Compliance and resilience for your foundation.
Independent examination of charity annual accounts.
Appointing a suitably qualified, sector-specialist independent examiner of your charity's year-end financial statements, is key to ensuring your entity meets its legal obligations.
Background
If your charity has gross annual income of over £25,000, its year-end accounts must be scrutinised by an independent third party, before they are submitted to the Charity Commission (except in rare cases of exemption).
This scrutiny exercise must take the form of either:
An independent examination (IE) - essentially a 'mini-audit' of the accounts, for smaller entities not subject to full audit; or
A full statutory audit, conducted in accordance with Auditing Standards - a much larger and more costly exercise than an IE.
An audit is typically the required option where:
Gross annual income exceeds £1,000,000;
Total assets on the balance sheet exceed £3,260,000 alongside annual income of £250,000 or more;
A requirement arises for another reason, for example, audit is stipulated by a clause in the charity's governing document, or imposed by a third-party authority (such as a Church council); or indeed if
The Trustee Board elects for a voluntary audit.
To determine your charity's legal annual accounts scrutiny obligations you can read more in this introductory article. Or to obtain clarity for your individual organisation, speak to a specialist.
At a minimum, a charity independent examination should deliver full compliance with UK charity law and the Charity Commission’s official Directions and Guidance for Examiners (CC32).
Good examiners however will exceed the minimum level of compliance, and deliver added value through proactive communication and insightful best practice sharing, as part of an enduring relationship throughout the financial year.
Explore an illustrative approach to a value-driven charity independent examination, below.
1.
Pre-engagement.
(Assuming a first-year engagement).
Initial fact-finding and scoping meeting between charity and examiner.
Research and knowledge-gathering on the charity and its accounts, by examiner.
Consideration, confirmation and documentation of:
Charity’s eligibility for IE as opposed to audit.
Permissibility of accounts preparation basis (e.g. accruals basis with Charities SORP compliance, vs. receipts and payments basis).
Objectivity and independence of examiner (e.g. to ensure absence of any conflict of interest).
Completion of anti-money laundering checks, fraud risk assessment and other pre-engagement considerations.
Agreement of engagement terms, subject to satisfactory completion of ‘take-on’ procedures.
Examiner creation of work programme and schedules through which they will document the results of testing and enquiry.
2.
Planning.
Formal examination planning meeting, to discuss:
An update on activities and recent developments, including income streams, expenditure types and non-financial matters of significance.
The current understanding and documentation of internal controls, key business processes, staffing, management and governance arrangements etc.
Factors contributing to the examiner’s risk assessment for example fraud instances (successful or known attempts), related party transactions, accounting estimates, contingent liabilities (/provisions), commitments and other unusual items.
Timeline and logistics.
Update of planned testing programme by examiner in response to any pertinent matters discussed in the planning meeting.
Sharing of initial list of deliverables requests, by examiner, and set-up of secure data-sharing portal for the transfer of documentary evidence.
Examiner’s planning stage review tasks, including:
Initial review of draft accounts if prepared, including analytical review if possible, or review of trial balance if Charity IE is undertaking accounts preparation.
First inspection of the ledger and financial records, making use of log-in details for direct (read-only) access to charity accounting system, if possible.
First reconciliation attempt of underlying financial data from the accounting system to the financial statements (trial balance / workings); investigation of any apparent variances.
3. Fieldwork.
The main body of the examiner’s work, including:
Consideration of quality of account records, including review of supporting reconciliations and workings for key financial statements balances.
Substantiation of a sample of income, expenditure, salaries and balance sheet items to supporting documentation or explanation and context provided which can be vouched to other sources.
Particular review of gift aid records and claims, VAT reconciliations and claims (if registered) and other balance sheet control account reconciliations.
Review of Declarations of Interest records of Trustees and Senior Management, conducting enquiry and analysis to identify any related party transactions which have not been noted and disclosed (if accruals accounts).
Review of the minutes of Trustee Board and relevant Subcommittee meetings throughout the year and to date.
Completion of analytical review vs. the prior year, budgets/ forecasts and expectations — documenting the rationale for movements year-on-year, with evidence.
Review of trustees’ annual report and financial statements document using a disclosure checklist software, to ensure full compliance with (if applicable), UK Generally Accepted Accounting Principles, the Charities Statement of Recommended Practice (or receipts and payments framework), plus all other relevant laws and regulations.
Consideration of the reasonability of significant judgements and accounting estimates in the financial statements (for example depreciation of fixed assets). Professionally sceptical review of the methodology adopted for quantifying numerical estimates.
Meetings as and when, to complete the examiner’s testing or flag issues arising for further discussion.
Timely status updates for your charity’s management, Board of Trustees and relevant scrutiny-focussed Subcommittee.
4. Completion and finalisation.
Review of the basis and adequacy of your charity’s going concern assessment; consideration of the reasonability and prudence of assumptions underlying projected future performance, and the formulation of budgets and forecasts. Consideration of the propriety and sufficiency of going concern related disclosures in the accounts, and discussion with you regarding your perception of future solvency risk.
Review of post year-end records and other available evidence to gain assurance as to the non-occurrence of any post-balance sheet events which could warrant disclosure in a note to the accounts, or else affect the financial picture portrayed by the charity more significantly.
Resolution of final analytical review, ensuring satisfactory explanations for all significant movements have been obtained, and performing a high-level credibility check of the accounts as a whole.
Consideration of ‘Other Information’, namely the contents of the trustees’ annual report, to ensure there is no major disparity with expectations, the accompanying accounts, or any omission of disclosure / non-compliance. Sharing thoughts on annual report content with you if valuable.
Consideration of possible Matters of Material Significance to report to the Charity Commission or other UK regulator.
Consideration of overall completeness of financial statements disclosure with reference to all evidence and information observed throughout the examination.
Creation and signature of the independent examiner’s report if work satisfactorily completed.
Sharing of written observations and recommendations in respect of the charity’s internal control environment, if any areas for possible improvement were identified.
Closing meeting with management and a Board representative, to discuss findings from the examination, and discuss pertinent sector updates.
Agreement of logistics for filing the examined accounts with the Charity Commission via the completion of the Annual Return (due within ten months of the year-end), along with Companies House (for charitable companies only, due within nine months of the year-end).
Debrief of the process and points forward to next year’s examination, and any challenges in the year ahead.
Speak to a specialist charity independent examiner.
Secure resilience for your foundation, through robust and compliant annual scrutiny.