BLOCK 2–4: FOUNDATIONS OF AUDITING
CHAPTER 7
Statutory and Non-Statutory Audits
When Does the Law Require an Audit?
“Not every organisation must be audited, but every organisation benefits from reliable financial information.”
Real-Life Scenario
Sipho and Lerato establish two companies.
Sipho owns a small consulting business with only three employees. The business has few assets, limited
liabilities and only one shareholder.
Lerato establishes a large manufacturing company employing over 600 people, with numerous
shareholders, millions of rand in annual turnover and significant bank borrowings.
Should both companies be subject to exactly the same audit requirements? The answer is no.
South African legislation recognises that larger organisations generally have greater public accountability
than smaller entities. For this reason, some organisations are legally required to undergo an audit, while
others may choose to do so voluntarily.
Understanding this distinction is essential for every auditing student.
Learning Outcomes
After studying this chapter, you should be able to:
✓ Distinguish between statutory and non-statutory audits.
✓ Explain why some entities are legally required to be audited.
✓ Explain the purpose of the Public Interest Score (PIS).
✓ Describe the benefits of voluntary audits.
✓ Apply these concepts to practical examination questions.
7.1 Introduction
An audit provides confidence in financial reporting, but not every organisation is legally required to
appoint an external auditor.
South African legislation recognises that organisations differ significantly in terms of size, ownership,
economic importance, public accountability, and financial complexity.
As a result, the law determines which organisations require mandatory audits and which organisations
may choose alternative forms of assurance.
7.2 What Is a Statutory Audit?
A statutory audit is an audit required by legislation. The organisation has no discretion. If legislation
requires an audit, the organisation must appoint an independent registered auditor.
The purpose is to protect stakeholders who rely on the organisation’s financial information. Examples
include certain public companies, state-owned entities and other organisations that meet statutory
requirements.
Statutory audits:
• protect investors;
• enhance public confidence;
• improve transparency;
, • strengthen accountability;
• promote compliance with legislation; and
• reduce information risk.
Because these organisations often affect large numbers of stakeholders, independent assurance becomes a
matter of public interest.
CONCEPT MADE EASY
Think about driving a motor vehicle. Motor insurance is optional for some motorists. However, obtaining a
driver’s licence is compulsory — whether you like the requirement or not, the law requires it.
Similarly, a statutory audit is compulsory because legislation requires it. The organisation cannot decide
otherwise.
7.3 What Is a Non-Statutory Audit?
A non-statutory audit is performed voluntarily. The organisation chooses to appoint an auditor even
though legislation does not require one.
Many organisations voluntarily request an audit because they recognise the value that independent
assurance brings. Voluntary audits often improve confidence among banks, investors and suppliers.
Organisations may voluntarily appoint auditors to:
• improve financial credibility;
• satisfy lenders’ requirements;
• attract investors;
• strengthen governance;
• identify weaknesses in internal controls;
• improve financial reporting; and
• prepare for future growth.
Many successful private companies continue obtaining annual audits long before legislation requires
them.
WORKED EXAMPLE
A family-owned construction company applies for a substantial loan to expand its operations. The bank requests
audited financial statements before approving the loan.
Although legislation does not require the company to undergo an audit, management voluntarily appoints an
independent auditor. The audit increases the bank’s confidence, making loan approval more likely.
7.4 The Public Interest Score (PIS)
One of the unique features of the South African auditing environment is the Public Interest Score, which
assists in determining the level of public accountability of certain companies.
In broad terms, the score considers factors such as the average number of employees, annual turnover,
third-party liabilities, and the number of individuals with a beneficial interest in the company.
Generally, organisations with higher Public Interest Scores have greater reporting and assurance
responsibilities because they affect a larger number of stakeholders.
The Public Interest Score ensures that audit requirements are proportionate. Large organisations that have
a significant economic impact are subject to greater scrutiny than small privately owned businesses. This
balances public protection with the cost of regulation.
Students should understand why the Public Interest Score exists, not merely memorise the factors that
contribute to it. Where calculations are required, follow the method prescribed in your textbook and
legislation.
