ANNUAL FINANCIAL STATEMENTS

Audit Committee Report

Introduction

The Clicks Group audit committee is a formal committee of the board which functions within documented terms of reference and complies with all relevant legislation, regulation and governance codes. The terms of reference, which are available on the group’s website, are reviewed annually and the effectiveness of the committee is assessed as part of the board and committee self-evaluation process each year.

This report of the audit committee is presented to shareholders for the first time this year, in compliance with the requirements of the Companies Act as amended by the Corporate Laws Amendment Act.

Role of the committee

The role of the committee is to ensure that management has created and maintained an effective control environment in the group. In conducting its business the committee is authorised by the board to investigate any activity within its terms of reference, seek any information that it requires from any employee of the company and obtain external legal or professional advice at the company’s expense.

The key functions of the committee are as follows:

Review and approve the appropriateness of accounting policies and disclosure policies in the annual financial statements and related financial reporting;
Assess the effectiveness of internal controls;
Review actions taken on major accounting issues;
Oversee the functioning of the internal audit department;
Ensure no limitations are imposed on the scope of the internal and external audits;
Confirm the nomination and appointment of the group’s auditor and be satisfied that the auditor is independent;
Approve the terms of engagement and fees paid to the auditor;
Ensure the appointment of the auditor complies with relevant legislation; and
Determine the nature and extent of any non-audit services which the auditor may provide to the company.

Composition of the committee

The committee comprises three independent non-executive directors who are all financially literate, with at least one member of the committee having recent and relevant financial experience. The chairman of the audit committee is not the chairman of the board.

The following directors served on the committee during the year under review:

John Bester – Chairman (Appointed 1 December 2008)
Fatima Jakoet
David Nurek
Robert Lumb (Resigned 30 November 2008)

Biographical details of the committee members appear here.

Fees paid to the committee members are outlined in the table of directors’ remuneration in the Remuneration Report, while the proposed fees for 2010 are detailed here.

The chief executive officer, chief financial officer, head of internal audit and senior management in the finance department attend every meeting at the invitation of the committee, together with the external auditors.

The audit committee also meets separately with the external and internal auditors, without members of executive management being present.

Internal audit

Internal audit is an independent, objective appraisal and assurance function which is central to the group’s audit process. The role of internal audit is contained in the internal audit charter.

Internal audit encompasses the review of the:

Effectiveness of the systems of internal control;
Means of safeguarding assets;
Reliability and integrity of financial and operating information;
Efficient management of the group’s resources;
Efficient conduct of the operations; and
Compliance with applicable laws and regulations.

The internal audit function reports to the audit committee and has the support of the board and management. Operationally, the head of internal audit reports to the chief financial officer who in turn reports to the chief executive officer. The head of internal audit has direct and unrestricted access to the chairman of the audit committee. The head of internal audit is appointed and removed by the audit committee, which also determines and recommends remuneration for the position. The chairman of the audit committee meets with the head of internal audit on a monthly basis.

Internal control

Systems of internal control are designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can provide reasonable, but not absolute, assurance against misstatement or loss.

While the board of directors is responsible for the internal control systems and for reviewing their effectiveness, responsibility for their actual implementation and maintenance rests with executive management. The systems of internal control are based on established organisational structures, together with written policies and procedures, and provide for suitably qualified employees, segregation of duties, clearly defined lines of authority and accountability. They also include budgeting controls, and comprehensive management reporting.

The directors are satisfied that control systems and procedures are suitably implemented, maintained and monitored on an ongoing basis by qualified personnel, with an appropriate segregation of authority, duties and reporting lines.

External audit

KPMG Inc. served as the group’s registered external auditor for the 2009 financial year.

The audit committee appraised the independence, expertise and objectivity of KPMG as the external auditor as well as approving the terms of engagement and the fees paid to KPMG. Fees paid to the external auditor are disclosed in note 6 to the annual financial statements.

The external auditor has unrestricted access to the group’s records and management. The auditor furnishes a written report to the committee on significant findings arising from the annual audit and is able to raise matters of concern directly with the chairman of the committee.

The company has received confirmation from the external auditor that the partners and staff responsible for the audit comply with all legal and professional requirements with regard to rotation and independence, including the stipulation that they should not hold shares in Clicks Group Limited.

Policy on non-audit services

In terms of the group’s policy on the provision of non-audit services by the external auditor, non-audit services may not exceed 25% of the total audit fee. These services should exclude any work which may be subject to external audit and which could compromise the auditor’s independence. Non-audit services are required to be approved by the audit committee.

During the year KPMG received fees of R3 000 (2008: R54 000) for non-audit services, equating to 0.1% (2008: 1.6%) of the total audit fee. These services related to audit certificates on transfer of properties.

KPMG satisfied the audit committee that appropriate safeguards have been adopted to maintain the independence of the external auditor when providing non-audit services.

Review of external auditor

On the recommendation of the audit committee, the board has undertaken to review the appointment of the external auditor as a good governance practice. In accordance with the audit committee charter, the audit committee undertook to assess the tender process and make a recommendation to the board. Four auditing firms, including the incumbent auditor KPMG Inc., were invited to tender for the audit for the 2010 financial year. Following the outcome of this process, the board will propose KPMG Inc. for election as the group’s external auditor at the annual general meeting in January 2010.

Activities of the audit committee

The committee meets four times annually. Members of the committee, the external auditors and the head of internal audit may request a non‑scheduled meeting if they consider that one is necessary. The chairman of the audit committee will determine if such a meeting should be convened.

Minutes of the meetings of the committee, except those recording private meetings with the external and internal auditors, are circulated to all directors and supplemented by an update from the audit committee chairman at each board meeting. Matters requiring action or improvement are identified and appropriate recommendations made to the board. The chairman of the committee is also a member of the risk committee and provides feedback to the audit committee on its activities and recommendations.

The chairman of the committee attends all statutory shareholder meetings to answer any questions on the committee’s activities.

In discharging its duties during the year under review, the committee performed the following activities:

Recommended to the board the appointment of the external auditors, approved the remuneration of the external auditors and monitored their independence, objectivity and effectiveness;
Evaluated and reviewed the audit tender process for the 2010 audit tender;
Determined the nature and extent of any non-audit services which the auditor may provide to the group and pre-approved any proposed contracts with the auditors;
Reviewed the company’s internal financial control and financial risk management systems;
Monitored and reviewed the effectiveness of the group’s internal audit functions;
Reviewed and recommended to the board for approval the company’s annual and interim reports; and
Evaluated the effectiveness of the committee.

Expertise and experience of the chief financial officer

In terms of the JSE Listings Requirements, the audit committee is satisfied that the expertise and experience of the chief financial officer is appropriate to meet the responsibilities of the position. This is based on the qualifications, levels of experience, continuing professional education and the board’s assessment of the financial knowledge of the chief financial officer.

Approval of the report

The committee confirms that it has functioned in accordance with its terms of reference for the 2009 financial year and that its report to shareholders has been approved by the board.


JOHN BESTER
Chairman: Audit Committee
Cape Town 12 November 2009