When a client moves from review to audit
What changes when a South African client's public interest score means an audit replaces its review: acceptance, letter, opening balances.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa
The client has had an independent review every year for as long as anyone at the firm remembers. This year the score came out differently, and the engagement manager now has to tell a director that the company needs an audit: more evidence, more time, a higher fee and a different kind of report. Usually the conversation happens late, after the year end, when the review was already planned and half the fieldwork booked.
A change of engagement level is not a relabelled review. It is a new audit engagement, with its own acceptance decision, its own terms and a first-year problem with the opening balances. This article follows that change through for a South African company.
Why the score changed
At the time of writing, Companies Regulation 28 requires an audit for a company with a public interest score of 350 or more, and for one scoring 100 or more whose statements were compiled internally. The score under Regulation 26(2) counts a point per average employee, a point for every R1 million or part of it in third-party liabilities and in turnover, and a point per individual with a beneficial interest.
So the trigger is usually one of three things. The business grew, through staff, borrowing or sales. Its ownership widened, adding individuals with a beneficial interest. Or the way its statements are prepared changed: a company that used to have them compiled independently brought the work in-house, and the lower threshold now applies. The last one is the easiest to miss, because nothing about the business looks different. The text of the Companies Regulations, 2011, published under the Companies Act, includes the public interest score calculation and the audit and independent review requirements. How the score is built and reviewed in detail is set out in when a South African company must be audited.
In Achekam, staff prepare the score for a financial year from the client's records on the Client 360 profile, a different person reviews it, and only then does Achekam say whether an audit or an independent review is required. Missing inputs are named rather than assumed, and the thresholds come from the approved rule book. A partner then records the engagement type. Running the score for the coming year early, from management accounts, gives the client warning before the year end rather than after it.
Accepting the client as an audit client
An existing review client is not automatically an acceptable audit client. Run a fresh acceptance review for the audit and ask the questions that did not arise before:
- Does the firm have registered auditors with the time and experience for this industry?
- Which other services does the firm provide, such as keeping the books, compiling the statements, payroll or tax? Reconsider each one against the independence requirements for audit clients, and record the safeguards or the services that must stop.
- Has the risk profile changed with the growth that triggered the audit, such as new lenders, new shareholders or new operations?
- Is the fee for an audit acceptable to both sides?
Achekam records a client acceptance review after a conflict check against the firm's own clients and contacts, and only a signed-in partner can approve it. Customer due diligence is a tick-box confirmation by the preparer, and Achekam runs no automatic FICA, CIPC or sanctions check, so the evidence for those steps comes from the firm's own work.
One further point for the partner who will sign. For a South African firm, Achekam does not check the practitioner credentials register when a partner approves an audit report or signs statements; signing needs only the Partner role. Confirm that the engagement partner is a registered auditor before the engagement is accepted, not at sign-off.
A new engagement letter
The review letter does not cover an audit. Issue a new letter setting out the objective and scope of an audit under the ISAs, the responsibilities of management and of the auditor, the applicable financial reporting framework, and the expected form of the report.
When the engagement is created in Achekam, staff choose its type, and statutory audit is one of the built-in types alongside independent review and compilation. AI can draft the letter's clauses, but never fees, and a person saves the draft. Achekam will not send a letter whose wording breaks the professional guardrails, and for audits and reviews it will not send one before a partner has reviewed it. The fee lines are typed by a person.
| Item | Independent review | First audit |
|---|---|---|
| Standard | ISRE 2400 (Revised) | ISAs |
| Assurance | Limited | Reasonable |
| Main procedures | Inquiry and analytical procedures | Risk assessment, tests of controls where relied on, substantive tests |
| Opening balances | Reviewed last year | Need audit evidence this year |
| Report | Review conclusion | Audit opinion |
Opening balances that were only reviewed
This is the technical heart of the change. Last year's closing balances were reviewed, which gave limited assurance. They are this year's opening balances, and ISA 510 requires the auditor to obtain sufficient appropriate evidence that they do not contain misstatements that materially affect this year's statements.
The review file helps but does not settle the question. For each significant balance, decide what evidence this year's work provides: receivables collected after the opening date, payables paid, fixed asset additions traced to invoices, loans agreed to the lender's statements. Opening inventory is often the hardest, because nobody attended last year's count; roll back from this year's count and test the margin, or find other evidence.
The report also changes. Where the prior period was not audited, ISA 710 asks for an Other Matter paragraph stating that the corresponding figures are unaudited. That paragraph does not remove the requirement to audit the opening balances. The procedures are covered in more depth in opening balances in a first audit.
Planning the first audit
Treat it as an initial engagement under ISA 300. Budget for a full understanding of the entity and its controls, documented from scratch rather than carried forward from the review file. Set materiality afresh for an audit. Plan the year-end inventory count, cut-off work and confirmations now, while the dates are still ahead of you.
A worked example in words: a wholesaler's score crosses 350 after a new bank facility and a second warehouse. The manager runs the projected score from management accounts mid-year, the partner approves a new acceptance review, the bookkeeping service is moved to a separate team with documented safeguards, and the audit letter is signed before the year end. The team attends the stock count at both warehouses and plans roll-back procedures for the opening inventory.
The conversation to have now
Look through your review clients for the ones growing fastest or about to borrow. Prepare next year's score for each from current figures, and talk to the directors before the year end. An audit that is planned is a cost; one discovered after the year end is a problem.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
