By Bennie van Dyk – Senior Operations Manager: Community Schemes Management

The audit process for community schemes is sometimes misunderstood by members and compared to that of regular businesses. One should also take note that sectional title schemes are regarded as high-risk businesses when it comes to audits.

For Sectional Title schemes (Bodies Corporate), the audit process is prescribed under PMR 26 (1)(c) which states:

A body corporate must prepare annual financial statements for presentation at the annual general meeting. These statements must include an analysis of the:

1. Amounts due to the body corporate in respect of contributions, special contributions and other charges, classified by members and the periods for which such amounts were owed.
2. Amounts due by the body corporate to its creditors generally and prominently disclosing amounts due to any public authority, local municipality or other entity for services including, without limitation, water, electricity, gas. Sewerage and refuse removal, classified by creditor and the periods for which such amounts were owed;
3. Amounts advanced to the body corporate by way of levy finance, a loan, in terms of a guarantee insurance policy or otherwise, setting out the actual or contingent liability of the body corporate and the amounts paid by the body corporate and by any member in terms of such arrangement;
4. Amounts in the reserve fund showing the amount available for maintenance, repair and replacement of each major capital item as a percentage of the accrued estimated cost and the rand value of any shortfall;
5. Premiums and other amounts paid and payments received by the body corporate and any member in terms of the insurance policies of the body corporate and the expiry date of each policy; and
6. Amounts due and payable to the Community Schemes Ombud Services (CSOS).

PMR 26(5) prescribes that the audit of a body corporate’s annual financial statements:

• Must be done by an independent auditor, who has not participated in the preparation of the annual financial statements or advised on any part of the accounts of the body corporate during the financial period being reported on;
• Need to be carried out in accordance with any recognized financial; reporting framework of guidelines for financial accounting;
• Must include opinions as to whether or not –
  • The annual statements accurately reflect the financial position of the body corporate for the financial year under review, with such qualifications and reservations as the auditor considers necessary;
  • The body corporate complied with the accounting requirements set out in PMR 21, 24 and 26, with specific description of any failure to comply with such requirements;
  • The books of account of the body corporate have been kept and its funds have been managed so as to provide a reasonable level of protection against theft or fraud; and
  • The financial affairs of the body corporate appear to be effectively managed;
  • Must be completed within four months of the end of the body corporate’s financial year.

Members of the body corporate appoint the auditor at the Annual General Meeting (AGM). This is a prescribed item on the AGM agenda. Once members agree on the appointment, the auditor is notified and provides an engagement letter, which trustees must sign and return before the audit begins. This signed engagement letter is a requirement under a directive from the Independent Regulatory Board for Auditors (IRBA). Without it, auditors cannot proceed.

After completing the audit, the auditors provide the scheme executives with a draft set of Audited Financial Statements (AFS). Scheme executives must review and sign off on this draft once satisfied that it accurately reflects the scheme’s financial position. Per IRBA directives, the auditor may only sign the AFS after the scheme executives have done so. Without both parties’ signatures, the AFS holds no value. The final signed version is then tabled at the AGM for consideration by members, as mandated by the agenda.

If the AFS is unavailable within four months after the financial year-end, trustees should still call the AGM. At this meeting, they should note the reason for the delay. Once the signed AFS is ready, a special general meeting can be convened for its consideration.

Key Items to Avoid Audit Qualifications or Notes:

• Updated 10-Year Maintenance Plan reflecting the current year’s projects and the subsequent nine years.
• Signed written resolutions implementing and documenting contribution increases.
• Employment contracts for all scheme employees.
• Compliance certificates from SARS and COIDA.
• Signed resolutions for reserve fund withdrawals (if applicable).
• Proof of sufficient fidelity cover as prescribed by CSOSA.

Scheme executives must ensure timely signing of required documents to minimise risks associated with delays in completing audits. If you are uncertain about the audit process or your responsibilities, please contact your property portfolio manager at MidCity – Your Property Partner for Life.