Determining the requirement.

Charities with more than £25,000 of annual gross income for the year need some form of external scrutiny over their annual accounts – either an independent examination (‘an IE’) or a full statutory audit. There are some exceptions for non-mainstream entities but this true in the majority of cases.

An IE is a much smaller exercise and usually much cheaper to procure, than an audit.

Then if the charity’s gross income for the year is £1m or more, or if gross income exceeds £250,000 and gross assets exceed £3.26m, a full statutory audit is required. A charity might also need an audit if there is a clause in its governing document which requires one, or if there’s another requirement imposed by a body such as a Church council.

There is also the option for Trustees to elect for a voluntary audit.

Who can carry out an independent examination?

They need to be an individual who is independent of the charity. That means they cannot:

• Have a close relationship with the Trustees or any of the charity’s related parties;

• Be an employee of the charity, involved in its bookkeeping or involved too closely in the day-to-day oversight of its finances;

• Be in any commercial arrangements with, or be a major donor or beneficiary of, the charity.

For charities with gross income under £250,000, an IE can be carried out by any independent person who has the sufficient financial awareness, numeracy skills and relevant experience to undertake one. In practice, they need a solid understanding of accounting principles, standards and the requirements of the Charities’ SORP (the accountancy framework applicable to charities in the UK), certainly when accruals accounts are prepared.

For charities with £250,000 or more, the examiner needs to be a member of a prescribed professional body, for example the Institute of Chartered Accountants in England & Wales (ICAEW), or the Association of Charity Independent Examiners (ACIE).

Action: Your Trustees should undertake sufficient enquiry to ensure the examiner they appoint is sufficiently competent. It is best practice to document this consideration (for example in Board minutes) albeit briefly unless there is concern.

What does an IE involve?

Some notable elements include (not an exhaustive list):

• A review of the financial records kept by the charity, to check the accounts are consistent with the underlying bookkeeping.

• A review of the annual reports & accounts to ensure they are compliant with the guidance & laws relevant to them (e.g. the SORP, UK accounting standards), and aren’t missing significant disclosure of any unusual items.

• A review of the minutes of Trustees’ meetings held in the year.

• Enquiry around levels of income and expenditure activity, and the nature of balance sheet items. They will seek to obtain explanation for year-on-year movements, or variances compared with their expectations, and corroborate these where possible by asking to see supporting documentation.

• Additional testing over the validity of transactions and balances, by asking to see supporting documentation such as invoices or contracts, for a sample of items.

The work carried out is proportionate to the charity’s size – a charity nearing the £1m audit income threshold can expect a much more thorough review, than a small charity with income only just breaching the £25,000 threshold.

The results of an IE.

The examiner will report to the trustees on whether they have reasonable cause to believe that in any material respect:

• proper accounting records were not kept.

• the accounts do not accord with the accounting records.

• if accruals accounts were prepared, they do not comply with the legal requirements & the applicable SORP, other than the requirement that the accounts give a ‘true & fair view’ which is not a matter considered as part of an IE.

If the examiner identifies any other significant concerns, they will also include them in their report. For example, if they have identified material expenditure which is improper and not in line with the charity’s aims, or numerous unexplained transactions with related parties.

Examiners are required to report to the Charity Commission directly (or the Scottish or NI regulator) if they identify any Matters of Material Significance. These include several matters including dishonesty and fraud, money laundering or other criminal activity, failure to manage conflicts of interest appropriately and other misdemeanours.

Timeline and logistics.

These should be agreed at the planning stage with the IE, ensuring completion the filing deadline of either 9 or 10 months after the year-end, for company and non-company charities respectively.

To prepare, the charity should:

• make sure the charity’s accounting records are up to date.

• set times when Trustees and relevant staff are available to answer questions from the examiner.

• start drafting the Trustees’ annual report, and the year-end accounts if the examiner isn’t preparing them.

If the IE is completed successfully, the accounts containing the examiner’s report can be signed by the Trustees and the examiner, and submitted to the Charity Commission.

Deadline: Submission should be within ten months of the charities year-end. Charitable companies should be mindful of the Companies House filing deadline, which is nine months after the year-end.