charity accounts and audit update - 2020 innovation · 2018. 1. 1. · charity accounts – cc...

Telford Financial Training Ltd

Charity Accounts and Audit Update

Bill Telford BA FCA


Introduction

Chapter 1


Charity sector under pressure

o Increased

o Scepticism

o Scrutiny

o Challenges by CC

o Registration

o Monitoring

o Implementation of new UK GAAP


Issues concerning the Charity Commission

o Charity News 57 – 5

o Other issues


Effective trustee management

o Last year

o Managing charity finances, planning, managing difficulties and insolvency (CC 12);

o Charity reserves: building resilience (CC 19);

o Charity governance, finance and resilience: 15 questions trustees should ask

o July 2017 Charity Governance Code


Updated Charity Governance Code

o Two versions

o Key principles

o Organisational purpose

o Leadership

o Integrity

o Decision-making risk and control

o Board effectiveness

o Diversity

o Openness and accountability


Charities, terrorist financing and fraud


CIO conversions – Company to CIO

Date Annual income

1 January 2018 Less than £12,500

1 March 2018 Between £12,500 and £25,000

1 May 2018 Between £25,000 and £100,000

1 June 2018 Between £100,000 and £250,000

1 July 2018 Between £250,000 and £500,000

1 August 2018 Greater than £500,000


Fundraising

o The disqualification of those who have

committed certain offences from acting as

a trustee or taking certain roles within a

charity;

o New rules relating to agreements with

charities with professional fundraisers and

commercial participators; and

o New requirements for disclosures in the

trustees’ report of larger charities.


Fundraising - Trustees’ duties

o Planning effectively; o Supervising your fundraisers; o Protecting your charity’s reputation, money

and other assets; o Identifying and ensuring compliance with the

laws or regulations that apply specifically to your charity’s fundraising;

o Identifying and following any recognised standards that apply to your charity’s fundraising;

o Being open and accountable


Fundraising - Reporting requirements

o Large charities

o Required periods commencing on or after

1 November 2016

o Small charities?


Reporting requirements o The fundraising approach taken by the charity, by

anyone acting on its behalf, and whether a professional fundraiser or commercial participator carried out any fundraising activities;

o Details of any fundraising standards or scheme for fundraising regulation that the charity has voluntarily subscribed to;

o Details of any fundraising standards or scheme for fundraising regulation that any person acting on behalf of the charity has voluntarily subscribed to;

o Details of any failure by the charity, or by any person acting on its behalf, to comply with fundraising standards or scheme for fundraising regulation that the charity or the person acting on its behalf has voluntarily subscribed to;


Reporting requirements (2) o Whether the charity monitored the fundraising activities

of any person acting on its behalf and, if so, how it did so;

o The number of complaints received by the charity, or by a person acting on its behalf for the purposes of fundraising, about fundraising activity;

o What the charity has done to protect vulnerable people and other members of the public from behaviour which: o Is an unreasonable intrusion on a person’s privacy; o Is unreasonably persistent; and

o Places undue pressure on a person to give money or other property.


Disqualification of trustees and senior

managers

o Previously limited application:

o Individual currently holding office as

trustee;

o Matters arising from misconduct or

mismanagement


Statutory criteria

o One of six criteria must be met

o Commission satisfied that person unfit to

be a trustee

o Commission satisfied that in public interest

to be dis qualified


The six offences A. A person has been cautioned for an offence against a

charity or in the administration of a charity for which a conviction would bring automatic disqualification;

B. A person has been convicted of an offence in another country that:

o Is against, or involves the administration of, a charity or similar body, and

o Is committed in the United Kingdom would bring automatic disqualification from acting as a trustee.

C. A person has been found by HMRC, not to be a ‘fit-and-proper person’ to be a manager of a body or trust.


The six offences D. A trustee, officer, agent or employer of a charity was

responsible for, contributed to or facilitated misconduct or mismanagement in a charity or the person knew of the misconduct or mismanagement and failed to take any reasonable step to oppose it.

E. An officer or employee of a corporate trustee was responsible for, contributed to or facilitated misconduct or mismanagement in a charity or the person knew of the misconduct or mismanagement and failed to take any reasonable step to oppose it.

F. Other conduct, whether or not in relation to a charity that is, or is likely to be, damaging to public trust and confidence in a charity or charities.


Extension to senior managers

o CEO / CFO equivalent


Charity Accounts – CC feedback

Chapter 3


Registered charities required to file o Have the trustees filed all the requested documents that make

up a set of accounts (the annual report, independent scrutiny and accounts) and are they transparent and internally consistent in what is reported?

o Does the annual report explain what activities the charity had carried out during the year to achieve its purposes?

o Have the accounts been subject to the required level of independent scrutiny based on the charity’s gross income and assets, either an audit or independent examination?

o Have the accounts been prepared on the correct basis depending on the charity’s income and type, either receipts and payments or accruals accounts?

o Do the accounts contain both a SoFA that analyses expenditure and balance sheet and are they consistent with each other (or the equivalent if receipts and payments were prepared.)?


