2a a32 small (frs 102 1a) guidance.… · web viewpresentation of the petty cash book to the...

Guidance notesWhat do you need to know about this manual?The clubs guidance notes and programmes have been developed to assist an auditor or accountant to:

• understand the accounting, reporting and legislative requirements of clubs; and• provide clubs with comprehensive but cost effective services.

This manual primarily deals with the accounting, reporting and legislative requirements of members’ clubs which are registered under the Co-operative and Community Benefit Societies Act 2014 or the Friendly Societies Act 1974.

It also provides guidance for members’ clubs which are:

• limited companies; or• unincorporated and unregistered.

What does this manual include?The manual consists of seven main parts as detailed on the contents page:

• The guidance notes in this section provide a useful interpretation of the legislation and regulations under which members’ clubs operate. Getting started guidance for new users of the manual, along with details about the last update and how to use the Creator option to the manual are also included in this section.

• The example letters section includes audit, reporting accountant’s and totally exempt engagement terms. An example letter of representation is also included.

• The example reports provide recommended audit report wording for different types of club as well reporting accountant’s reports.• Example accounts for a club registered under the Co-operative and Community Benefit Societies Act 2014 or the Friendly Societies Act 1974 are

provided in the Example Accounts section.• The accounts disclosure checklists prompt legislative specific disclosures relevant to clubs registered under the Co-operative and Community Benefit

Societies Act 2014 or Friendly Societies Act 1974 plus the Financial Conduct Authority’s disclosure requirements for clubs registered under these Acts. From a financial reporting perspective, a disclosure checklist for a small club using FRS 102 Section 1A is included, as is an FRS 102 disclosure checklist.

• The current file documentation provides audit completion, planning and work programmes which relate specifically to the general risk / problem areas associated with clubs, whilst also ensuring compliance with International Standards on Auditing (UK). Supplementary non-audit documentation is also included.

• The permanent file section contains prompts for information which is of continuing importance to an engagement over a number of years.

What else do you need?Auditors of clubs registered under the Co-operative and Community Benefit Societies Act 2014 or the Friendly Societies Act 1974 will need:

• copies of / access to the Acts and applicable statutory instruments as detailed in chapters 2, 3 and 7 of the guidance notes; and• to be familiar with the registration and reporting requirements of the Financial Conduct Authority in its capacity as the registrar for mutual societies.

Auditors of clubs incorporated under the Companies Act should refer to their corporate manuals for detailed legislative guidance and will clearly need to be familiar with the requirements of company law, including the options available to small companies.

Copyright© Mercia Group Ltd. The guidance notes and / or programmes can be printed or photocopied as many times as you like or installed on an intranet or network, provided they are used solely within the purchasing firm. Alternatively, additional copies are available from Mercia Group Ltd.

Audit, Accounting and Corporate Governance works printed and published by the Financial Reporting Council© Financial Reporting Council Ltd (FRC). Adapted and reproduced with the kind permission of the Financial Reporting Council. All rights reserved. For further information please visit www.frc.org.uk or call +44 (0)20 7492 2300.

UpdatingThis manual will be updated when changes are required as a result of new guidance specific to clubs or to normal audit procedures. As a user of this manual you will automatically be notified of any significant updates.

For information of usersThis manual should be read in conjunction with the detailed legislation or regulations. No responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this manual can be accepted by the authors or the firm.

Clubs Manual September 23

Clubs guidance notes1 Introduction

1.1 Types of club

A club can be generally described as a group of people who have joined together to promote a common purpose or objective. A club can take several different forms, for example, it may be registered under the Co-operative and Community Benefit Societies Act 2014 (or its ‘predecessor’, the Industrial and Provident Societies Act 1965 (see chapter 2 for details) or under the Friendly Societies Act 1974; it may have been incorporated under the Companies Act (generally limited by guarantee) or it may not have been formed under any legislation at all.

This manual is aimed at members’ clubs, many of which are affiliated to the Working Men’s Club and Institute Union or others such as Royal British Legion or the Association of Conservative Clubs, although such an affiliation is not necessary. Many members’ clubs are registered under the Co-operative and Community Benefit Societies Act 2014 (CCBSA14) or the Friendly Societies Act 1974 (FSA74) and this manual is mainly focused on these types of clubs. Note, however, that registration under this legislation is not a requirement and clubs may also be formed under company law or indeed, as noted above, not under any legislation at all (see chapter 4 for further details).

Clubs may also be run as commercial enterprises and as such are owned by a proprietor and can generally be known as ‘proprietary clubs’. These may be incorporated or unincorporated businesses in the same way that other commercial businesses can. An example would be a nightclub. Such clubs would not meet the criteria to be registered as a society under the CCBSA14 or the FSA74 and are not specifically dealt with in this manual.

1.2 An introduction to societies

Subscribers to previous versions of the Clubs Manual will no doubt be familiar with the term ‘industrial and provident society’. However, the CCBSA14, which came into effect on 1 August 2014, brought about name changes within the sector. With effect from 1 August 2014, it is not possible to register a new industrial and provident society and existing industrial and provident societies are known as ‘registered societies’.

Much of the previous legislation that affected industrial and provident societies has been consolidated into the Co-operative and Community Benefit Societies Act 2014. This manual refers to ‘registered societies’ where it previously referred to ‘industrial and provident societies’. Further detail about the new Act and how it affected the clubs’ sector can be found in chapter 2 of these guidance notes.

It is important to note that this legislative change only affected industrial and provident societies and not societies registered under the Friendly Societies Act 1974, which are also considered in this manual.

A friendly society is a voluntary mutual organisation whose main purpose is to assist members (usually financially) during sickness, unemployment or retirement and to provide life assurance. A friendly society may be registered under the Friendly Societies Act 1974 or incorporated under the Friendly Societies Act 1992. Certain other types of other society (as opposed to a ‘friendly society’ providing financial assistance) may also be registered under the Friendly Societies Act 1974 (ie. working men’s clubs; cattle insurance societies; benevolent societies; old people’s homes societies; and specially authorised societies).

The Financial Conduct Authority (FCA) is the registering authority for registered and friendly societies. This registration function is separate from the FCA’s wider role as regulator of the financial services industry in the UK (see paragraph 1.8 below). While many friendly societies also fall under FCA regulation, clubs normally would not, even where they are registered under the Friendly Societies Act 1974, as they do not provide financial services. They are not therefore regulated by the FCA even though they are registered with them.

1.3 Other Specialist Assignment Manuals

This manual provides guidance on the members’ club sector as a whole and is not intended to provide detailed guidance on all of the different types of registered or friendly society. Subscribers to the Clubs Manual are advised to refer to the Societies and Community Interest Companies, Registered Social Housing Providers or Charities manuals if they are working on these types of engagement rather than a club. Those with proprietary club clients should generally also refer to their corporate audit or audit exemption manuals.

1.4 Clubs Manual

Whilst the Clubs Manual provides overall guidance relevant to the clubs sector, it focuses in particular on clubs that are registered under the CCBSA14 or FSA74 and are therefore subject to the audit and accounts requirements of that legislation.

Guidance is provided for assignments where the society is exempt from audit in chapter 7 of these guidance notes. Documentation for such assignments, including where a reporting accountant’s report is required, is also included in the Current File Documents section.

As the range of organisations that can be registered under the CCBSA14, or registered or incorporated under the Friendly Societies Act 1974 or Friendly Societies Act 1992, is wide, their activities vary considerably. (There are more than 10,000 mutual societies currently in the UK, however, this number has been gradually decreasing over recent years.)

FCA website

Those with registered or friendly society clients or new co-operatives or community benefit societies that are not clubs, as noted above, must refer to a more general Societies specialist manual, as this clubs manual only refers to legislation and guidance that is applicable to clubs. It therefore contains omissions for other types of society, in particular friendly societies whose main purpose is to assist members financially during sickness, unemployment or retirement and to provide life assurance.

1.5 Clubs registered under the CCBSA14 or FSA74

The following types of ‘society’ are referred to in this manual:

• Club registered under the CCBSA14 - clubs registered under the Co-operative and Community Benefit Societies Act 2014 (CCBSA14). These clubs are subject to the audit and accounts requirements of the CCBSA14.

• Club registered under the FSA74 - clubs registered under Friendly Societies Act 1974 (FSA74). These clubs are subject to the audit and accounts requirements of the FSA74.

• Audit Exempt Club - clubs that are registered under the CCBSA14 or the FSA74 which have disapplied the audit requirement under the provisions of the CCBSA14 (clubs registered under the CCBSA14) or the Deregulation (Industrial and Provident Societies) Order 1996) (clubs registered under the FSA74) detailed in chapter 7 and that require an independent reporting accountant’s report.

• Totally Exempt Club - clubs that are registered under the CCBSA14 or the FSA74 and which have disapplied the audit requirement under the provisions of the CCBSA14 (clubs registered under the CCBSA14) or the Deregulation (Industrial and Provident Societies) Order 1996 (clubs registered under the FSA74) detailed in chapter 7 but that have a turnover of less that £90,000 and therefore do not require an independent reporting accountant’s report.

• The term small or exempt society is specifically referred to in the CCBSA14 (small) and the FSA74 (exempt). These are very small societies (eg. receipts and payments less that £5,000) that have the option to appoint a qualified auditor or two lay auditors. See chapter 7 for further details.

The manual also makes reference to limited company clubs, which are clubs that are incorporated under company law and are limited by guarantee. Such clubs are subject to the normal audit and accounts requirements of the Companies Act 2006.


https://www.fca.org.uk/firms/our-responsibilities-mutual-societies

Finally, the manual also refers to unincorporated, unregistered clubs, which are not subject to any legislative requirements and have simply been formed by members. Such clubs are not subject to any legislative or filing requirements.

1.6 Financial Conduct Authority (FCA) - Mutual Societies Registration

The FCA maintains the public register of mutual organisations registered under the CCBSA14, the Building Societies Act 1986 and the Friendly Societies Acts 1974 or 1992. Any society with a registered office in Great Britain is subject to the FCA’s registration procedures. Under the CCBSA14, the FCA is therefore the registering authority for:

• co-operative societies;• community benefit societies; and• registered societies (includes societies previously known as ‘industrial and provident societies).

The public record files of all societies are open to inspection by the public.

The FCA’s address is:

Financial Conduct Authority Head Office

12 Endeavour Square

London

E20 1JN

0300 500 0597 (The contact number for firms and people representing firms.)

www.fca.org.uk

The Mutuals Public Register can be accessed at www.fca.org.uk/firms/mutuals-public-register

The Financial Services Authority, the FCA’s predecessor, took over the role of registrar of mutual societies in 2001 from the Registrar of Friendly Societies.

The FCA has to be satisfied that a society is, for example, a community benefit society or a co-operative on registration and whilst it remains registered and has the power to cancel a society’s registration if appropriate conditions are no longer met.

The FCA is the registering authority under CCBSA14 and the Friendly Societies Act 1974. Its role as registering authority is different and separate from its role as a financial services regulator. The FCA is the registering authority for societies in the same way that Companies House is the registering authority for companies. The FCA has powers similar to those that the Secretary of State can exercise on companies. Broadly, these powers include powers to:

• appoint inspectors to investigate the affairs of a society; and• require documents and information recorded in any form.

These powers must only be exercised to the extent necessary to maintain confidence in registered societies.

In November 2015, the FCA published FG15/12: Guidance on the FCA’s registration function under the Co-operative and Community Benefit Societies Act 2014 following on from its consultations on the subject in both October 2014 and subsequently in June 2015. This guidance brought together the existing series of information notes and the results of the FCA’s consultation with stakeholders.

The guidance addresses:

• the role of the FCA;• registration of a society;• defining a co-operative society;• defining a community benefit society;• capital;• accounting and audit requirements;• obligations and processes;• powers of the FCA;• disputes with the members.

FCA guidance

The FCA has a section of its website devoted to mutual societies, which contains information about its role as registrar for mutual societies, background information, as well as copies of the forms and information notes applicable to registered and other societies. This can be found at the online portal for mutual societies: https://www.fca.org.uk/firms/online-mutual-society-portal. Users need to register in order to access the portal. This will then allow a user to associate with a society.

1.7 Annual returns

All societies are required to submit annual returns relating to their affairs to the FCA. The returns include financial information (comprising at least a revenue account and balance sheet). They must be submitted each year by a specified date:

registered societies (CCBSA14) must submit the return within seven months of their period end; and

other societies registered under FSA74 must submit the return by 31 July.

Subject to being suitably completed and signed, annual returns are placed on the public record files of the individual societies. Those returns that are not acceptable for filing are returned for correction or completion. Failure to submit an annual return by the required date is an offence, for which both the society and its responsible officers may be prosecuted. The FCA will cancel the registrations of societies that wilfully violate the requirement to submit their annual return. A list of societies that have been prosecuted and fined for non-submission of annual returns by the due date can be found on the FCA’s website.

It is possible to purchase copies of annual returns and accounts from the FCA, including online.

1.8 The wider role of the FCA

The Financial Conduct Authority (FCA) acts as Registrar to mutual societies. Under the Financial Service Act 2012 it also acts as the conduct of business regulator which supervises financial services and markets to ensure their business is conducted in a way that advances the interests of all users and participants. Clubs would rarely provide such services and as such would not be subject to this type of regulation.

1.9 Companies House

Clubs that are formed under company law are subject to the filing requirements established in the Companies Act 2006 and within the Registrar’s Rules.


https://www.fca.org.uk/firms/annual-returns-accounts-mutual-societies/prosecutions-cancellations

https://www.fca.org.uk/firms/online-mutual-society-portal

http://www.fca.org.uk/news/fg1512-guidance-fcas-registration-function-under-the-cooperative-and-community-benefit-societies-act-2014



http://www.fca.org.uk/firms/mutuals-public-register

http://www.fca.org.uk/

It is worth noting that clubs registered under the CCBSA14 do not file documents at Companies House. As noted above, they are instead registered with the FCA and file documents there. However, the Companies Act 2006 requires the name of a society registered under the CCBSA14 to be included on the registrar of companies’ index of company names, therefore you may see the name of a club on the Companies House register. This does not mean that the club is a limited company. This issue is sometimes further confused by the fact that clubs registered under the CCBSA14 also use the word ‘limited’ in their name (see paragraph 2.4).

It is always important therefore to understand the legislation, if any, that a club is formed or registered under in order to establish the legal framework that applies.


2 Clubs registered under The Co-Operative and Community Benefit Societies Act 2014

2.1 Legislative change for industrial and provident societies

The Co-operative and Community Benefit Societies Act 2014 (CCBSA14) came into effect on 1 August 2014 and, as noted in chapter 1 above, brought about name changes in a sector that had previously been used to referring to ‘industrial and provident societies’.

With effect from 1 August 2014, it has not been possible to register a new industrial and provident society and existing industrial and provident societies became know as ‘registered societies’. Much of the previous legislation that affected such societies was consolidated into the new Act.

Useful guidance

The Financial Conduct Authority (FCA) provides useful guidance for industrial and provident societies registered before 1 August 2014 and their advisors on some of the effects of the CCBSA14. For example, it notes that the following could be included on letterheads and websites:

“[name of society] is a registered society under the Co-operative and Community Benefit Societies Act 2014”

and goes on to say that it would be incorrect to refer to such a society as a ‘community benefit society’ or a ‘co-operative’. Other relevant questions for those affected by the new legislation are also answered in this guidance, such as:

• Do we have to change our name?• Do we get a new registration number?• Do we need to change our rules?• How do we switch from being a ‘registered society’ to a ‘co-operative society’ or a ‘community benefit society’?

Meaning of ‘registered society’ in the CCBSA14

Section 1 of the CCBSA14 states that in the Act ‘registered society’ means:

• a society registered under this Act on or after 1 August 2014; or• a society that immediately before 1 August 2014 was registered, or treated as registered, under the Industrial and Provident Societies Act 1965.

Therefore ’old’ industrial and provident societies and ‘new’ co-operatives or community benefit societies are subject to the same legislation set out the in CCBSA14 and in that legislation are all collectively referred to as ‘registered societies’.

New registrations under CCBSA14

With effect from 1 August 2014, a society for carrying on any industry, business or trade, may be registered under the CCBSA14 as either a co-operative society or a community benefit society, provided the conditions in subsection (2) of section 2 CCBSA14 are met.

A new society cannot therefore be both a co-operative and a community benefit society and it cannot be an ‘industrial and provident’ society.

The FCA in its ‘Mutual Societies Information Note: New registrations and conversions: co-operative societies and community benefit societies (Release 3: April 2017)’ notes that:

co-operative societies are formed primarily to benefit their own members, who will participate in the primary business of the society; and

that in a community benefit society, the business must be run primarily for the benefit of people who are not members of the society, and must also be in the interests of the community at large. It will usually be charitable or philanthropic in character.

As regards new society registration numbers going forward:

• community benefit societies will have a number starting from 7000; and • co-operative societies will have a number starting from 4000.

On letterheads and websites, a society registered on or after 1 August 2014 could describe itself as:

“[name of society] is a Co-operative society registered under the Co-operative and Community Benefit Societies Act 2014” or

“[name of society] is a Community Benefit Society registered under the Co-operative and Community Benefit Societies Act 2014” as applicable.

Clubs are unlikely to meet the requirements to register as community benefit societies and new clubs wishing to register as a society would likely therefore register as co-operatives.

2.2 Introduction

Subscribers to this manual who are assisting clubs registered under the CCBSA14 (see paragraph 2.1 above - includes those previously known as ‘industrial and provident societies’) must be familiar with the Co-operative and Community Benefit Societies Act 2014 (CCBSA14).

Becoming effective on 1 August 2014, the CCBSA14 consolidated and therefore replaced the:

• Industrial and Provident Societies Act 1965 (IPSA65);• Industrial and Provident Societies Act 1967 (IPSA67);• Friendly and Industrial and Provident Societies Act 1968 (FIPSA68); • Industrial and Provident Societies Act 1975 (IPSA75);• Industrial and Provident Societies Act 1978 (IPSA78);• Industrial and Provident Societies Act 2002 (IPSA02); and• Co-operatives and Community Benefit Societies Act 2003 (CCBSA03).

The Co-operative and Community Benefit Societies and Credit Unions Act 2010 (CCBSCUA10) was also mainly repealed for registered societies, although certain sections remain effective for credit unions.

A key Statutory Instrument (SI) for what were industrial and provident societies was the Deregulation (Industrial and Provident Societies) Order 1996 (SI 1996/1738). This allowed industrial and provident societies and other societies registered under the Friendly Societies Act 1974 to opt out of audit where certain conditions are met. This SI has also been consolidated into the CCBSA14 for registered societies, although remains effective for other societies registered under the Friendly Societies Act 1974 (see chapter 3). The opt out audit rules have been updated through The Co-operative and Community Benefit Societies Act 2014 (Amendments to Audit Requirements) Order 2018 (SI 2018/322) which came into force on 6 April 2018. See chapter 7 of these guidance notes for details.

A copy of the CCBSA14 can be found at www.legislation.gov.uk/ukpga/2014/14/contents.

2.3 Co-operative and Community Benefit Societies Act 2014

All societies that were previously registered under the IPSA65 or its predecessors are automatically now registered under the CCBSA14. Schedule 3 of the CCBSA14 includes provisions for certain ‘pre-commencement societies’.


http://www.legislation.gov.uk/ukpga/2014/14/contents

http://www.fca.org.uk/your-fca/documents/forms/registering-a-new-industrial-and-provident-society-notes

https://www.fca.org.uk/firms/registered-societies-introduction/co-operative-community-benefit-societies-act-2014

As noted above, any new societies registered on or after 1 August 2014 will now be registered as either a ‘co-operative society’ or a ‘community benefit society’ (see paragraph 2.1).

Section 1 of the CCBSA14 states that in the Act ‘registered society’ means:

• a society registered under this Act on or after 1 August 2014; or• a society that immediately before August 2014 was registered, or treated as registered, under the Industrial and Provident Societies Act 1965.

Therefore ’old’ industrial and provident societies and ‘new’ co-operatives or community benefit societies are subject to the same legislation set out the in CCBSA14 and in that legislation are all referred to as ‘registered societies’.

Most of the provisions of the new Act apply to England and Wales and Scotland. Section 142 of the new Act applies relevant provisions to any Northern Ireland societies that choose to record their rules with the FCA so as to conduct business in Great Britain in respect of that business. Also:

• chapter 1 of Part 5 extends to England and Wales only;• chapter 2 of Part 5 extends to Scotland only;

1. the following provisions also extend to Northern Ireland:2. section 153 (extent);3. sections 136, 147, 154 and 155;4. Schedule 5.

2.4 New registrations and rules

A society for carrying on any industry, business or trade (including dealings of any kind with land) which meets the conditions in section 2(2) of the CCBSA14 may register under the Act as a co-operative society or as a community benefit society.

Under section 2(2) CCBSA14 the conditions are:

a. that it is shown to the satisfaction of the FCA:1. in the case of registration as a co-operative society, that the society is a bona fide co-operative society; or2. in the case of registration as a community benefit society, that the business of the society is being, or is intended to be, conducted for the

benefit of the community;b. that:

1. the society has at least three members, or2. the society has two members both of which are registered societies;

c. that the society's rules contain provision in respect of the matters mentioned in section 14 CCBSA14 (this section sets out the minimum content of a society’s rules); and

d. that the place that under those rules is to be the society's registered office is in Great Britain or the Channel Islands.

Per section 2(3) CCBSA14 - For the purposes of 2(2)(a)(i) a co-operative society does not include a society that carries on, or intends to carry on, business with the object of making profits mainly for the payment of interest, dividends or bonuses on money invested or deposited with, or lent to, the society or any other person.

To become registered, a society must have at least three members, or two members where both are registered societies themselves.

A registered society is by virtue of its registration a body corporate (by its registered name), with limited liability.A registered society must have a set of rules, which must be registered with the FCA, and which bind the society and all of its members.These rules represent the constitution of the society and are important in setting out how the society will interact with the outside world, as well setting out the legal relationship between the society and its members.

The CCBSA14 is not prescriptive in the way that the Companies Act is, in that it does not set out model rules that can be adopted.The CCBSA14 (the Act) largely allows societies to adopt whatever rules they wish.There are however, minimum requirements set out in the Act as regards the rules as well as other requirements, including:

• the last word in the name of every registered society must be ‘limited’ or if the society's rules state that its registered office is to be in Wales, either limited or cyfyngedig However, where the FCA is satisfied that a registered society's objects are wholly charitable or benevolent, it may register the society by a name which does not end in limited (or the Welsh equivalent).

s10 CCBSA14

• the registered name must appear on business correspondence and documentation, cheques etc. on the society's websites and outside of the registered office and every other office or place of business;

s11 CCBSA14

• a charitable society whose registered name does not include the word charity or charitable (or Welsh equivalent as applicable) must state the fact that it is a charity in business correspondence and documentation, cheques etc. and on the society's websites;

s12 CCBSA14

• a society's rules provide for, amongst others, its objects, a committee (by whatever name) and for managers or other officers, as well as for audit;

s14 CCBSA14

• changes to a society's rules are not valid until the amendment is registered under the CCBSA14, therefore a registered society must give the FCA two copies of any amendment to its rules, signed by the society’s secretary and by three of its members (unless both or all of its members are registered societies, in which case the secretaries of two of the societies must sign the amendment). If the FCA is satisfied that the amendment is not contrary to the provisions of the Act, it will register the amendment and provide the society with an acknowledgement of the registration of the change;

• the FCA must be informed of any change in name or registered office;

s16 CCBSA14

• maximum interests in a society’s withdrawable shares for members;

s24, s25 CCBSA14

• to keep a register of members and officers at the registered office.

s30 CCBSA14

As regards membership, those under 18 may be a member, unless the rules of the society state otherwise. Bodies corporate may also be members.

A co-operative or community benefit society may register using its own rules or it may use model rules. Model rules are produced by sponsoring bodies, a list of which can be found at www.fca.org.uk/your-fca/documents/forms/model-rules-sponsors-list. Registration fees vary depending on whether model rules are being used and if so, how many changes are made to these.


http://www.fca.org.uk/your-fca/documents/forms/model-rules-sponsors-list

Developments in 2014 allow registered societies to submit electronic copies of registration documents to the FCA.

SI 2014/184The Industrial and Provident Societies and Credit Unions

(Electronic Communications) Order 2014

Rule amendments are not valid until the FCA has registered them.