, 7.5 Statutory versus Non-Statutory Audits
Statutory Audit Non-Statutory Audit
Required by law Voluntary
Organisation has no choice Organisation chooses the audit
Protects public interest Improves business credibility
Usually applies to entities with greater public Often obtained for business reasons
accountability
Understanding this comparison is a favourite examination topic.
7.6 The Auditor’s Responsibility
Whether an audit is statutory or voluntary, the auditor’s responsibilities remain the same. The auditor
must comply with the International Standards on Auditing, maintain independence, obtain sufficient
appropriate audit evidence, exercise professional scepticism, and express an independent opinion.
The nature of the engagement does not change the professional responsibilities of the auditor.
KING IV IN PRACTICE
King IV encourages governing bodies to embrace transparency and accountability, regardless of whether an
audit is legally required.
Many organisations therefore voluntarily strengthen governance through independent assurance because good
governance creates long-term value.
REAL SOUTH AFRICAN CASE STUDY — Voluntary Audits in Practice
Many successful privately owned South African companies voluntarily undergo annual audits even when
legislation permits alternative assurance arrangements.
Banks, investors and suppliers often regard audited financial statements as more reliable, making it easier for
businesses to obtain finance and establish credibility in the marketplace.
This demonstrates that an audit should be viewed not merely as a legal obligation but also as a strategic business
asset.
EXAMINER’S CORNER — Differentiate between a statutory audit and a non-statutory audit
To achieve full marks: define each type of audit; explain whether it is compulsory or voluntary; discuss why
each is performed; and support your answer with an example.
EXAM MARKER’S SECRET
Students often write: “A statutory audit is compulsory.” Although correct, this answer earns very few marks.
A stronger answer explains why legislation requires certain organisations to be audited and how statutory audits
protect stakeholders and the public interest. Examiners reward explanation, not memorisation.
MEMORY TRICK — Remember the difference using LCV
L – Law requires a Statutory audit.
C – Company chooses a Non-Statutory audit.
V – Voluntary audits add Value.
Chapter Summary
CHAPTER 7
Statutory and Non-Statutory Audits
When Does the Law Require an Audit?
“Not every organisation must be audited, but every organisation benefits from reliable financial information.”
Real-Life Scenario
Sipho and Lerato establish two companies.
Sipho owns a small consulting business with only three employees. The business has few assets, limited
liabilities and only one shareholder.
Lerato establishes a large manufacturing company employing over 600 people, with numerous
shareholders, millions of rand in annual turnover and significant bank borrowings.
Should both companies be subject to exactly the same audit requirements? The answer is no.
South African legislation recognises that larger organisations generally have greater public accountability
than smaller entities. For this reason, some organisations are legally required to undergo an audit, while
others may choose to do so voluntarily.
Understanding this distinction is essential for every auditing student.
Learning Outcomes
After studying this chapter, you should be able to:
✓ Distinguish between statutory and non-statutory audits.
✓ Explain why some entities are legally required to be audited.
✓ Explain the purpose of the Public Interest Score (PIS).
✓ Describe the benefits of voluntary audits.
✓ Apply these concepts to practical examination questions.
7.1 Introduction
An audit provides confidence in financial reporting, but not every organisation is legally required to
appoint an external auditor.
South African legislation recognises that organisations differ significantly in terms of size, ownership,
economic importance, public accountability, and financial complexity.
As a result, the law determines which organisations require mandatory audits and which organisations
may choose alternative forms of assurance.
7.2 What Is a Statutory Audit?
A statutory audit is an audit required by legislation. The organisation has no discretion. If legislation
requires an audit, the organisation must appoint an independent registered auditor.
The purpose is to protect stakeholders who rely on the organisation’s financial information. Examples
include certain public companies, state-owned entities and other organisations that meet statutory
requirements.
Statutory audits:
• protect investors;
• enhance public confidence;
• improve transparency;
, • strengthen accountability;
• promote compliance with legislation; and
• reduce information risk.
Because these organisations often affect large numbers of stakeholders, independent assurance becomes a
matter of public interest.