Findings – 25% of 107 not met standard

o The accounts as a whole were inconsistent or not transparent (3 charities):

o The accounts did not balance or were not complete (8 charities);

o A proper independent examination had not been carried out (4 charities);

o The annual report did not cover the charity’s objectives and / or its charitable activities (9 charities);

o The annual report, independent scrutiny report and / or the accounts were missing (3 charities).


Income < £25,000

o Have the trustees provided both an annual

report and accounts?

o Does the annual report explain what activities

the charity had carried out during the year to

achieve its purposes?

o Do the accounts include both an analysis of

receipts and payments and a statement of net

assets and liabilities and are these consistent

with each other (or the equivalent if accruals

accounts are prepared)?


Findings – 49 (45%) did not meet standards

o Neither the annual report nor the accounts

were provided (10 charities);

o Either the annual report or the accounts

was provided (17 charities);

o Both were provided but key information

was missing (22 charities).


SORP information sheet 1

Chapter 4


Where are we now?

1/1/2015

31/12/15

31/12/16

31/12/17

31/12/18

31/12/19

Large and

medium

Small

16/3/18 Revised FRS 102

16/3/18

Early

adopt?


Cash flow statements

o Originally FRS 102 only permitted

qualifying entities to adopt the reduced

disclosure exemptions if approved by the

shareholders

o This was removed for periods beginning on

or after 1 January 2016


Information sheet 1 confirms

o It otherwise applies the recognition, measurement and disclosure requirements of the FRS.

o It discloses in the notes to its financial statements:

o a brief narrative summary of the disclosure exemptions adopted; and

o the name of the parent of the group in whose consolidated financial statement its financial statements are consolidated and from where those financial statements may be obtained. (Only applicable to subsidiary entities)

o Includes disclosure requirements of Module 9


Cash flow statement

o Required for all larger charities

o Income > £500,000


The cash flow statement

FRS 1 FRS 102

o Cash flows from operating activities

o Dividends from joint ventures and associates

o Returns on investments and servicing of finance

o Taxation

o Capital expenditure and financial investment

o Acquisitions and disposals

o Equity dividends paid

o Management of liquid resource

o Financing

o Operating activities

o Investing activities

o Financing activities


SORP Cash flow


Fundraising disclosures


Comparative figures for fund disclosures

o Comparative figures should be provided when making the disclosures required by paragraph 2.29 of the SORP for the summary of assets and liabilities of each category of fund of the charity and for the detail in the movements in material individual funds.

o The analysis of charitable funds will include fund movements from the beginning of the prior reporting period to the end of the prior period; and from the beginning of the current reporting period to the end of the current period. o Where the current and prior periods have been

12 months long, the charity will provide an analysis over a period of 24 months


Governance costs

o For charities reporting on an activity basis, expenditure on raising funds, paragraph 4.44, should include any apportioned support costs.

o This includes those costs relating to the governance of the charity.

o Module 8 requires support costs to be analysed across all relevant activities and is illustrated in Table 4.

o Governance costs can therefore be allocated to all relevant activities, including expenditure on raising funds.


Funding clawed back by funders

o Where there is a right to claw back

o Should income be recognised?

o Is a provision for clawback required?


Definition

o Omissions from, and misstatements in, the

entity’s financial statements for one or more

prior periods arising from a failure to use, or

misuse of, reliable information that:

o Was available when financial statements for

those periods were authorised for issue; and

o Could reasonably have been expected to

have been obtained and taken into account

in the preparation and presentation of those

financial statements.

37


Funding clawed back by funders

1/1/17

31/12/17

Income Clawback Clawback


Disclose

o Material amounts of funds clawed back in

respect of previous years


Exemption from disclosure of names of

related parties

o FRS 102 does not require disclosure of

names

o SORP does

o May be excluded or replaced by role if

there is danger to the individual


Aggregate disclosure of total amount of

donations received without conditions

o Interpret in context of those transactions

with trustees and other related parties only

o Disclose if judged material in context of

total income from donations and legacies

o Disclosure is required of donations with

conditions


Disclosure of employers NI

o Include in aggregate benefits of key

management employees

o Exclude from bandings


Loss on disposal of fixed assets

o Loss = additional depreciation

o allocate to appropriate expense head

and activity in SoFA and notes


Fair value reserve

o Fair value reserve does not appear in CA

formats

o But there are requirements / guidance on

treatment of such reserves

o Required E.g. Hedging instruments and

hedge accounting

o Permitted e.g. Investment property and

financial instruments at fair value

o CC recommends only use when required


Disclosure of government grants

o Government =

o Government

o Government agencies,

o Similar bodies o whether local, national or international


Definition of a larger charity

o Income > £500,000


Gift aid and trading charities

Chapter 5


The issues

1/9/16

31/8/16

31/8/17

Earn profit

Make payment

and obtain tax

relief

31/5/17


The questions

The gift aid payment Tax relief

o Is it an expense or a distribution?

o When does company recognise the payment?

o Where does company report the payment?

o When to recognise?

o Where to recognise?

