This fact sheet is intended for charities registered only in England & Wales. There are different scruiting requirements for charities registered in Northern Ireland and in Scotland. Independent Examination vs. Audit.
Those charities registered in more than one jurisdiction need to fulfil the requirements of the most onerous regime.
Options
Independent examinations and audits are both forms of “external scrutiny”. All charities in England and Wales who have an income of over £25,000 are required to have a form of external scrutiny.
The primary objective is to maintain transparency and public confidence in the work of charities and the use of their resources.
The thresholds for the type of external scrutiny required were last amended in February 2015, the government announced the results of its consultation on charity and audit thresholds and related matters.
Its proposals were enacted via the Charities Act 2011 (Accounts and Audit) Order 2015, resulting in revised thresholds as follows:
- The income threshold for charity audit increased from £500,000 to £1 million therefore giving more charities the option of having an independent examination as opposed to a statutory audit.
- The aggregate group income threshold at which parent charities should have group accountants audited was raised from £500,000 to £1 million in order to align it with the income threshold for individual charities.
- The threshold for the preparation of group accounts was raised from £500,000 to £1 million; and
- These changes were implemented with effect for charities with a period end ending on or after 31 March 2015.
Important points to note
It is important to re-iterate that they may be many cases where a charity is not required by statute to have its accounts audited but may still choose to do so because, for example:
- There is a (current) requirement in its governing document - although note that this may be able to be amended if desired.
- Certain funders require the statutory accounts to be subject to audit; and / or
- The charity chooses to have an audit as a means of providing additional assurance to its various stakeholders, and to take advantage of the benefits and by-products of a well-planned and executed audit.
It is acknowledged that the proposed measures will create a discrepancy between audit thresholds for charities in different parts of the UK - an unavoidable situation given that charity law is devolved in Scotland and Northern Ireland. It is important to note that charities need to comply with the audit requirements in their particular jurisdiction.
Relative merits: Independent examination vs. audit
These are the best set out in the table on the following page, as the merits of one approach often reflect the relative downside of the other approach, and vice versa.
This is particularly the case where the charity has a range of existing and potential stakeholders, is active in a wider community and relies on its good reputation and profile to maintain / increase funding from funders, or the public. Some trustees consider that subjecting the charity to an audit also helps them to demonstrate their charity’s - and their own - accountability and transparency, especially to existing and potential funders, donors and beneficiaries.
Whilst an audit can place more demands on charity staff time, staff often welcome the opportunity to have their work independently verified as it affords them a level of “protection” - particularly if there are only one or two individuals responsible for the accounting processes to be independently reviewed with opportunities to learn more about wider best practice.
Where charities are actively looking for new sources of funding, the provision of audited accounts is often an advantage - if not a necessity. Some funders specifically require audited accounts; others are still not sure of the status of an independent examination and may view it with a certain element of suspicion.
Where charities decide to opt for an independent examination, however, it will almost undoubtedly be cheaper - a key factor in ensuring that as many of the charity’s resources as possible are directed to charitable activities.
In our experience, even charities which can opt for an independent examination often prefer to have an audit due to the increased assurance provided from the audit process.
| Independent Examination | Statuary Audit | |
|---|---|---|
| Pros | • Simpler process - in essence it comprises of the accounting records key by the charity and a comparison of the accounts to those records. Should be undertaken in accordance with the Charity Commission’s “Directions”. • The examination provides trustees, funders, beneficiaries, stakeholders and the public with a form of confirmation that the accounts of the charity have been reviewed by an independent person. | • More onerous form of external scrutiny than an independent examination requiring more auditor input, and management time. Has to be undertaken in accordance with International Standards of Auditing (ISAs) supplemented by relevant specialist guidance for charity auditors. • Costs more than an independent examination |
| Cons | • Less depth to the work i.e. less vouching of the validity of entries and items as the examiner’s work is primarily based around checking the extraction of underlying data into the accounts. • The examiner’s report to the trustees is only required to confirm that no evidence has been found that suggests that the accounts have not been prepared properly. It is “negative assurance” therefore providing a more limited form of scrutiny. Certain matters will be reported where there are significant concerns. • The opinion is not providing assurance as to whether the accounts show as “true and fair” view. • No requirement to review internal financial (and other) controls and systems; no requirement to plan work and review systems from the perspective of prevention / detection of fraud and error although the examiner will report any issues they come across in this area. • No requirement to produce a management letter. | • Audit work is governed by ISAs which require more rigor, including testing (on a sample basis) the validity of items, completeness, cut off, existence of assets etc. For example, verifying bank balances to independent bank letters; property entries to land registry records / valuation reports. • The auditor provides a positive statement on whether the accounts show a “true and fair view” (i.e. based on whether they contain any “material” errors / omissions). • The auditor has to build up a body of evidence to support a positive opinion on the accounts; therefore, the audit opinion provides more assurance - thus giving more comfort to trustees, staff, funders, donors, beneficiaries and other stakeholders. • Requirement to review and test internal financial controls and systems. As well as providing more assurance, this can lead to helpful recommendations in the management letter. • Useful end product is a constructive management letter for trustees (agreed with management). This is a helpful way of highlighting recommendations for systems improvements, sharing of best practice and flagging relevant upcoming sector / regulatory developments to management and trustees. |
