It’s only large charities that need an audit – isn’t it?
At Scrutton Bland we specialise in audits in the not-for-profit sector, particularly charities. Adam Smith, Corporate Services Partner, discusses the need for charities to have audited financial statements and the benefits that brings, particularly in a time of economic uncertainty and the collapses of some businesses due to accounting irregularities.
F or some charities an audit can be seen as an unnecessary compliance cost, diverting valuable time and resources away from the charity’s core activities and purpose. However, the benefits of an audit are far more extensive than achieving a legal requirement. An audit can provide stakeholders and Trustees with the comfort that they are compliant with the necessary Charities Commission requirements as well as providing them with credibility to donors and stakeholders that their funds are being appropriately managed.
Basic principles Charities are regulated by the Charities Commission which requires that all charities must maintain accounting records and prepare accounts. These must be made available to the public on request. Registered charities must also prepare a Trustees’ Annual Report incorporating their financial statements, which will vary in terms of content, dependent upon the size and constitution of the charity. The Trustees’ report is a method for the charity to explain to the users of its financial statements the charity’s purpose and how its activities have helped to achieve that in the previous year. This can be seen to be a method of promoting the charity, however the report should be balanced.
Does my charity need to be audited? In most cases charities are governed by the Charities Act, and for incorporated charities, also the Companies Act. However, the threshold for charities to be legally required to prepare and file audited financial statements is much lower than those of private and public companies. The law now states that charities with an income of £1 million and over are legally required to be audited. An audit will also be needed if total assets (before liabilities) exceed £3.26m, and the charity’s gross income is more than £250,000 per annum. Audits may also be undertaken if it is required by the charity’s governing document or due to a condition imposed by a funder. Charities with a gross income in excess of £25,000 are required to have an independent examination of their financial statements, which requires a lower level or inspection, but provides stakeholders with the reassurance that their financial affairs are in order at a basic level. However, a charity can voluntarily request an audit and there is a strong argument for charities voluntarily submitting their accounts for inspection by an auditor.
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