Distribution

When there is a

legal obligation

Statement of

changes in equity

In year profit

made

Profit or loss


Illustration 10

o A trading subsidiary has a profit before tax

of £120,000. It has disallowable expenses

of £20,000 and tax is 20%. What is the

maximum amount of gift aid that it can pay

in respect of its first year of trading?


Illustration 10

1/9/16

31/8/16

31/8/17

Profit

Make payment

and obtain tax

relief

31/5/17


Illustration 11 Statement of comprehensive income

Turnover 676,502

Cost of sales (385,230)

Gross profit 311,272

Administrative expenses (4,232)

Operating profit 307,040

Other interest receivable and similar income 150

Profit before taxation 307,190

Tax (61,438)

Profit after taxation 245,752


Illustration 11 (continued) Statement of changes in equity Share

capital

Profit

and loss

account

Total

equity

At 1 September 2015 100 Nil 100

Comprehensive income for the year

Profit for the year 245,752 245,752

Donation payable to parent under the gift aid

scheme (307,190) (307,190)

Tax relief obtained on the gift aid payment 61,438 61,438

At 31 August 2016 100 Nil 100


FRS 102 S 29 Statement of comprehensive income

Turnover 676,502

Cost of sales (385,230)

Gross profit 311,272

Administrative expenses (4,232)


Other interest receivable and similar income 150


Tax -



FRS 102 S 29

Statement of changes in equity Share

capital

Profit and

loss

account

Total

equity

At 1 September 2015 100 293,526 293,626

Comprehensive income for the year

Profit for the year 307,190 307,190

Donation payable to parent under the gift aid

scheme (293.526) (293,526)

At 31 August 2016 100 307,190 307,290


Revisions to FRS 102

Chapter 6


FRS 102 version control

o September 2015

o March 2016

o Fair value disclosures

o December 2016

o Notification

o March 2017

o Directors’ loans

o December 2017

o Triennial review, incremental improvements and clarifications


Update Bulletin 2

o Amends SORP

o Contents

o Chapter 1 – Introduction

o Chapter 2 – FRC statement

o Chapter 3 – Clarifying amendments

o Chapter 4 – Significant amendments

o Chapter 5 – Other amendments


Clarifying amendments

o Need for comparatives

o Unless specifically excluded

o Assets with two or more major components

o Impact of removing undue cost or effort

exemption

o Events after the balance sheet date

o Determination of a gift aid payment under

a constructive obligation removed


Significant amendments

o Scope

o Investment properties

o See later


Cash flow statements o An entity shall present cash flows from operating

activities using either: a) the indirect method, whereby a measure of

profit or loss disclosed in the statement of comprehensive income (or separate income statement) is adjusted for the effects of non-cash transactions, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows; or

b) the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed.


Choices in FRS 102

Interest paid Operating or financing

Interest received Operating or investing

Dividends paid Financing or operating

Interest received Operating or financing

Tax Operating unless can be attributed

to investing or financing


Profit and loss account Turnover 2,000,000

Cost of sales (1,500,000)

Gross Profit 500,000

Other operating income 60,000

Distribution costs (50,000)

Administration costs (150,000)


Income from fixed asset investments 40,000

Interest payable and similar expenses (100,000


Taxation 60,000



Original FRS 102

Profit for the year 240,0000

Adjustments which are not operating profit

items

Dividends receivable (?)

Interest payable (?)

Adjustments not involving cash flows

Depreciation

Changes in stock, debtors, creditors etc

Cash from operations


New disclosure – Net debt analysis

o Definition o Net debt consists of the borrowings of a

charity, together with any related derivatives and obligations under finance leases, less any cash and cash equivalents.

o When several balances have been combined to form the components of opening and closing net debt, paragraph 14.17A requires sufficient detail to be shown to enable users to identify such balances.

o This analysis is not required in future periods.


Illustration At start of

year

Cash

flows

New

finance

leases

Fair value

movemen

ts

Other

non-cash

changes

At end of

year

£ £ £ £ £ £

Cash 540 180 720

Cash equivalents 230 40 270

Overdraft (50) (10) (60)

720 210 930

Bank loans falling

due within one year

(900)

150

(450)

(1,200)

Bank loans falling

due after more than

one year

(1,100)

450

(650)

Finance lease

obligations

(650)

100

(350)

(900)

Current asset

investments

400

200

100

700

TOTAL (1,530) 660 (350) 100 - (1,120)


Charity mergers

o The transfer of activities to a subsidiary is

now included as an example of a charity

reconstruction that may be accounted for

as a merger.

o A common example is the transfer of

non-charitable trading activities to a

trading subsidiary when small scale

exemptions cease to apply.


