A comparison between audit and independent examination for charities

For Trustees' Week 2024, one of our charity specialists, Director Rory McCall, is adding to the theme of recruitment and retention by sharing knowledge with trustees.

Here Rory looks at a comparison between audits and independent examinations.

Legal requirement for external scrutiny of charity accounts in Scotland

If a charity is registered in Scotland, then legally it’s required to have some form of external scrutiny of its accounts. The Charities Accounts (Scotland) Regulations 2006 set out the legal requirements for this, however broadly speaking a charity will be subject to an audit where:

  • It reports gross income for the year of £500,000 or more, or
  • It holds gross assets of £3.26m or more.

When does a charity qualify for an audit?

The charity is assessed for audit on an annual basis, meaning if the charity qualifies for an audit due to breaching the thresholds in one year, it may not necessarily require an audit if they fall below them in the next. This is particularly helpful where a charity receives a one off piece of funding, meaning it’s not “locked in” to the audit regime for a number of years.

Exceptions to audit requirements for charities

If the charity does not qualify for an audit based on the above, there may still be a requirement for it to be audited, for example to meet the requirements of a funder, if its governing document states that an audit is required, or if the trustees determine that an audit should be undertaken.

Alternatives to audit: independent examinations

Where the charity doesn’t need an audit, it may opt for an independent examination of its accounts instead. This must be undertaken by someone who is independent of the charity which would rule out the trustees, management and employees of the charity.

What does an independent examination involve?

For charities preparing fully accrued accounts the independent examination must be carried out by an individual who is appropriately qualified in matters of accounting and financial administration, such as a qualified member of a professional accounting body.

An independent examination is a lesser form of scrutiny, and the report tends to go into less detail. No opinion on the accounts is presented, with the focus being on ensuring that the charity has kept proper accounting records and that the accounts are correctly prepared and agree with those underlying records.

Differences between audit and independent examination

An audit goes into much more detail, with an opinion prepared as to whether the accounts present a true & fair view and are free from material misstatement. The audit must be undertaken by a registered auditor.

Key areas an audit may consider include:

  • Analytical planning work to assess each material aspect of the accounts, to document and assess the charity’s internal control procedures, and to plan procedures to address the risk of material misstatement of each of these.
  • Sample testing of the income, expenditure, assets and liabilities of the charity to assess the completeness, existence and accuracy of the figures reported.
  • Review of the charity’s governance procedures in order to ensure these comply with OSCR requirements.
  • Testing of internal financial controls and systems which drive the transactions and balances and ensure that these are operating effectively.
  • Consideration of non-financial areas such as compliance with key laws and regulations.
  • Preparation of a formal audit report setting out the opinion on the financial statements, as well as a statement on going concern and compliance with relevant legislation.

Preparing for an audit or independent examination

Regardless of whether an audit or independent examination is undertaken, it’s important to be well prepared, set expectations of both parties and the deadlines to which everyone is working towards.

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