What level of scrutiny do you need?Originally published: July 2017 | Last reviewed: June 2018
Most UK charities must face scrutiny of their accounts by an external expert. The purpose is to check financial records are correct and that they comply with accounting standards.
While a looming audit can cause anxiety, there are benefits, as financial management experts Mango point out:
- It allows you to prove that you’re following correct procedures. A positive audit is an indication of responsible financial management, which will give potential funders and partners greater confidence in your charity’s governance
- It can be a useful opportunity for learning, since auditors can offer feedback on strengths and weaknesses and advise on improvements
Audit or independent examination?
There are two forms of external scrutiny that UK charities may face.
An audit is the highest level of scrutiny of accounts by a registered auditor, in compliance with international auditing standards and regulations, who looks for positive evidence to enable the accounts to be described as 'true and fair'. Audits involve the review of internal financial reporting, policies, controls and systems, and verification of certain items, such as reported income, assets, disclosures, bank balances and land registry records.
An auditor’s report will confirm whether the accounts show a 'true and fair view' and provide a reasonable assurance of the charity’s financial management. ('True' means that transactions did take place and that assets exist; 'fair' that a transaction is fairly valued and assets and liabilities are fairly stated.)
A less rigorous (and therefore usually cheaper) option for smaller organisations is an independent examination, which provides a limited assurance of financial management. Rather than verifying the validity of entries and items, it entails reviewing accounting records kept by the charity and checking how these match up to the accounts.
The examiner is only required to report whether specific matters have come to their attention and their report is stated in negative terms — that is, that there is no reason to believe that a charity’s accounts are not accurate. (You won’t, therefore, benefit from the advice on improving your systems and controls that an auditor may provide.)
Which level of scrutiny does my organization need?
Rules differ slightly depending on which country your charity is registered in (and what your charity’s governing document states on this issue). Note also that the financial thresholds are subject to periodic review (figures below are correct as of March 2017 but are subject to change — check your regulator for latest updates).
Income thresholds also define whether an independent examination must be carried out by a certified person or not.
England and Wales
Charities with gross income of £25,000 or less in their financial year are not usually required to have their accounts independently examined or audited (one exception is NHS charities).
If your gross income exceeds £25,000 annually, trustees can choose either an independent examination or audit. If the former is chosen and gross income exceeds £250,000, the independent examiner appointed must be a member of a body specified under the Charities Act.
If income exceeds £1 million, an audit is required. Audit is also necessary if gross income is more than £250,000, and total assets (before liabilities) exceed £3.26 million.
Charities whose annual income is less than £500,000 and whose gross assets do not exceed £3.26 million must have an independent examination (unless an audit is required for some other reason). Those with an income above £500,000 must have a full audit.
External scrutiny is currently required of all charities — regardless of legal structure — that are registered with the Charity Commission for Northern Ireland. An independent examination is needed for all registered charities with gross income up to £500,000 in the relevant financial year; statutory audit is required for income exceeding that level.
Why might you choose a full audit?
Even if you aren’t required to undergo an audit because of your income levels, you might still want or need to choose a full audit (despite the higher cost), in the following cases:
- If it’s required by your governing document (note, though, that this can be amended if necessary)
- If it’s required by certain funders or lenders
- Because it provides additional assurance, with greater accountability and transparency which will provide greater comfort to the trustees
- If the difference in price between audit and independent examination is not too significant
- If the charity is approaching the income threshold at which it will have to be audited
- If the Charity Commission requires it, which can happen in certain cases
How much will it cost?
Fees vary depending on location, size and complexity of the charity’s structure.
A government estimate, reported by Third Sector magazine in 2015, suggests an average cost of £2,500 for an independent examination of a charity with an income of between £500,000 and £1m, while an average audit would cost around £4,750.
When you’re weighing up cost factors, don’t forget to consider staff hours. Audits are time-intensive and usually require involvement of finance staff and trustees. Independent examinations are much less rigorous but still require the examiner to be on site to assess your accounts and usually means questions and request for clarification. Auditors will likely be based in your office for up to a week with additional time to write their report and recommendations; an independent examination will take less time.
Charities should keep accounting records up to date (including cash books, invoices, receipts and gift aid receipts) to meet legal requirements and ensure that the correct documentation is ready to hand. This will help to make the examination process smoother. Remember that financial records must be kept for six years.
Once you know what kind of scrutiny you need, you’re ready to start planning for your audit or independent examination.
This article draws on the expertise of Nishka Smith, a chartered management accountant and founder of the London-based Visual Finance Ltd., which supports charities to strengthen their financial management and planning capabilities.
Mango: Handling an external audit
GOV.UK/Charity Commission: Charity reporting and accounting: the essentials March 2015
Association of Charity Independent Examiners: What is an IE?
Voluntary Action Islington: Audit versus independent examination (2015)
Office of the Scottish Charity Regulator (OSCR): Independent examination: OSCR guidance for charities and independent examiners (2015)
The Charity Commission for Northern Ireland: Charity reporting and accounting: the essentials (2016)