Service potential

o is the capacity to provide services that

contribute to achieving a charity’s

objectives. Service potential enables a

charity to achieve its objectives without

necessarily generating net cash inflow.’


Other amendments

o Revised definition of a financial institution

o Includes o Charitable incorporated friendly societies; and

o Charities that undertake lending at a market rate or to

achieve an element of market return (mixed motive

investments); but

o Excludes o Charities which provide concessionary rate finance in

the form of programme related investments, unless

such lending is the charity’s only principal or sole

charitable activity


Module 11 Financial instruments

o Definitions

o Now uses ‘non-derivative instruments

that are equity of the issuer’ rather than

‘non-convertible preference shares and

non-puttable ordinary or preference

shares’


Transaction costs

o If at amortised cost

o Taken into account in computing effective

interest rate

o If at fair value through SoFA

o Written off to profit ands loss


New 11.9A o A debt instrument not meeting the conditions in

paragraph 11.9 shall, nevertheless, be considered a basic financial instrument if it gives rise to cash flows on specified dates that constitute repayment of the principal advanced, together with reasonable compensation for the time value of money, credit risk and other basic lending risks and costs (e.g. liquidity risk, administrative costs associated with holding the instrument and lender’s profit margin).

o Contractual terms that introduce exposure to unrelated risks or volatility (e.g. changes in equity prices or commodity prices) are inconsistent with this.


Revised disclosures - Deleted o An entity shall disclose the carrying amounts of each of the following

categories of financial assets and financial liabilities at the reporting date, in total, either in the statement of financial position or in the notes:

a. * financial assets measured at fair value through profit or loss (paragraphs 11.14(b), 11.14(d)(i), 12.8 and 12.9);

b. financial assets that are debt instruments measured at amortised cost (paragraph 11.14(a));

c. financial assets that are equity instruments measured at cost less impairment (paragraphs 11.14(d)(ii), 12.8 and 12.9);

d. * financial liabilities measured at fair value through profit or loss (paragraphs 11.14(b), 12.8 and 12.9). Financial liabilities that are not held as part of a trading portfolio and are not derivatives shall be shown separately;

e. financial liabilities measured at amortised cost (paragraph 11.14(a)); and

f. loan commitments measured at cost less impairment (paragraph 11.14(c)).


Replaced by

o An entity shall disclose separately the carrying amounts at the reporting date of financial assets and financial liabilities measured at fair value through profit or loss.

o This disclosure may be made separately by category of financial instrument.

o Financial liabilities that are not held as part of a trading portfolio and are not derivatives shall be shown separately.


Module 18: Heritage Assets

o Fair value may now be assessed by

reference to a binding sales agreement,

identical or substantially similar assets,

o provided that the agreement is between

knowledgeable willing parties in an arm’s

length transaction.


Module 21: Social investments

o Additional guidance that recent

transactions providing evidence of fair

value must be between knowledgeable,

willing parties in an arm’s length

transaction.


Module 24: Group accounts

o A subsidiary may be excluded from

consolidation when its inclusion is not

material for the purpose of giving a true

and fair view (but two or more subsidiaries

may be excluded only if they are not

material taken together).


Module 24: Group accounts

o Incorporates revised treatment of

intangibles

o Finally, the SORP adds a disclosure in

relation to the nature and extent of risks

associated with any interests in

unconsolidated entities


Permitted not to recognise intangible assets

separately from goodwill

o Need not recognise assets acquired

separately from goodwill

o They may, on an asset by asset basis,

choose to separately recognise intangible

assets if this provides useful information

o If choose to recognise separate intangibles

must do so consistently


Goodwill

Licence

Customer list

Domain name

Goodwill

Software

Order book


Transition

o Not apply revised treatment for intangibles

to business combinations made after the

date of transition to FRS 102 but before

date of transition to updated FRS 102


Effective date

31/12/16

31/12/17

31/12/18

31/12/19

First mandatory

period

Date of

transition

Restate Early

adoption

permitted


3 types of client?

o New charities in their first year

o Charities yet to transition

o Charities who have already transitioned


Charity Decision? Transitional issues

New charity



New charity Early adopt None




Charity yet to

transition




Charity yet to

transition

Early adopt




Charity yet to

transition

Early adopt Section 35 – as

amended




Charity yet to

transition

Early adopt Section 35 – as

amended

Charity already

transitioned

Early adopt S 35 does not

apply but

disclosures in

chapter 10 do


Investment property

Chapter 7


Investment property

o No exemption for properties let to another

group member

o Unless involved undue cost or effort

o Mixed use property had to be included at

fair value

o Unless involved undue cost or effort

FRS 102 revision

December 2017 removes

the undue cost or effort

exemption


Revised FRS 102

Let to group member Mixed use

o Accounting policy

choice

o Transitional

exemption to include

fair value as

deemed cost

o Only fair value if

could be sold or let

on a finance lease


Transition

o Use fair value of investment property let to

another group member as deemed cost at

date of transition to updated FRS;