2.5 Accounts, audit and annual returns

Part 7 of the CCBSA14 sets out the requirements for accounts and audit. For previous industrial and provident society clubs, these had been mainly contained in the Friendly and Industrial and Provident Societies Act 1968. It is worth noting that the CCBSA14 does not contain detailed statutory rules for the format and content of accounts in the same way that the Companies Act does.

Accounts must, however, be produced in accordance with the CCBSA14 and with the clubs own rules. They must give a true and fair view and should therefore be prepared in accordance with generally accepted accounting practice, often Section 1A of FRS 102. In practice, this means that in many ways a clubs accounts look similar to a limited companys accounts. Clubs that are affiliated to a sponsoring body may also have specific requirements to follow.

Accounts must be signed by the secretary and two other members of the committee acting on behalf of the committee.Accounts should not be published unless they are accompanied by an audit or reporting accountants report where applicable.

The Annual Return applicable to clubs registered under the CCBSA14 (AR30) and its supporting Notes can be found on the FCA’s website . A copy of the accounts, including original signatures and the auditor’s or reporting accountant’s report (as necessary), should be submitted with the annual return.

The accounts, audit and annual return provisions of the CCBSA14 can be found in Part 7 of the Act. Some of the key provisions are as follows:

Section 75 CCBSA14 - Duty to keep books of account etc.

1. A registered society must ensure that proper books of account are kept with respect to its transactions and its assets and liabilities.2. The duty under subsection (1) includes a duty to ensure that there are kept such books as are necessary to:

1. give a true and fair view of the state of the society's affairs; and2. explain its transactions.

3. A registered society must establish and maintain a satisfactory system of control of its:1. books of account,2. cash holdings, and3. receipts and remittances.

Section 79 CCBSA14 - Duty to prepare revenue accounts

1. A registered society must ensure that there is prepared, in respect of each year of account:1. a revenue account for that year which deals with the society's affairs as a whole; or2. two or more revenue accounts for that year which deal separately with particular businesses carried on by the society.

Section 80 CCBSA14 - Accounts and balance sheets to give a true and fair view

1. A revenue account of a registered society must give a true and fair view of:1. the income and expenditure of the society as a whole (if the account deals with the society's affairs as a whole); or2. the income and expenditure of the society in respect of a particular business carried on by it (if the account deals with that business),for the

period to which the account relates.2. Where two or more revenue accounts are prepared in respect of a registered society for a year of account (see section 79(b)), the accounts when

considered together must give a true and fair view of the income and expenditure of the society as a whole for that year.3. A balance sheet of a registered society must give a true and fair view of the state of the society's affairs as at the date of the balance sheet.

[NB. Legislation continued but not fully reproduced here.]

Section 81 CCBSA14 - Duty to display latest balance sheet at registered office

A registered society must, at all times, display a copy of its latest balance sheet in a conspicuous position at its registered office.

Section 82 CCBSA14 - Restrictions on publication of accounts and balance sheets

A registered society must not publish a revenue account or balance sheet unless the account or balance sheet complies with such of the requirements set out in the following table as apply in relation to it.

Accounts and balance sheets to which requirement applies Requirement

1 Any revenue account or balance sheet

Must be signed by:

1. the society's secretary: and2. two members of its committee, acting on behalf of the

committee.

2Year end revenue account or balance sheet, where section 83 (duty to appoint auditors) applies to the society for the relevant year of account

Must:

1. have been audited by the auditors appointed under section 83, and

2. incorporate a report by them stating whether, in their opinion, it complies with section 80(1) or (3) (true and fair view).

3Year end revenue account or balance sheet, where section 85 (duty to obtain report in certain cases where section 83 disapplied) applies to the society for the relevant year of account

Must:

1. have obtained a report under section 85(2)(a) on it, and2. incorporate so much of the report as relates to it.

This ceases to apply if a direction under section 86 is made in respect of the relevant year of account.

[NB. Table continued in the legislation but not fully reproduced here]

Section 83 CCBSA14 - Duty to appoint auditors


http://www.legislation.gov.uk/ukpga/2014/14

https://www.fca.org.uk/firms/annual-returns-accounts-mutual-societies

https://www.fca.org.uk/firms/annual-returns-accounts-mutual-societies

1. In each year of account, a registered society must (subject to subsection (2)) appoint one or more qualified auditors to audit its accounts and balance sheet for that year.

2. If the society is a small society for the year of account, it must:1. make an appointment under subsection (1) for that year; or2. appoint two or more persons who are not qualified auditors to audit its accounts and balance sheet for that year.

3. The FCA may give a direction to a society that is a small society for the current year of account, requiring it to make an appointment under subsection (1) for that year.

4. For the purposes of this Part a registered society is a “small society” for a year of account if:1. the total amount of its receipts and payments in respect of the preceding year of account did not exceed £5,000;2. it had no more than 500 members at the end of that year; and3. the total value of its assets at the end of that year did not exceed £5,000.

5. The Treasury may by regulations:1. substitute for any sum or number for the time being specified in subsection (4) such other sum or number as the Treasury consider

appropriate;2. prescribe what receipts and payments of a society are to be taken into account for the purposes of that subsection. The regulations may

make different provision for different cases or circumstances.6. This section is subject to section 84 (power of certain societies to disapply this section).(See chapter 7 of these guidance notes.)

Qualified auditor above means eligible for appointment as a statutory auditor under Part 42 of the Companies Act 2006. The auditor cannot be an employee or officer of the society (or its holding or subsidiary society) or an employee, employer or partner of a society employee or officer.

2.6 Group accounts

Whilst still not setting out formats for group accounts, the CCBSA14 does provide more detail in respect of group accounts. These are required where a parent society has one or more subsidiaries at the end of the year. The group accounts must be audited and then sent to the FCA.

The primary applicable legislation for group accounts can be found in sections 98 to 101 of the CCBSA14.

2.7 Financial reporting standards

FRS 102 Section 1A for Small Entities

FRS 102 Section 1A paragraph 1A.4 confirms that section 1A applies to all small entities applying the small entities regime, whether or not they report under the company law. For those small entities that do not report under company law (ie. a large proportion of clubs), they shall comply with the requirements of Section 1A, and with relevant small company regulations where referred to in Section 1A, except to the extent that those requirements are not permitted by the small entity’s legal reporting framework.

Under Section 1A, the financial statements must give a true and fair view of the assets, liabilities, financial position and profit or loss of that small entity. Section 1A allows small entities three choices for preparing their accounts:

• full accounts (based on company law formats);• abridged accounts; and• adapted accounts.

An abridged profit and loss account (income and expenditure account) does not require the disclosure of turnover and cost of sales but instead the first required line is gross profit / (loss). Given that clubs registered under either the CCBSA14 or the Friendly Societies Act 1974 must submit an annual return which requires the disclosure of turnover, the question of suitability regarding the preparation of an abridged profit and loss account would need to be considered in light of the accounts showing a true and fair view.

A similar issue arises with the balance sheet, as an abridged balance sheet does not require the breakdown of a number of assets and liabilities but yet again the respective annual returns for clubs registered under CCBSA14 or the Friendly Societies Act 1974 do require a number of these figures. As such the option of both an abridged profit and loss account and an abridged balance sheet is scoped out of the Mercia Clubs Manual, as although it is possible for a club to prepare abridged accounts, careful consideration will always be required as to whether the accounts show a true and fair view. There is an added complication as to how a club would gain consent from its members regarding the preparation of abridged accounts (NB. Under company law, abridged accounts can only be prepared when all members of the company have consented to the abridgement).There is some guidance in paragraph A4.11E of FRS 102.

Where a small club chooses to adapt the format of its income and expenditure account, as a minimum the headings must include (where relevant): income, finance costs, share of the profit or loss of investments in associates and joint ventures, surplus / deficit or loss before taxation, tax expense excluding tax allocated to other comprehensive income or equity, and the surplus / deficit. A small club may also include additional line items and amend the descriptions used above (see FRS 102 1AB), and the ordering of items, when this is necessary to explain the elements of financial performance, providing the information given is at least equivalent to that required by the format had it not been adapted. Additional line items may, for example, analyse income by type (eg. subscriptions, advertising, donations, etc.) and provide greater detail on the types of expenditure incurred.

The micro-entity regime under FRS 105 is only available to companies, limited liability partnerships and qualifying partnerships. Clubs registered under CCBSA14 are therefore not permitted to apply the micro-entities regime.


3 Clubs registered under The Friendly Societies Act 1974

3.1 Introduction

While ‘other societies’ such as clubs as well as ‘friendly societies’ may be registered under the Friendly Societies Act 1974, it is important to make the distinction between a ‘friendly society’ and an ‘other society’ such as a working men’s club. Friendly societies are subject to more legislation and their accounting and auditing requirements stem from the Friendly Societies Act 1992. The accounting and auditing requirements of clubs are contained in the Friendly Societies Act 1974 and these are very similar to those contained in the Co-operative and Community Benefit Societies Act 2014.

The key legislation for clubs registered under the Friendly Societies Act 1974 is:

• Friendly Societies Act 1974 (FSA74); and• The Deregulation (Industrial and Provident Societies) Order 1996 (SI 1996/1738) (see chapter 7).

3.2 Friendly Societies Act 1974 (FSA74)

Societies which may be registered under the 1974 Act are as follows:

• friendly societies for the purpose of providing, by voluntary subscriptions of the members, any of the purposes specified in Schedule 2 to the Friendly Societies Act 1992 (eg. maintenance, death, unemployment); and

• other societies including:5. Cattle Insurance Societies for the purpose of insurance to any amount against loss of cattle, sheep, lambs, swine, horses and other

animals by death from disease or otherwise;6. Benevolent Societies for any benevolent or charitable purpose;7. Working men's clubs for purposes of social intercourse, mutual helpfulness, mental and moral improvement and rational recreation;8. Old People's Home Societies for the purpose of providing homes for members and others at any age after fifty; and9. Specially Authorised Societies” for any purpose which the Treasury may authorise as a purpose to which the provisions of this Act, ought

to be extended.

A friendly society registered under the 1974 Act is an unincorporated association of individuals. As such it does not have a separate legal ‘personality’; it is not a body corporate. This has a number of consequences, including that the society’s assets have to be held in the names of its trustees and that the society cannot form or acquire any subsidiaries.

To register under the Act, the rule book must comply with the Act’s requirements. There must be at least seven members. The Act also requires every society to have one or more trustees.;

Since the introduction of the Friendly Societies Act 1992 no new society registrations have been accepted under the 1974 Act. However, there are many old clubs that remain registered under this legislation.

3.3 Audit and accounting requirements

Clubs registered under the 1974 Act are subject to the audit and accounts requirements of the 1974 Act and are required to:

• keep proper books of account;• establish and maintain a satisfactory system of control of the society’s books of account, its cash holdings and all its receipts and payments;• prepare a revenue account and balance sheet showing a true and fair view and signed by the Secretary and two committee members; and• only publish accounts incorporating an audit report or, where a disapplication under section 32A(1) of the Act is in force (see chapter 7 of these

guidance notes) a reporting accountant’s report.

The sections of the Act that cover accounts, audit and auditors are 29 to 40, with annual returns being dealt with in sections 43 to 44.

Annual return

A club registered under the Friendly Societies Act 1974 must submit an annual return (AR 41) to the FCA including:

• a set of printed accounts; and• a copy of the audit report or reporting accountant’s report as applicable.

There is an information guidance note that supports the annual return.

The return must be submitted by 31 July. A copy must be supplied, on demand, to any person with an interest in the funds of the society.

Annual accounts

Accounts must be produced in accordance with the FSA74 and the club’s own rules. They must give a true and fair view and should therefore be prepared in accordance with generally accepted accounting practice.

The FCA has the power to determine the form and content of the accounts and the annual return includes a section on compliance with the ‘Disclosure requirements for the accounts of a Working Men’s Club registered under FSA74’ (R/FS/AR 41D).

Where the accounts submitted to the FCA have not been produced to a minimum standard a supplementary return (R/FS/AR 42) must be submitted. This essentially requires the same disclosures as those required by (R/FS/AR 41D).

The annual return, information note, disclosure requirements and the supplementary return are available on the FCA’s website.

The accounts must be signed by the secretary and two other members of the committee acting on behalf of the committee. Accounts should not be published unless they are accompanied by an audit or reporting accountant’s report where applicable.

3.4 Financial reporting standards

Section 1A of FRS 102 for Small Entities

FRS 102 Section 1A paragraph 1A.4 confirms that section 1A applies to all small entities applying the small entities regime, whether or not they report under the company law. For those small entities that do not report under company law (ie. a large proportion of clubs), they shall comply with the requirements of Section 1A, and with relevant small company regulations where referred to in Section 1A, except to the extent that those requirements are not permitted by the small entity’s legal reporting framework.

Under Section 1A, the financial statements must give a true and fair view of the assets, liabilities, financial position and profit or loss of that small entity. Section 1A allows small entities three choices for preparing their accounts:

• full accounts (based on company law formats);• abridged accounts; and• adapted accounts.


https://www.the-fca.org.uk/mutual-societies-annual-returns-and-accounts?field_fcasf_sector=271&field_fcasf_page_category=unset

An abridged profit and loss account (income and expenditure account) does not require the disclosure of turnover and cost of sales but instead the first required line is gross profit / (loss). Given that clubs registered under either the CCBSA14 or the Friendly Societies Act 1974 must submit an annual return which requires the disclosure of turnover, the question of suitability regarding the preparation of an abridged profit and loss account would need to be considered in light of the accounts showing a true and fair view.

A similar issue arises with the balance sheet, as an abridged balance sheet does not require the breakdown of a number of assets and liabilities but yet again the respective annual returns for clubs registered under CCBSA14 or the Friendly Societies Act 1974 do require a number of these figures. As such the option of both an abridged profit and loss account and an abridged balance sheet is scoped out of the Mercia Clubs Manual, as although it is possible for a club to prepare abridged accounts, careful consideration will always be required as to whether the accounts show a true and fair view.

There is an added complication as to how a club would gain consent from its members regarding the preparation of abridged accounts (NB. Under company law, abridged accounts can only be prepared when all members of the company have consented to the abridgement).There is some guidance in paragraph A4.11E of FRS 102.

Where a small club chooses to adapt the format of its income and expenditure account, as a minimum the headings must include (where relevant): income, finance costs, share of the profit or loss of investments in associates and joint ventures, surplus / deficit or loss before taxation, tax expense excluding tax allocated to other comprehensive income or equity, and the surplus / deficit. A small club may also include additional line items and amend the descriptions used above (see FRS 102 1AB), and the ordering of items, when this is necessary to explain the elements of financial performance, providing the information given is at least equivalent to that required by the format had it not been adapted. Additional line items may, for example, analyse income by type (eg. subscriptions, advertising, donations, etc.) and provide greater detail on the types of expenditure incurred.

The micro-entity regime under FRS 105 is only available to companies, limited liability partnerships and qualifying partnerships. Clubs registered under the FSA74 are therefore not permitted to apply the micro-entities regime.


4 Other types of Club

4.1 Clubs formed under company law

Clubs formed under company law are likely to be companies that are limited by guarantee and may have a charitable objective. They are governed by the Companies Act and therefore such a club must follow the required formats for its primary statements, although the profit and loss account would normally be replaced by an ‘income and expenditure’ account. This is because a members’ club as defined in this manual would not be trading for ‘profit’ in the normal sense that a commercial company would. Therefore any reference to a ‘profit and loss account’ would normally be to an ‘income and expenditure account’ and references to ‘profit’ and/or ‘loss’ would be to ‘surplus’ and/or ‘deficit’. See paragraph 2.7 above and example accounts for comments on this and adapting formats.

Other points to note for such clubs are:

• Shareholders’ funds - there are no ‘shareholders’ in a company limited by guarantee, instead they have ‘members’.• Directors’ report - a ‘directors’ report’ in the appropriate statutory format is required, even where the committee members are not generally referred to

in this way. (For not small limited company clubs a strategic report would also be required.)• Auditor’s report - the report should be addressed to the ‘members’.• Accounting practice - UK GAAP should be applied (FRS 102), as can small company exemptions. IFRS could be applied, as long as the company

is not a charitable company. Small companies will apply FRS 102, although section 1A (small company disclosures) can be used. • Name - Providing the Articles contain specified charitable objectives, the club can dispense with the word 'limited' at the end of its name.

4.2 Registered charities

A club which is a registered charity must have regard to the Charities SORP. If an independent examination is to be undertaken, guidance should be sought from the Charity Commission publication 'Independent Examination of Charity Accounts: Examiners Guide (CC32) (England and Wales).

At the time of going to print, if a charitable society is registered under FSA74 or CCBSA14 then it is currently exempted from registration with the Charity Commission and from certain accounting and reporting provisions of the Charities Act (eg. they do not need to file their accounts with the Charity Commission). Such charitable societies submit their financial statements to the Financial Conduct Authority instead. This aspect of regulation is, however, currently under review and CC23 – Exempt charities (Annex 1) highlights that “no firm decision has been made on the future regulation of community benefit societies and friendly societies as charities; one possibility is that those which are registered social housing providers may remain exempt whilst others may lose their exemption if no suitable principal regulator can be found”.

4.3 Unincorporated, unregistered members’ clubs

A group of people may join together to create a club that is not formed under any legislation at all. The club in this instance would be governed by its own set of rules. It would not have a separate legal identity, distinct from its members and therefore any liabilities incurred may be the responsibility of all of the members in equal shares. Examples of such clubs may be sports clubs, such as golf clubs, or trades or works clubs.

It will be the requirements of the rule book in such clubs that establishes the need for scrutiny of the accounts rather than the normal requirements of statutory legislation. If the accounts are required to show a ‘true and fair’ view then compliance with UK generally accepted accounting practice would be normal.


https://www.gov.uk/government/publications/exempt-charities-cc23

5 Accounting systems and internal controls in Clubs

5.1 General

Clubs registered under the Co-operative and Community Benefit Societies Act 2014 (CCBSA14) or the Friendly Societies Act 1974 (FSA74) are required to:

• keep proper books of account with respect to transactions, assets and liabilities; and• establish and maintain a satisfactory system of control of books of account, cash holdings and all receipts and payments.

Clubs incorporated under the Companies Act are required to maintain adequate accounting records to:

• show and explain the company’s transactions;• disclose with reasonable accuracy at any time the financial position of the company at that time; and• enable the directors to ensure the financial statements comply with the requirements of the Companies Act 2006.

5.2 Accounting records

Clubs require the normal books and records relevant to any business, although they are of course, predominantly cash businesses. This emphasises the need to have adequate control systems in place. Books of prime entry should record the takings. Other relevant non financial information for all sources of revenue should also be recorded, eg. meter readings on games machines. The following records are relevant to the particular sources of income for clubs:

• bar turnover: daily takings book, till rolls, goods received book, order book and stock reports;• subscriptions: members' register recording receipt of subscriptions;• games machines: recorded takings book, and meter reading book;• door money takings: tickets reconciled to income recorded;• tote, raffles and bingo: tickets reconciled to income recorded;• miscellaneous income (eg. phones, cigarette machines, pool tables): recorded takings book and meter reading book; and• subsidiary funds': all subsidiary funds should maintain a record of transactions.

5.3 Internal controls

Internal controls are required so that the club’s management can ensure:

• all transactions are correctly recorded;• assets are safeguarded; and• accounting records are properly maintained.

The CCBSA14 and the FSA74 require the auditor to carry out such investigations that allow the formation of an opinion as to whether:

• proper books of account have been kept by the society in accordance with the requirements of the legislation; and• a satisfactory system of control over transactions has been maintained by the society in accordance with the requirements of the legislation.

5.4 Management committee

The management committee of members' clubs generally elects a finance committee to undertake the regular review of the club's financial activities. This, in many clubs, is the key aspect of internal control. Best practice suggests that the finance committee should have controls in place for bar trading, all cash takings and over cash floats.

5.5 Examples of controls

Below are some area’s of a club’s activities where systems and controls should be considered, together with some suggestions as to the types of controls which may be appropriate.

Computer systems

Objectives to ensure that:

• Software and systems are reliable and operate properly.• Unauthorised amendments may not be made to programs.

Factors to consider:

1. Use of standard well known software packages.2. Your knowledge and experience of their use.;3. Availability of a complete hard copy audit trail.4. Access procedures and controls.5. Use of batch controls.6. Adequacy of back-up procedures.;7. Contingency plans in the event of a major breakdown.

Cash receipts

Objectives to ensure that:&

• All income is recorded fully and properly.


1. Post opening procedures.2. Prompt banking of all cash.3. Suitable records exist to reconcile the takings to the bankings.4. Recording of cash takings in books of prime entry and countersignature by the officers responsible for collection of the takings.&5. Evidence of the transfer of cash from one person to another.;

Bar takings


• All bar takings are recorded fully and properly.



1. Agreement of till rolls to the takings on a daily basis.2. Review of the steward’s bar takings book and checking to till rolls, by an officer of the club on a regular basis.3. Checking of bar cash floats on a random basis by an officer of the club.4. There are monthly independent stocktakes reconciling sales to consumption.5. Management review of the stock reports and investigation of discrepancies.

Subscriptions


• All subscriptions are recorded accurately in the accounting system.• Subscriptions are collectable from members.;


1. Controls over and suitable recording of the membership records to ensure all members pay the correct subscription.2. Controls over the issue of membership cards.;3. Systems/procedures to identify non members using the facilities.

Gaming machines, pool and snooker income


• Procedures exist to control the maintenance and emptying of machines.• Income from machines is recorded fully and properly.


1. Security over the keys to the machines which prevents any one individual access to the machines’ takings.2. Emptying of the machines by at least two officers who sign the book of prime entry to record the takings.3. Rotation of officers emptying the machines.4. Reconciliation of meter readings to the takings.5. Regular review of the takings by management.

Games and entertainment


• Procedures exist to control the conduct of games and entertainment.• Income from games and entertainment is recorded fully and properly.

Factors to consider:;

1. Numerical sequence controls for games and entertainment.2. Sufficient 'hands on' involvement of management and members in the conduct of the games and entertainment to identify any discrepancies between

recorded and actual takings.3. Regular review of the games and entertainment results by management.

Other income


• All other income is recorded fully and properly.


1. Systems are in place to ensure all other sources of income are properly accounted for. Consider:1. fees, including for guests;2. food;3. investment income; and4. other income.

2. Recording of the above in a book of prime entry signed by officers of the club.

Expenditure and creditors

Objectives to ensure that::

• Only valid purchases and expense costs are incurred.• All liabilities are recorded.


1. Approval of purchase orders.2. Checking procedures for invoices eg. use of a grid stamped on each invoice and credit note indicating the checks carried out. (If so list checks done.)3. Approval of invoices and credit notes before payment.4. Checking delivery notes to the goods received and to the purchase invoice.&5. Preparation and follow up of monthly list of purchase ledger balances.6. Regular reconciliation of the purchase ledger control account.

Payments


• Payments are only made against valid documentation.• Payments are accurately recorded.

Factors to consider:;

1. Cheque signing procedures (ie. at least two club officers).2. Availability of supporting documents for nominal ledger payments. 3. Presentation to the cheque signatory of approved purchase invoices or other supporting documents for purchase ledger payments.4. Agreement of the wages cheque to the exact amount of the net wages.5. Presentation of the petty cash book to the cheque signatory at the time the petty cash cheque is drawn.6. Availability of supporting documentation for petty cash payments.


Wages, salaries and pensions

Objectives to ensure that:;

• Wages, salaries and pensions are only paid to valid employees at valid rates and in accordance with agreed terms of contracts.• Deductions are paid over promptly.• All liabilities for unpaid wages, salaries, pensions and related matters are included within the accounts.


1. Evidence to support time worked, piecework and calculations of gross pay.2. Authorisation of salary rates and changes by management.3. Adequacy of records for statutory maternity/paternity pay purposes.4. Adequacy of PAYE procedures.

Stocks


• Stock is physically controlled and identifiable for year end purposes.


1. The availability of reliable stock records. 2. Management knowledge of:

1. stocks held; and2. obsolete and damaged stock.

3. Control of stock levels. 4. Checking of goods received against delivery notes.5. Monthly independent stocktakes.


6 Audit requirements

6.1 Introduction

Where clubs that are registered under the CCBSA14 or the FSA74 require an audit, the auditor is required to report as to whether the financial statements show a true and fair view and comply with the provisions of the relevant Act. The same applies to limited company clubs.

