Requirements for an independent examination

Except for NHS charities, the law in England and Wales requires small charities with annual income above £25,000 to have their accounts independently examined or audited. By law, a statutory audit is only required where the audit threshold has been passed. Broadly speaking, an independent examination is needed if gross income is between £25,000 and £1 million and an audit is needed where the gross income exceeds £1 million. An audit will also be needed if total assets (before liabilities) exceed £3.26 million, and the charity’s gross income is more than £250,000. See the Charity Commission’s guidance CC15 here.

Note that your charity may have an internal or donor requirement for a statutory audit.

What is the difference between an audit and independent examination?

The difference between the two levels of scrutiny is largely technical. In practice, an audit will result in more depth and breadth of scrutiny, and therefore, an audit will require more effort from both the charity and the auditor.

The result is reflected in the report that the auditor or examiner issues, which is included within the Trustees’ Annual Report and Accounts filed to the charity commission (and companies house for charitable companies).

In England and Wales – and in Scotland – an independent examiner will issue a report which gives a ‘negative assurance’ opinion. The statement issued reads:

‘no matter has come to my attention which gives me reasonable cause to believe that……..the requirements……have not been met.’

In contrast, an auditor will issue a ‘positive assurance’ opinion on the financial statements. The opinion issued is a positive affirmation of the auditor’s findings which reads:

‘the financial statements give a true and fair view’…

What are the pros and cons of an audit versus an independent examination for a small charity?

Statutory Audit

Pros

• The auditor has to build up a body of evidence to support a positive opinion on the accounts; therefore the audit opinion provides more assurance – thus giving more “comfort” to trustees, staff, funders, donors, beneficiaries and other stakeholders.
• Audit work is governed by International Standards on Auditing which require more rigour, including testing (on a sample basis) the validity of items, completeness, cut off, existence of assets etc. For example, verifying bank balances to independent bank letters; property entries to land registry records / valuation reports etc.
• Requirement to review and test internal financial controls and systems. As well as providing more assurance, this can lead to helpful recommendations in the management letter.
• A management letter is required which often includes constructive advice for trustees (agreed with management). This is a helpful way of highlighting recommendations for systems improvements, sharing of best practice and flagging relevant upcoming sector / regulatory developments to management and trustees.

Cons

• An audit is a more onerous form of external scrutiny than an independent examination, requiring more effort on both the auditor and the charity. In practice, this translates into a higher cost in terms of auditor fees and staff time.
• Where an audit is not required, having one anyway could actually indicate that the Trustees and management are not fully confident in the charity’s systems and internal controls, and are seeking the additional external validation and reassurance that an audit brings.

Independent examination

Pros

• Simpler process – in essence it comprises a review of the accounting records kept by the charity and a comparison of the accounts to those records, in accordance with the Charity Commission’s “Directions”.
• The examination provides trustees, funders, beneficiaries, stakeholders and the public with a form of assurance that the accounts of the charity have been reviewed by an independent person, at a fraction of the cost of a full audit.

Cons

• Because of the nature of “negative assurance”, an independent examination provides a limited form of scrutiny. Only certain matters will be reported where there are significant concerns, and only if they come to the examiner’s attention.
• There is no requirement to write a management letter which can be a useful tool for highlighting and tracking the resolution of systems and internal control weaknesses.

If your charity does not require an audit by law, but you are not sure whether to have one anyway, please do get in touch and we will be happy to chat through the options with you.