Illustration 14 V Ltd has an investment property occupied by W Limited a

subsidiary which cost £250,000. The company has a 31

December year end and transitioned to FRS 102 1A for the

year ended 31 December 2016. V Ltd had previously

taken advantage of the exemption in SSAP 19 to treat the

property as tangible fixed assets, and not investment

property, but incorporated fair values on transition as

follows

31 December 2014 350,000

31 December 2015 380,000

31 December 2016 420,000

Advise the directors on the implications of the changes

introduced by the triennial review.


Illustration 14

31/12/14

31/12/15

31/12/16

31/12/17

350,000 380,000 400,000


Illustration 14 A charity owns the freehold of a four-storey office block. The ground floor is

sublet to its trading subsidiary which operates a retail outlet. A separate

subsidiary has an agreement to rent two offices on the top floor, sharing toilet

and kitchen facilities. There is no separate access or egress.

The charity qualifies as a small company, has a 31 December year end and

transitioned to FRS 102 for the year ended 31 December 2016.

It had previously taken advantage of the exemption in SSAP 19 to treat the

property as tangible fixed assets, and not investment property. On transition it

incorporated fair values on transition for the ground and first floors but used the

undue cost or effort exemption for the top floor. The cost for each of the ground

and first floors was assessed as £250,000 and the fair values incorporated in

the 2016 accounts were as follows:

31 December 2014 350,000

31 December 2015 380,000

31 December 2016 420,000


Transfers

Investment Property

Inventory / Tangible fixed asset

Fair value of investment property

becomes deemed cost


Tangible fixed asset

Investment property

Revalue to fair value before

transfer – gain to OCI and

revaluation reserve


Inventory Investment property

Transfer to investment property at

fair value and recognise gain in

profit and loss


Disclosures

o The following disclosures (other than those

related to fair value measurement) are

relevant to an entity that chooses to

measure investment properties rented to

another group entity under the cost model

in this section, as permitted by paragraph

16.4A(b).


Disclosures

o An entity shall disclose the carrying

amount at the end of the reporting period

of investment property rented to another

group entity, when the entity has chosen to

account for such properties using the cost

model in accordance with this section (see

paragraph 16.4A).

o 17.31A


Revised ISAs and charities

Chapter 8


Audit requirements guidance

o ISAs (UK) and FRC Ethical Standards

o Effective for periods commencing on or

after 17 June 2016

o Practice Note 11


The standards

o ISA 700 – now adopted IAASB version

o ISA 701 – Key audit matters

o Those required (or choose) to comply

with Corporate governance code;

o Other public interest entities;

o Where auditor chooses to communicate

key audit matters


The standards

o ISA 705 – Modified opinion

o ISA 706 - Emphasis of matters

o ISA 710 - Comparative information—

corresponding figures and comparative

financial statements

o ISA 720 – Other information


Misstatement of other information

o A misstatement of the other information

exists when the other information is

incorrectly stated or otherwise misleading

(including because it omits or obscures

information necessary for a proper

understanding of a matter disclosed in the

other information).


Reports for periods commencing on or after

16 June 2016

Independent auditor’s report to the members [trustees] of [XYZ Limited] [XYZ]

Opinion

We have audited the financial statements of [XYZ Limited (the ‘company’)] [XYZ (the ‘charity’)]for the year ended [date] which comprise the statement of financial activities, balance sheet, cash flow statement and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (United Kingdom Generally Accepted Accounting Practice).


In our opinion, the financial statements: o give a true and fair view of the state of the

[charity’s] [charitable company’s] affairs as at [date] and of its incoming resources and application of resources for the year then ended;

o have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice;

o have been prepared in accordance with the requirements of [the Companies Act 2006] [the Charities Act 2011.].


o Basis for opinion

o We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the [charity] [charitable company] 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. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion


Conclusions relating to going concern

We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:

o the [directors’] [trustees’] use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or

o the [directors] [trustees] have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the [charity’s] [charitable company’s] ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.