6.2 True and fair view

All audits should follow the firm’s audit approach and the ISAs (UK).

6.3 Compliance with legislative reporting requirements

Generally the prescribed reporting requirements for societies registered under the CCBSA14 or the FSA74 are not onerous. A summary of the contents of the Acts is contained in chapters 2 and 3 above. Care must also be taken to ensure any guidance regarding disclosure issued by the FCA is being followed. The FCA is empowered by legislation to determine the form and content of a club’s financial statements.

6.4 Audit requirements for clubs registered under the CCBSA14 / FSA74

In accordance with the CCBSA14 / FSA74, the auditor should carry out such investigations as will enable an opinion to be formed as to whether:

• the financial statements give a true and fair view; and• have been prepared in accordance with the Co-operative and Community Benefit Societies Act 2014 / Friendly Societies Act 1974 (as applicable).

The auditor must also carry out such investigations that allow the formation of an opinion as to whether:

• the society has kept proper books and records;• the society has maintained a satisfactory system of control over its transactions; and• the accounts are in agreement with the books of account.

If the auditor is of the opinion that the above are not the case, this fact should be stated in the report.

If the auditor fails to obtain all the information and explanations which, to the best of their knowledge and belief, are necessary for the purposes of the audit, this fact should also be stated in the report.

6.5 The rights of auditors under the CCBSA14 and FSA74

The auditor of a club registered under the CCBSA 14 or the FSA74 shall:

• have a right of access at all times to the books and records;• be entitled to obtain from the officers of the society (or branch) such information and explanations necessary for the performance of the audit;• be entitled to attend any general meeting of the society and to receive all communications relating to general meetings; and• have a right to be heard at any meeting which they attend on any part of the business of the meeting which concerns them as auditor.

The relevant legislation can be found in sections 87 and 88 CCBSA14 or sections 38 and 39 FSA74 as applicable.

6.6 Auditor re-appointment and removal under the CCBSA14 and FSA74

The auditor will be automatically re-appointed for the current year of account unless:

• a resolution has been passed at a general meeting of the society appointing somebody instead or providing expressly that the auditor shall not be re-appointed, or disapplying section 83 of CCBSA14 / section 31 of FSA74 in relation to the current year of account;

• the auditor has given to the society notice in writing of unwillingness to be re-appointed; or• the auditor is ineligible for appointment as auditor of the society for the current year of account; or• the auditor has ceased to act as auditor of the society by reason of incapacity.

Therefore, the auditor will remain in office unless steps are taken to remove them. A society’s rules may also contain provisions relating to reappointment.

6.7 Restrictions on auditor appointment under the CCBSA14 and FSA74

An auditor of a club registered under the CCBSA14 or the FSA74 must be independent and the FRC Ethical Standard must be followed. The following specific requirements are also contained in the legislation. The auditor cannot be:

Club registered under the CCBSA14 (see s92 CCBSA14)

• an officer or employee of the society or any connected registered society;• an employee, employer or partner of a person above;• a person prohibited by section 1214 of the Companies Act 2006 (independence requirement) from acting as statutory auditor of a company that is a

subsidiary of the society.

For this purpose, a society is “connected with” another society if:

• one of them is a subsidiary of the other, or• they are both subsidiaries of another registered society.

Club registered under the FSA74 (see s37 FSA74)

• an officer or servant of the society or branch;• a partner of, or in the employment of, or who employs an officer or servant of the society or branch;

Note also that the original versions of FIPSA68 and FSA74 stated that a body corporate could not be appointed as auditor. This restriction has been removed by subsequent legislation but care should be taken to ensure that a club’s rules do not still prevent this by mirroring the original legislation if a firm is a limited company or an LLP.

6.8 The Clubs Manual

This manual provides guidance, completion, planning, fieldwork and permanent file documentation which has been tailored for the audit of a club. These guidance notes assume a user is already familiar with the firm's approach to auditing, as set out in its audit procedures manual and generally only provides guidance on matters specific to the audit of clubs and specific documentation contained in the manual.

The documentation can be used for the audit of any club where there is a requirement to give a 'true and fair' opinion for members’:


• clubs registered under the CCBSA14;• clubs registered under the FSA74;• clubs which are limited companies under the Companies Act, in particular those which are limited by guarantee; and• clubs which are unincorporated and unregistered where the club’s rules require a 'true and fair' audit.

6.9 The audit of clubs

As noted above, the audit of a club should follow the firm’s usual audit approach, ensuring compliance with the ISAs (UK). Below we have set out guidance that complements the firm’s approach in relation to audit of a club and includes guidance on some of the special features of the audit of a club. For full guidance on the firm’s audit approach reference should be made to the firm’s audit procedures manual.

NB. Practice Note (PN) 20 - The audit of Insurers in the United Kingdom (revised) contains detailed explanations of the legislative framework which friendly societies operate within and provides guidance on the application of auditing standards to the audit of friendly societies carrying on insurance business in the UK. This PN does not apply to the audit of other societies, eg. working men’s clubs, registered under the 1974 Act.

6.10 The FRC Ethical Standard

In December 2019, the FRC published the FRC Revised Ethical Standard (2019) which is mostly effective from 15 March 2020. Audits for periods commencing before this date are conducted in accordance with the Ethical Standard 2016. The firms detailed ethical policies and procedures should always be adhered to.

The requirements of the FRC Ethical Standard is effective for audits of clubs financial statements in the same way as it is for private limited companies. It is structured as follows:

Part A:

• Overarching Principals and Supporting Ethical Provisions

Part B:

• Section 1: General Requirements and Guidance• Section 2: Financial, Business, Employment and Personal Relationships• Section 3: Long Association with Engagements and with Entities Relevant to Engagements• Section 4: Fees, Remuneration and Evaluation Policies, Gifts and Hospitality, Litigation• Section 5: Non-audit / Additional Services• Section 6: Provisions Available for Audits of Small Entities (PAASE) - see below for criteria

The FRC Ethical Standard imposes ethical requirements on firms of auditors and applies to all clubs audits undertaken in accordance with the ISAs (UK). Section 5 - Non-audit / Additional Services is likely to have the main impact on club audit assignments. In addition, section 6 - Provisions Available for Audits of Small Entities (PAASE) is also likely to be of relevance, as it provides alternative provisions for auditors of smaller clients. Remember, where advantage is taken of PAASE, this is sometimes disclosable in the audit report, with certain disclosures also required in the financial statements.

Ethical threats

Whilst all ethical threats must be identified and described, particular attention may need to be paid to the management and self review threats in a club. Problems may specifically arise as a result of the provision of accounting services and the lack of ‘informed management’.

The ES states that unless there is ‘informed management’ and there are appropriate safeguards there is a risk of the auditor taking a management role. Auditors of clubs should therefore record clearly on file who they believe is ‘informed management’ within the club where such threats arise. Where problems exist the provisions available for smaller entities may be useful.

Provisions Available for Audits of Small Entities (PAASE)

To qualify for PAASE, a club must be a 'small entity'. To be a 'small entity', a club which is a company would need to qualify as a small company under s382 of the Companies Act 2006. A non-company club which would qualify as a small company under s382 of the Companies Act 2006 if it were a company, would also be a 'small entity'.

PAASE contain an alternative provision and an exemption that may be relevant to the audit of a club in respect of the self review and management threats when providing non-audit services, depending on the presence of informed management or not. A full list of conditions, and other alternative provisions and exemptions available, can be found in the firm’s audit procedures manual.

It should be noted that if advantage is being taken of the alternative provision, no disclosure is needed in the audit report or in the notes to the accounts.Disclosure is required for the exemption where the audit firm is taking part of the role of management.

Disclosure Requirements

Where advantage has been taken of the exemption against the management threat in the provision of non-audit services, the Responsible Individual should ensure that:

• the audit report discloses this fact; and• either the financial statements or the auditor’s report discloses the type of non audit services provided.

The sample wording offered to include in the audit report is:

'We are independent of the club in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard, and the provisions available for small entities, in the circumstances set out in note [X] to the financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements.'

Sample wording that can be used to include in the note is:

'In common with many other clubs of our size and nature we use our auditors to prepare and submit returns to the tax authorities and assist with the preparation of the financial statements.'

Other PAASE exemptions are also available - see your audit procedures manual or section 6 of the FRC Ethical Standard for details.

6.11 Opening balances

For initial engagements, whether sufficient appropriate evidence can be obtained to confirm the club’s opening balances must be considered. Specifically, the following should be confirmed:

• that opening balances do not contain material misstatement affecting the current year’s figures; and• that appropriate accounting policies have been consistently applied or, when changed, have been properly accounted for and presented.


If a firm become auditors of a previously audited club there is no responsibility to re-audit the financial statements of the preceding period. The sufficiency and appropriateness of the audit evidence regarding opening balances required by the firm as incoming auditors depends on such matters as:

• the accounting policies followed by the club;• whether the preceding period's financial statements were audited and, if so, whether the auditor’s report was qualified;• the nature of the opening balances, including the risk of their misstatement; and• the materiality of the opening balances relative to the current period's financial statements.

For incoming auditors, normally the audit work on the current period provides evidence regarding opening balances. Other procedures which incoming auditors might perform include the following:

• requesting information from the predecessor auditor;• consultations with management and review of records, working papers and accounting and control procedures for the preceding period; and• substantive testing of any opening balances in respect of which the results of other procedures are considered unsatisfactory. Particular emphasis may

need to be given to such testing where the previous financial statements were unaudited.

When the previous period’s financial statements have not been audited, for example the club had taken advantage of audit exemption in the previous year, there needs to be disclosure in the audit report (in an ‘Other Matter’ paragraph) and financial statements that the comparatives are unaudited. In some instances where the incoming auditor is unable to gain evidence regarding opening balances it might be necessary to qualify the opinion on the results for the year, but not the state of affairs (ie. the balance sheet), due to a limitation of scope.

6.12 Consideration of laws and regulations in an audit of financial statements (ISA 250A)

Auditors must obtain a sufficient understanding of laws and regulations to identify and assess risk. It is not the auditors responsibility to prevent non-compliance with laws and regulations and auditors are not expected to detect non-compliance with all laws and regulation. Auditors should be chiefly concerned with areas that:

• directly affect amounts / disclosures in the financial statements;• may have a fundamental effect on operations of the club.

Auditors must obtain a general understanding of the legal and regulatory framework applicable to the entity and the industry or sector in which the entity operates and how the entity complies with that framework. These details are recorded on PF1-3 and appending schedules.

Beyond the risk assessment procedures, auditors must maintain professional scepticism and remain alert for the possibility of non-compliance or suspected non-compliance during the fieldwork and completion stages of the audit (prompted on A31). Certain procedures on significant laws and regulations are included on K section audit programmes (in this context, ‘Significant’ means those laws and regulations where non-compliance may have a material effect on the financial statements). Written representations from the client are obtained and confirm that they have disclosed all known or suspected instances of non-compliance with laws and regulations.

Beyond this however, in the absence of identified or suspected non-compliance, auditors are not required to perform any further procedures.

When actual or suspected non-compliance is discovered, we obtain an understanding of the nature of the act and the circumstances occurred and obtain any further information to evaluate the impact on the financial statements. We discuss this with the appropriate level of management and those charged with governance (unless prohibited by law or regulation) and consider the effects on our audit opinion. In doing so, we assess whether legal advice is required. In the rare situation where we are not provided with sufficient information, we will also consider whether we are required to report the non-compliance with appropriate authorities (eg. NCA) and we document this on A31.

Areas that may have a fundamental effect on the operations of a club include:

• Licensing legislation, in particular the Licensing Act 2003

Information available from:

https://www.gov.uk/alcohol-licence-your-area

https://www.gov.uk/alcohol-licensing including special rules for members’ clubs

https://www.gov.uk/alcohol-licensing#club-premises-certificates

• Gambling legislation, in particular the Gambling Act 2005


https://www.gov.uk/government/policies/regulating-gambling-in-great-britain-to-make-sure-it-is-run-responsibly-and-contributes-to-economic-growth and

http://www.gamblingcommission.gov.uk/for-licensing-authorities/GLA/Part-25-Clubs.aspx

• The Health Act 2006 (Smoke-free Regulations)


http://www.gov.scot/Publications/2005/12/21153341/33429

www.smokefreeengland.co.uk

• The Smoke-free Premises and Vehicles (Wales) Regulations 2018


https://gov.wales/sites/default/files/consultations/2018-05/smoke-free-regulations.pdf

Others may include:

Food safety and hygiene regulations: Food Standards Agency - www.food.gov.uk

Entertainment licences, such as performing rights www.prsformusic.com and www.ppluk.com

• The rules / constitution of the club itself and any affiliation that it may have.

When actual or suspected non-compliance is discovered, auditors must discuss this with management and consider the effects on the audit opinion.


http://www.ppluk.com/

http://www.prsformusic.com/

http://www.food.gov.uk/

https://gov.wales/sites/default/files/consultations/2018-05/smoke-free-regulations.pdf

http://www.smokefreeengland.co.uk/

http://www.gov.scot/Publications/2005/12/21153341/33429

http://www.gamblingcommission.gov.uk/for-licensing-authorities/GLA/Part-25-Clubs.aspx

https://www.gov.uk/government/policies/regulating-gambling-in-great-britain-to-make-sure-it-is-run-responsibly-and-contributes-to-economic-growth

https://www.gov.uk/alcohol-licensing#club-premises-certificates

https://www.gov.uk/alcohol-licensing

https://www.gov.uk/alcohol-licence-your-area

6.13 Internal controls

The understanding of the club's internal control systems is recorded on PF2. At the planning stage the record of the accounting system on the permanent file is reviewed and the auditor establishes the basic control procedures in operation by using knowledge and making enquiries of the club’s management. PF2-3 should summarise the key controls relevant to the audit identified in the system notes. Testing the design and implementation of key controls relevant to the audit (including observations, enquiries and inspections) will be undertaken for each key system every year. If it is concluded that there is low control risk, audit testing might be restricted to substantive analytical review (following ISA 520 requirements) or substantive test of detail and evidence gained from accounts preparation work.

Chapter 5 of these guidance notes discusses the controls that a club may typically have in place across its operations.

6.14 Materiality

Materiality and performance materiality limits are set at B41. These assist in planning the extent of the audit procedures to be undertaken. As most clubs seek to broadly match expenditure to income, the surplus before taxation is generally not a useful indicator for calculating materiality, neither is gross assets. Instead income may be the most appropriate measure of materiality but this will depend on individual circumstances. See Appendix I to these guidance notes for further guidance on completion of the B41 Materiality form.

6.15 Accounting estimates and work of experts

Whilst often unavoidable, the use of accounting estimates in the preparation of the accounts gives rise to increased risk of material misstatement. Accounting estimates are identified and assessed on the permanent file (form PF1-8). Examples of accounting estimates may include:

• outcomes of litigation;• provision of doubtful debts;• stock provisions;• depreciation method / asset life;• provisions against investments when not held at fair value;• costs arising from legal settlements / judgments;• complex financial instruments held at fair value (eg. derivatives such as interest rate swaps);• property held for disposal.

Therefore during risk assessment procedures, the auditor must gain sufficient understanding of the client’s use of accounting estimates. The focus should be on estimates with a high level of estimation uncertainty. Examples of situations where there is relatively low estimation uncertainty include non-complex business operations, routine transactions, simple methods of estimation or well established models used to make the estimation.

The club auditor should also assess the degree to which assumptions may be biased by managers of the club.

An expert is an individual or organisation with expertise in a field other than auditing. In order to comply with ISA (UK) 500 Audit Evidence to the extent necessary, taking into account the significance of the expert’s work for the purposes of the audit, the auditor shall:

• obtain an understanding of the work performed;• evaluate their competence, capabilities and objectivity; and• evaluate the appropriateness of the work in relation to the relevant audit assertion.

This information and evaluation is recorded on PF1-7 and appending schedules, as part of work performed to understand the entity and its environment driven from the completion of PF1-1/2.

[For periods commending on or after 15 December 2019 only] In December 2018, the FRC issued a revised ISA (UK) 540 on Accounting Estimates, to reflect changes made by the IAASB to this standard. The new standard takes effect for audits of financial statements for periods beginning on or after 15 December 2019, although early adoption is permitted.

The revised standard is a complete overhaul of the previous version and introduces a number of key changes to the approach that must be followed when auditing all types of accounting estimate and the associated financial statement disclosures. These changes strengthen the audit of what can be a difficult area.

In order to reflect the requirements of the revised standard, the audit methodology now places greater emphasis on the documentation of our understanding of accounting estimates, and the risks they present, and there is a revision to the workflow of key accounting estimates.

For each individual key accounting estimate that is identified using PF1-8 at the planning stage, we also complete a supporting Key Accounting Estimates Summary at B30X to document the risk assessment process specific to that estimate, along with the proposed audit procedures to be performed in response to the assertion risks that are identified. We replace the ‘X’ in B30X with a corresponding page number, eg. if there are three key accounting estimates, then we will complete three B30Xs, referenced at B30A, B30B and B30C.

To complete our risk assessment at the planning stage, we detail whether the key accounting estimate poses a significant risk of material misstatement. If so, the risk will also need to be documented on the Risk Assessment at B32.

Having identified the key areas of risk, we determine what our audit approach will be in response. The planned approach will be documented in full on the key accounting estimates audit plan at B33/Q2 and a Q audit programme must be tailored for each key accounting estimate and completed during the fieldwork stage of the audit. More detailed guidance on the use of the B33 forms to document the audit approach is provided in Appendix II to these guidance notes. The Q audit programme on key accounting estimates is designed to ensure that the detailed requirements of ISA 540 are being complied and that sufficient appropriate audit evidence has been obtained that enables us to be able to draw a conclusion on the reasonableness of the key accounting estimate, regardless of the approach that is being followed to test the accounting estimate.

We then consolidate all our individual accounting estimate work to formulate an overall conclusion for accounting estimates on the A44.

See ISA s (UK) 500, 540 and 620 and your firm's audit procedures manual for further guidance. Guidance on completing the substantive sampling form can be found within Appendix III.

[For periods commending before 15 December 2019 only] Having assessed risks using planning form B32, materiality and considered the use of analytical procedures etc. auditors should prepare an overall plan using planning forms B33, and then tailor the audit programmes to the club. More detailed guidance on the use of the B33 forms to document the audit approach is provided in Appendix II to these guidance notes.

See ISA s (UK) 500, 540 and 620 and your firm's audit procedures manual for further guidance.

6.16 Going concern

[For periods commending on or after 15 December 2019 only] In September 2019, the FRC issued a revised version of ISA (UK) 570 on Going Concern, which is effective for audits of financial statements commencing on or after 15 December 2019, although early adoption is permitted. These revisions are in response to a number of recent audit failures regarding going concern, with the requirements of the new standard being much more prescriptive. Accordingly, a number of changes have been made throughout the manual to reflect these requirements and, again, there is a revision to the workflow and a number of new documents, most notably the creation of a going concern audit programme (R audit programme) within field work and a new permanent file document (PF1-10).


An understanding of the entity and its environment in relation to going concern is considered on PF1-10 and then an initial risk assessment is made at the planning stage on B31, although we should always be alert to additional events or conditions which may cast significant doubt on the entity’s ability to continue as a going concern throughout the audit. An audit plan is included at B33 / R2 and an audit programme is included for section R along with update and evaluation procedures at the completion stage at A42.

See ISA 570 and your firm's Audit Procedures Manual for further details.

[For periods commending before 15 December 2019 only] A preliminary assessment of going concern is required on the B31 and then a going concern work programme is completed at A42.


6.17 Subsequent events

[For periods commending on or after 15 December 2019 only] In addition to the going concern audit programme within fieldwork, a subsequent events audit plan is included at B33 / S2 and a subsequent events audit programme (S audit programme) has been added to fieldwork to give the same level of prominence. An update and subsequent evaluation of the work is recorded at A41.


[For periods commending before 15 December 2019 only] A subsequent events work programme is completed at A41.


6.18 Audit evidence (ISAs 500, 520, 530)

In undertaking the audit work the firm's normal procedures and compliance with International Standards on Auditing (UK) apply.

Generally good audit evidence can be derived from substantive analytical procedures (following the requirements of ISA 520) for clubs, as there are several relationships between different figures within a club's financial statements which can provide a substantial amount of audit evidence:

• A proof in total approach can be applied to subscription income using membership records and subscription rates.For clubs with subscription periods not coinciding with the financial year this also provides evidence on the deferred income figure.

• The pricing policy noted from management minutes provides evidence for the gross profit percentage on bar takings.The gross profit per the monthly stock reports net of cleaning and spillage allowances should agree to the gross profit per the financial statements.Recorded bar income and purchases can be reconciled to the monthly external stocktaker’s reports.

• The reconciliation of investment income to investment holdings.• On some games machines metered readings can be reconciled to recorded takings. This is true if they are either games with no prizes or have a

standard percentage payout.• On some games (eg. Bingo) there is a standard payout policy, typically 85%.

Different clubs do, however, have different variations of games and different procedures for running the games.It is not, therefore, possible to prescribe a fixed audit approach.An auditor must understand and document how the games are run and then devise appropriate audit procedures.The guidance below provides examples of recording of some typical games and a suggestion of audit procedures that could be applied.

Raffles

• The club buys pre-numbered tickets in strips of 100,000.These are sold at £1 for a strip of 10. If 100 tickets are bought 10 tickets are given free.• A committee member (Jim) buys prizes, generally spending £50 per week.• All sales are on Sunday, being the day of the raffle.The draw takes place on the Sunday evening.Ticket stubs are placed in a large tub.Someone

neutral from the club is invited to perform the draw.• Jim enters the tickets sold, takings and purchases in the raffle book which is signed by Jim and Arthur on the Sunday night.• On Monday morning Jim submits the raffle book, the unsold tickets and the balance of takings less prizes to the treasurer.The treasurer enters the

details in the main cash book.• At Christmas and on special occasions the prize levels are greatly increased.

Audit procedures

• Verify income by performing a proof in total calculation (following the requirements of ISA 520), but this must incorporate the effect of ticket discounting.• Confirm prize level and income level remain reasonably constant.• Confirm an unconnected committee member is reviewing the records regularly.• Confirm no breaks in the control sequence occur.• Attend at year end to confirm cut off procedures on ticket sequence.• Test a sample of weeks to ensure the raffle book is signed and the amounts agree to the cash book details.

Gaming machines and pool table

• The club owns two pool tables and hires three gaming machines.• Each machine requires two keys to be opened.These are kept in a sealed envelope in the club safe which is signed by the treasurer and a committee

member.Every Sunday two committee members empty the machines and replace the keys in the sealed envelope.• The takings and meter readings are recorded and the book signed by both committee members.• The treasurer is handed the takings on Monday and inspects the gaming machines book.• The committee members emptying the gaming machines must always ensure the tube containing prize money is full so that there are not variations

between the meter readings and recorded takings.• The finance committee has the authority, which it exercises, to perform spot checks of meter readings.

Audit procedures

• Confirm who holds keys to machines.• Confirm at least two officers were present at the opening of the machines.• Check the book of prime entry is signed by two officers of the club.• Verify meter readings at stocktake.• Test from ‘gaming machine book’ to book of prime entry and to bankings.• Check the numerical sequence of meter readings and ensure they are not broken.• Examine the book of prime entry for unusual entries.Note any explanations added, setting out reasons for fluctuations.

Bank and cash

This can be an increased risk area because of the large cash balances maintained by clubs.A cash count should be considered either at the year end or at the time of the audit, which can be reconciled back to the year end.The controls that the club has in place over the handling and banking of cash will also be important.


Dependent on our risk assessment, we will consider obtaining a report from the bank for accounts that were open during the period being audited. The bank confirmation provides us with an opportunity to obtain audit evidence about other matters such as addressing the completeness assertion and auditing of derivatives. We request bank letters either through confirmation.com, the online audit confirmation solution or through the traditional paper request approach.

Payroll

Again, this can be an increased risk area because of the risk of casual labour being used without proper payroll procedures being applied.A review of the cashbook to identify possible wage payments that have not been classified as such should be undertaken.

6.19 Audit evidence - use of management’s expert (ISA 500)

ISA 500 is particularly relevant to the audit of clubs when an external stock taker provides audit evidence on sales, gross profit and the year end stock figure.

The auditor must consider the following when determining whether to use the work of an expert:

• the importance of the matter being considered in the context of the financial statements;• the risk of misstatement based on the nature and complexity of the matter being considered;• the objectivity and professional qualifications, experience and resources of the expert; and• the quantity and quality of other available relevant audit evidence.

