Transitioning from independent examination to audit

An increasing number of charities now face the requirement for their accounts to be audited. Making the transition from an independent examination for the first time is a significant step for any charity and there are several key considerations to keep in mind to ensure that they are well prepared.

When does a charity require an audit?

• income is greater than £1 million; or
• assets exceed £3.26 million, and income is more than £250,000.

A charity could also need an audit if their governing document states that it is required or if a funder imposes that condition. Charities do have the option to voluntarily elect to have an audit as well, despite it not being mandatory for them.

What is the difference in scope between an independent examination and audit?

An independent examination will check whether:

• proper accounting records have been kept; and
• the accounts comply with accounting requirements and accord with the records.

However, an audit will provide an opinion on whether the accounts:

• • give a ‘true and fair view’ of the state of the charity’s affairs and their results for the year; and
  • have been properly prepared in accordance with accounting practice and relevant law.

Whilst an independent examination is thorough, it is less rigorous than an audit which requires extensive testing and verification of financial transactions. Auditors perform substantive tests, analytical procedures, and detailed checks on assets, liabilities, income, and expenses. They also assess the effectiveness of internal controls and may conduct physical inspections and confirmations with third parties.

What do you need to do to prepare for an audit?

The more comprehensive nature of the audit will mean that charities will need to provide additional information, so it would be wise to start planning for this well in advance. Things to consider include:

• • • Evaluating and documenting the internal financial systems and controls, including procedures for authorising transactions, safeguarding assets, and ensuring accurate financial reporting;
    • Documenting the IT applications and other aspects of the entity’s IT environment, such as the databases, operating system and network;
    • Considering and documenting what the charity does to prevent and deter fraud;
    • Documenting the charity’s related parties; and
    • Formally assessing whether the charity is a going concern.

What other factors should be considered?

Staff may need to dedicate more time to prepare for an audit, which includes gathering documentation, liaising with auditors, and addressing any issues raised.

As a result of the significant amount of additional work that will be undertaken, the cost of an audit will be substantially more than an independent examination.

Transitioning from an independent examination to an audit represents a significant change for any charity. It can enhance transparency, governance, and funders’ trust, but it also brings increased costs and resource demands. Charities should prepare early and thoroughly to ensure a smooth transition that ultimately strengthens their financial foundation and public reputation.

If you would like any further information and specific guidance, please do contact us.