Notice No. 1512

27 October 2006

Under the powers vested in me by section 3 of the Public Audit Act, 2004 (Act No. 25 of 2004) (hereinafter referred to as the PAA), I, Shauket Allie Fakie, Auditor-General of the Republic of South Africa, hereby determine the following:

The objective of an audit of financial statements is to enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework.

In terms of section 13(3) of the PAA I hereby advise that, for the 2005-06 audits, I have determined that the approach set out in annexure A to this notice be followed in the formulation of my audit reports on the financial statements of municipalities and municipal entities. This is in response to the financial reporting frameworks prescribed by the National Treasury in terms of the MFMA for application by municipalities and municipal entities.

The National Treasury has determined the GRAP & GAAP basis of accounting to be as follows:

"The financial statements have been prepared in accordance with the South African Statements of Generally Accepted Accounting Practice (GAAP) including any interpretations of such Statements issued by the Accounting Practices Board, with the prescribed Standards of Generally Recognised Accounting Practice (GRAP) issued by the Accounting Standards Board replacing the equivalent GAAP Statement.. . " (This is more fully set out in annexure B to this notice.)

The National Treasury has determined the GRAP & GAMAP basis of accounting to be as follows:

"The financial statements have been prepared in accordance with the Standards of Generally Recognised Accounting Practice (GRAP) and the Standards of Generally Accepted Municipal Accounting Practice (GAMAP) prescribed by the Minister of Finance in terms of:

Accounting policies for material transactions, events or conditions not covered by the above GRAP and GAMAP Standards ... have been based on the South African Statements of Generally Accepted Accounting Practice (GAAP) including any interpretations of such Statements issued by the Accounting Practices Board…"(This is more fully set out in annexure C to this notice.)

I have recognised the GRAP & GAAP and GRAP & GAMAP bases of accounting set out above as comprehensive bases of accounting and my audit report will therefore be issued in terms of ISA 800.

The IMFO basis of accounting constitutes the standards determined by the Institute of Municipal Treasurers and Accountants (now the Institute of Municipal Finance Officers) in its Code of Accounting Practice (1997) and Report on Published Annual Financial Statements (second edition - January 1996).

I have recognised the IMFO basis of accounting as an entity-specific basis of accounting and I will therefore issue a "prepared in accordance with…" audit opinion in accordance with SAAPS2.

In terms of section 20(2)(b) and (c) of the PAA, an audit report must reflect an opinion or conclusion on (b) the auditee’s compliance with any applicable legislation relating to financial matters, financial management and other related matters, and (c) the reported information relating to the performance of the auditee against predetermined objectives.

I have determined that, until further information is published in this respect, no separate opinion or conclusion on compliance with legislation or performance against predetermined objectives should be included in the audit reports. Conclusions in this regard will be reached as part of the financial auditing process. Reporting will be in respect of material non-compliance with applicable legislation relating to financial matters or material shortcomings in the process of reporting against predetermined objectives that may come to the attention of the auditor during the audit.

I have determined that, until further information is published in this respect, no separate opinion or conclusion on compliance with legislation should be included in the audit reports. Conclusions in this regard will be reached as part of the financial auditing process. Reporting will be in respect of material non-compliance with applicable legislation relating to financial matters that may come to the attention of the auditor during the audit. Reporting on the performance measurement system in terms of section 46 of the Municipal Systems Act, 2000 (Act No. 32 of 2000) will be undertaken in a separate report in accordance with ISRS 4400.

GRAP 1 paragraph 11 et seq. requires that financial reporting by entities shall provide information on whether resources were obtained and used in accordance with the legally adopted budget. As the budget reporting standard is still in the process of being developed, I have determined that my audit of any disclosures made by the entities in this respect will be limited to reporting on non-compliance with this disclosure requirement.

The guidance provided in this document comes into immediate effect, but will not influence any audit reports already issued.

Regardless of any changes to international auditing standards regarding the audit report that may come into effect after the date of this directive, the reporting requirements outlined above will apply to all audit reports dated on or before 31 May 2007, issued in respect of audits conducted on entities subject to the MFMA.