In order to consider the objectivity and experience of the expert the auditor should:

• consider the expert's professional standing and experience in the relevant field; and• consider the risk that the expert's objectivity is impaired for instance by being employed by or having a stake in the club.

The use of independent stock takers does not eliminate the need for the auditor to obtain audit evidence as to the existence of stocks. This in keeping with ISA 500 which, where stock is material to the financial statements, requires attendance at a stock count unless impracticable (eg. poses a threat to the auditor’s safety) or the stock is in the custody and control of a third party. Auditors should consider how to obtain evidence as to the procedures followed by the stock taker to ensure that the stocktaking records have been properly prepared. In this context the auditor also has regard, where relevant, to ISA 402 ‘Audit Considerations Relating to an Entity Using a Service Organisation’.

It is very important that the auditor carefully documents all the above work undertaken.Form PF1-7 can be used to record this information.

6.20 Specific problem area - brewery discount / loan write off

Where a club wishes to raise finance, for example, for a large project such as a refurbishment, a potential source of finance is a brewery. The money ‘borrowed’ could be repaid way of a straight repayment or by a barrelage / advance discount. Both methods will be linked to the amount of barrelage taken, therefore the terms of such an agreement must be checked carefully. A straight repayment loan is likely to be at a favourable rate only as long as a specified amount of product is purchased. Penalty rates will arise if these are not met.

A barrelage loan / advance discount is likely to be set up such that there are no formal repayments but instead the loan is paid off on the basis of purchases over the year. Again, targets will have to be achieved. If these are not met, repayment terms are likely to arise.

A 'brewery discount / loan write off package' can amount to a value exceeding a club's typical annual surplus. The auditor can calculate the value of the package as follows:

Calculation of value of brewery discount package

£

Bank interest say ____% on x (loan balance) X

Less: Brewery loan interest at ____% X

Annual savings in bank interest charges X

Loan write off at £____x____barrels per annum X

Loan write off at £____x____barrels per annum X

Annual finanical benefit to club Y

Value per barrel = £Y / Number of barrels per annum

Financial reporting considerations

As noted above, in the scenario where the brewery provides a straight repayment loan, the interest charged is likely to be below the market rate for a standalone loan. The fact that the brewery requires the club to purchase a specified amount of product also needs to be considered for FRS 102. In some cases, the rate of interest for a similar debt instrument would also include equivalent terms for future purchase of product and would include similar rates of interest. In other cases, where the rate of interest is not a market rate, the club will need to consider accounting for the loan as a financing transaction under section 11 of FRS 102. The terms and conditions of each individual loan must be considered in detail.

6.21 Completion procedures

The completion procedures will be the same for clubs as they would be for any audit assignment. When auditing members' clubs the auditor must particularly consider whether:

• in view of the high exposure of the financial statements to a large number of members, a second partner review may be appropriate;• there is sufficient information for the completion of necessary returns (eg. AR 30 or AR 41);• the manager / Responsible Individual due to attend the AGM has a detailed knowledge of the working papers in order to be able to answer a range of

questions from the members.

6.22 Money laundering regulations (MLR)

The implications of the MLR must be considered on all club assignments. Full details of the firm’s anti-money laundering procedures can be found in the firm’s money laundering compliance manual. Specific consideration of how these apply to audit assignments may be found in the firms Audit Compliance Manual.

Prompts are included in the planning and completion sections of the clubs documentation to remind staff of the requirement to consider the need to update customer due diligence (CDD) information as well as reminding them to report any suspicious activities observed during the course of their work.

The permanent file documentation includes new client forms.

Club-specific CDD considerations


https://bba.confirmation.com/uk/

Specific guidance for clubs and societies can be found in the Joint Money Laundering Steering Group (JMLSG) Guidance for the UK Financial Sector (see paragraphs for ‘clubs and societies’), which is available from http://www.jmlsg.org.uk/.The following guidance is based on the principles contained in the JMLSG guidance.

An appropriate distinction should be made between those clubs that serve a limited social or regional purpose and those where the activities and connections are more sophisticated, or are geographically based and / or with financial links to other countries.

For the vast majority of clubs and societies, either there will be no individual who is a beneficial owner within the meaning of the MLR, or at most a class of persons who stand to benefit from the club or society’s objects who must be identified. These persons will be self-evident from a review of the club or society’s objects in its constitution.

Obtain standard evidence

For many clubs and societies, the money laundering or terrorist financing risk will be low. The following information should be obtained about the club:

• full name of the club;• legal status of the club;• purpose of the club; and• names of all officers.

The firm should verify the identities of the officers who have authority to operate an account or to give the firm instructions concerning the use or transfer of funds or assets (‘key’ officers).Firms should take appropriate steps to be reasonably satisfied that the person the firm is dealing with is properly authorised by the customer.”

Other considerations

If the firm’s risk assessment leads it to conclude that the money laundering or terrorist financing risk is higher, additional information will be required on the purpose, funding and beneficiaries of the club.The firm may decide to verify the identities of additional officers, and/or institute additional transaction monitoring arrangements.

As noted throughout this manual, clubs can take a number of legal forms and this can have a bearing on the verification of identity element of CDD.

Incorporated clubs

Where a club has its own legal personality it is considered to be the firm’s client, represented by those officers who give instructions to the firm.

In this situation the normal procedures for corporate clients provide the basis for identification procedures.

Clubs that are unincorporated associations

Such a club does not have its own legal personality and its officers are considered to be the firm’s clients, on whom the firm should carry out full CDD measures.

Clubs that are trusts

Such a club does not have its own legal personality and those trustees who enter into the business relationship with the firm, in their capacity as trustees of the particular trust are the firm’s clients, on whom the firm must carry out full CDD measures.

6.23 Audit reports

[For periods commencing on or after 15 December 2019]

Example audit reports can be found in FRC Bulletin ‘Compendium of illustrative auditor’s reports on United Kingdom private sector financial statements (March 2020)’, which are prepared in accordance with the requirements of ISA (UK) 700 (Revised November 2019) and ISA (UK) 570 (Revised September 2019). The Bulletin can be found at www.frc.org.uk/auditors/audit-assurance/standards-and-guidance/bulletins. The only example reports included are for companies.

Revised ISA 700 requires auditors to explain in the auditor’s report to what extent the audit was considered capable of detecting irregularities, including fraud. The Audit and Assurance Faculty of the ICAEW have published a guide for auditors on reporting on irregularities, including fraud and can be found at: https://www.icaew.com/insights/viewpoints-on-the-news/2020/oct-2020/guide-for-auditors-on-reporting-on-irregularities-including-fraud

Under revised ISA 570, where the auditor concludes the going concern basis is appropriate and no material uncertainty exists, a positive conclusion regarding going concern is now required under ‘Conclusions related to going concern’ or other appropriate heading.

Example audit reports for clubs have been updated in accordance with this and can be found in the example reports section of this manual.

[For periods commencing before 15 December 2019]

Example audit reports can be found in FRC Bulletin ‘Compendium of illustrative auditor’s reports on United Kingdom private sector financial statements for periods commencing on or after 17 June 2016’, which are prepared in accordance with the requirements of ISA (UK) 700 (Revised June 2016). The Bulletin can be found at www.frc.org.uk/auditors/audit-assurance/standards-and-guidance/bulletins. The only example reports included are for companies.

The Audit and Assurance Faculty of the ICAEW subsequently published helpsheets designed to assist firms prepare their revised ISA (UK) 700 audit reports for certain specified other types of entity, including 'Preparing an audit report for a society registered under the co-operative and Community Benefits Societies Act 2014' which is one of the ways a club maybe incorporated'.

The ICAEW helpsheets can be found at www.icaew.com/en/technical/audit-and-assurance/audit-and-assurance-helpsheets.

Example audit reports for clubs have been updated in accordance with this and can be found in the example reports section of this manual.

6.24 Using audit data analytics (ADA) and other technology

Use of technology

The variety of technology and automated tools which are available for use on an audit engagement is incredibly diverse, ranging from relative routine analysis within a spreadsheet, to the use of sophisticated applications which apply algorithms and machine learning, to the use of drones or online applications. Throughout this manual, audit data analytics (ADA) is referred to as a specific category of technology and automated tools. For the purposes of this manual ADA is defined as data analysis techniques (eg. the filtering and sorting of data to identify outliers, anomalies, deviations and other inconsistencies or detection and evaluation of trends and patterns within a data set) which can be used to perform risk assessment procedures, both controls and substantive testing and completion activities. In most cases, audit teams performing such analysis will have the ability to directly control the parameters used within this analysis, although certain applications may draw on the use of algorithms, artificial intelligence and machine learning to aid users with this analysis. Guidance on the additional considerations needed when planning the use of algorithms, artificial intelligence and machine learning is set out below.

B20 should be used to record how ADA and other technology is intended to be utilised on an engagement and how its use has been considered appropriate. Whilst not an exhaustive list, areas where ADA and other technology could be considered are:

• As part of the risk assessment (eg. for its use of part of the preliminary analytical review) • Highlighting high risk transactions for testing (see below)• Stratification of populations for sampling (see below).


http://www.icaew.com/en/technical/audit-and-assurance/audit-and-assurance-helpsheets

http://www.frc.org.uk/auditors/audit-assurance/standards-and-guidance/bulletins

https://www.icaew.com/insights/viewpoints-on-the-news/2020/oct-2020/guide-for-auditors-on-reporting-on-irregularities-including-fraud

http://www.frc.org.uk/auditors/audit-assurance/standards-and-guidance/bulletins

http://www.jmlsg.org.uk/

The use other technology which does not meet the definition of ADA should be recorded on the respective B33/X2 when setting out the audit plan for each area (for example use of a drone or video technology to physically verify a fixed asset would be recorded on B33/E2).

Appraising the use of technology on engagements

The use of technology on engagements can take various forms and each engagement team team will need to appraise the use of technology on each engagement. Considerations are recorded on B20.

Applicability and potential uses of ADA on an engagement

The use of technology is evaluated on a client by client basis and is not deployed as a blanket approach to all engagements. While it is expected certain technologies and in particular ADA will be appropriate to use on the majority of engagements, certain complexities for particular clients may mean its use is not appropriate (such as unusual general ledger posting processes or complex business model meaning common algorithms are less applicable to them etc). Balanced consideration of these factors is recorded on B20 whether ADA or technology is applicable for use.

For clients where the use of ADA is considered applicable, how it is iintended to be used is considered. While not an exhaustive list, areas where its use could be considered are:

• As part of the risk assessment (eg. for its use for the preliminary analytical review);• Highlighting high risk transactions for testing (see below); and• Stratification of populations for sampling (see below).

Where the use of ADA in other areas is planned, (eg. to gather audit evidence), this should be recorded on B20 and if applicable, on B33 to confirm the audit plan has been suitable tailored to reflect its use.

Evaluation of the application being used

Before using ADA or other data analysis applications, the system being used needs to be understood and evaluated. Such applications may have been developed either internally or sourced from an external provider, but in either case, individual engagement files need to record how it was deemed appropriate for use. As a minimum this needs to evaluate the integrity of the application being used and the knowledge, expertise, and competence of the developers (whether internal or external to the firm). While the extent of evaluation needed requires an element of judgement in each case, as a general rule the more complex / sophisticated the application being used is, the extent of evaluation required increases.

The evaluation of the independence and expertise of the application developer needs to be considered, much in the same way auditors assess an expert. The application itself needs to have its integrity evaluated, in the same way an internally developed application would. Where the application being used is hosted by a third party, this should be discussed with the client to confirm they understand the role of the third party and respective responsibilities for data handling have been acknowledged and agreed.

Where the use of ADA purely involves analysing data within a spreadsheet, using relatively routine functionality that can be understood and reviewed by most individuals with basic spreadsheet training, this would generally involve explaining which functionality / formula(s) is being used and why they are considered appropriate.

Where a more bespoke ADA application is utilised (eg. one which automates the running of analytical tools based upon parameters within the application), this evaluation needs to be expanded to demonstrate an understanding of the automation within the application, how this has been assessed as reliable and as such is appropriate for use (eg.via user acceptance testing).

For larger firms, some efficiencies may be gained by a central team of experts within the firm undertaking the required testing and evaluation of the ADA application being used, which individual engagement teams then look to draw on when completing B20, rather than the underlying evaluation of the application being performed by each individual audit team. Where teams use a centrally approved ADA application/functionality, they need to ensure the appropriate version is used on their engagement (i.e. not rolling forward an old version which is now out of date or accelerating the use of a new version prior to it being approved). Where individual engagement teams use a version of an ADA application that has not been tested and approved central, they should document why they are comfortable in using an unapproved version and how it is deemed appropriate for use.

Where an application utilises and relies on an algorithm (eg. use of machine learning or artificial intelligence), it is essential that development of any algorithms used is tracked, along with an audit trail to show how that algorithm has been tested and confirmed as being appropriate for use. It is expected that such testing (and approval for use) will be undertaken by a central team within the firm and that once approved any applications which utilise algorithms will be deployed and used consistently for a fixed amount of time (eg. 1 audit cycle) across all engagements, as this will help to ensure a consistent understanding of the application is in place across the firm. Individual teams looking to use such applications/algorithms with be responsible for confirming and documenting on each file that the version being used is appropriate , referencing where the testing of the version being used can be found and appraising why its use is considered appropriate for that specific engagement (eg their are no specific factors for that particular client which means it would not be reliable).

Evaluating the data to be used for ADA and other technology

Where applicable, each file should record details of the data set being analysed by ADA or other technological applications. In most cases this will be general ledger data, but could vary from audit to audit, with some analysing multiple data sets, from various sources (eg sales ledger, purchase ledger or inventory records from client systems).

Procedures to confirm the application has a complete and accurate data set(s) to be analysed will be performed. For general ledger data, this will generally be done by using the data set for all general ledger transactions during a period to reconcile the opening trial balance to the closing trial balance. The integrity of the data being used is evaluated, in particular considering controls around data extraction and the prevention of the data set being manipulated post extraction and also considering if wider audit procedures indicate any issues with the data set being used (eg. the results the preliminary analytical review) or if audit procedures need to be planned to test the validity of a data set (eg. where sales ledger data is being used, have audit procedures been planned to confirm this is complete and accurate).

Where teams are unable to validate the integrity of the data, then use of ADA is unlikely to be appropriate.

Preparing data for use in an application

In most cases where the application is using general ledger data, the chart of accounts will need to be mapped to the financial statements (eg. which general ledger accounts make up sales, cost of sales etc). While the account mapping will generally be rolled forward from one year to the next (with documentation also being rolled forward), any new accounts will need to be mapped in the first period they are used and an annual review should be performed to confirm if any accounts need to be remapped (eg. as a result of an accounting policy change).

For some uses, the application may also require the different document / transaction types within the clients general ledger data to be defined (for example manual journals, automated subledger posting, reversing journal etc), as these will generally present different levels of risk. As the coding of the different document / transactions types will vary between client systems this will be done for each engagement (although retaining a central firm wide library of system codes may provide some efficiencies should multiple clients use the same accounting software), with particular attention being paid to any bespoke document/journal types used by the client.

Where non-general ledger data is being analysed, the definition of the key data fields used by the application for its analysis will be considered. For example where ADA is being used to analyse aging of debtors, it is likely that the data fields which contain invoice number (as a document identified), invoice date (to determine age) and invoice amount. Where necessary the data fields which need to be defined with any internal experts (or the application developer) are confirmed.


Where sufficient understanding of the parameters needed for the application to analyse the data appropriately can not be obtained, then use of ADA is unlikely to be appropriate.

Use of audit data analytics (ADA) for identifying high risk journals / transactions

As noted above, ADA can be applied to identify transactions for testing on the basis of risk criteria, including journal entries. This allows testing to be focused more efficiently than it would be using manual sample selection. This could involve using ADA to generate a risk score for each general ledger transaction, which can either be based upon artificial intelligence / machine learning, criteria set manually by the audit team (which is tailored for each client), or a combination of these methods depending on the ADA system being used.

Automated risk scoring

Where transactions have been risk scored using an automated ADA application, the application will usually have preset parameters set by the developer. What these are need to be understood and evaluate their use for each client, ensuring they are tailored as appropriate. Given the bespoke nature of such applications, a freeform working paper will be needed to record this assessment, and a prompt to reference this included on B33/N2 (ADA). For larger firms, some efficiencies may be gained by a central team of experts within the firm undertaking the required evaluation of the preset system parameters, wand this is considered when completing the assessment. Consultation where relevant with the central teams of experts or the application developer to confirm the appropriateness of any tailoring made to these parameters should be recorded.

Manual risk scoring

Where risk criteria are manually applied to transactions (eg when analysing data in a spreadsheet), each of the criteria selected should be allocated a risk score on a scale of 1 to 5 (1 being used for criteria which is consider to be the lowest risk and 5 for criteria which is considered the highest risk). The risk posed by certain factors will vary from client to client, and is tailored based upon the knowledge and experience of each client.

There are various criteria that can be applied when manually evaluating the level of risk posed by a transaction. While not an exhaustive list, common criteria to apply are as follows:

Risk Condition Example of criteria that could be applied

Large amounts Greater than or equal to performance materiality

Round sum amounts Amounts which end 000.00, 999.99, 999.00

Unusual description / key word search Descriptions which include names / titles of key management,directors and other related parties or unusual words such as adjust, correct etc

Transactions posted at unusual times Journals posted when the office is usually closed, such as weekends or between 7pm and 8am

Back dated transactions Journals which post to a prior period (i.e. a journal raised in accounting period 3 which is shown in accounting period 2)

Transactions posted and reviewed by the same person Where a system had a ‘park and post’ or ‘maker/checker’ function and these roles have been performed by the same person

Transactions posted by an unexpected person Journal posted by a senior member of staff/non-finance staff who typically are not involved in day to day ledger posting

Unexpected account combinations Journals which are posted to accounts which would not typically be linked, for example sales and fixed assets

Transactions which bypass the expected transaction flow System entries which are usually automated/triggered from a sub-ledger but are posted manually

These risk conditions and examples are not exhaustive examples and teams should also use their judgement to consider additional criteria and tailoring which could be applied relevant to the client. The justification for the criteria selected should be documented on file, with a template within B33/N3 being provided for this.

Risk enhancers

To further tailor the risk score, certain ADA applications (both automated and manual) may allow us to enhance the risk score of a transaction by applying a multiple. This may be linked to certain document / journal types or members of client staff considered to present a higher risk, the financial statement assertion risks (eg. a high risk area could receive a higher risk multiple) or certain accounts which are considered inherently riskier due to their susceptibility to fraud. Details of enhancers applied should be recorded on B33/N2 (ADA).

Manually calculating a transactions risk score

A transaction risk score is calculated by taking the sum of any risk scores triggered by a specific risk condition, which is then multiplied by any applicable risk enhancers (where no enhancer is applicable to a particular transaction, this will be assumed to be a multiplier of 1).

Example risk score calculation

Extract example of a manually applied risk criteria:

Risk condition Specific definition for this client Risk score applied

Large Value £100,000 (performance materiality) 3

Round sum amount or transaction ending in '999' Amount ending '000.00' 2

Transaction posted at unusual timeAny posting between before 7.30am and after 8.00pm Monday to Friday and at any time on a weekend

5


Extract example of a risk enhancer:

Risk enhancer Multiple to be applied

Any transactions posted to Revenue 3

Example extract transaction data and scores calculation:

Description Transaction ID Account Dr Account Cr Value (£) Time and Date Risk score

Correction to accrued income 1234 Accrued income Sales 200,000.00 11pm Friday

dd/mm/yyyy 30 [(3+2+5)x3]

Monthly depreciation charge for Motor Vehicles

1235 P&L depreciation (Motor Vehicles)

Accumulateddepreciation (Motor Vehicles) 105,000.00 2pm Monday

dd/mm/yyyy 5 [(3+2)x1]

Items to be selected for testing

The final element of tailoring is setting the criteria which highlight the transaction to be tested. A risk score is set and any transactions which score equal or greater than this will be selected for testing. Consideration of other specific risk factors which may trigger a transaction to be tested or why it can be excluded from testing (eg. the value of the transaction is trivial or a reversing journals where it can be confirmed the net impact in the period is nil) and the rationale for using is recorded on B33/N2(ADA).

Where teams are relying on an algorithm (eg. in which risk scoring is done via machine learning or artificial intelligence), the understanding and evaluation of the appropriateness of the algorithm being used should be recorded on B20.

The use of ADA and other technology and ethics

The use of certain ADA applications and / or other technology may allow us to communicate more detailed and meaningful insights to management. However, this does not extend beyond feedback that would be seen as being the normal by product of the audit, into wider commentary and analysis that could be seen as offering business advice that could be used in a managerial decision making process.

6.25 COVID-19

The FRC, ICAEW, ICAS and ACCA have all published guidance to support auditors in relation to the difficulties they face during the pandemic.

Guidance can be obtained at:

- https://www.frc.org.uk/covid-19-guidance-and-advice ;

- https://www.icaew.com/coronavirus/audit ;

- https://www.icas.com/professional-resources/coronavirus; and

- https://www.accaglobal.com/gb/en/cam/coronavirus.html.


https://www.accaglobal.com/gb/en/cam/coronavirus.html

https://www.icas.com/professional-resources/coronavirus

https://www.icaew.com/coronavirus/audit

https://www.frc.org.uk/covid-19-guidance-and-advice

7 Audit exemption

7.1 Introduction

The Co-operative and Community Benefit Societies Act 2014 (CCBSA14) and the Friendly Societies Act 1974 (FSA74) both include requirements that oblige societies registered under them to appoint a ‘qualified’ auditor. There are, however exceptions to this for ‘small’ (CCBSA14) / ‘exempt’ (FSA74) societies (which are very small societies) and for:

• registered societies, through section 84 CCBSA14; and• other societies (FSA74) through the 1996 Deregulation Order (SI 1996/1738)

where there is an option to disapply the section of the respective legislation that requires the society to appoint an auditor (often known as audit ‘opt out’), subject to the society meeting certain (different) criteria.

Limited company clubs are subject to the normal audit exemption criteria set out in the Companies Act 2006.

Unincorporated, unregistered clubs will be subject to the requirements set out in their own rules and are not subject to any statutory requirements.

7.2 Small / Exempt societies

Societies are referred to as ‘small societies’ (CCBSA14) or ‘exempt societies’ (FSA74) if they fulfil the following criteria:

• the receipts and payments in aggregate in the preceding year of account did not exceed £5,000;• the number of members did not exceed 500 at the end of that year; and• the value of assets at the end of that year did not exceed £5,000.

A ‘small’ / ‘exempt’ society has the option to appoint a ‘qualified’ auditor or two or more persons who are not qualified auditors (lay auditors) to audit its accounts and balance sheet if its rules permit this.

7.3 Audit opt out for clubs registered under CCBSA14 or FSA74

Statutory Instrument 1996/1738 The Deregulation (Industrial and Provident Societies) Order 1996 amended certain provisions contained within IPSA65, FIPSA68 (see paragraph 2.2 above) and FSA74. The main change introduced thresholds, below which industrial and provident societies (but not credit unions) and other societies registered under FSA74 (but not friendly societies) had the power to opt out of audit.

SI 2018/322 - The Co-operative and Community Benefit Societies Act 2014 (Amendments to Audit Requirements) Order 2018 amended CCBSA14 to increase the thresholds up to turnover of £10.2 million and balance sheet total to £5.1 million. The 2018 order came into force on 6 April 2018. This change only applies to co-operatives or community benefit societies, and that the current audit requirements for credit unions remain. The turnover threshold for charitable societies will not change at £250,000 and nor does this change affect societies registered under the Friendly Societies Act 1974.

SI 2006/265 - The Friendly and Industrial and Provident Societies Act 1968 (Audit Exemption Amendment) Order 2006 amended FIPSA68 to increase the thresholds up to turnover of £5.6 million and balance sheet total £2.8 million.The 2006 Order applied to accounting periods ending on or after 6 June 2006 but only to industrial and provident societies.Other societies registered under FSA74 were not affected by this change and should therefore continue to apply the earlier 1996 thresholds (see over).

