When do your charity’s accounts have to be audited?
We recently carried out some research and discovered several common mistakes charities make when preparing their annual report and accounts. One of the four key issues identified was:
- Failing to ensure that the accounts are subject to the appropriate external scrutiny and independent review of the financial information.
The Charities Accounts (Scotland) Regulations 2006 (as amended) sets out two different forms of external scrutiny that can be carried out on charity accounts – audit and independent examination.
The objective of an audit is to offer an opinion on the financial statements, and it must be carried out by a registered auditor. An audit provides reasonable assurance that the accounts are free from material misstatement, whether caused by fraud or other irregularity or error.
An independent examination is less rigorous than an audit and offers an assurance that nothing has been found that needs to be brought to the attention of readers of the accounts, rather than the positive expression of an opinion based on an audit.
When does an audit need to take place?
All charity accounts must be independently scrutinised, but whether you need to carry out an audit or an independent examination depends on a range of factors.
In general, an audit must take place when:
- The gross income in the financial year is £500,000 or more; or
- The assets of the charity are more than £3.26 million (where fully accrued accounts have been prepared); or
- The charity’s governing document requires the accounts be audited; or
- The charity trustees themselves decide to have an audit; or
- Another piece of legislation requires the charity to have an audit.
The Guide to Charity Accounts on our website contains a flowchart which can help trustees to determine the type of external scrutiny under charity law which is most appropriate for their charity’s accounts.
Gross income
The threshold for audit is not pro-rated in Scotland to align with the length of the financial year. It is a fixed £500,000 threshold in any period.
Therefore, if you have prepared a statement of account and the gross income is £500,000 or more, then the accounts will have to be audited.
This is the case even where the threshold will be breached for only one year.
Trustees should take this into consideration, for example, when they are applying for high levels of grant funding or when accepting a significant donation. If the accounts were previously subject to an independent examination and now require to be audited, it may involve additional expense for the charity.
Governing document
Your governing document, which sets out the rules by which the charity must operate, may require your charity’s accounts to be audited. The governing document in your charity may be your constitution, trust deed or memorandum and articles of association.
As this document forms the basis for how the charity operates it is important to make sure that it is fit for purpose. Some governing documents contain reference to a requirement for an audit as a generic term for checking the accounting records. The word audit in charity law means that the accounts need a full statutory audit by a registered auditor, even where the law would not require it based on the charity’s income or asset levels.
You may want to amend your governing document so the charity trustees can choose not to have an audit if it would not otherwise be required.
The use of the wording: ‘the accounts should be subject to external scrutiny in line with the relevant requirements of legislation’ would allow the charity to use the form of scrutiny the law permits depending on the income or asset levels each year.
Where changes are made to the governing document in respect of this you must advise OSCR within three months of the change taking place. Before making any changes to your governing document you must check that the document itself allows for such changes to be made.
More information about making changes to your charity and advising OSCR of changes can be found here.
For more guidance to help you complete your charity accounts, please visit:
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