Understanding the Differences Between Review, Assessment, and Audit in South African Legislation

In the context of South African law, particularly within corporate governance, financial management, and compliance, the terms “review,” “assessment,” and “audit” have distinct meanings and implications. Understanding these differences is essential for organizations to ensure compliance and effective management.

1. Review

Definition: A review typically refers to a limited examination of financial statements or operations to provide a moderate level of assurance, commonly conducted by accountants or auditors.

Legislation Reference: The Companies Act, 2008, stipulates that a review engagement is less extensive than an audit and involves inquiries and analytical procedures.

Purpose: The primary purpose is to provide stakeholders with a level of assurance that the financial information is plausible, particularly useful for smaller companies.

Liability: While the reviewer may provide some assurance, the ultimate responsibility for the accuracy of the financial statements rests with the company’s management and board of directors.

Advantages:

• Cost-Effective: Typically less expensive than a full audit.
• Quicker Process: Generally faster to complete due to the limited scope.
• Moderate Assurance: Provides a reasonable level of assurance without the depth of an audit.

Disadvantages:

• Limited Scope: Less comprehensive than an audit, potentially overlooking significant issues.
• Not Mandatory for All Entities: May not satisfy stakeholders needing high assurance, such as investors or banks.

2. Assessment of Financial Statements

Definition: An assessment involves evaluating the accuracy and compliance of financial statements against established accounting standards and principles.

Legislation Reference: This process is guided by frameworks like the International Financial Reporting Standards (IFRS) and the Companies Act, 2008.

Purpose: To identify discrepancies, errors, or non-compliance, ensuring that financial statements present a true and fair view.

Liability: Responsibility for the accuracy of the financial statements lies with management and the board of directors.

Advantages:

• Tailored Evaluation: Allows for a focused review of specific areas of concern within the financial statements.
• Identifies Gaps: Helps in recognizing compliance issues or areas needing improvement.

Disadvantages:

• Variable Assurance: The level of assurance may not be quantified or consistent.
• Can Be Subjective: The effectiveness of the assessment depends on the methods and criteria used.

3. Audit

Definition: An audit is a systematic examination of financial records, operations, or compliance with laws, performed by an independent third party, providing a high level of assurance.

Legislation Reference: Under the Companies Act, 2008, public companies and certain private companies must undergo an annual audit conducted by registered auditors.

Purpose: To ensure the accuracy and integrity of financial statements and enhance stakeholder confidence.

Liability: Legal liability for the accuracy of the financial statements rests with the management and board of directors, although auditors can be held liable for negligence.

Advantages:

• High Level of Assurance: Provides comprehensive assurance to stakeholders regarding the accuracy of financial statements.
• Increases Credibility: Enhances trust among investors, creditors, and regulators.
• Compliance Verification: Confirms adherence to laws and regulations.

Disadvantages:

• Costly: More expensive than reviews and assessments due to the extensive work involved.
• Time-Consuming: Requires more time to complete, which can delay financial reporting.
• Stressful for Management: The audit process can create pressure on management and staff.

Key Differences

Aspect	Review	Assessment of Financial Statements	Audit
Scope	Limited examination	Evaluation of accuracy and compliance	Comprehensive examination
Assurance Level	Moderate	Variable, often not quantified	High
Independence	May be independent, but not always	Can be internal or external	Must be conducted by independent auditors
Legislation	Governed by Companies Act	Guided by accounting standards and Companies Act	Governed by Companies Act and auditing standards
Purpose	To provide plausible financial information	To ensure accuracy and compliance of financial statements	To ensure accuracy and compliance with laws
Liability	Management and board are liable	Management and board are liable	Management and board are liable; auditors may face liability for negligence
Advantages	Cost-effective, quicker process	Tailored evaluation, identifies gaps	High assurance, credibility, compliance verification
Disadvantages	Limited scope, not mandatory for all	Variable assurance, can be subjective	Costly, time-consuming, stressful for management

Conclusion

Understanding the distinctions between a review, assessment of financial statements, and audit is crucial for organizations operating within South Africa’s legal framework. Each serves a unique purpose and is governed by specific legislation, affecting how organizations manage compliance, financial reporting, and operational effectiveness. By recognizing these differences, businesses can make informed decisions about which type of evaluation is appropriate for their needs, ensuring they maintain accountability and transparency in their operations. Ultimately, while external reviewers and auditors provide valuable insights, the legal responsibility for the accuracy of financial statements rests with the management and board of directors.