With effect from 1 August 2014, for societies registered under the CCBSA14 (which includes what were ‘industrial and provident’ societies), the audit opt out rules were consolidated into the sections 84 and 85 of the CCBSA14.The thresholds noted above however, for what were industrial and provident societies, were not changed in the CCBSA14. SI 2008/322 increased the turnover threshold to £10.2 million and the balance sheet total (total value of assets) to £5.1 million with effect from 6 April 2018.

SI 2006/265 continues to apply for other societies registered under the FSA74.

Conditions for audit opt out - clubs registered under the CCBSA14

• Clubs registered under the CCBSA14 have the power to disapply the audit requirement if their rules allow this and if they satisfy the following conditions:

• total value of assets at the end of the preceding year of account did not exceed £5.1 million1;• turnover for the preceding year did not exceed £10.2 million1 (charities, £250,0002); and• a resolution to opt out of an audit is passed at a general meeting in the year of account at which:

10. less than 20% of the total votes cast are cast against the resolution; and11. less than 10% of the society’s members entitled to vote cast their votes against the resolution.

s84 CCBSA141With effect from 6 April 2018, these thresholds increased total assets from £2.8 million and turnover from £5.6 million.2Under section 84(6) of CCBSA 14 the income threshold for a society registered under the CCBSA 2014 that is also a charity is £250,000.Although this threshold was raised in the Charities Act 2006 (and carried forward into the Charities Act 2011), the audit exemption level for charitable societies registered under the CCBSA 14, has not changed.This turnover / income limit is not affected by the increases noted in 1 above.

Conditions for audit opt out - clubs registered under the FSA74

• Clubs registered under the FSA74 have the power to opt out of the audit requirement if they satisfy the following conditions:• value of assets at the end of the preceding year of account did not exceed in aggregate £1.4 million;• turnover for the preceding year did not exceed £350,000 (charities, £250,000); and• a resolution to opt out of an audit is passed at a general meeting at which:

12. less than 20% of the total votes cast are against the resolution; and13. less than 10% of the society’s members entitled to vote cast their votes against the resolution.

s32A FSA74

These limits represent a significant difference in principle from limited companies as the club qualifies on the basis of the previous year’s figures.Therefore, even in the situation where a club has exceeded the limits in the year for which an accountant’s report is being prepared, if it qualified for the opt out in the previous year an audit is not required.

This is a sensible provision as it enables the club to table a motion at the annual general meeting to opt out of audit when the accounts used to calculate whether the opt out applies are to be adopted.The resolution operates for one year of account and therefore a resolution must be passed for each year that opt out is desired.

It should also be noted that the exemption threshold for a charity reporting under CCBSA 14 or FSA74 is much lower than the £1m under charities’ legislation. This is because the above thresholds have not been amended in CCBSA14 or FSA74.

Ineligible societies


The above rules do not apply if the club is any of the following:

Clubs registered under the CCBSA14:

• a credit union;• a subsidiary, or has a subsidiary;• holding, or has held a deposit* since the end of the preceding year of account, other than in the form of withdrawable share capital;• is registered in the register of social landlords maintained under section 20(1) of the Housing (Scotland) Act 2010; or• is preparing accounts under the Insurance Accounts Directive (The Insurance Accounts Directive (Miscellaneous Insurance Undertakings) Regulations

2008 (SI 2008/565 - Reg. 14)).

Clubs registered under the FSA74:

• holding, or has held a deposit* since the end of the preceding year of account.

* ‘Deposit’ should be read with section 22 of the Financial Services and Markets Act 2000 / Article 5 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544).

Furthermore, the FCA can require a mutual society to have an audit.Care should also be taken to ensure that an audit requirement is not included as a condition of any brewery or bank loan.

Club rules

A club’s rules must allow it to disapply the requirement for a full audit.If the rules only permit a full audit, then the appropriate rule amendments must first be registered with the FCA.

Groups

As noted above, the legislation on ineligible societies registered under the CCBSA14 (section 84(3) of CCBSA14) states that a society cannot be exempt from the requirement for an audit if it is, or has, a subsidiary. This is unlikely to affect clubs but auditors should be aware of this requirement.

7.4 Reporting accountant’s report

For those societies which meet the relevant criteria above there are two types of audit opt out, either:

• total exemption (a club known as a ‘totally exempt society’ in this manual) (see 7.6 below); or• a requirement to obtain a report from an independent reporting accountant (a club known as an ‘audit exempt’ society in this manual) - see below.

Where turnover is more than £90,000 (in the preceding year), CCBSA14 / (FSA74) require:

• a report on the club’s accounts and balance sheet for the current year which meets the requirements of subsection (2)(a) of section 85 / (subsection 2 of section 39A); and

• a report relating to the preceding year of account which meets the requirement of subsection (2)(b) of section 85 / (subsection (4) of section 39A).

NB. Note that even if turnover in the current year (to which the report primarily relates) is less than £90,000 a reporting accountant’s report would be required where turnover exceeded £90,000 in the preceding year.The same is true of the converse, a reporting accountant’s report would not be required for the current year (to which the report primarily relates) where turnover in the preceding year was below the £90,000 threshold.

Clubs registered under the CCBSA14

Subsection 2 of section 85 CCBSA14 states that a report for the purposes of the above shall state in the auditor’s opinion:

• whether the revenue account, any other account to which the report relates, and balance sheet are in agreement with its books of account kept under section 75;

• (on the basis of the information contained in those books of account) whether the revenue account and balance sheet comply with the requirements of the Co-operative and Community Benefit Societies Act 2014: and

• in relation to the preceding year of account, whether, in the auditor's opinion, the financial criteria for the exercise of the power conferred by section 84 were met in relation to the year.

Clubs registered under the FSA74

Subsection 3 of section 39A FSA74 states that a report for the purposes of the above shall:

• state whether, in the opinion of the person making the report, the revenue account or accounts, the other accounts (if any) to which the report relates, and the balance sheet are in agreement with the books of account kept by the society under section 29 of the Friendly Societies Act 1974; and

• state whether, in that person’s opinion, on the basis of the information contained in those books of account, the revenue account or accounts and the balance sheet comply with the requirements of the Friendly Societies Act 1974.

Subsection 4 of section 39A FSA74 states that the report shall state whether in the opinion of the person making the report the financial criteria for the exercise of the power conferred by section 32A(1) of the Friendly Societies Act 1974 were met in relation to the year.

Care should be taken if the club is approaching the financial limits above which an audit is required.

Rights and duties of reporting accountants

In order to perform the duties of a reporting accountant, the reporting accountant has a number of rights:

• of access to all books and records relating to the club’s affairs;• of entitlement to obtain such information and explanations from the officers of the club as the reporting accountant deems necessary; and• to receive notice of, and attend, any general meeting and be heard at any such meeting on any relevant matter.

If the reporting accountant fails to obtain all the information and explanations needed; this fact should be stated in the report.

Balance sheet statements

There is no specific legal requirement for a statement to be on the balance sheet setting out any responsibilities of the committee in respect of audit exemption, unlike the situation for limited companies taking advantage of audit exemption provisions contained in the Companies Act.There are also no legislative requirements for statements to be made in respect of any ‘small’ exemptions as there are for limited companies.

Statement of standards for reporting accountants

Guidance on the work performed by reporting accountants could previously be found in the Statement of Standards for Reporting Accountants published by the APB (now FRC) specifically for small charitable companies.This guidance was withdrawn in March 2012.

Filing responsibilities

Societies still have the responsibility to file their annual return with the FCA.The reporting accountant may assist the club in the discharge of this responsibility.


7.5 Qualification as a reporting accountant

Section 85(2) CCBSA14 states that a ‘qualified auditor’ must be appointed to make the reporting accountant’s report. Section 91 CCBSA14 gives the meaning of ‘qualified auditor’ as “a person eligible for appointment as a statutory auditor under Part 42 of the Companies Act 2006”.

Section 39A(2) FSA74 state that an ‘appropriate person’ must be appointed to make the reporting accountant’s report.Subsection 5 of 39(A) FSA74 goes on to state that an appropriate person is a qualified auditor.

It has, in the past, been advisable to include the heading ‘Chartered/Certified Accountants & Statutory Auditor’ at the bottom of the reporting accountant’s report (NB. ‘Registered Auditor’ may be used instead of ‘Statutory Auditor’), although more recently the ICAEW has commented (in Audit News 55, November 2015) that the FCA no longer rejects accounts that include (audit) reports that fail to include the words ‘Registered Auditor’, therefore this is not a requirement.

The reporting accountant must not be ineligible under CCBSA14 / FSA74 to be appointed as an auditor of the society.

7.6 Totally exempt societies - clubs with turnover of less than £90,000

There is no requirement for an audit or reporting accountant’s report or statement to be made by a society whose turnover is less than £90,000 and meets all other criteria. Again, a resolution is required and the rules of the society may have to be changed so that it is able to take advantage of the exemption.

At the planning stage of such an engagement the society’s eligibility should be confirmed. The engagement should be carried out in accordance with a firm’s normal accounts compilation procedures.

7.7 Audit exemption for small limited companies

A company qualifies as small if it meets two out of three criteria relating to turnover, balance sheet total (fixed assets plus current assets) and number of employees as set out below. A company qualifies as small in relation to its first financial year if the qualifying conditions are met in that year. A company qualifies as small in relation to a subsequent financial year:

• if the qualifying conditions are met in that year and the preceding financial year;• if the qualifying conditions are met in that year and the company qualified as small in relation to the preceding financial year;• if the qualifying conditions were met in the preceding financial year and the company qualified as small in relation to that year.

The relevant criteria are:

• turnover not more than £10.2 million;• balance sheet total (gross assets) not more than £5.1 million;• number of employees not more than 50.

In addition to meeting these limits, a company must also not be excluded from the small companies regime and not be ineligible for audit exemption. For a full explanation of these criteria and the small group rules and limits see your corporate audit exemption manual, which will also set out the rules in respect of dormant companies.

Audit exemption for subsidiaries

The qualifying conditions for subsidiary audit exemption are set out in section 479A Companies Act 2006 and in order for the subsidiary to qualify for audit exemption, all of the conditions must be met. Again, see your corporate audit exemption manual for full details of this exemption.

7.8 Accountant's report for audit exempt limited company clubs

Audit exempt companies do not legally need to file an independent report from an accountant with either the full statutory or the abbreviated accounts. However, the ICAEW, ICAS and the ACCA all recommend in their best practice guidance on accounts compilation assignments that an accountants’ report is attached to the financial statements. Suggested wording for such reports is included in the example reports section of this manual, based on the now withdrawn CCAB guidance which is reflected in the guidance issued by the member bodies.

The guidance issued by the ICAEW emphasises the need to distinguish the work of a Chartered Accountant from that of other, unqualified, accountants, particularly as professionally qualified accountants must comply with their own code of ethics. This can be emphasised in the title of the accountants’ report attached to the accounts.

Core and optional paragraphs in the accountants’ reportThe now withdrawn CCAB guidance on accounts compilation reports (adopted by the ICAEW, ICAS and the ACCA) includes both ‘core’ and ‘optional’ paragraphs. The recommendations are as follows:

• Audit Technical Release 07/16 issued by the ICAEW

The previous version of the TR noted that “professional accountants are advised to include core paragraphs in all CCAB accounts preparation reports … and recommends that, in order to manage professional liability, practices include the optional paragraphs in their compilation reports.”

• Technical Factsheet 163 issued by the ACCA

The factsheet notes that “the core paragraphs should be present in all ACCA accounts preparation reports. The use of optional paragraphs is left to the practitioner’s professional judgement.”

• Framework for the Preparation of Accounts – Best Practice Guidance issued by the Institute of Chartered Accountants of Scotland (Revised January 2017)

The guidance notes that “whilst it is recommended that statements … (the optional paragraphs) are included in the report issued to management, this is ultimately a risk management decision for each member firm.”

7.9 Accountant’s reports for audit exempt unincorporated, clubs

For general unincorporated assignments, the Institutes and Association have also published guidance / recommendations based on the now withdrawn CCAB guidance referred to above. An example report can be found in the example reports section of the manual (example 7) based on the ICAEW’s Audit and Assurance Faculty Technical Release Audit 08/16 'Chartered Accountants’ Report on the Compilation of Historical Financial Information of Unincorporated Entities’.

This report should be tailored for the specific requirements of the club’s rules / the committee of management.

7.10 Money laundering

Consideration of the requirements of the Money Laundering Regulations is required on non-audit assignments. See paragraph 6.22 above for specific guidance.


http://www.icaew.com/en/technical/technical-releases/audit-technical-releases



https://www.icas.com/__data/assets/pdf_file/0014/2606/Framework-for-the-Preparation-of-Accounts-ICAS.pdf

https://www.icas.com/__data/assets/pdf_file/0014/2606/Framework-for-the-Preparation-of-Accounts-ICAS.pdf

http://www.accaglobal.com/gb/en/technical-activities/technical-resources-search/2009/october/factsheet-163-audit-exempt-companies.html

http://www.icaew.com/en/about-icaew/what-we-do/technical-releases/audit-technical-releases

Appendix I - notes for completion of planning form B41 - Materiality


Appendix II - notes for completion of planning forms B33 - Audit plan

Audit plan - notes for completionThe objective of the audit plan is to record the risk and approach for the individual areas of the audit.

This can be achieved by completing the individual area audit plans on B33 / X2.

Alternatively, you may prepare a free-form audit plan setting out the risks (including the risks in relation to internal control) and the planned approach.


Appendix II-I: notes for completion of planning forms B33 Audit plan - Trial balance (use of ADA)

Appendix III - notes for completion of substantive sampling formThe substantive sampling form requires the documentation of a number of qualities of the test being performed and population being tested in order to evidence due consideration of those factors. The form encourages the extraction of significant and other key items which would be tested in addition to the calculated sample size for the residual population. This sample size for the residual population is determined by reference to the assessed risk in the population, the planned reliance on other procedures and the size of the residual population.

Sample size calculation

When determining the sample size for the residual population in a substantive test of detail the initial sample size will be 60 items. This number can be reduced based on various deduction factors that are dependent upon the following:

• the risk of material misstatement associated with the population being tested;• the planned level of reliance placed on the operating effectiveness of controls;• the strength of analytical and other related substantive procedures; and• the size of the residual population (adjusted via a ‘materiality factor’).

The following table highlights the level of deduction available in each instance. This is followed by guidance on the application of judgement in taking deductions available.

Assessed risk in population Planned reliance on internal controls

Analytical and other related substantive procedures Materiality factor

Level No. Level No. No. Value No.


evidence

Low 20 High 20 Strong 20 Under 15 20

Medium 10 Medium 10 Moderate 10 15-27 10

High 0 None 0 Weak 0 Over 27 0

Assessed risk in the population

The assessed risk of material misstatement inherent in the population relates to the susceptibility of a relevant assertion (or assertions) within the population to a misstatement that could be material, either individually or when aggregated with other misstatements, assuming that there are no related controls.

This assessed risk in the population will depend on the audit area and the particular assertion being tested.

Examples of factors which may affect the risk assessment include:

• misstatements identified by the audit team in prior audits;• unexplained relationships identified at the preliminary analytical review stage;• complex financial reporting which requires specialised skills, eg, valuations;• the involvement of significant judgements or estimates;• significant related party transactions;• the potential for fraud or misappropriation;• recent changes in the related accounting system; and• the expected and tolerable misstatement within the population.

Accounting estimatesSampling techniques are unlikely to be utilised when testing accounting estimates, however certain accounting estimates such as depreciation / amortisation calculations may utilise a sampling approach. Care is needed here regarding clarity over the assertion(s) being tested The process for determing the risk assessment of accounting estimates differs from other aspects of the financial statements as it requires inherent risk and control risk to be considered separately.

The inherent risk assessment of an accounting estimate is assessed on a ‘spectrum of risk’ resulting in an assessment ranging between very low and very high. In order to be able to reflect how this method of assessing the risk inherent in an accounting estimate when determining a sample size for testing the approach should be as follows:

Inherent risk as assessed for an accounting estimate Assessed risk in the population as used for determining a sample size

1 or 2 Low

3 Medium

4 or 5 High

Control risk is assessed using low / mmoderate / high and if there is no plan to test the operating effectiveness of controls then control risk is assessed as high.

Planned reliance on internal controls

Where we only confirm the design and implementation of control procedures, we cannot reduce the substantive test sample size for any reliance on controls.

Tests of operating effectiveness of internal controls are often designed to provide either a high or moderate level of reliance and therefore risk reduction.

• A high level of reliance (low level of risk remaining) applies where the primary evidence is coming from tests of controls.• A medium level of reliance (medium level of risk remaining) applies where the tests of controls will be combined with other substantive procedures to

address a particular assertion.

The type of controls being tested may influence the level of reliance to be placed on them. For example, a control applied to all items in the population is likely to provide a sounder basis for reliance than one only applied to certain types or sizes of transactions.

The extent to which we test controls for the planned level of reliance is a matter of professional judgement; however, in ascertaining an appropriate sample size for tests of controls we may use the tests of controls sampling form.

Analytical procedures and other related substantive procedures

The level of reliance which can be placed on analytical and other related substantive procedures is specific to each situation and so is an area where we will need to apply professional judgement.

The degree of reliance on analytical procedures will generally depend upon:

• The predictability of the relationships relevant to the assertion – in general, predictability tends to be greater for profit and loss account items than for balance sheet items.

• The level of detail of the analytical procedure – for example, analytical procedures may be applied to the overall population, eg sales or debtors, or the population could be disaggregated into its component parts, eg different types of sales or classes of debtors.

Care should be taken that undue reliance is not placed upon analytical procedures which provide little assurance.

The extent of sample size reductions based on analytical procedures should have a direct link to the effectiveness of the analytical procedure in detecting the same errors as the test being performed on the sample items.

The reference to "other related substantive procedures" does not solely refer to analytical procedures, but includes other tests of details within the same cycle that provide evidence regarding the monetary correctness of a financial statement assertion. For example, if subsequent cash receipts are examined in conjunction with the determination of the reasonableness of the valuation assertion for debtors, the audit team may “take credit” for the fact that this procedure also provides evidence as to the existence of debtors – the same assertion being tested by the debtors sample.

Although evidence from other substantive procedures can be obtained from any procedure within the same cycle, it is important to remember that the procedure has to provide evidence in respect of the assertion being tested.

Materiality factor

The materiality factor is calculated as follows:


total value of population / materiality = materiality factor

The lower the resulting figure for the materiality factor the greater the reduction in sample size. Thus, not surprisingly, the larger the value of the residual population relative to materiality the greater the value of the materiality factor and the larger the final sample size will be.

Where a different specific audit area materiality is set on the B41 then this materiality rather than the overall materiality should be used to calculate any sample sizes for that particular area.

Minimum sample size

Small samples have an increased risk of being unrepresentative and unreliable. If the total population comprises a relatively small number of items, say fewer than 50 items, then alternative procedures should be considered in place of sampling. For example, this might include analytical procedures or a review for unusual items.

When the calculated sample results in a sample size of 15 items or fewer, then alternative audit procedures should be considered as outlined above. If these are not appropriate then the minimum sample size should be 15 items.

Total number of items to be examined

The total number of items to be examined is equal to:

• the number of items over tolerable misstatement; plus• the number of other key items; plus• the sample size for the residual population.


Getting started for new manual usersIntroductionThis getting started guidance will help you to use the Mercia Clubs Manual. You may be a regular user of our products or this may be the first time that you have used such a manual. Either way these notes will help you understand the Mercia approach and how to maximise the benefits of the package.

The manual includes example letters, proforma accounts and disclosure checklists, in addition to all the other essential current and permanent file documentation necessary for an audit assignment.

The Clubs Manual itself consists of the following sections:

• Guidance• Example letters• Example reports• Example accounts• Accounts disclosure checklists• Current file documents• Permanent file documents

GuidanceYou will find the following documents in this section of the Clubs Manual:

• guidance notes on the clubs Sector• a contents page;• this getting started guidance for new manual users; and• What’s changed, which provides a summary of the changes made to the manual in the most recent updates.

Example lettersThis section provides examples of the following:

• letters of engagement for an individual club, covering audit and non-audit, including a reporting accountant’s engagement. These are structured into separate sections: a covering letter and agreement of terms; appendices 1A, 1B etc. - schedules of professional services; and appendix 2 - terms of business. This will assist with future updates where it is necessary to only amend a specific section of the letter and send an updated version of this to your clients. It is also easy to add more detailed engagement terms into the standard format, for example, for other services such as payroll or VAT where you wish to do so..

• letter of representation;

Example reportsExample reports (eg. audit reports and reports to management) can be found in this section.

Example accountsThis section includes example proforma accounts for a small club registered under the Co-operative and Community Benefit Societies Act 2014 or the Friendly Societies Act 1974 using FRS 102 Section 1A.

Accounts disclosure checklistsAccounts disclosure checklists are included in this section, covering small (FRS 102 section 1A) and not-small companies (FRS 101 and FRS 102), as well as small and not-small group accounts under FRS 102.

Current file documentsEach section of the current file working papers (including planning, audit programmes), along with proforma working papers are separately available in this section of the manual. See below for further details.

Permanent file documentsEach section of the permanent file working papers is separately available and they are all filed in one place in this section. See below for further details.

Audit approachThe Mercia approach encourages you to adopt a thinking rather than a form filling approach. This is achieved in two main ways:

• Through the use of permanent information. If something that you record is unlikely to change significantly from one year to the next, we believe it is better that this is recorded properly once and then rolled forward (updating where necessary) each year.

• By encouraging those completing audit work not to file surplus copy documentation thus generating the need to sign off, date and evidence as reviewed the excess paperwork. Where additional paperwork is considered necessary, the system encourages you to file these on a non-audit section of the file.

The planning approach (the Permanent file documents and section B within the Current file documents)The key to an effective audit is effective planning. The various steps to be undertaken at the planning stage (such as updating your knowledge of the client, calculating materiality, etc.) are driven by the planning checklist (B11) which is filed within the Current file documents.

There are different approaches to completing the planning documentation. For more straightforward assignments, as an alternative to completing many of the standard current planning forms, you may choose to adopt a ‘free-form’ planning memorandum.

In such cases, you may opt for the Mercia proforma free-form memorandum which must also be completed alongside a two-page planning checklist (B11) to ensure you have covered all necessary matters.

Whilst completing the memorandum, you are able to read guidance on what is required in certain areas by reading the applicable endnotes.

It is for the firm to decide the criteria as to when the free-form planning memorandum should be used to replace other standard forms. We recommend that such criteria include:

• the client has been audited by the firm for at least the immediate preceding period;• there has been no history of controversial issues arising from the previous audits;• the client qualifies as small as per company law or contains characteristics indicative of a simple business as set out below.

The following characteristics may be indicative of a simple business:


• ownership is concentrated in a small number of individuals (sometimes a single individual) who are actively involved in managing the business; and• the operations are uncomplicated with few sources of income and activities; and• business processes and accounting systems are simple; and• internal controls are relatively few and may be informal.

Such entities are likely to include companies which are exempt from audit, but which choose nonetheless to have a voluntary audit, small subsidiary companies, as well as larger entities that are also relatively simple.

The fieldwork approach (sections C onwards within the Current file documents)Once the audit plan has been formed and tailored audit programmes have been produced (see the section named "The structure of each audit section" within these notes), the audit evidence should be obtained in accordance with these programmes..

The completion approach (section A within the Current file documents)At the completion stage, the planning must be reviewed alongside the evidence obtained and all matters need to be drawn together and concluded upon. Completion of the appropriate forms on this section (including a full record of review points, notes of discussions with the client and evidence of clearance of all of these points) will help to achieve the required objectives.

The current fileThe current audit file provides the documentary record of the audit and constitutes the evidence of what was done and why. In conjunction with the permanent file, it supports the report on the financial statements.

The report not only consists of the opinion but also contains a statement that the audit has been carried out in accordance with auditing standards, thus the two files must demonstrate compliance with the International Standards on Auditing (ISA) (UK), the Ethical Standard and any other regulatory requirements.

The principal objectives of the current audit file are to provide:

• evidence of the planning process (including the risk assessment procedures) and any changes from the original plan;• a record of the nature, timing and extent of auditing procedures undertaken, the results of such procedures and conclusions drawn;• a record of the figures included in the financial statements, and evidence supporting these figures;• evidence of control and review;• a record of problems encountered, weaknesses discovered, and any contentious issues raised and how they were resolved;• a record of communications with the client relevant to the audit; and• evidence of the opinion formed.