Other information – ISA 720

o Does audit report require an opinion on

other information?

o If Yes – report as required and state

nature of work performed; o Charitable company

o If No – state that opinion does not cover

other information and report if there is a

material inconsistency or misstatement o Unincorporated charity / CIO


o Other information

o The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. The [directors] [trustees] are responsible for the other information

o Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. [other charities - Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

o We have nothing to report in this regard.


o Other information

o The other information comprises the

information included in the annual report,

other than the financial statements and our

auditor’s report thereon. The [directors]

[trustees] are responsible for the other

information.


o [Charitable company] Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

o [Other charities] Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.


o In connection with our audit of the financial

statements, our responsibility is to read the

other information and, in doing so,

consider whether the other information is

materially inconsistent with the financial

statements or our knowledge obtained in

the audit or otherwise appears to be

materially misstated.


o If we identify such material inconsistencies

or apparent material misstatements, we

are required to determine whether there is

a material misstatement in the financial

statements or a material misstatement of

the other information.


o If, based on the work we have performed,

we conclude that there is a material

misstatement of this other information, we

are required to report that fact.

o We have nothing to report in this regard.


Exception reporting – Charitable company

Matters on which we are required to

report by exception

In the light of the knowledge and

understanding of the charitable company

and its environment obtained in the course

of the audit, we have not identified material

misstatements in the [strategic report] or the

directors’ report included within the trustees’

report.


Company charities only We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:

o adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or

o the financial statements are not in agreement with the accounting records and returns; or

o certain disclosures of directors’ remuneration specified by law are not made; or

o we have not received all the information and explanations we require for our audit; or

o the directors were not entitled to prepare the financial statements in accordance with the small companies’ regime and take advantage of the small companies’ exemptions in preparing the directors’ report and from the requirement to prepare a strategic report.


Non-company charity – England & Wales

We have nothing to report in respect of the following matters in relation to which the Charities (Accounts and Report) Regulations 2008 requires us to report to you if, in our opinion:

o The information given in the financial statements is inconsistent in any material respect with the trustees’ report; or

o sufficient accounting records have not been kept; or

o the financial statements are not in agreement with the accounting records and returns; or

o we have not received all the information and explanations we require for our audit.


Company charities Responsibilities of directors trustees

As explained more fully in the directors’ trustees’ responsibilities statement [set out on page ...], the trustees (who are also the directors of the charitable company for purposes of company law) are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors trustees are responsible for assessing the [charity’s] [charitable company’s] ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors trustees either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.


Requiring statutory audit Auditor’s responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: [website link]. This description forms part of our auditor’s report.


If eligible for independent examination Auditor’s responsibilities for the audit of the financial statements

We have been appointed as auditor under section 145 of the Charities Act 2011 and report in accordance with the Act and relevant regulations made or having effect thereunder.

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: [website link]. This description forms part of our auditor’s report.


Bannerman paragraph o Use of our report

o This report is made solely to the [charitable company’s members] [charity’s trustees], as a body, in accordance with [Chapter 3 of Part 16 of the Companies Act 2006] [charity’s trustees as a body in accordance with Part 4 of the Charities (Accounts and Report Regulations) 2008]. Our audit work has been undertaken so that we might state to the [charitable company’s members] [charity’s trustees] those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than [the charitable company and the charitable company’s members] [the charity and the charity’s trustees] as a body, for our audit work, for this report, or for the opinions we have formed


Illustration 1

o Your charity client has refused to include

certain information required by charity law

and the SORP. What are the implications

for your report in the following alternative

scenarios:

a. The charity is a limited company?

b. The charity is unincorporated?


Part (a)

o Required to report under CA 2006

o Need to qualify


o If, based on the work we have performed,

we conclude that there is a material

misstatement of the other information, we

are required to report that fact.

o We have nothing to report in this regard


o If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.

o As described in the Basis for qualified opinion on other matters prescribed by the Companies Act 2006 section of our report we have concluded that a material misstatement of the other information exists.


o Basis for Qualified Opinion on other matters prescribed by the Companies Act 2006

o Based on the work undertaken in the course of the audit, the information given in the trustees’ report including the strategic report has not been prepared in accordance with applicable legal requirements because of the omission of the following information [provide details].


Qualified opinion on other matters prescribed by the Companies Act 2006

Except for the matter described in the Basis for Qualified Opinion on other matters prescribed by the Companies Act 2006 section of our report, in our opinion, based on the work undertaken in the course of the audit:

o the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

o the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.


Matters on which we are required to report by exception

Except for the material misstatement described in the Basis for qualified opinion on other matters prescribed by the Companies Act 2006 section of our report, in the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report.


Part (b) – No opinion required

If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.

We have concluded that a material misstatement of the other information exists because the trustees’ report including the strategic report has not been prepared in accordance with applicable legal requirements because of the omission of the following information [provide details].


Directions and guidance for

independent examiners

Chapter 9


Updated framework for examination

o Updated for:

o Audit exemption limits

o Change in reportable incidents

o Revised directions

o New form of report


Revisions to directions

o New direction 2 – Check for any conflict of interest that prevents you as an examiner form carrying out your independent examination;

o New direction 7 – If during the independent examination, the examiner identifies a conflict of interest was present and / or related party transactions took place, the examiner must check if these were properly authorised and were fully disclosed;

o New direction 9 – Check that the charity’s financial sustainability and the trustees’ assessment of going concern.


