Your Responsibility
If you are in business, regardless of the business entity you choose (e.g. sole proprietor or (Pty) Ltd company) then you need to prepare annual financial statements. This is because the companies Act and the tax man, also known as The South African Revenue Services (SARS) says so!
It should be obvious in any event that the only way to really know what is going on in your business is by keeping complete and accurate books and records of your trading transactions. It is best practice to prepare financial statements also known as management accounts on a monthly basis so that you can use them to make sound ongoing business decisions. Annually however you MUST prepare or have an accountant help you prepare, a set of Annual Financial Statements.
What You Should Know
The preparation of Annual Financial Statements (AFS) for a (Pty) Ltd is governed by the Companies Act No. 71 of 2008. The level of detail in AFS varies by business entity type. For small entities like sole proprietors, AFS can be as simple as a two-page compilation, while larger entities may require an independent review or a statutory audit, the latter being the most comprehensive.
The Companies Act outlines three processes for AFS preparation:
- Statutory Audit
- Independent Review
- Compilation (None of the above)
A statutory audit is the most costly, followed by an independent review, with compilation being the cheapest. An auditor’s goal is to ensure no material misstatements in the AFS, which could impact decisions like bank loans.
The need for an audit or independent review is based on the public interest score, which determines legal requirements for audits. Even if not required, businesses can voluntarily opt for an audit, for example, when seeking bank financing or preparing for a sale.