The permanent fileThe principal purpose of the permanent file is to improve the efficiency of the assignment by providing a good understanding of the organisation. It is an intrinsic part of the audit assignment. Therefore, the permanent file must be comprehensive and up to date. Each year the file should be reviewed, updated and signed to evidence that this has been done.

The permanent file contains information of a permanent and semi-permanent nature, being information, which will be of continuing importance to assignments over a number of years.

Although there is a standard index to the file, as with all aspects of an audit, the file should only contain mandatory information required to comply with auditing standards and other legislation and regulation along with information which will aid the efficiency of the audit. The content and form of the file is therefore likely to be different for each client and must be decided upon by the Responsible Individual and manager.

However, a permanent file will normally include the following information:

• information concerning the legal and organisational structure of the organisation, including information regarding related parties and any group structure;

• extracts of important legal documents and agreements;• any sector specific data;• details of the accounting systems and internal control environment;• an appraisal of those systems;• permanent risk information;• a summary of key ratios and figures over a period of years; and• accounts information of ongoing value.

The Mercia approach also encourages users to develop tailored audit programmes which can be held on the permanent file. If held on the permanent file, in future years these must be reviewed and, if necessary, updated as appropriate.

The structure of each audit sectionDivider cards (see Current file indexes within the Current File Documents)The divider cards include recommended standard references for working papers as well as the conclusions for each section of the audit file.

The audit conclusions should be signed by the person completing the work and should then be signed by the reviewer.

Audit planWhere individual audit sections have been planned separately using the standard individual area audit plans, a copy of the working paper can be placed on the planning section, the permanent file and / or the front of each section of the audit file (where it is filed behind the relevant lead schedule, as this helps to ensure that the section is audited in accordance with the plan).

The use of the individual area plan schedules also helps to focus selection of appropriate audit programmes.

Audit programmesThe audit programme is very flexible and must be carefully tailored for each audit area at the planning stage.

• A General and mandatory tests• B Tests of controls• C Non-audit services• D Analytical procedures• E Tests of detail (blank programme), or• F Tests of detail (tailorable programme)

Section A (General and mandatory tests)This section is nearly always applicable, as this deals with general file completion issues, and in some cases mandatory ISA (UK) requirements, rather than specific audit assertions. Selecting section A will ensure that each programme generated has the correct heading and objectives at the top. Also included in this section, where applicable, is the prompt to record the risk assessment procedure confirming the design and implementation of controls.


Section B (Tests of controls)This section is a prompt to the test required when assurance is to be placed on the effective operation, throughout the period, of one or more control procedures, as established on the individual area audit plans.

Section C (Non-audit services)This section is useful when non-audit procedures (such as involvement in the compiling of numbers for the accounts) are to be carried out and used as part of the audit evidence.

Section D (Analytical procedures)This section is a menu of possible procedures that could be utilised to achieve the objectives.

Section E (Tests of detail (blank programme))This section is a page highlighting the key audit assertions for the individual audit area. It should be used either:

• to record any additional tests for objectives not achieved by sections A to D above, or;• on a very low risk area, to record all the tests required for the section.

Section F (Tests of detail (tailorable programme))This section can be used:

• to record the additional procedures for objectives not achieved by sections A to D above, or;• as the main audit programme for the individual audit area.

NB. If this section is selected, it is very likely that it will need to be tailored, with a number of the procedures crossed through or deleted.

Each individual section of the audit file has its own audit programme. The tailoring process takes place in two stages. Firstly, you should select which of the standard pages are appropriate. Once this decision has been made, further tailoring on a line by line basis is required to select / design the appropriate tests.

The four main areas are referenced consistently for each individual section. Using the sales / income and debtors’ section as an illustrative example:

• H3 General and mandatory testsAs above this should normally be included on all sections as it deals with general requirements and specific ISA (UK) requirements.

• H3 Tests of controls and non-audit services programmeThis is the programme to select when some or all of the evidence is to be obtained from non-audit services (accounts preparation) or systems work.

• H3 Analytical proceduresThis is the programme to select when some or all of the evidence is to be obtained from analytical procedures.

• H4 Blank additional programme The programme to select either:

14. to record any further tests on objectives not met by work planned on the above tests at H3; or15. to record all the tests required in a low risk area.

These pages could be used in every section of a very low risk assignment.

• H5 Bank of 'tests of detail'This programme can be used in a variety of ways, for example:

16. as the main programme; or17. as a reference document to select tests for recording on H4; or18. as an additional programme to H3 for higher risk areas.

Selecting appropriate audit programmes for each section is the answer to eliminating over auditing and improving efficiency.

Regardless of which audit programmes are selected as the starting point, individual tests must be added or deleted depending on the specific circumstances of the client.

All combinations and permutations of programmes are acceptable. However, the appropriate programme would normally be made from the first three areas with the fourth area being used in rare circumstances only. It is extremely unlikely that all of the tests on any of the programmes will be necessary. This is particularly true of the "bank of tests of detail" programme (H5).

Accessing the manual

Introducing a new and improved way to access some of our productsWe are delighted to present to you our new online platform, found within our existing website, from which you can access some of our methodology and compliance products which you subscribe to.To access your Manual, all you need to do is log into the Mercia Group website and scroll to My methodology and compliance products under Dashboard on the right hand side.

Once within My methodology and compliance products, please click Open Manual and the manual will automatically open:


https://www.mercia-group.co.uk/

When viewing content in the browse tab, you have the option to Maximise the page, which will remove the standard website borders and allow more content to be displayed on screen.

Once within the manual there are two ways of consuming the content:

• Browse – for manual content• Customise – for creating individual assignments

BrowseOur easy to use Browse function allows you to view the entire manual online and also gives you the ability to target specific parts of the manual more efficiently.

One way this can be done is by clicking on the orange underlined text (typically on a contents page or embedded within the text of the manual where a related section is referenced), this will take you directly to the section referred to. It should be noted that using the ‘back’ button within your browser will not return you back to the section where you clicked the link, as you have been navigated internally on the same web page.

Alternatively, you can use the menu on the left-hand side to access specific areas, pressing the “+” or “-” icons to expand or collapse sections then clicking on the section you wish to read. Should you click a section which has subsections within it (as indicated by the “+” or “-” icons being shown) then all the subsections will also be loaded (for example clicking ‘Accounts disclosure checklists’ would load that section, allowing you to scroll through all the options.

Where a “>” icon is displayed, this indicates you are not able to expand this section further.

By selecting either the Word or PDF icons within the menu, you will be able to download specific areas in your desired format (as above, this will also include any subsections of the area you have selected).

In addition, there is an Expand all and Collapse all tool located at the bottom to aid with navigation using this option.

Reference copy of manual contentThe manual is designed to be updated regularly and it is Mercia’s recommendation that users should log on to the Mercia website and either browse the content online and / or use the customise tool for specific client assignments.

If you would like a reference copy of the manual for your records then the Browse function is the easiest option to obtain a download of the manual content. However, we do suggest that the website version is revisited, and the latest updates page checked, as minor changes may have been implemented since accessing the manual, and reference copies many have to be refreshed so that you and your staff are accessing the most current and up to date version of the manual.

To download a reference copy use the Browse option and click on the "Word" or "PDF" icon by each of the sections. This will generate a copy of the content of the sections which can then be saved as required. This will mean downloading seven sections (Guidance, Example letters, Example reports, Example accounts, Accounts disclosure checklists, Current file documents and Permanent file documents).


For Guidance and Accounts disclosure checklistsThe content will download into one document, eg. the word document will contain all the content of the guidance section.

For Example letters, Example reports, Example accounts, Current file documents and Permanent file documentsSome sections of the manual, such as the Example reports, have two distinctive date options.

You can individually select one of the periods or select the whole section. If you select the whole section then the output produced is a Zip file containing both documents.

Example letters, Current file documents and Permanent file documents will download into individual folders.

Customise viewFor individual assignments and client packs, the Customise tool allows for the selection of documents required and for users to tailor to the client.


Using the “+” allows the selection of individual documents by clicking the box by the required documents.

As in the Browse tab , pressing the “+” or “-” icons will expand or collapse sections, where a “>” icon is displayed, this indicates you are not able to expand this section further and there is an Expand all and Collapse all tool located at the bottom to aid with navigation using this option.

When selecting a section of content which has a subsection (as indicated by the “+” or “-” icons being shown) all the subsections will be preselected to be included within the download, although users have the option to deselect any sections they wish to exclude by clicking on the tick box against that section. You also have the option to select all or specific Attachments by ticking or unticking these as desired.

AttachmentsWhere the manual includes attachments (typically templates, forms and other documents), you are able to access and download these through several methods:

1. Clicking the Attachments highlighted in the blue box within each section (where there are a large number of attachments you may need to click the Show all option for these to be displayed on screen).

2. In addition, where attachments have been referenced within the content of the manual, the Attachments are also hyperlinked in orange throughout the manual. Clicking on any of these options will automatically download the relevant attachment.


Client tailored packIn those manuals aimed in assisting with client engagements, it is possible to create and download the documents as a client or firm-tailored pack. This can be done via the Options menu on the right-hand side where you can enter client’s / firm’s name in the relevant input field and if applicable, the financial year end date. These are then displayed in the header of the downloaded documents.

Once you have finished selecting the areas you wish to include in the download, you then choose either a Word or PDF format, by selecting the relevant option in the Options menu on the right-hand side of the Customise tab. It should be noted that the choice of Word or PDF is not applicable to any attachments and these will be downloaded in their pre-set format regardless of the option selected when choosing a download format.

Example customised screen

The customised documents are downloaded into a zipped up folder for you to save in your preferred location.

We hope you find our new online platform useful and more efficient to navigate.

For details of the fully paperless versions of the manual available, where all programmes can be completed on screen and stored digitally please visit our website at https://www.mercia-group.com/.

Contact usAdministration or product related queries: [email protected]

Mercia website login details requests: [email protected]

Telephone: 0330 058 7141


https://www.mercia-group.com/

What's changedUpdate - May 2021We are pleased to issue updates to your Mercia Clubs Manual (dated 05/21). The principal changes in this update relate to the inclusion of guidance and related forms in respect of the use of audit data analytics (ADA), and reporting on irregularities including fraud.

Use of audit data analytics

A number of changes have been throughout the manual to encourage teams to consider the use of audit data analytics (ADA) on audit engagements. These changes principally focus on the use of ADA as part of the risk assessment, selection of high risk transactions for testing and stratification of populations to assist with sampling, although teams are encouraged to consider its use in other areas, with revisions to planning forms providing prompts for you to record its planned use. Given the audit quality and efficiency gains which can provided by the use of ADA, a new planning form (B20) has been added for teams to appraise its use on engagements and record why ADA was or was not considered appropriate to use. Where the use of ADA is intended, a number of other revisions have been made throughout the manual to help you record and reflect on the results from its use.

Please see below for a detailed list of all changes made as part of this update.

Reporting on irregularities, including fraud

Following the ICAEW publication of 'How to report on irregularities, including fraud, in the auditor’s report - Guide for auditors reporting for the first time' in April 2021 and the comment that 'how the auditor developed their explanation, and the areas considered, would be expected to be documented in the audit file', we have added a new A29 Reporting on irregularities, including fraud in the auditor's report in the Audit Methodology and also an additional test on A21 for the RI to confirm their approval.

Contact us

We are always pleased to receive feedback on our manuals, including any improvements that you would like to see incorporated. Please contact me if you have any comments to make.

Jenny Faulkner (Head of Publications - Assurance and Financial Reporting)

May 2021

May 2021 detailed list of changesThe following changes have been made:

Updated area Main reason for update

Audit data analytics and reporting on irregularities updateExample reports (P_C on or after 15 December 2019)

All audit reports - Updated to reflect the ICAEW 'Audit guide: how to report on irregularities, including fraud' published in April. The footnotes have been added to give clarity over what is mandatory and what is expected of auditors.

Current file documents

Completion (P_C on or after 15 December 2019)

A21 - Responsible Individual review and conclusion

- New test added to confirm the RIs approval of the 'Reporting irregularities, including fraud' wording in the audit report.

A29 - Reporting on irregularities, including fraud in the auditors' report

- New form added to reflect the ICAEW 'Audit guide: how to report on irregularities, including fraud' published in April which states 'How the auditor developed their explanation, and the areas considered, would be expected to be documented in the audit file'. This expectation goes beyond ISA 700 and we have added a new form to aid documentation for firms.

Completion (both P_C on or after 15 December 2019 and P_C before 15 December)

A45 - Audit data analytics and other technology update and evaluation - New form added to provide an update and evaluation of the use of ADA and if relevant, other technology.

A52-1 - Communication with management checklist - Test 3 updated to include salient findings from the use of ADA and / or other technology.

Planning (both P_C on or after 15 December 2019 and P_C before 15 December)

B11 - Planning memorandum (and freeform version)

- Updated risk assessment procedures to include a new test 5 on consideration of the use of audit data analytics (ADA) and confirming the appropriateness of it's use (B20) A new footnote has also been added to refer to additional guidance material included in the Audit Procedures Manual.

B11 - Audit Freeform Planning memorandum

- References to the B20 for planning the use of ADA and a new footnote 31 added which confirms that B20 must be completed to appraise the use (or rationale for the lack of use) of audit data analytics.

B12 - Acceptance of appointment or - New footnote added for consideration of audit data analytics as a non-audit service.


reappointment

B20 - Audit data analytics assessment - New form added to appraise the use (or rationale for the lack of use) of audit data analytics and to plan the approach.

B21-1 - Communication with management

- Updated nature of assignment to refer to audit data analytics and other technology when communicating the scope of the engagement and the general approach.

B22 - Preliminary analytical review- Updated objective to include the utilisation of audit data analytics (ADA) for the preliminary analytical review. Additional guidance added at the top of the form and confirmation that the B20 must be completed to confirm the appropriateness of the use of ADA.

B23 - Audit team discussion– Approach to the assignment updated to incorporate the use of audit data analytics (ADA) and other technology. A new footnote added in relation to which area(s) are assigned to which team members to confirm that where there are specialists supporting the engagement for ADA / other technology they should also be included in the team briefing.

B33 - Audit plan - Trial balance (use of audit data analytics) - New form added for when using ADA to identify journals /significant unusual transactions for testing.

Audit programme

N Trial balance audit programme - New test on journals for confirming the appropriateness of using ADA where relevant.

Other minor updatesA42 - Going concern update and evaluation (P_C on or after 15 December 2019)

- Updated to make a small correction for a missing word.

B11 freeform planning memorandum (P_C on or after 15 December 2019) - Updated to make a small correction for a missing word.

PF1-8 - Accounting estimates (P_C on or after 15 December 2019) - Updated to make a small correction for a missing word.

March 2021We are pleased to issue updates to your Clubs Manual (dated 03/21). The principal technical changes in these updates relate to the Ethical Standard 2019 and Brexit:

Ethical Standard 2019

The B12 and B13 have been updated for the Ethical Standard 2019 which is largely effective for engagements with periods commencing on or after 15 March 2020.

The Accounts and Reports (Amendment) (EU Exit) Regulations 2019 (SI 2019/145)

These regulations update certain definitions to be applied within company law as a result of the UK withdrawing from the European Union (EU). The key update for this manual relates to the disclosure requirements for political donations within the directors’ report. Statutory Instrument (SI) 2019/145 was published on 30 January 2019, with a small number of updates taking effect immediately and others taking effect for accounting periods commencing on or after 1 January 2021.

Your accounts disclosure checklists incorporate these updates.

Other changes

A number of other minor updates to wording have also been made including updating the language used in example letters and reports for gender neutrality.

We have also updated the manual include a new section 'Supplementary forms' which are not mandatory but maybe used on assignments. These include COVID-19, Brexit and a Change of Financial Reporting Framework Impact assessment and risk analysis. These have previously been provided outside of the manual but with the new method of delivery are now included as supplementary material. Please let us know if there is any other documentation that would enhance the product.

Please see below for a detailed list of all changes made as part of this update.

Contact us

We are always pleased to receive feedback on our manuals, including any improvements that you would like to see incorporated. Please contact me if you have any comments to make.

Jenny Faulkner (Head of Publications - Assurance and Financial Reporting)

March 2021

March 2021 detailed list of changesUpdated area Main reason for change

Guidance

Contents - Contents page updated for the changes made in this update.

Guidance notes - Updated the FRC Ethical Standard section.


http://www.legislation.gov.uk/uksi/2019/145/pdfs/uksi_20190145_en.pdf

- Other minor typographical and formatting updates.

What’s changed - A copy of this guidance has been added to the manual.

Example letters

All - Updated language for gender neutrality.

Engagement - terms of business - Updated 10.6.5 and 10.6.9 to reflect Brexit and 16.2 for best practise.

Example reports

Report to management - Updated language for gender neutrality.

Audit exempt - Updated wording to note that the CCAB accountants report guidance has recently been withdrawn.

Accounts disclosure checklists

A32 SMALL FRS 102 1A- Updated for the FRC’s Amendments to FRS 102: UK exit from the European Union and the encouraged disclosure of early adoption of these amendments, where applicable.

- Updated to show that disclosure of total contributions to non-UK political parties (rather than non-EU) is required for accounting periods commencing on or after 1 January 2021.

A32 NOT SMALL FRS 102 (P_C on or after 1 January 2019)

- Updated for the FRC’s Amendments to FRS 102: UK exit from the European Union and the requirement to disclose of early adoption of these amendments, where applicable.

- Updated to show that disclosure of total contributions to non-UK political parties (rather than non-EU) is required for accounting periods commencing on or after 1 January 2021.

Current file documents - Planning (detailed) [P_C on or after 15 December 2019]

B12 Acceptance of appointment or reappointment and

B13 Compliance with the Ethical Standard- Updated for FRC's Ethical Standard 2019.

Current file documents - Completion (detailed) [P_C on or after 15 December 2019]

A31 Completion checklist- Updated for FRC's Ethical Standard 2019.

Supplementary forms - New section added with the inclusion of non-mandatory supplementary forms, including on COVID-19, Brexit and Changes to Financial Reporting Framework.


January 2021The A31 has been reinstated after a number of tests on accounting estimates had inadvertently been excluded.


December 2020 - Changes made in relation to the update in methodologyWhat’s changed?

We are pleased to issue this update to your Mercia Clubs Manual (dated December 2020). The principal technical changes in this update relate to:

Changes to Auditing Standards

ISA (UK) 540 (Revised December 2018) – Auditing Accounting Estimates and Related Disclosures

In December 2018 the FRC issued a revised ISA (UK) 540 on Accounting Estimates, to reflect changes made by the IAASB to this standard. The new standard takes effect for audits of financial statements for periods beginning on or after 15 December 2019, although early adoption is permitted. Several other minor consequential amendments were made to other ISAs (UK) early in 2020.

The revised standard is a complete overhaul of the previous version and introduces several key changes to the approach that must be followed when auditing all types of accounting estimate and the associated financial statement disclosures. These changes will strengthen the audit of what can be a difficult area. The revised standard emphasises the need for professional scepticism at all times when assessing the methods, significant assumptions and data used by management when determining accounting estimates to be included in the financial statements, as well as the associated financial statement disclosures.

In order to reflect the requirements of the revised standard the audit methodology now places greater emphasis on the documentation of our understanding of accounting estimates and the risks they present at the planning stage and there is a revision to the workflow of key accounting estimates.

ISA (UK) 570 (Revised September 2019) – Going Concern

In September 2019, the FRC issued a revised version of ISA (UK) 570 on Going Concern, which is effective for audits of financial statements commencing on or after 15 December 2019, although early adoption is permitted. These revisions are in response to a number of recent audit failures regarding going concern, with the requirements of the new standard being much more prescriptive. Accordingly, a number of changes have been made throughout the manual to reflect these requirements, most notably the creation of a going concern work programme within field work.

Other changes

In addition to the going concern work programme within fieldwork, we have also added a subsequent events programme to fieldwork to give the same level of prominence.

Other changes to the Manual have been made for ISA amendments that are effective for audits of financial statements commencing on or after 15 December 2019.

See below for a full list of changes to the Manual.

What’s next?

The changes required for the Ethical Standard 2019 will be made to the Clubs Manual in early 2021 to be ready for predominately periods commencing on or after 15 March 2020.

Contact us

We are always pleased to receive feedback on our manuals, including any improvements that you would like to see incorporated. Please contact me on [email protected] if you have any comments to make.

Jenny Faulkner

December 2020 detailed changesA small number of minor formatting amendments have been made to ensure consistency across the Mercia product range . In addition the following changes have been made:

Updated area

Guidance

Contents and guidance notes - Updated for the changes made in this update.

Update 12/20 - What’s changed - Updated for the changes made in this update.

Example letters

Letter of representation - Amended to include the going concern management representation requirements as set out in ISA (UK) 570 (Revised September 2019).

- Updated to reflect revised wording of the representation required from management for accounting estimates as set out in ISA (UK) 540 (Revised December 2018).

Example reports

New tree structure added to separate out Example reports [For periods commencing on or after 15 December 2019] and [For periods commencing before 15 December 2019]

- N/A

Unqualified audit report - Clubs registered under CCBSA 14

- Updated to reflect the requirement in ISA (UK) 570 (Revised September 2019) to give positive conclusions regarding going concern and ISA (UK) 700 (Revised November 2019) to add a placeholder to explain the extent the audit was capable of detecting irregularities, including fraud.

Unqualified audit report - Clubs registered under FSA 74- Updated to reflect the requirement in ISA (UK) 570 (Revised September 2019) to give positive conclusions regarding going concern and ISA (UK) 700 (Revised November 2019) to add a placeholder to explain the extent the audit was capable of detecting irregularities, including fraud.

Unqualified audit report - Unregistered Club - Updated to reflect the requirement in ISA (UK) 570 (Revised September 2019) to give positive conclusions regarding going concern and ISA (UK) 700 (Revised November 2019) to add a


mailto:[email protected]

https://www.frc.org.uk/getattachment/13b19e6c-4d2c-425e-84f9-da8b6c1a19c9/ISA-UK-570-revised-September-2019-Full-Covers.pdf

https://www.frc.org.uk/consultation-list/2018/consultation-revision-of-isa-(uk)-540

placeholder to explain the extent the audit was capable of detecting irregularities, including fraud.

Disclosure checklists

All - for periods commencing on or after 1 January 2019 - Updated to reflect the requirement in ISA (UK) 700 (Revised November 2019) to explain the extent the audit was capable of detecting irregularities, including fraud.

- Updated for FRC's Amendments to FRS 102 - COVID-19-related rent concessions, Amendments to FRS 102 – Interest rate benchmark reform and Amendments to FRS 102 - Multi-employer defined benefit plans.


New tree structure added to separate out the following areas [For periods commencing on or after 15 December 2019] and [For periods commencing before 15 December 2019]:

- Completion;

- Planning (detailed);

- Planning (free form);

- Audit programmes;

- Current file indexes

- N/A

Current file index - Updated for the changes made in this update.

A21-1 - Responsible Individual review and conclusion - New document B30X added.

A22 - Overall Review of the Financial Statements - Amended to reflect going concern and subsequent events which now form part of the field work programme.

A25 - Audit Summary Memorandum - Additional test 15 added in relation to ISA (UK) 540 (Revised December 2018).

A31 - Audit completion checklist - Amended to reflect the updated work paper references regarding going concern.

- Amended to reflect the updated requirements of ISA (UK) 540 (Revised December 2018) in respect of accounting estimates.

- Updated referencing to reflect ISA (UK) 600 (Revised November 2019).

A41 - Subsequent events update and evaluation - Updated referencing to reflect ISA (UK) 600 (Revised November 2019).

A42 - Going concern update and evaluation- Amended to remove some core ISA (UK) 560 requirements which are now set out in the S work programme within field work. Updated conclusions to allow space to document key judgements made.

A44 - Accounting estimates update and evaluation- Amended to remove some core ISA (UK) 570 (Revised September 2019) requirements which are now set out in the R work programme within field work. Additional areas added to ensure that key documentation requirements are dealt within in relation to stand back requirements and key judgements made.

- A new completion form to document the global conclusions on accounting estimates and to demonstrate compliance with ISA (UK) 540.

A51 - Written representation checklist - Amended to include the going concern management representation requirements as set out in ISA (UK) 570 (Revised September 2019).

- Wording updated to bring into line with the requirements of ISA (UK) 540 (Revised December 2018) in respect of accounting estimates.

A52-1 - Communication with management checklist - Amended to include the required communications with management regarding going concern as set out in ISA (UK) 570 (Revised September 2019).