Effective date

o Reports signed and dated on or after 1

December 2017

o Encouraged to apply immediately


Non-company charity

Independent examiner’s report to the trustees of ABZ Trust

I report on the accounts of the company for the year ended 30 November 2017.

Responsibilities and basis of report

As the charity’s trustees of the Trust you are responsible for the preparation of the accounts in accordance with the requirements of the Charities Act 2011 (“the Act.)”


Independent examiner’s statement

I have completed my examination. I confirm that no material matters have come to my attention in connection with the examination giving me cause to believe that in any material respect:

1. accounting records were not kept in respect of the Trust as required by section 130 of the Act; or

2. that the accounts do not accord with those records; or

3. that the accounts do not comply with the applicable requirements concerning the form and content of accounts set out in the Charities (Accounts and Reports) Regulations 2008 other than any requirement that the accounts give a ‘true and fair view’ which is not a matter considered as part of an independent examination


o I have no concerns and have come across

no other matters in connection with the

examination to which attention should be

drawn in this report in order to enable a

proper understanding of the accounts to be

reached.


o Signed:

o Name:

o Relevant professional qualification (if any):

o Address:

o Date


Limited company

Independent examiner’s report to the

trustees of WXY Charitable company

(‘the Company)

I report on the charity trustees on my

examination of the accounts of the Company

for the year ended 30 November 2017.


Limited company Responsibilities and basis of report

As the charity’s trustees of the Company (and also as directors for the purposes of company law) you are responsible for the preparation of the accounts in accordance with the requirements of the Companies Act 2006 (‘the 2006 Act’).

Having satisfied myself that the accounts of the Company are not required to be audited under Part 16 of the 2006 Act and are eligible for independent examination, I report in respect of my examination of your charity’s accounts as carried out under section 145 of the Charities Act 2011 (‘the 2011 Act’). In carrying out my examination I have followed the Directions given by the Charity Commission under section 145(5)(b) of the 2011 Act.


Independent examiner’s statement

Since the Company’s gross income

exceeded £250,000 your examiner must be

a member of a body listed in section 145 of

the 2011 Act. I confirm that I am qualified to

undertake the examination because I am a

member of [named body e.g. ICAEW] which

is one of the listed bodies.


I have completed my examination. I confirm that no material matters have come to my attention in connection with the examination giving me cause to believe that in any material respect:

1. accounting records were not kept in respect of the Trust as required by section 386 of the 2006 Act; or

2. that the accounts do not accord with those records; or

3. that the accounts do not comply with section 396 of the 2006 Act other than any requirement that the accounts give a ‘true and fair view’ which is not a matter considered as part of an independent examination; or

4. the accounts have not been prepared in accordance with the methods and principles of the Statement of Recommended Practice for accounting and reporting by charities preparing their accounts in accordance with the Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS 102)


o I have no concerns and have come across

no other matters in connection with the

examination to which attention should be

drawn in this report in order to enable a

proper understanding of the accounts to be

reached.


o Signed:

o Name:

o Relevant professional qualification (if any):

o Address:

o Date


Illustration 2 o You are the independent examiner of EFG CIO which is preparing

receipts and payments accounts. You have identified a lapse in the keeping of accounting records recording of restricted income. At the end of one church service a special appeal was held for a mission to Samarkand, but the money was banked together with the routine collections for that month and no separate record kept of the amount received for the specific purpose of the mission to Samarkand.

o You raised the matter with the trustees who pointed out that the deposits for that service was noted £1,978 against an average weekly banking of £1,275. They also confirmed that this was a one-off lapse in following the established protocol that ensures that specific appeals are counted and deposited separately. They reminded all who are involved in collecting and counting the collections at services of the correct procedures.

o The accounts did show the expenditure on the mission to Samarkand was separately identified and amounted to £2,837.

o What are the implications for your report?


Illustration 3 o You are the independent examiner of the DEF Trust and have

identified that the receipts and payments accounts prepared for the Trust show cash received in the year of £36,873, but that no records have been kept to match the record of the donations received to the deposits made and cash balances were retained and not deposited at the Trust’s bank. The only written record retained is a letter advising a grant award of £10,000. The majority of the expenditure was made in cash from retained unbanked cash or via cash withdrawals using a charity debit card, but few receipts were kept. Aside from invoices for utilities and rent and play equipment, there are no records of volunteer or other expenses. Total cash spent amounted to £86,000 with receipts for only £41,732 leaving £44,268 of payments without any supporting records.

o What is the impact on your independent examiner’s report?


