Top 6 frequently asked auditing questions

28 April 2023 | Alistair Scholtz

The appointment and selection of an auditor, the community scheme financial year end, and the annual financial statements - their preparation, acceptance, and their actual use can often be confusing or considered not to be of much use or importance. In this article, I have tried to provide clarity to these frequently asked questions and provide some insight beyond the annual general meeting (AGM).

1. Auditor And Appointment 

Bodies Corporate are regarded as legal entities and are required to be audited (regardless of the number of sections) by an independent auditor as per Prescribed Management Rule (PMR) 26 of Annexure 1 of the Regulations “the Regulations” to the Sectional Titles Schemes Management Act 8 of 2011 (“the STSMA”). An independent auditor is defined as a person accredited to perform an audit in terms of the Auditing Professions Act, 2005. Previous legislation, which allowed schemes with 9 or less units to be authorised by an accounting officer, was repealed in 2016. The change arose primarily from the banking institutions’ requirement for audited financial statements as a prerequisite to granting a home loan to a prospective purchaser of a sectional title unit. A body corporate may therefore not provide its members with financial statements in any format other than an independent audit report unless all the sections in the scheme are owned by one person. 

An auditor is appointed at the AGM by an ordinary resolution of the members. There is currently no requirement in the STSMA enforcing a mandatory audit firm rotation, however, it may be required by the Independent Regulatory Board for Auditors should the scheme be considered a public interest entity.

2. Financial Year End 

All new sectional title schemes registered after October 2016 have a designated financial year end of September, meaning that their financial year runs from 1 October to 30 September each year. 

This date, if required, may be amended by a majority of the members in a general meeting. February and June are known busy periods for most auditing firms, so these months are best avoided when deciding on an alternative year end date. 

The STSMA requires that an AGM be convened, and that annual financial statements be considered, noting that the STSMA further provides that the audit must be completed within 4 months of the scheme’s financial year end. With proper planning and communication between the auditor and client, it is achievable, irrespective of when the year end is, to present an audited set of annual financial statements, which should leave a reasonable timeframe within which to call an AGM.

3. Preparation And Retention 

The auditor must not have participated in the preparation of the financial statements or advised on any aspect of the accounts of the scheme during the period being reported on, and for this reason, either an external compiler or management will prepare the financial statements for audit. This separation of responsibilities strengthens the independence and integrity of the engagement.

It is not a requirement of the STSMA that a recognised accounting framework be used to prepare the annual financial statements. Many schemes adopt a user defined accounting policy that complies with generally accepted accounting practices. Any adopted accounting policy should be noted in the annual financial statements along with the prescribed accounting disclosures as set out in the PMRs. The independent audit will comply with all International Standards on Auditing.

The books of account and financial records are to be retained for a period of 6 years after the period to which the transactions relate. This provision is applicable to sectional title schemes and may differ for other community scheme types.

4. Financial Statement Approval 

The Trustees, having been elected to exercise the body corporate’s powers and functions assigned and delegated to them, and acting in accordance with member approved budgets and imposed restrictions, are responsible for the approval of the annual financial statements. Members only consider the annual financial statements at the AGM.

The approval of the annual financial statements by the Trustees is valid and supported, as they have a working knowledge and understanding of the events that underlie the transactions that are being reported on – in many ways comparable to the directors of a company signing its financial statements.

The members, however, may have valid questions regarding the annual financial statements, and these are best addressed, in writing, during the period between receipt of the AGM documentation (a minimum of 14 days before the AGM) and the AGM itself. The AGM needs to be conducted in an orderly manner with minimal interruption, and therefore any potential concern that can be addressed beforehand is best. Any matter that warrants a more detailed explanation should be highlighted and commented on either by the chairperson, managing agent, financial trustee, or in the case of a serious irregularity, the auditor may be asked to address the members. 

5. Value Add

A set of accounts that have been subject to a comprehensive and independent audit is useful to both internal and external parties, and having supporting evidence available to substantiate the disclosed values can greatly simplify administrative and verification processes.

Internal users (e.g., trustees, directors, owners, and management) may make use of the annual financial statements for various purposes, which may include:

• The acquisition of external funding to finance emergency remedial works or longer-term capital-intensive projects.

• The acquisition of levy finance products in the case of unmanaged and unsuccessfully collected levy debts.

• The preparation of the annual budget and motivation for levy adjustments.

• The monitoring of annual administrative costs and the imposition of trustee spending restrictions.

• The basis for significant financial decisions of the scheme, e.g., the installation of pre-payment metres due to increased utility costs and levy arrears.

External users (e.g., banks, private finance providers, revenue agencies, and prospective buyers) rely on the annual financial statements for various purposes, such as:

• The review of the solvency and liquidity of the scheme when considering amounts to finance.

• The financial position of the scheme (particularly its liabilities) before purchasing a unit, and whether any special levies or other charges exist that may impact the buyer’s ability to service debt.

• The review of general scheme compliance (insurance, tax, maintenance reserve fund, etc.) before deciding to purchase a unit.

• The analysis of income and expenditure when verifying liabilities such as taxes and levies payable, e.g., income taxes and Community Schemes Ombud Service levies.

6. First General Meeting Tips 

The standard documents, as outlined in the STSMA, should be obtained and scrutinised carefully to ensure legal and other compliance. A few specific checks and balances that may be performed include the following:

• Obtain a copy of the certificate of establishment, occupancy certificate, and sectional plan, as these will be needed for various registrations and other purposes during the life of the scheme.

• Check the insurance policy to ensure that the minimum insurance coverage required for the different insurance types is sufficient; otherwise, have the terms amended.

• Check supplier contracts for escalation clauses and lock-in periods, plus any penalties that may apply for early termination.

• Check the management agreement carefully and make sure that you are in good hands, i.e., a reputable agency.

• Check budgets before approving for reasonableness and completeness – starting with an unrealistically low levy that may result in a deficit and that will have to be increased soon is not desirable.

• Given the newly established body corporate, impose spending restrictions on the trustees – these are unknown people looking after your interests in an unknown and newly established operating environment.

Please contact us at TVDM Consultants at info@tvdmconsultants.com or 061 536 3138 if you would like more information, or if you have any questions on the article above. If you have not already done so, click here to sign up to our newsletter.

Alistair Scholtz is a Community Scheme Consultant at PKF Octagon.