- The need to discuss accounting estimates with management to comply with ISA (UK) 540 (Revised December 2018) has been added.

A52-2 - Communication with those charged with governance checklist

- Amended to include the required communications with those charged with governance regarding going concern as set out in ISA (UK) 570 (Revised September 2019).

B11 - Planning checklist - Added the requirement to consider accounting estimates as part of the risk assessment procedures, including reference to new document B30.

B11 - Planning checklist (freeform memorandum approach)

- Added the requirement to consider accounting estimates as part of the risk assessment procedures.

- Added a requirement to discuss with management the contents of the other information to be presented alongside the financial statements and the timing of their issuance as required by ISA (UK) 720.


B11 - Freeform planning memorandum - Amended to reflect the requirements of ISA (UK) 570 (Revised September 2019) and ISA (UK) 540 (Revised December 2018) and related footnotes included.

- Amended to highlight that subsequent events are now addressed in the S programme at fieldwork.

B21-1 - Agenda for communication with management - Amended to include the required communications with management regarding going concern as set out in ISA (UK) 570 (Revised September 2019).

- Amended to better highlight the need to discuss with management the contents of the other information to be presented alongside the financial statements and the timing of their issuance as required by ISA (UK) 720.

B21-2 - Agenda for communication with those charged with governance

- Added accounting estimates to the list of matters to be discussed as part of understanding the entity and its environment in accordance with the requirement to do so in ISA (UK) 540 (Revised December 2018).

- Amended to include the required communications with those charged with governance regarding going concern as set out in ISA (UK) 570 (Revised September 2019).

B22 - Preliminary analytical review - Amended opening narrative to highlight that changes in the method of determining accounting estimates may help to identify audit risks.

B23 - Audit team discussion - Added accounting estimates as a matter to be discussed as part of the audit approach.

- Amended to align audit team discussion prompts regarding going concern to ISA (UK) 570 (Revised September 2019).

B30X - Key accounting estimates summary- New planning checklist designed to ensure compliance with the requirements of ISA (UK) 540 (Revised December 2018). A copy of this should be completed for each identified key accounting estimate.

B31 - Going concern risk assessment - Amended to reflect the requirements of ISA (UK) 570 (Revised September 2019).

B32 - Risk assessment - Amended to include new forms within the checklist, including PF1-10 and B30X.

B33/ Q2 / R2 / S2 - Audit plan - Amended to reflect accounting estimates, going concern and subsequent events now being part of the field work programmes.

C - Taxation programme - Amended B section ‘Tests of control’ of work programme to highlight the need to consider controls relevant to the making of accounting estimates.

- Amended F section ‘Tests of detail’ to make clear that current and deferred tax provisions are accounting estimates. The top of the page notes that where there are key accounting estimates, the Q programme also needs to be completed.

D - Related parties programme - Amended B section ‘Tests of control’ of work programme to highlight the need to consider controls relevant to the making of accounting estimates.

- Amended F section ‘Tests of detail’ at the top of the page to note that where there are key accounting estimates, the Q programme also needs to be completed.

E - Fixed assets programme - Amended B section ‘Tests of control’ of work programme to highlight the need to consider controls relevant to the making of accounting estimates.

- Amended F section ‘Tests of detail’ to better reflect ISA (UK) 540 (Revised December 2018)’s requirements when testing accounting estimates such as depreciation, valuation and impairment and to include testing of related disclosures. The top of the page notes that where there are key accounting estimates, the Q programme also needs to be completed.

F - Investments programme - Amended B section ‘Tests of control’ of work programme to highlight the need to consider controls relevant to the making of accounting estimates.

- Amended F section ‘Tests of detail’ to better reflect ISA (UK) 540 (Revised December 2018)’s requirements when testing accounting estimates such as valuation and impairment and to include testing of related disclosures. The top of the page notes that where there are key accounting estimates, the Q programme also needs to be completed.

G - Stocks programme - Amended B section ‘Tests of control’ of work programme to highlight the need to consider controls relevant to the making of accounting estimates.

- Amended F section ‘Tests of detail’ to add estimation uncertainty to be considered as part of presentation and disclosure and highlighted that stock impairment is an accounting estimate and to include testing of related disclosures. The top of the page notes that where there are key accounting estimates, the Q programme also needs to be completed.

H - Income and debtors programme - Amended B section ‘Tests of control’ of work programme to highlight the need to consider controls relevant to the making of accounting estimates.

- Amended F section ‘Tests of detail’ to add estimation uncertainty to be considered as part of presentation and disclosure and highlighted that debtor impairment and derivatives are accounting estimates and to include testing of related disclosures. The top of the page notes that where there are key accounting estimates, the Q programme also needs to be completed.

I - Bank and cash programme - Amended B section ‘Tests of control’ of work programme to highlight the need to consider controls relevant to the making of accounting estimates.

- Amended C section ‘Non-audit services’ to add preparation of the Analysis of Changes in Net Debt to presentation.

- Amended F section ‘Tests of detail’ to remove obsolete reference to Practice Note 16 ‘Bank confirmations’. The top of the page notes that where there are key accounting estimates, the Q programme also needs to be completed.

J – Creditors and expenditure programme - Amended B section ‘Tests of control’ of work programme to highlight the need to consider controls relevant to the making of accounting estimates.

- Amended F section ‘Tests of detail’ to highlight that derivatives are accounting estimates and to


include testing of related disclosures. The top of the page notes that where there are key accounting estimates, the Q programme also needs to be completed.

K - Provisions programme - Amended B section ‘Tests of control’ of work programme to highlight the need to consider controls relevant to the making of accounting estimates.

- Amended F section ‘Tests of detail’ to highlight that provisions are an accounting estimate and to include testing of related disclosures. The top of the page notes that where there are key accounting estimates, the Q programme also needs to be completed.

L - Capital and reserves programme - Amended B section ‘Tests of control’ of work programme to highlight the need to consider controls relevant to the making of accounting estimates.

- Amended F section ‘Tests of detail’ at the top of the page to note that where there are key accounting estimates, the Q programme also needs to be completed.

M - Wages programme - Amended B section ‘Tests of control’ of work programme to highlight the need to consider controls relevant to the making of accounting estimates.

- Amended F section ‘Tests of detail’ to highlight that share-based payments and pension obligations are accounting estimates and to include testing of related disclosures. The top of the page notes that where there are key accounting estimates, the Q programme also needs to be completed.

N - Trial balance programme- Amended A section ‘General and mandatory tests’ to remove the retrospective review of accounting estimates as this is now included as part of the planning section and expanded the testing of accounting estimates as required by ISA (UK) 540 (Revised December 2018).

- Amended B section ‘Tests of control’ of work programme to highlight the need to consider controls relevant to the making of accounting estimates.

- Amended F section ‘Tests of detail’ to include testing of disclosures of estimation uncertainty related to accounting estimates. The top of the page notes that where there are key accounting estimates, the Q programme also needs to be completed.

O - VAT programme - Amended B section ‘Tests of control’ of work programme to highlight the need to consider controls relevant to the making of accounting estimates.

- Amended D section ‘Analytical procedures’ for best practice amendment.

- Amended F section ‘Tests of detail’ to include testing of estimated VAT obligations. The top of the page notes that where there are key accounting estimates, the Q programme also needs to be completed.

Q - Accounting estimates programme- New programme created to give more prominence to certain requirements of ISA (UK) 540 (Revised December 2018) within field work. A copy of this programme is to be used for each key accounting estimate. As such we have included 5 versions of the programme (QA - QE) to tie in with 5 versions of the B30.

R - Going concern programme - New programme created to ensure auditors obtain sufficient appropriate audit evidence for going concern in accordance with ISA (UK) 570 (Revised September 2019).

S - Subsequent events programme - New programme, created to give more prominence to certain requirements of ISA (UK) 560 within field work.

Permanent file documents

New tree structure added to separate out Permanent file documents [For periods commencing on or after 15 December 2019] and [For periods commencing before 15 December 2019]

- N/A

Permanent file indexes - Updated for the changes made in this update.

PF1-1 - The entity and its environment - Amended to reflect the requirements of ISA (UK) 570 (Revised September 2019) and ISA (UK) 540 (Revised December 2018).

PF1-3 - Laws and regulations - Amended to add whether there are any indications of non-compliance with laws and regulations in accordance with the requirements of ISA (UK) 250 Section A (Revised November 2019).

PF1-8 - Accounting estimates- Amended form to provide an overview of management’s approach for determining accounting estimates and to highlight expected key accounting estimates, with cross reference to supporting documentation for each identified key accounting estimate at B30X.

PF1-10 - Going concern- New form to ensure that the requirements of ISA (UK) 570 in relation to understanding the entity and its environment including internal control specifically in relation to going concern are addressed.

PF2-1 - Systems overview- Amended to reflect the need to obtain an understanding of the entity’s processes regarding accounting estimates, going concern and subsequent events (where these are not covered elsewhere).

PF2-2 - Internal control overview- Amended to reflect the requirements of ISA (UK) 570 (Revised September 2019), and ISA (540) (Revised December 2018) making it clear that documentation of the entity’s risk assessment process includes consideration of going concern and accounting estimates.

PF2-3 - Internal control summary - Amended to reflect the need to obtain an understanding of the entity’s internal controls regarding accounting estimates, going concern and subsequent events.

PF3-1 - Risk analysis- Question added to consider whether there are accounting measurements subject to a high degree of subjectivity in accordance with the requirements of ISA (UK) 540 (Revised December 2018).

- Question added to consider whether there are any indications of non-compliance with laws and regulations in accordance with the requirements of ISA (UK) 250 Section A (Revised November


2019).

Appendix IISA (UK) 540 (Revised December 2018) – Auditing Accounting Estimates and Related Disclosures

In December 2018 the FRC issued a revised ISA (UK) 540 on Accounting Estimates, to reflect changes made by the IAASB to this standard.

The new standard takes effect for audits of financial statements for periods beginning on or after 15 December 2019, although early adoption is permitted. A number of other minor consequential amendments were made to other ISAs (UK) early in 2020.

The new version of the ISA includes:

• A requirement to obtain an understanding of the entity and its environment, including an entity’s internal control, to provide an appropriate basis for the identification and assessment of risks of material misstatement of accounting estimates at both the financial statements and assertion level. It should be noted that this standard was developed internationally alongside a new version of ISA (UK) 315, however, the application of these sister standards is non-coterminous, with the ISA (UK) 315 revisions not coming into effect for or audits of financial statements for periods beginning on or after 15 December 2021, although early adoption is permitted. The revised ISA (UK) 540 will still work alongside the extant ISA (UK) 315, however it does include a number of concepts that are in common with the new version that are not yet in effect.

• Requirements for risk assessment at the assertion level, with the new standard explicitly requiring separate assessment of inherent risk and control risk. It also introduces the concept of the “spectrum of risk” which is part of a theme of looking at the overall position with regard to inherent risk and making a clear-sighted assessment of actual risk levels for each engagement. Control risk is based upon the likely effectiveness of the control procedures implemented by management to address the assessed inherent risks. If there is no plan to test the operating effectiveness of controls the assessment of control risk should be high.

• When assessing inherent risk, the degree of estimation uncertainty, the effect of complexity, subjectivity and other inherent risk factors on the selection and application by management of the methods, assumptions and data used in making the estimate and on the selection of point estimates and related disclosures will need to be considered.

• Other considerations relating to obtaining and documenting audit evidence around:19. the events up to the date of the audit report;20. testing how management made the estimate;21. testing controls (where appropriate);22. management’s disclosures in relation to estimation uncertainty; and23. developing an auditor’s point estimate or range (requiring that the range only includes amounts supported by sufficient appropriate audit

evidence).• The updated objective requires audit procedures to address whether both the accounting estimates AND related disclosures are reasonable (rather

than simply adequate, as is currently the case for the latter) in the context of the financial reporting framework.• Reinforced the application of professional scepticism. Enhancements include using wording to drive questioning or challenging management where

appropriate; more focus on identifying indicators of possible management bias; requiring further audit procedures to be designed and performed in a manner that is not biased towards obtaining audit evidence that may be corroborative or towards excluding audit evidence that may be contradictory; and an enhanced retrospective review and an overall evaluation based on procedures performed.

• A new requirement to remind auditors of their responsibilities to communicate certain matters to those charged with governance and to consider the matters to communicate regarding accounting estimates, considering the reasons given to the risks of material misstatement.

• Enhanced documentation requirements, particularly around:24. understanding the entity;25. the link between audit risks and audit procedures;26. the response if management procedures are inadequate;27. indicators of possible management bias and implications for the audit; and28. significant judgements made when assessing whether or not estimates and disclosures are reasonable.

The revised standard is applicable to all estimates. It has been designed to be scalable, recognising that some estimates may not require significant judgments and the processes for making them may not be complex.

Alongside the revised ISA (UK) 540, confirming and consequential amendments have also been made to the following standards:

• ISA (UK) 200 Overall objectives of the independent auditor and the conduct of an audit in accordance with International Standards on Auditing (UK)• ISA (UK) 230 Audit documentation• ISA (UK) 240 The auditor’s responsibilities relating to fraud in an audit of financial statements• ISA (UK) 260 Communication with those charged with governance• ISA (UK) 500 Audit evidence• ISA (UK) 580 Written representations• ISA (UK) 700 Forming an opinion and reporting on financial statements

Most of these changes are minor and have little impact. The most significant change is the inclusion for the first time of guidance for auditors within ISA (UK) 500 on the use of external information sources which are often used by auditors when assessing the estimates and judgements made by management when determining accounting estimates to be reflected in the financial statements.

The publication of a revised version of ISA (UK) 540 Auditing Accounting Estimates and Related Disclosures has provided the opportunity to revisit the approach adopted by the Mercia audit methodology in addressing this complex area. In doing so we have not just ensured that the methodology demonstrates compliance with the requirements of the revised standard but have also overhauled the entire approach to documenting the work performed in respect of accounting estimates, from planning through to completion. The inclusion of new and revised forms at each key stage of the process will facilitate an efficient audit approach that concentrates on those key accounting estimates that represent a heightened risk of material misstatement in the financial statements and better enable the auditor to demonstrate that all aspects of ISA (UK) 540’s requirements have been complied with.

The risk assessment

The initial phase of the planning of an audit engagement is to complete a risk assessment. As with previous versions of the Audit Manual this will include completion of form PF1 The Entity and its Environment and it is here, as part of the documentation of the financial reporting framework that the entity is subject to, that knowledge of the accounting estimates relevant to the entity is first recorded.

The majority of entities that are subject to audit will have one or more accounting estimates in their financial statements, and for those entities it will be necessary to complete form PF1-8 Accounting Estimates in support of the overall consideration of the entity and its environment.

Compared to the previous version of the Audit Manual form PF1-8 has been significantly updated. The purposes of this form are the following:

• To document issues relevant to understanding the entity’s approach to determining accounting estimates at an entity level. This includes how management identifies the need to reflect accounting estimates in its reporting, regulatory issues and how the entity’s system of internal control demonstrates oversight and governance of the process, identifies areas of risk, implements general control procedures and utilises management experts.


https://www.frc.org.uk/consultation-list/2018/consultation-revision-of-isa-(uk)-540

• To record all the accounting estimates that have been identified as being relevant to the entity’s financial reporting, whether or not management have reflected them in the draft financial statements presented for audit. This would include any accounting estimates that the auditor would expect to be relevant to the entity’s reporting based on their understanding of the entity and the applicable financial reporting framework but may have been overlooked by the entity’s management.

In recording the accounting estimates relevant to the entity, it is necessary to record whether from an audit perspective it is considered to be a key accounting estimate or not. A key accounting estimate is one with an increased possibility of there being material misstatements in the financial statements due to estimation uncertainty or the complexity, subjectivity or other inherent risk factors involved in its determination.

For those accounting estimates that are not considered to be key accounting estimates documentation of this is required on form PF1-8, including the reason why in the professional judgement of the auditor this is the case. It may be that the accounting estimate concerned does not have a material impact on the financial statements due to its magnitude, or that the method used for its determination is such that the assumptions and data utilised carry no risk of significant estimation uncertainty, such that the possibility of a material misstatement in the financial statements is considered to be remote. Such accounting estimates will not need to be considered further in planning the audit engagement.

Additional consideration is required for each key accounting estimate that has been identified. In order to better document the risk assessment of those key accounting estimates that do present a risk of possible material misstatement in the financial statements form B30X Key Accounting Estimates Summary has been introduced, and a separate copy of this form should be completed in respect of each key accounting estimate (eg. the X is replaced with a letter, therefore if there are three key accounting estimates, then there will be a B30A, B30B and a B30C).

This form records the auditor’s understanding of specific issues related to that key accounting estimate. This includes issues such as those related to the entity and its environment, such as any specific requirements of the applicable financial reporting framework, and the entity’s internal controls and other related procedures. This will set out the method utilised by the entity to determine the accounting estimate, the underlying assumptions involved, and data incorporated into the calculation, and ultimately how management select the point estimate for recognition in the financial statements. The use of any management experts will be noted. Crucially the form also records how management address the level of estimation uncertainty inherent in the accounting estimate.

Form B30X also provides an opportunity for the auditor to record their review of the outcome of previous accounting estimates made in prior years and their accuracy, useful in helping to identify the risk of material misstatement in the current period.

Having identified all of the issued related to each key accounting estimate, form B30X also records the auditor’s assessments of inherent risk and control risk, which in order to comply with the requirements of the revised version of ISA (UK) 540 are required to be considered separately.

The revised standard requires inherent risk to be assessed on a spectrum, which under the Mercia methodology results in an assessment that falls between 1 (being very low) and 5 (being very high). In arriving at this determination there is an opportunity to note the degree to which the accounting estimate is affected by the following:

• Estimation uncertainty;• The complexity, subjectivity and other inherent risk factors arising from the selection and application of the method, assumptions and data used to

determine the accounting estimate; and• The complexity, subjectivity and other inherent risk factors arising from the selection of management’s point estimate and related disclosure.

The auditor’s understanding of these three key issues will inform the inherent risk assessment. Clearly an accounting estimate that is simple to determine and carries little estimation uncertainty would result in a conclusion of their being minimal inherent risk and would be assessed at the lower end of the spectrum. Conversely an accounting estimate that exhibits considerable estimation uncertainty and requires complex modelling to determine would be assessed as being at the higher end of the spectrum.

The control risk assessment is based upon whether the auditor considers the control procedures implemented by management will be effective and will be assessed on a scale from low to high, similar to other risk assessments within the Mercia audit methodology. If there is no plan to test the operating effectiveness of controls (see below) the assessment of control risk should be high.

If there are any risks which are considered to be significant risks, they also reflected on form B32 Risk Assessment.

Lastly form B30 requires the auditor to consider whether testing of controls should be planned, where management implement control procedures in relation to the key accounting estimate.

The approach to the key accounting estimate then needs to be planned and this is recorded on B33 / Q2 Audit Plan or an alternative freeform memorandum. The planned approach must meet ISA (UK) 540’s requirement to take the form of one or more of the following:

• Obtaining evidence from events occurring up to the date of the auditor’s report;• Testing how management made the accounting estimate; or• Developing an auditor’s point estimate or range.

Whichever of the above approaches is followed, the audit procedures performed should be designed to ensure that auditors can conclude on the following issues:

• whether management has appropriately applied the requirements of the applicable financial reporting framework;

• whether the methods used to determine the accounting estimate are appropriate and have been consistently applied;

• that any changes in accounting estimates are appropriate; and

• that disclosure related to the accounting estimate included in the financial statements is reasonable.

Each individual key accounting estimate should have its own planned approach and there are duplications of the planned approach tables within the B33 / Q2 in order to facilitate this (ie. if there are three key accounting estimates, then there will be a B30A, B30B and a B30C and three corresponding planned approaches on the B33/Q2 – that this does not require three versions of the B33/Q2 as there are duplications of the tables within the form).

For each key accounting estimates documented at B30X, we consider where management implement control procedures, whether testing of controls should be planned. Where it is deemed suitable to test controls in relation to key accounting estimates, either because we aim to rely on those controls, or where substantive procedures alone cannot provide sufficient appropriate audit evidence at the assertion level, we perform the controls testing as part of the related individual audit area programme. For example, if the impairment of a particular class of fixed assets is a key accounting estimate and we plan to test controls then we would use the Fixed asset audit programme, B tests of controls to record our controls audit. This would also be documented on the audit plan for Fixed assets and feed through to the Fixed asset audit programme (E).

Audit fieldwork

An entity may have several key accounting estimates, and it is likely that the procedures to be performed in respect of each will differ considerably. For example, you would not expect to adopt the same approach for testing an impairment provision and the valuation of investment property. Regardless of the nature of each individual key accounting estimate, the procedures being performed must comply with the approach required by ISA (UK) 540.

To help the auditor ensure that the standard is being complied with a new Q Audit programme for Accounting Estimates has been developed, a copy of which should be completed for each key accounting estimate being tested. This sets out the specific requirements of the standard for each of the three permitted audit approaches, allowing the auditor to demonstrate that they have been complied with.


There are certain requirements of the standard that will apply regardless of the approach being followed, such as whether the requirements of the applicable financial reporting framework have been complied with and that the disclosures in the financial statements are appropriate and to consider whether there has been management bias. There are separate sections of the Q audit programme which deal with these requirements.

Having ensured that the key accounting estimate has been tested in accordance with the requirements of ISA (UK) 540 the form requires the auditor to conclude on whether they have obtained sufficient appropriate audit evidence on which to be able to form a conclusion in respect of that key accounting estimate. The documentation surrounding this area is critical to show compliance with the standard.

Audit completion

The updated ISA (UK) 540 includes a ‘stand-back’ requirement that involves performing an overall evaluation of accounting estimates based on the audit procedures that have been performed. This is performed at an individual key accounting estimate level on the Q audit programme, but it is also considered globally at the completion stage. To help demonstrate compliance with this requirement a new form has been added to the completion section, form A44 Accounting Estimates Update and Evaluation.

Using the experience gained from having completed the detailed audit work this form is used to consider whether the original risk assessment determined during the audit planning stage remains appropriate, and if not whether any additional procedures should be completed.

The overview process is used to determine whether management’s approach to assessing accounting estimates is reasonable or not. It helps the auditor to identify possible instances of management bias, for example where assumptions made or point estimates selected in the context of an individual accounting estimate may appear reasonable but collectively demonstrates a pattern that best fits management’s objectives for the company’s reporting rather than a more objective, reasonable approach.

The overview is also used to ensure that the accounting estimates have been made in accordance with the applicable financial reporting framework, including any related disclosure requirements. This may include disclosures beyond that required by the framework when considered necessary to ensure that the financial statements show a true and fair view.

Building on the conclusions reached on the individual Q audit programmes completed for each individual key accounting estimates, the overview also provides an opportunity to document whether sufficient appropriate audit evidence has been obtained in respect of accounting estimates. This should take account of all audit evidence obtained, whether it corroborates the entries in the financial statements or is contradictory. As part of the audit evidence required the overview form is used in conjunction with form A51 Written Representations to consider whether what, if any, representations need to be obtained from management or those charged with governance in respect of accounting estimates.

Working alongside form A52-1 Communication with Management Checklist the overview form is also used to detail any matters that need to be reported, including any qualitative aspects of the entity’s reporting practices or significant deficiencies in internal control.

Lastly the overview form provides an opportunity for the auditor to conclude on whether, in their opinion, accounting estimates collectively are reasonable and whether sufficient appropriate audit evidence has been obtained and to document any significant judgements made in relation to this conclusion. The impact on the audit opinion is also documented.

ISA (UK) 570 (Revised September 2019) – Going Concern

In September 2019, the Financial Reporting Council (FRC) issued a revised version of ISA (UK) 570 Going Concern which becomes effective for audits of financial statements for periods commencing on or after 15 December 2019. Early adoption is permitted. This revised ISA (UK) has been extensively amended in light of the well-publicised criticisms of the auditing profession. ISA (UK) 570 (Revised September 2019) increases the work which auditors are required to undertake when auditing the going concern status of an entity. A summary of the amendments is as follows:

• Responsibilities of the auditor – the standard has been revised to clarify that as well as obtaining sufficient appropriate audit evidence to conclude on the appropriateness of management’s use of the going concern basis of accounting, the auditor also needs to obtain sufficient appropriate audit evidence to conclude on whether or not a material uncertainty regarding going concern exists, this requirement being more explicit than in the previous standard.