Illustration 4

o You are the independent examiner of the

WXY charitable company preparing accounts

for the year ended 30 April 2018. The trustees

have refused to prepare a SoFA and have

prepared a profit and loss account. There are

restricted funds relating to a public collection,

but this is not reflected anywhere in the

financial statements.

o What are the implications for your examiner’s

report?


Whistle blowing

Chapter 10


The 4 issues

o Auditor / examiner duty to report matters of

material significance

o Auditor / examiner right to report relevant

matters

o Trustees’ responsibility to make reports

o Protection for whistle-blowers in the charity


Matters of material significance

o Some changes to material from significant

e.g. losses through fraud, internal control

weaknesses

o Some confirm reportable if come to light

during the audit

o Two new ones


Material significance

o “The term material significance requires

interpretation in the context of the specific

legislation applicable to the regulated

entity. A matter or group of matters is

normally of material significance to a

regulator’s function when, due either to its

nature or its potential financial impact, it is

likely of itself to require investigation by the

regulator.”


Dishonesty and fraud

o Matters suggesting dishonesty or fraud

involving a significant loss of, or a

material risk to, charitable funds or assets


Internal controls and governance

o Failure(s) of internal controls, including

failure(s) in charity governance, that

resulted in or could give rise to a

material loss or misappropriation of

charitable funds, or which leads to

material charitable funds being put at

major risk


Money laundering and criminal conduct

o Knowledge or suspicion that the charity or

charitable funds including the charity’s

bank accounts have been used for money

laundering or such funds are the proceeds

of serious organised crime or that the

charity is a conduit for criminal activity


Support of terrorism

o Matters leading to the knowledge or

suspicion that the charity, its trustees,

employees or assets, have been involved

in or used to support terrorism or

proscribed organisations in the UK or

outside the UK, with the exception of

matters related to a qualifying offence

as defined by Section 3(7) of the

Northern Ireland (Sentences) Act 1998


Risk to charity’s beneficiaries

o Evidence suggesting that in the way the

charity carries out its work relating to the

care and welfare of beneficiaries, the

charity’s beneficiaries have been or were

put at significant risk of abuse or

mistreatment


Breaches of law or the charity’s trusts

o Single or recurring breach(es) of either a

legislative requirement or of the charity’s

trusts leading to material charitable

funds being misapplied


Breach of an order or direction made by a

charity regulator

o Evidence suggesting a deliberate or

significant breach of an order or direction

made by a charity regulator under statutory

powers including suspending a charity

trustee, prohibiting a particular transaction

or activity or granting consent on particular

terms involving significant charitable

assets or liabilities


Withdrawn….

o Any notification or matter reported to the

trustees on resigning as independent

examiner or matter that the examiner is

aware of on resignation or ceasing to act

that falls within the categories of the

previously reportable matters, or for

examiners the notification on ceasing to

hold office or resigning from office, of those

matters reported to trustees.


Modified audit opinion or qualified

examiner’s report

o n making a modified audit opinion, emphasis of matter, material uncertainty related to going concern, or issuing of a qualified independent examiner’s report identifying matters of concern to which attention is drawn, notification of the nature of the modification / qualification / emphasis of matter or concern with supporting reasons including notification of the action taken, if any, by the trustees subsequent to the audit opinion, emphasis of matter or material uncertainty identified / examiner’s report.


Not pursued ….

o Evidence that, without reasonable cause,

trustees have not taken action on matters

identified by the auditor / examiner in their

scrutiny of accounts for a previous year


Conflicts of interest and related party

transactions

o Evidence that conflicts of interest have not

been managed by the trustees and / or

related party transactions have not been

fully disclosed in all the respects required

by the applicable SORP, or applicable

Regulations.


Right to report

o Updated guidance encouraging auditors

and examiners to use their statutory right

o Significant but not on previous list ….


Illustration 5

o An examiner identifies that money within a restricted fund has been spent on an activity that is not compatible with the restriction on the use of those funds. The amount was less than £1,000 and the balance on the restricted fund at the end of the reporting period was over £100,000 so it is not considered material to the accounts.

o What are the implications for the auditor / independent examiner?

o What difference would it make if the amount involved had been material?


Illustration 6

o A charity established to care for vulnerable adults and children is reliant on a single contract for 90% of its income in the reporting period and the trustees are uncertain whether they will be able to secure future funding at the current level when the contract is renewed the following year.

o What are the reporting implications for auditors / independent examiners?


Illustration 7

o Reverting to illustration 3 above, relating to

the qualified audit report arising from the

inadequate accounting records, what are

the reporting implications to the Charity

Commission?


Illustration 8

o Reverting to illustration 4 above, relating to

the failure to prepare a SoFA, what are the

implications for reporting to CC?


Reporting and public benefit

Chapter 11


Public benefit framework


Charity Accounts and Audit Update

Bill Telford BA FCA

charity accounts and audit update - 2020 innovation · 2018. 1. 1. · charity accounts – cc...

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