6 Steps to an Independent Examination

1. 6 Steps to an Independent Examination Chris Smith FCIE

2. Best practice steps to independent examination • Preparation by the independent examiner • Ensuring the accounts are prepared on the correct basis and charity can have an IE • Planning and recording your work • Accounting records and comparison with accounts • Form and content of accounts • Drawing conclusions and preparing a report

3. Step 1: Preparation Understand the charity Objects and governing document Organisation and its activities Accounting systems Assets and liabilities Incoming resources and their application Can I carry out the examination? Comply with Proceeds of Crime Act 2002 and Money Laundering Regulations

4. Step 1: Preparation Review governing document Review the accounts and previous years accounts Discussions with trustees and/or staff Review trustee minutes Record/update accounting records kept Record/new activities What sort/changes in income? What sort/changes in expenditure? Nature of the assets and liabilities

5. Step 2: Ensuring the accounts are prepared on the correct basis and charity can have an IE Exercise1

6. Step 2: Ensuring the accounts are prepared on the correct basis

7. Step 2: Ensuring the charity can have an IE

8. Step 3: Planning and recording your work • Plan the examination processes required for the: • Size and complexity of the charity • The type of accounts R&P or accrued • The type of records held and accounting polices & procedures • Record work done • Show that all Steps followed • Show work carried out; objective, method, results, conclusion • Support conclusions drawn • Record judgement issues

9. Step 3: Working papers • Permanent Information • Relevant for more than one year • Constitution, Charity register extract, list of assets, risk assessment, proof of identity • Current Information • Relevant to current year examination • Breakdown of accounts figures, details of disclosure issues • Copy of final reconciliation, bank account statement etc. • Copies or extracts from minutes of trustee meetings • Kept for 6 years

10. Step 4: Accounting records and comparison with accounts • Adequacy - do the accounting records comply with the requirements of Regulation 4 of the 2006 Regulations? • Comparison - Do the accounts agree with the accounting records?

11. Step 4: Accounting records • Records must: • show & explain money received & spent day by day • record assets and liabilities • show financial position at any time • produce statement of account • Appropriate for the size, scale and nature of the charity’s transactions • Kept for 6 years

12. Step 4: Accounting records – Analytical procedures • Day to day • Transactions written up as they occur • Individual transactions • Show source of transaction (e.g. payee, supplier) • Distinguish between funds • Accurate and complete • Bank reconciliations • Control accounts • Assets and Liabilities • Fixed asset register • Unpaid invoice file • Debtors tracked

13. Step 4: Comparison - Analytical procedures • Do accounts look as expected • TAR • Minutes • Scale of operations • Fundraising leaflets • Discussions with client • Check against other financial information • Previous years accounts • Budgets • Financial reports to Trustees • Review source documents for large/unusual items • Cash Books • Bank Statements • Pay in books

14. Step 4: Comparison - Analytical procedures If questions or suspicions arise • Make enquiries of client trustees or staff • Verify to source documentation only if explanation unsatisfactory • Draw conclusions • Will it affect detail of other work • Will it impact on opinion

15. Step 4: Materiality • No formal definition • Size of error in relation to size of charity • Consider nature of error • Consider reputational damage • Beware of cumulative impact of small errors • Key test: Does error alter the overall “picture” the accounts portray? • Materiality thresholds lower in charities than commercial organisations

16. Step 5: Form and content of the accounts • Receipts & Payments – Regulation 9 and Schedules 2 & 3 • Accrued Accounts – Regulation 8, Schedule 1 and SORP

17. The Statement of Recommended Practice • Charities SORP 2005 – For accounting periods starting in 2014 or earlier • Charities SORP (FRSSE) or (FRS102) – For accounting periods starting in 2015 • Charities SORP (FRS 102) plus update bulletin 1 – For accounting periods starting in 2016 or later

18. FRSSE SORP • Based on Financial Reporting Standard for Smaller Entities • Can use SORP (FRSSE) if two of the following apply • Gross income not exceeding £6.5m • Total assets not exceeding £3.26m • Employs no more than 50 staff • Modular format - download from SORP micro-site http://www.charitiessorp.org/

19. FRSSE & FRS 102 SORPs - New Key Principles • “Fair value” - assets & liabilities - non monetary income & expenditure • Recognition of income & expenditure when “probable” • Recognition at “Present value” for assets and liabilities receivable or payable over several years • Must, should and may

20. Layout of Charity Accounts • Include charity name/s and number and make clear it is a charity • Must show surplus or deficit for the year • Previous years figures • Distinguish between restricted, unrestricted and endowment funds • Show any transfers between funds

21. Layout of Charity Accounts • Must include a Trustees Annual Report signed and dated by a charity trustee • The Balance Sheet or Statement of Balances must be signed and dated by a charity trustee • Disclosure of expenses and remuneration paid to, or other financial transactions with, charity trustees or connected persons • If accruals – disclosure of related party transactions, even if nil • Descriptions of the nature and purpose of the different funds

22. Layout Report and Accounts – Good Practice • Title and contents pages • Have the component documents in the following order: • Trustees Annual Report • Independent Examiners or Auditors Report • Statement of Financial Activities / Statement of R&P • Balance Sheet / Statement of Balances • Notes • Well laid out with consistent style and fonts and easy to read

23. Step 6 Drawing conclusions and preparing a report • Stand back and reflect on accounts and work done • Any further discussions or questions for trustees • Draw conclusions • Negative assurance

24. Step 6 Content of the Examiners Report • Name and address of examiner and name of charity • The signature of the examiner and details of any relevant qualification • The date of the report (after date of trustees approval) and the financial year being examined • A statement that the examination has been carried out in accordance with section 44 (1)(c) of CTI 2005 Act

25. Step 6 Content of the Examiners Report • A statement as whether or not the examiner has found anything that leads them to think the: • Accounting records do not comply with 2006 accounts regulations • Accounts do not agree with the records • Accounts do not comply with the regulation 8 or 9 • A statement as to whether or not anything else needs to be disclosed to help understand the accounts

26. Step 6 Content of the Examiners Report • A statement explaining any of the following matters if found during the examination: • Expenditure outwith the purposes of the charity • Information not being given to the examiner • The trustees report is inconsistent with the accounts

27. Step 6 Drawing conclusions and preparing a report Is there any reason to believe that in any material respect Accounting records not in accordance with CTI s44 (1) & Regulation 4. Accounts are not in agreement with and derived form these records Accounts do not comply with CTI Act 2005 & 2006 Regulations re accounting and reporting requirements (Regulation 8 or 9) Information needed for a proper understanding of the accounts has not been given Expenditure is not within the trusts of the charity All information has not been provided to you Annual report is not consistent with the accounts

28. Step 6: Qualified Report • Cannot answer ‘no’ to all 7 questions • Need to highlight the areas of concern in the report • Separate paragraph for each concern • Nature of concern • Financial effect on the accounts (if any) • Clearly state that all concerns are detailed • Example Reports in OSCR 2009 Guidance

29. Exercise 3: Qualified report Review the various scenarios and decide whether or not you would qualify your report

30. Summary - 6 Good Practice Steps • Preparation by the independent examiner • Ensuring the accounts are prepared on the correct basis and charity can have an IE • Planning and recording your work • Accounting records and comparison with accounts • Form and content of accounts • Drawing conclusions and preparing a report

31. Any questions?