• Definitions – the revised standard now also includes the following definitions to be applied when using ISAs (UK):29. Management bias – A lack of neutrality by management in the preparation of information.30. Material uncertainty related to going concern – An uncertainty related to events or conditions that, individually or collectively, may cast

significant doubt on the entity’s ability to continue as a going concern, where the magnitude of its potential impact and likelihood of occurrence is such that appropriate disclosure of the nature and implications of the uncertainty is necessary for, the fair presentation of the financial statements.

• Enhanced risk assessment procedures – The risk assessment procedures in the revised standard have been significantly expanded, drawing a clear link to the requirements of ISA (UK) 315, including a requirement to understand the following areas in relation to going concern in order to meet the objectives of the standard:

31. the entity and its environment;32. the applicable financial reporting framework; and33. the entity’s system of internal control.

• Further, should the auditor identify events or conditions which may cast significant doubt on the entity’s ability to continue as a going concern which management has not previously identified or disclosed to the auditor, the standard now requires the auditor to:

34. request management to perform additional procedures to understand the effect of the events or conditions on management’s going concern assessment;

35. inquire as to why management’s going concern assessment failed to identify or disclose the events or conditions; and36. perform additional audit procedures relating to the newly identified events or conditions.

• Requirements when evaluating management’s assessment – While the broad requirement to evaluate management’s going concern assessment is unchanged, the new standard gives much more prescriptive requirements for the auditor when doing this, including:

37. evaluating the method used by management in assessing the entity’s ability to continue as a going concern;38. evaluating the relevance and reliability of the underlying data used to make the assessment;39. evaluating the assumptions on which management’s assessment is based;40. evaluating management’s plans for future actions in respect of going concern.

• The new standard also gives an explicit requirement that management’s assessment needs to cover at least 12 months from the date of approving the financial statements and where this is not done, the auditor shall request management to extend its assessment to cover this period.

• Evaluating the sufficiency and appropriateness of audit evidence and consider all relevant audit evidence obtained, whether corroborative or contradictory.’

• Reporting – The revised standard uses the words ‘appropriate’ and ‘appropriateness’ in terms of the disclosures made in the financial statements relating to going concern rather than ‘adequate’ and ‘adequacy’. In the audit report, should the auditor conclude the going concern basis is appropriate and no material uncertainty exists, a positive conclusion regarding going concern is now required under ‘Conclusions related to going concern’ or other appropriate heading.

• Documentation - The revised standard now also includes some specific documentation requirements which need to be recorded on the audit file (drawing on the requirements of ISA (UK) 230 which would be relevant to this standard) as follows:

41. Key elements of the auditor's understanding of the entity and its environment, including the entity's internal control related to going concern;

42. Indicators of possible management bias related to going concern, if any, and the auditor's evaluation of the implications for the audit.43. Significant judgments relating to the auditor's determination of:


1. Whether or not a material uncertainty related to going concern exists;2. The appropriateness of management's use of the going concern basis of accounting in the preparation of the financial

statements; and3. The appropriateness of management's disclosures in the financial statements.

In light of the changes above several updates have been made throughout the Audit Manual to reflect these requirements within the methodology. Firstly, permanent file forms have been updated to reflect the specific requirements within the updated ISA to ensure the requirements regarding going concern are reflecting in the understanding of the entity and its control environment. There is a new PF1-10 which specifically looks at understanding the entity its environment in relation to going concern.

The PF1-10 firstly identifies the events or conditions regarding the going concern status by reviewing the information of PF1 relating to the following areas:

Entity's business model, objectives, strategies and related business risks

Through understanding the above, auditors will obtain information that is relevant in identifying events or conditions that may cast significant doubt on the entity's ability to continue as a going concern and whether a material uncertainty related to going concern exists, for example;

• developments in the environment where the entity operates (eg. a potential related business risk might be increased costs, loss of market share);

• new products and services (eg. leading to increased product liability);• expansion of the business (eg. demand has not been accurately estimated); and• current and prospective financing requirements (eg. current financing requirements may be approaching maturity without realistic prospects

of renewal or repayment).

The nature of the entity, including its operations, the types of investments or disposals the entity is making and plans to make, and how the entity is structured and financed

Through understanding the above, auditors will obtain information that is relevant in identifying events or conditions that may cast significant doubt on the entity's ability to continue as a going concern and whether a material uncertainty related to going concern exists (eg.

• whether the entity has a complex structure or large in size;• whether the entity has any financial obligations / undertakings / guaranties, with lenders / suppliers / group entities and the terms of those

facilities.

Requirements of the applicable financial reporting framework relating to going concern, and the related disclosures that we expect to be included in the entity's financial statements

The entity’s risk assessment process relating to going concern

After identifying events or conditions regarding the going concern status, consideration of the entity’s risk assessment process is required:

• the risk assessment process identifies relevant business risks and assesses their significance; including likelihood and impact;

• the information system identifies and captures events or conditions, that individually or collectively may threaten the entity’s ability to continue as a going concern;

• the methods, assumptions and data used in assessing its going concern status are identified by management. This may include how they determine the relevance and accuracy of the method, how they determine that assumptions are relevant and complete and the nature and source of the method, data and assumptions;

• management prepares disclosures relating to going concern for its financial statements;

• the nature and extent of oversight and governance over management’s assessment process. Auditors’ will assess whether those charged with governance have the skills and knowledge to understanding how characteristics of the method used by management to assess the entity’s ability to continue as a going concern and as to whether the assessment fulfils the requirements of the financial reporting framework. This final element is also covered on the B21-1 and B21-2.

The understanding reflected in these forms then leads to an updated B31 risk assessment. This revised form guides users to consider if any events or conditions that, individually or collectively, may cast significant doubt on the entity's ability to continue as a going concern would give rise to a material uncertainty regarding going concern. The form then prompts auditors to obtain a copy of management’s initial going concern assessment and document the understanding of how this was made. Auditors are then required to evaluate if the period assessed covers at least 12 months from the expected date of approving the financial statements and where it does not, this should be discussed with the client, noting the key points from the discussed and considering the impact this has on your risk assessment. Auditors inquire with the client of their knowledge of events or conditions beyond the period initially assessed and the potential significance of these on their assessment of the entity’s ability to continue as a going concern and then, considering management’s assessment as whole, evaluate if their assessment considers all the events or conditions that may cast significant doubt on the entity's ability to continue as a going concern.

An important aspect is that auditors evaluate whether factors, events or conditions that may cast significant doubt on the entity's ability to continue as a going concern give rise to a risk of management bias.

When reflecting on this risk assessment process auditors ensure they have updated and reviewing relevant permanent file documents. If through their risk assessment process, additional factors, events or conditions that cast significant doubt over the entity's ability to continue as a going concern have been identified by the auditor, auditors must inquire as to why management failed to identify or disclosure those factors, events or conditions. An overall conclusion should then be summarised as to whether events or conditions [have / have not] been identified that may individually or collectively, cast significant doubt on the entity’s ability to continue as a going concern and there is a [low / medium / high] risk that a material uncertainty related to going concern exists; and a[low / medium / high] risk that managements use of the going concern basis of accounting in the preparation of the financial statements is inappropriate. Any specific risks noted should be added to B32 and B33 / R2. The audit approach should be planned on B33 / R2 and the R audit programme tailored accordingly.

Given the increased emphasis on the auditors work around going concern, a dedicated audit programme has been created to give a greater focus on the work needed during core field work. This takes a number of the procedures that were previously performed when completing A42 along with a number of mandatory procedures now required in the revised version of ISA (UK) 570 and is set out in Section R of the work programmes. For consistency, the same change has been made for work required over subsequent events, with certain procedures which were previously set out in A41 now being included in Section S of the work programme. Given the nature of these areas, these sections only contact ‘General and Mandatory’ procedures, given the other work programmes seen in other areas are not considered applicable.

While the majority of work required over going concern (and subsequent events) has been moved into field work per the changes set out above, A41 & A42 have been retained for a final update and evaluation prior to finalising the engagement. The documentation of significant judgements made and the impact on the audit opinion should be reflected here and are also documented on the Audit Summary Memorandum at A25.


The example reports included within the manual have also been updated to reflect the reporting requirements set out in the revised version of ISA (UK) 570. In addition the a standard opinion, which reflects a positive conclusion regarding there not being a material uncertainty relating to going concern and that managements use of the going concern basis of accounting in preparing the financial statements is appropriate, there is now also a template which reflects a material uncertainty relating to going concern.

Other recent changes to ISAs (UK)

Alongside the recent update to the FRC Ethical Standard in December 2019, the FRC issued a number of relatively minor revisions to the following ISAs (UK) that take effect for accounting periods commencing on or after 15 December 2019:

• ISQC (UK) 1 Quality control for firms that perform audits and reviews of financial statements, and other assurance and related services engagements

• ISA (UK) 220 Quality control for an audit of financial statements• ISA (UK) 250A Consideration of laws and regulations in an audit of financial statements• ISA (UK) 250B The auditor’s statutory right and duty to report to regulators of public interest entities and regulators of other entities in the financial

sector• ISA (UK) 260 Communication with those charged with governance• ISA (UK) 600 Special considerations – audits of group financial statements (including the work of component auditors)• ISA (UK) 620 Using the work of an auditor’s expert• ISA (UK) 700 Forming an opinion and reporting on financial statements• ISA (UK) 701 Communicating key matters in the independent auditor’s report• ISA (UK) 720 The auditor’s responsibilities relating to other information

As can be seen from the list above, the changes affect a broad selection of the ISAs, although the main changes focus on four principal areas.

Laws and regulations

There are requirements for greater consideration of whether there are any indications of non-compliance with the legal and regulatory framework in which the audited entity operates. Additional work will be required as part of the auditor’s risk assessment, and the updated ISA (UK) 250A includes improved guidance on circumstances which may indicate that such non-compliance has taken place.

The changes also emphasise the importance of qualitative factors when considering whether non-compliance is material and may require disclosure in the financial statements. PF1-3 and the related guidance in the Guidance Notes has been updated for this.

Reporting

Possibly the biggest impact outside of the ISA 540 and ISA 570 changes for the majority of auditors will be the introduction of what is intended to be a bespoke paragraph in each audit report. It is required to explain to what extent the audit was considered capable of detecting irregularities, including fraud. The FRC’s own impact assessment noted that it was expected that this additional requirement would take an additional one manager hour per engagement, though in reality this will undoubtably vary considerably from one engagement to the next.

The example reports included within the manual have also been updated to reflect the reporting requirements set out in the revised version of ISA (UK) 700. This includes a section for you to set out the extent the audit was considered capable of detecting irregularities, including fraud. We have included guidance within the Audit Procedures Manual to help guide auditors as to what could be included in this section.

December 2020 - Changes made in relation to the new method of deliverySet out below is a list of all of the documents that have been revised in this update, along with a brief explanation of how they have changed.

Pages to be changed Main reason for change

All

All - The creator tool has been withdrawn, so areas of the Clubs Manual required are selected from the webpage instead. Users are able to 'customise' a pack of documentation for the clients.

- The overall document hierarchy has been amended to be more intuitive. ‘Permanent file documents’ is now the final section of this manual (also see comments below for how specific sections have been re-ordered).

Guidance and Procedures

All - Section renamed to ‘Guidance’ from ‘Section A - Guidance notes’.

Contents - Contents page updated to reflect the new format and method of delivery.

Guidance and procedures - Chapter referencing has been updated to reflect the new method of delivery.

- A number of other minor amendments to reflect best practice and standardise guidance notes across the Mercia product range.

Getting started for new manual users - A revised set of guidance notes has been included to reflect the updated method of product delivery.

What's changed - A copy of this document.

Example letters

All - Section renamed to ‘Example letters’ from ‘Section B - Example letters’.

Engagement - covering letter-

A number of amendments to reflect best practice and standardise engagement letters across the Mercia product range.


Engagement - schedule of professional services -

A number of amendments to reflect best practice and standardise engagement letters across the Mercia product range

Engagement - standard terms of business - ‘Term of business’ renamed ‘Standard terms of business’, along with a number of amendments to reflect best practice

and standardise engagement letters across the Mercia product range.

Representation letter - A number of minor amendments to reflect best practice and standardise engagement letters across the Mercia product range

Example reports

All - Section renamed to ‘Example reports’ from ‘Section C - Example reports’.

- A number of minor amendments to reflect best practice and standardise engagement letters across the Mercia product range.

Example accounts

All - Section renamed to ‘Example accounts’ from ‘Section D - Example accounts’.

Accounts disclosure checklists

All - Section renamed to ‘Accounts disclosure checklists’ from ‘Section E - Accounts disclosure checklists’.

- The references given to the disclosure checklists, including the summary, have been amended to reflect the new system of product delivery. Titles have also been updated in some cases for clearer descriptions.

- All guidance is now shaded grey and in small italics to aid users in completing these documents.

- Areas which used to be shaded grey (eg. where qualifying entities may take advantage of disclosure exemptions) are now marked with a symbol (eg. an omega (Ω)) rather that indicated by shaded text.

All except A32 Summary Disclosure checklist summary -

The "Section N/A" column has been removed, instead users select "N/A" from the column options situated against the section headings, where needed, to reflect the section does not apply. In addition, the heading "Compliance" above the column options has been removed.


All - Section renamed to ‘Current file documents’ from ‘Section G - Current file documents’.

- The hierarchy of the content in this section has been amended to be more intuitive, with sections now being presented in the order they would appear in an audit file (i.e. Completion, then Planning, then Audit programmes).

- For consistency across the Mercia product range, specific references in the main body of forms to 'ISA (UK) have been replaced with 'ISA', with guidance notes at the top of the form being added to make it clear these refer to ISAs (UK).

All completion documents - For consistency of presentation, under all subheadings within a completion form, procedure numbering now reverts back to 1 (for example within A21-1 procedures 13-15 are now 1-3 under the heading ‘Approval and signature’).

A21-1 - Responsible Individual Review And Conclusion - Procedures 1-13 now sit under a heading ‘Audit finalisation’.

- The heading ‘Confirmation of signing / completion’ has been replaced with ‘Approval and signature’.

- Conclusions now have explicit options to ‘tick as appropriate’, rather than being a strike through ‘delete as appropriate’.

‘Reappointment considerations’ have been separated into their own section under ‘Conclusions and Audit Opinion’.

A21-2 - Engagement Quality Control Review Checklist - Column headings ‘Comments’ and ‘Initials’ have been consolidated under the heading ‘Notes (refer to other schedules

where applicable)’.


-The procedures on this form have been re-ordered, to be better grouped for the objectives they achieve, with 8 & 9 now being under the heading ‘Integrity, objectivity and independence’, 1, 3, 4 & 5 now being under a heading ‘Matters arising during the assignment’ and 6, 2, 7 & 10 now being under the heading ‘Final review and reporting’.

A21-3 - Consultation / Ethics review - For improved styling guidance notes for the relevant section have been re-formatted.

- Within the ‘Review points’ section, the column headings ‘Sch Ref.’ ‘Clearance’ and ‘Initials/Date’ have been consolidated under the heading ‘Schedule reference and details of clearance, with initials and date’.

A22 - Overall Review Of The Financial Statements - Column headings ‘Comments’ and ‘Initials’ have been consolidated under the heading ‘Notes (refer to other schedules


A25 - Audit Summary Memorandum - For improved styling guidance notes for the relevant section have been re-formatted.

- The column heading ‘Clearance’ has been renamed ‘Justification for clearance', to encourage more appropriate responses.

A27 - Summary Of Misstatements - For improved styling the materiality section has been re-formatted, with the conclusion section now having options to ‘tick as appropriate’, rather than being a strike through ‘delete as appropriate’.

A31 - Audit completion checklist - For clarity, confirmation that ISA references refer to ISA’s (UK) is now in the guidance notes at the top of the form.

- The column headings ‘Yes, No or N/A’ and ‘Comments’ have been consolidated under the heading ‘Yes/No (add comments as needed)’ to better reflect the expected responses.

- Footnote explaining point 7 is relevant for accounting periods beginning on or after 15 December 2017 has been removed given all year ends now being audited will be beyond this date.

A41 - Subsequent Events Checklist - Column headings ‘Comments’ and ‘Sch Ref’ have been consolidated under the heading ‘Notes (refer to other schedules where applicable)’ to encourage more complete responses.

- For clarity the conclusion section now cross references to A42 for going concern considerations.

- For clarity the section for updates prior to signing is now headed ‘Update to the audit report date’.

A42 - Going Concern Work Programme - Column headings ‘Comments’ and ‘Sch Ref’ have been consolidated under the heading ‘Notes (refer to other

schedules where applicable)’.

A51 - Written Representations Checklist - ‘The ‘Comments’ column has been renamed ‘Notes (refer to other schedules where applicable)’ to encourage more

complete commentary.

- For clarity, confirmation that ISA references refer to ISA’s (UK) is now in the guidance notes at the top of the form.

- For clarity, the section for updates in respect of additional procedures performed up to the date of signing has been separated from the ‘Conclusions’ section and is now under the heading ‘Update to the audit report date’.

A52-1 - Communication With Management Checklist - Guidance notes to indicate that any communication with those charged with governance, where different from

management, should be recorded on B21-2 has been moved to the top of the form for clarity.

- Column headings ‘Sch Ref’ and ‘Comments’ have been consolidated under the heading ‘Notes (refer to other schedules where applicable)’.

A52-1 - Communication With Those Charged With Governance Checklist

- The ‘Comments’ column has been renamed ‘Notes (refer to other schedules where applicable)’ to encourage more complete commentary.

- Column headings ‘Sch Ref’ and ‘Comments’ have been consolidated under the heading ‘Notes (refer to other schedules where applicable)’.

All planning documents -For consistency of presentation, under all subheadings within a completion form, procedure numbering now reverts back to 1. (for example within B12 procedure 2-3 are now procedure 1-2 under the heading ‘Long association with the audit engagement’).

B11 - Planning Checklist - Column headings ‘Notes’ and 'Sch Ref' have been consolidated under the heading ‘Notes (refer to other schedules where applicable)’.

B13 - Compliance With The Ethical Standard -

‘N/A’ has been removed from the response column given questions should generally only require a ‘Yes’ or ‘No’ answer, although a prompt has been added to ‘add comments as needed’ for where enhanced explanation is required.


- Prompts to ‘tick as applicable’ have been added where the form gives multiple options for the response.

- The Acceptance of appointment or reappointment form has been consolidated under one reference 'B13-1'.

- A ‘Consultation and communications’ section has been added to separate any communications with the firm’s ethics partner and the client from the final conclusion.

-The conclusion section has been renamed ‘Responsible Individual judgement and conclusion’ and now includes space for RI judgement to be recorded, with the final conclusion now being a tick options rather than a strike through to make the choice clearer.

B14 - Preliminary Engagement Quality Control Review - The columns ’Comments’ and ‘Initials’ have been consolidated under the heading ‘Notes (refer to other schedules


- The conclusion section has been renamed ‘EQC reviewer conclusion’ for clarity.

B21-1 - Communication With Management and Communication With Group Management

- The title of the form has been shortened to ‘Communication with management’.

- Guidance notes to indicate that any communication with those charged with governance, where different from management, should be recorded on B21-2 has been moved to the top of the form for clarity.

- The heading ‘Discussions must, as a minimum, include the areas noted below’ has been replaced with ‘Record of the communication’, with additional guidance notes added for recording the discussion.

- Column headings ‘Response / matters arising’ and ‘Sch Ref’ have been consolidated under the heading ‘Notes (refer to other schedules where applicable)’.

B21-2 - Communication with those charged with governance - The title of the form has been shortened to ‘Communication with those charged with governance’.

- The heading ‘Discussions must, as a minimum, include the areas noted below’ has been replaced with ‘Record the communication’, with additional guidance notes added for recording the discussion.

- Column headings ‘Response / matters arising’ and ‘Sch Ref’ have been consolidated under the heading ‘Notes (refer to other schedules where applicable)’.

B23 - Audit Team Discussion - Guidance notes regarding capturing the discussion(s) have been moved to the top of the form for clarity and the summary of points to discuss is now under the heading ‘Matters to discuss’.

B31 - Going Concern Preliminary Assessment - For clarity the form now includes a Y/N response column for factors to consider.

B32 - Risk Assessment - For clarity the strike-through options for risk levels in the conclusions have been replaced with tick boxes.

B33 - Audit Plan - All - For clarity, the guidance notes have been moved to the top of the forms.

- The options to select the audit programmes required now sit above the area to record more detailed comments.

B41 - Materiality - Guidance notes have been moved to the top of the form for clarity.

-The table has been reformatted for clarity, with ‘Basis for determining materiality’ section being merged into the ,’Materiality for the financial statements as a whole’ section and the ‘Amount below which misstatements are clearly trivial’ and ‘Audit areas requiring other levels of materiality’ not being under a heading of ‘Trivial threshold and other levels of materiality’.

- The area to update for final materiality has been given more prominence in its own section at the end of the form.

B11 - Planning Checklist – Freeform Memorandum Approach - Across all areas, column headings ‘Notes’ and ‘Sch Ref’ have been consolidated under the heading ‘Notes (refer to

other schedules where applicable)’.

B11 - Freeform Audit Planning Memorandum - For ease of use, this form now contains more tick box options, rather than having to tailor and lock the form prior to

printing.

- Other minor amendments have been made to reflect best practice guidance and ensure consistency across the Mercia product range.

Audit programmes - all - The structure and referencing of work programmes has been amended to reflect the new method of delivery and best practice.

- Across all the work programmes, the heading 'Sch ref / Work done' has been replaced with 'Notes (refer to other schedules where applicable).

- E1 – This section is now titled ‘E Test of detail (blank programme)’.

- E2 – This section is now titled ‘F Test of detail (tailorable programme)’.

Current file indexes - sections C to P - The sign-off’s on these forms have been updated from ‘Signed by’ to ‘Prepared by’ to be consistent with other sign-offs

within the manual.

A21 - Audit exemption - Completion checklist, partner review and conclusion

- For ease of use, this form now contains tick box options for the conclusions.

B11 - Audit exemption - Planning checklist - Column headings ‘Notes’ and 'Sch Ref' have been consolidated under the heading ‘Notes (refer to other schedules



Permanent file documents

All - Section has been renamed to ‘Permanent file documents’ from ‘Section F - Permanent file’.

- Across all the permanent file forms, column headings ‘Notes’ and ‘Sch Ref’ have been consolidated under the heading ‘Notes (refer to other schedules where applicable)’.

New and existing client customer due diligence forms - These have been removed from the manual, as these should be completed inline with the guidance and procedures in

the firm's Anti-Money Laundering compliance manual.

PF1-1 - The Entity and its environment - Given it is one form, PF1-1 and PF1-2 have been merged, with PF1-2 now being an omitted reference.

PF1-3 - Laws and regulations - This form has been reformatted to give space for commentary under the items to consider, rather than to the right, as this provides more space for documentation.

PF1-4 - Related parties -To emphasise the requirements when recording related parties the guidance ‘You should include all known related parties, regardless of whether or not there are any likely transactions.’ has been moved from an end note to be part of the core content on the form.

PF1-6 - Using a service organisation - This form has been reformatted to give space for commentary under the items to consider, rather than to the right, as

this provides more space for documentation.

PF1-7 - Using the work of an expert - This form has been reformatted to give space for commentary under the items to consider, rather than to the right, as this provides more space for documentation.

PF1-8 - Accounting estimates - The ‘Planned approach’ section of this form has been reformatted to give space for commentary under the items to consider, rather than to the right, as this provides more space for documentation.

PF2-2 - Internal control overview - For clarity, the items to consider have now been listed as bullet points, rather than a single body of text.

PF2-4 - Using The Work Of And Communication With Internal Auditors

- Across all areas, column headings ‘Notes’ and ‘Sch Ref’ have been consolidated under the heading ‘Notes (refer to other schedules where applicable)’.

PF3-1 - Risk analysis -The ‘Y/N’ column has been removed, to encourage more qualitative discussion of risk factors, with the ‘Comments / other factors’ column being replaced with ‘Notes (refer to other schedules where applicable). The guidance notes have been updated and moved to the top of the page to also reflect this.

PF3-2 - Fraud risk analysis -The ‘Y/N’ column has been removed, to encourage more qualitative discussion of risk factors, with the ‘Comments / other factors’ column being replaced with ‘Notes (refer to other schedules where applicable). The guidance notes have been updated and moved to the top of the page to also reflect this.
