We have all seen the headlines about large corporate collapses and questions about the role of the auditor, so it comes as no surprise that auditing standards have been enhanced. However, it is an unfortunate fact that the standards apply equally to a small charity as they do to the largest conglomerate, so the increased regulation will affect all audits, including those of charities.
Three standards have been amended, dealing with:
- Going concern
- Accounting estimates
The first two standards change the work that the auditor has to undertake, and it is notable that they are now more prescriptive than previously and require management to prepare certain documentation. Auditing standards also require auditors to exercise professional scepticism - auditors will be asking you to justify your judgements and estimates, so be prepared for more questions and challenge. The third standard amends the actual audit report.
Going concern refers to the assumption that an entity will have sufficient financial resources to be able to continue in business for the foreseeable future.
Auditors have always considered going concern, but in the future you can expect to see:
- More enquiries at the planning stage: auditors have to consider eight factors which may impact on going concern and you will need to provide information for this
- More detail to be included in your going concern assessment, such as considering different scenarios (and if you haven’t been preparing a going concern assessment, it is likely that you will need to do one)
- More questions – there is a mandatory list of six areas for enquiry
The going concern assessment will be commensurate with the charity’s complexity – for a grant giving charity funded by investment income, it should be very simple.
Accounting is not an exact science and most sets of financial statements include estimates, such as (a) how long a piece of equipment will last; (b) how much a debtor will actually pay; (c) what the estate of a legator will realise. Clearly, changes in estimates can have a direct impact on the reported surplus for the year.
You can expect to see:
- At planning, questions about what accounting estimates arise, how estimates are prepared and reviewed, and how accurate previous estimates have been;
- For material estimates, you will have to justify your assumptions, by providing supporting data and undertaking sensitivity analysis
- More detail in the letter of representation
The auditor will also assess the overall impact of estimates. If you take a prudent view on all estimates, does that distorted the results? If so, you will need to revise your approach.
The final standard requires audit reports to include details of the extent to which the audit was considered capable of detecting irregularities, including fraud. The wording will depend on the charity’s activities, the extent and nature of the trustees’ oversight, the specific regulations applying, and the risks of fraud.
Auditing standards have changed and this will affect all future audits, including audits of charities. You may also see auditors requesting an increase in fees to cover the cost of the additional work.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
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This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.