA.

Professional accountants registered for the ADP are referred to as Registered Candidate Auditors (RCAs).

• Register as an RA

On successful completion of the ADP, a person is eligible to register as a Registered Auditor (RA).

[1] Accentuations in quotations from the Companies Act, the Auditing Profession Act, the IRBA, and SAICA are by the article writer.