CONCEPT MADE EASY
Think about driving a motor vehicle. Motor insurance is optional for some motorists. However, obtaining a
driver’s licence is compulsory — whether you like the requirement or not, the law requires it.
Similarly, a statutory audit is compulsory because legislation requires it. The organisation cannot decide
otherwise.
7.3 What Is a Non-Statutory Audit?
A non-statutory audit is performed voluntarily. The organisation chooses to appoint an auditor even
though legislation does not require one.
Many organisations voluntarily request an audit because they recognise the value that independent
assurance brings. Voluntary audits often improve confidence among banks, investors and suppliers.
Organisations may voluntarily appoint auditors to:
• improve financial credibility;
• satisfy lenders’ requirements;
• attract investors;
• strengthen governance;
• identify weaknesses in internal controls;
• improve financial reporting; and
• prepare for future growth.
Many successful private companies continue obtaining annual audits long before legislation requires
them.
WORKED EXAMPLE
A family-owned construction company applies for a substantial loan to expand its operations. The bank requests
audited financial statements before approving the loan.
Although legislation does not require the company to undergo an audit, management voluntarily appoints an
independent auditor. The audit increases the bank’s confidence, making loan approval more likely.
7.4 The Public Interest Score (PIS)
One of the unique features of the South African auditing environment is the Public Interest Score, which
assists in determining the level of public accountability of certain companies.
In broad terms, the score considers factors such as the average number of employees, annual turnover,
third-party liabilities, and the number of individuals with a beneficial interest in the company.
Generally, organisations with higher Public Interest Scores have greater reporting and assurance
responsibilities because they affect a larger number of stakeholders.
The Public Interest Score ensures that audit requirements are proportionate. Large organisations that have
a significant economic impact are subject to greater scrutiny than small privately owned businesses. This
balances public protection with the cost of regulation.
Students should understand why the Public Interest Score exists, not merely memorise the factors that
contribute to it. Where calculations are required, follow the method prescribed in your textbook and
legislation.
, 7.5 Statutory versus Non-Statutory Audits
Statutory Audit Non-Statutory Audit
Required by law Voluntary
Organisation has no choice Organisation chooses the audit
Protects public interest Improves business credibility
Usually applies to entities with greater public Often obtained for business reasons
accountability
Understanding this comparison is a favourite examination topic.
7.6 The Auditor’s Responsibility
Whether an audit is statutory or voluntary, the auditor’s responsibilities remain the same. The auditor
must comply with the International Standards on Auditing, maintain independence, obtain sufficient
appropriate audit evidence, exercise professional scepticism, and express an independent opinion.
The nature of the engagement does not change the professional responsibilities of the auditor.
KING IV IN PRACTICE
King IV encourages governing bodies to embrace transparency and accountability, regardless of whether an
audit is legally required.
Many organisations therefore voluntarily strengthen governance through independent assurance because good
governance creates long-term value.
REAL SOUTH AFRICAN CASE STUDY — Voluntary Audits in Practice
Many successful privately owned South African companies voluntarily undergo annual audits even when
legislation permits alternative assurance arrangements.
Banks, investors and suppliers often regard audited financial statements as more reliable, making it easier for
businesses to obtain finance and establish credibility in the marketplace.
This demonstrates that an audit should be viewed not merely as a legal obligation but also as a strategic business
asset.
EXAMINER’S CORNER — Differentiate between a statutory audit and a non-statutory audit
To achieve full marks: define each type of audit; explain whether it is compulsory or voluntary; discuss why
each is performed; and support your answer with an example.
EXAM MARKER’S SECRET
Students often write: “A statutory audit is compulsory.” Although correct, this answer earns very few marks.
A stronger answer explains why legislation requires certain organisations to be audited and how statutory audits
protect stakeholders and the public interest. Examiners reward explanation, not memorisation.
MEMORY TRICK — Remember the difference using LCV
L – Law requires a Statutory audit.
C – Company chooses a Non-Statutory audit.
V – Voluntary audits add Value.
Chapter Summary
