Introduction

PMR 26(5) deals with the audit of the body corporate’s annual financial statements. The
legislation requires that schemes must have their annual financial statements audited
and presented to the members of the body corporate for their consideration at the AGM.
It is an important function of the body corporate to ensure that its annual financial
statements are audited. The members of the body corporate need to know that the
scheme funds are being managed properly, and accounted for correctly. This reduces
the risk of any irresponsible spending and even fraud of body corporate funds.

Who must conduct the audit?

PMR 26(5)(a) states that the audit must be carried out by an independent auditor who
has not participated in the preparation of the annual financial statements or advised on
any aspect of the accounts of the body corporate during the period being reported on.
Audit principles and ethics require that the audit be done by someone who is
independent. Therefore, the auditor should not be an owner or trustee of the body
corporate. Furthermore, a firm of auditors that acts as a managing agent should also not
audit the books of the scheme it manages. The reason for this submission is that the
owners vote on the approval of the budget at the AGM, and consider the annual
financial statements, and a trustee is involved in preparing or organizing the preparation
of the annual financial statements.
If the scheme is small and has a member who is an accountant by profession, then I
suggest he or she be nominated and elected as the treasurer trustee, and that he or she
be involved in preparing the annual financial statements. The body corporate should
then appoint an auditor to audit and sign the annual financial statements.

When and how is the auditor appointed?
PMR 17(6)(j)(vi) sets out the required agenda items for the AGM, and states that the
body corporate must appoint an auditor to audit the annual financial statements. The
only exception is that an auditor need not be appointed in cases where all the sections
in the scheme are registered in the name of one person. Therefore, at the first general
meeting and at every AGM of the body corporate thereafter the owners must appoint an
auditor who is to hold office from the end of that meeting until the end of the AGM.
Requirements for the audit

The audit need not be carried out in accordance with any recognized financial reporting
framework of guidelines for financial accounting.

What must the audit contain?

The audit must include opinions as to whether or not:

1. The annual financial 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.
2. The body corporate has complied with the accounting requirements set out in
   PMR 21, 24 and 26, with specific description of any failure to comply with such
   requirements.
3. 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.
4. The financial affairs of the body corporate appear to be effectively managed.

When must the audit be completed?

The audit must be completed within four months of the end of the body corporate’s
financial year. PMR 21(1) states that the financial year of a body corporate established
after the STSM Act came into operation must run from the first day of October of each
year to the last day of September of the following year unless otherwise resolved by the
body corporate in the general meeting. The AGM is required to be held within four
months of the financial year end. So, although it is not required, it makes sense for the
audited financial statements to be presented to the AGM for owners’ consideration.
Anton Kelly in “Why is the audit a problem in sectional title schemes?
(https://paddocksblog.com/2018/02/28/why-is-the-audit-a-problem-in-sectional-title-
schemes/amp/) states that the AGM is frequently late in sectional title schemes and the
most common reason given is that the audit has not been completed. He gives the
following reasons the auditors could be too busy; the scheme accounting is not up to
date; incomplete trustee projects; municipal disputes and delays; among others.
Where must the audited financial statements be sent
Section 59(b)(ii) of the Community Schemes Ombud Service Act 9 of 2011 (the “CSOS
Act”) states that every community scheme must each calendar year, and at such times
as may be prescribed, file with the CSOS a copy of its annual financial statements. This
provision does not specifically require that they be audited, but Regulation 18(1) states
that the documents referred to in section 59(b) of the CSOS Act states that the financial
statements must be filed with the CSOS within four months after the end of the
scheme’s financial year, by filing the prescribed Form CS 2. Prescribed form CS2
specifically asks whether audited annual financial statements are attached. Therefore, I
strongly recommend that all sectional title schemes file a copy of its audited annual
financial statements.