Managing a charity in the UK involves navigating various regulatory requirements to ensure transparency, accountability, and the effective use of resources.
Among the critical oversight processes are audits and independent investigations. While both aim to maintain the integrity and trustworthiness of charitable organisations and both require the services of an expert charity accountant, they differ significantly in purpose, initiation, methodology, and outcomes. This blog post explores the distinctions between an independent investigation and an audit for charities in the UK.
Purpose and Scope
Audit: An audit is a systematic, periodic examination of a charity’s financial records and statements. The primary aim is to verify the accuracy and fairness of the financial statements, ensuring they reflect the charity’s true financial position and comply with accounting standards and legal requirements. Audits also assess the effectiveness of internal controls and financial management practices.
Independent Examination: An independent examination is a simpler, less formal review of a charity’s financial records compared to an audit. Its primary purpose is to provide an assurance that the accounts have been properly prepared according to accounting standards and charity law, without the level of scrutiny that an audit entails. This process is typically applicable to smaller charities with an annual income below £1 million.
Initiation and Triggers
Audit: Audits are generally scheduled regularly as part of statutory requirements or internal governance policies. For example, charities with an annual income exceeding £1 million must undergo an independent audit. Audits may also be conducted voluntarily to enhance donor confidence and maintain robust financial oversight.
Independent Investigation: Independent examinations are often a statutory requirement for smaller charities, specifically those with an annual income between £25,000 and £1 million that are not subject to an audit. Charities may also choose to undergo an independent examination voluntarily as a means of maintaining good financial oversight and donor confidence.
Process and Methodology
Audit: The audit process involves a thorough review of financial records, including income, expenditures, assets, and liabilities. Auditors assess the accuracy of financial statements, evaluate internal controls, and verify compliance with legal and regulatory standards. The process concludes with an audit report, providing an opinion on the financial statements and any recommendations for improvement.
Independent Examination: The process of an independent examination involves reviewing the charity’s accounting records and comparing them to the accounts prepared by the trustees. The examiner checks that the accounts comply with relevant legal requirements and accounting standards, and that they are consistent with the underlying records. However, unlike an audit, the examiner does not perform detailed testing of transactions or internal controls.
Outcomes and Consequences
Audit: The outcome of an audit is typically an audit report that highlights whether the financial statements provide a true and fair view of the charity’s financial position. If issues are identified, the report may include recommendations for improving financial practices and internal controls. However, audits are generally not punitive but rather aimed at enhancing financial accountability.
Independent Examination: The outcome of an independent examination is a report that confirms whether any matters have come to the examiner’s attention which indicate that the accounts do not comply with the relevant requirements. This report is less detailed than an audit report and is not intended to provide a high level of assurance. The focus is on the reasonableness of the accounts rather than their absolute accuracy.