Audit and examination of public school financial statements - the grey areas

The article highlights some of the grey areas in the Audit and examination of public school financial statements.

The article highlights some of the grey areas in the audit and examination of public school financial statements

Public schools are required to draw up their annual financial statements in accordance with guidelines determined by the Member of the Executive Council (MEC) and submit the audited or examined set to the head of department within six months after the end of each financial year. The financial year of a public school commences on the first day of January and ends on the last day of December.

The South African Schools Act (SASA) requires that only a person registered as an auditor in terms of the Auditing Profession Act 26 of 2005 may audit the records and financial statements of a public school. Where this is not reasonably practicable, SASA provides that the governing body of a public school must appoint a person to examine and report on the records and financial statements who is qualified to perform the duties of an accounting officer in terms of section 60 of the Close Corporations Act 69 of 1984), or is approved by the MEC for this purpose.

Several grey areas however exist that require careful consideration by practitioners who are involved in audits and examinations of public school financials statements.

Impracticability of an audit

SASA does not provide guidance on the circumstances under which it will be reasonably impracticable to have an audit performed on the financial statements of a public school. Circular M1 of 2017 issued by the National Department of Education states that the school governing bodies (SGBs) of public schools must appoint registered auditors and in cases where it is not reasonably practicable to appoint an auditor, that they must obtain approval from the MEC to appoint a person qualified to perform the duties of an accounting officer of a close corporation to perform an examination in accordance with section 43(2) of SASA. Practitioners can therefore only accept examination engagements where the public school has obtained the necessary approval from the MEC.

Types of engagements that qualify as ‘examinations’

An examination is not defined in SASA. Practitioners who are engaged to examine financial statements of public schools have the option of conducting a review engagement or an agreed-upon procedures engagement. It is important to note, however, that an agreed-upon procedures engagement brings with it some challenges, as the Department of Basic Education in most instances require that an opinion or a conclusion be expressed based on the engagement performed on the financial statements of a public school. This is not possible with an agreed-upon procedures engagement, as the auditor or examiner is engaged to carry out procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings.

An engagement to compile financial statements will not meet the criteria to be classified as an examination of financial statements as it is an engagement in which a practitioner applies accounting and financial expertise to assist management in the preparation and presentation of financial information of an entity in accordance with the applicable financial reporting framework. Thus a compilation engagement is conducted to assist the school to comply with the requirements for keeping records of funds received and spent and of its assets, liabilities, and financial transactions and drawing up of financial statements as required by section 42 of SASA.

Impact of classification of the guidelines from the MEC as a special purpose financial reporting framework

Where the guidelines are classified as a special purpose financial reporting framework, the requirements of ISA 800 (Revised), Special Considerations − Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks, must be complied with. The requirements include the following:

• The auditor’s report must describe the purpose for which the financial statements are prepared and, if necessary, the intended users, or refer to a note in the special purpose financial statements that contains such information.
• If management has a choice of financial reporting framework in the preparation of such financial statements, the explanation of management’s responsibility for the financial statements must include reference to its responsibility for determining that the applicable financial reporting framework is acceptable in the circumstances.
• The auditor’s report must include an emphasis of matter paragraph alerting users of the report that the financial statements are prepared in accordance with a special purpose framework and that, as a result, they may not be suitable for another purpose

Impact of the classification of the guidelines from the MEC as a fair presentation framework or compliance framework

The wording of the opinion or conclusion paragraph will be changed to suite the circumstances as follows:

• Fair presentation framework: ‘… the financial statements present fairly, in all material respects, the financial position, financial performance and cash flows …
• Compliance framework: ’… the financial statements are prepared, in all material respects in accordance with …’

SAAPS 2 (Revised 2018) issued by the Independent Regulatory Board (IRBA) for Auditors provides further guidance on the impact of financial reporting frameworks on the auditor’s report.