As your business in Cape Town grows, the question often shifts from “Do I have financials?” to “What level of assurance do we actually need on these financials?”. In South Africa, the Companies Act and its Regulations recognise three broad levels: compilation, independent review and audit, with requirements largely driven by your Public Interest Score (PIS) and who compiles your annual financial statements.
This article explains the differences in plain language so you can have informed discussions with your auditor and stakeholders.
The three levels: compilation, independent review and audit
Compilation (no assurance)
A compilation is when financial statements are prepared from the underlying accounting records, but no assurance is provided on those financial statements.
In practice, this means:
- A professional may help you prepare the statements in line with a chosen framework.
- They do not test or verify the information beyond what is needed to compile it.
- There is no opinion or conclusion stating whether the financials are fairly presented.
Compilations can be sufficient for very small, owner-managed entities with low PIS and no external stakeholders requiring assurance.
Independent review (limited assurance)
An independent review provides limited assurance that nothing has come to the reviewer’s attention to indicate that the financial statements are not fairly presented in all material respects.
Key points:
- Procedures are mainly inquiry and analytical procedures, rather than detailed substantive testing.
- The reviewer issues a conclusion, not an audit opinion, and the level of assurance is lower than in an audit.
- Independent reviews are performed in terms of standards such as ISRE 2400.
For many private companies below certain PIS thresholds, an independent review is permitted as an alternative to an audit, provided specific conditions are met.
Audit (reasonable assurance)
An audit provides reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error.
In an audit:
- The auditor performs a broader range of risk assessment and substantive procedures, including tests of details and, where applicable, tests of controls.
- The auditor issues an opinion stating whether the financial statements present fairly, in all material respects, in accordance with the applicable financial reporting framework.
- The work is performed under International Standards on Auditing (ISAs), as adopted in South Africa.
Audits are mandatory for certain entities and voluntary for others that choose a higher level of assurance.
How Public Interest Score (PIS) influences what you need
What is PIS?
Public Interest Score is a calculation prescribed by the Companies Act Regulations and must be done at the end of every financial year.
The score is based on factors such as:
- Average number of employees.
- Turnover, measured in units of R1 million (or part thereof).
- Third-party liabilities, also in units of R1 million (or part thereof).
- Number of shareholders or members, depending on the type of entity.
The higher your PIS, the greater the public interest in your company, and the more likely it is that an audit will be required.
Simplified view of thresholds
While you should always confirm specifics for your situation, many summaries of the Companies Act and Regulations explain the effect of PIS in broad terms as follows:
- PIS 350 or higher: An audit of the annual financial statements is generally required, subject to certain exemptions.
- PIS between 100 and 349: If the annual financial statements are compiled internally, an audit is often required; if they are independently compiled and the company is owner-managed, an independent review may be sufficient.
- PIS below 100: Owner-managed companies may in some cases be exempt from both audit and review, unless the Memorandum of Incorporation or another law requires assurance, although an independent review or audit may still be chosen voluntarily.
There are also automatic audit requirements for public companies, state-owned companies, certain non-profit companies and entities holding assets in a fiduciary capacity beyond specific thresholds.
Typical paths for growing Cape Town SMEs
While each entity needs advice based on its own facts, many SMEs in Cape Town follow a similar progression as they grow:
Early stage / micro entities
- Low PIS, limited external stakeholders.
- Often start with compilation only, while keeping records and reconciliations simple and up to date.
Growing SMEs with bank facilities or outside investors
- PIS moves into the 100–349 range.
- Banks, investors or group policies may require an independent review or audit, even where not yet strictly mandated.
- Independent reviews are often used where the risk profile and complexity are moderate and limited assurance is sufficient.
Larger or more complex entities / groups
- PIS at 350 or above, or other legislative triggers.
- Statutory audits become mandatory, often combined with additional reporting, for example to group auditors or regulators.
The key is to understand both your legal requirements and your stakeholders’ expectations.
What you actually get from each service
Compilation: useful but no comfort
With a compilation, you get:
- Financial statements prepared in line with the chosen framework.
- No assurance regarding whether the underlying records are complete, accurate or free from material misstatement.
This can be acceptable for very small, owner-managed entities, but offers limited comfort to banks or external investors.
Independent review: limited assurance with focused procedures
With an independent review, you receive:
- An independent assessment based primarily on inquiries and analytical procedures.
- A written report expressing limited assurance that nothing has come to the reviewer’s attention to indicate that the financial statements are not fairly presented.
- A level of comfort that is higher than a compilation but lower than an audit.
This is designed to be a more cost-effective, less onerous form of assurance for entities that do not require a full audit but still want independent scrutiny.
Audit: reasonable assurance and deeper insight
With an audit, you can expect:
- A comprehensive risk-based approach that includes understanding the business, assessing internal controls and performing substantive tests of transactions and balances.
- An audit opinion stating whether the financial statements present fairly, in all material respects.
- Often, a separate report to management on internal control observations and process improvements identified during the engagement.
This level of assurance is generally expected by larger stakeholders, complex groups, regulated entities and companies with higher PIS.
How to decide what is appropriate for your SME
Start with legal and regulatory requirements
First, determine what the Companies Act and any sector-specific laws require for your entity, taking into account:
- Your latest PIS.
- Whether your annual financial statements are compiled internally or independently.
- Any specific provisions in your Memorandum of Incorporation or shareholder agreements.
- Whether you fall into categories, such as public or state-owned companies, that always require an audit.
A registered auditor or other suitably qualified professional can help you interpret these rules correctly.
Consider stakeholder expectations
Even where the Act does not mandate a particular level, stakeholders may have their own expectations:
- Banks may require an independent review or audit as part of lending conditions.
- Investors or shareholders may prefer a higher level of assurance.
- Group reporting may require audited figures for consolidation.
It can be useful to discuss the options with those stakeholders before deciding.
Factor in your risk, complexity and growth plans
Finally, think about:
- The complexity of your operations and financial reporting.
- The scale and nature of your risks, for example cash-intensive operations, significant estimates or complex funding.
- Where you expect the business to be in three to five years.
Some entities voluntarily move from compilation to review or from review to audit earlier than required because the additional discipline and insight support their growth and governance goals.
Frequently asked questions
Is an independent review “less professional” than an audit?
No. Both are conducted under recognised assurance standards and require appropriate expertise. The difference lies in the scope of work and the level of assurance: an audit provides reasonable assurance with more extensive procedures, while an independent review provides limited assurance based mainly on inquiries and analytical procedures.
Can we switch from an audit to an independent review if our PIS decreases?
In some cases this may be possible, provided you still meet the criteria for a review and there are no contractual or governance reasons to retain the audit. Any such change should be discussed carefully with your auditor, board and key stakeholders, considering both compliance and perceptions of transparency.
Who may perform an independent review?
For many companies, the reviewer must be a registered auditor or a member of a professional body accredited in terms of the Auditing Profession Act, who is not involved in compiling the same financial statements. Independence requirements apply even at the review level.
How often should we reassess our assurance level?
At minimum, your PIS and assurance requirements should be revisited annually when you finalise your financial statements. It is also sensible to reassess when there are major changes in ownership, financing, size, structure or regulatory environment.