The Auditing Practices Board has issued for public consultation Practice Note 11 on audit of charities in the UK.
The PN has been updated for the new, clarified, International Standards on Auditing (ISAs) (UK and Ireland) that were issued in October 2009 and for changes in legislation, regulation and other relevant guidance. The closing date for the consultation was 21 January 2011.
The key areas of change are as follow:
Special features of charities : gift aid and trading income
The PN recognises the importance of gift aid as a source of income for many charities. The revised guidance reminds trustees that they need to ensure that the charity is complying with the strict rules set out by HMRC in relation to the operation of gift aid and that trustees must meet the 'fit and proper persons' test in order for the charity to be able to take advantage of charity tax reliefs.
ISA 250 Section B: The auditor's right and duty to report to regulators in the financial sector
As well as being updated for the ISA requirements, this section has been updated to clarify the tipping off offence, in particular in relation to discussing matters of material significance with trustees. In addition, a list of issues which auditors need to consider when making a report to one of the regulators is included in the guidance.
ISA 265: Communicating deficiencies in internal control to those charged with governance and management
The ISA contains additional guidance on communicating to those charged with governance significant deficiencies in internal control. The auditor should consider the need to make a report on matters of material significance to the charity regulators if they identify significant deficiencies which call into question the integrity or competence of management.
ISA 320: Materiality in planning and performing and audit
The new ISA requires auditors to determine the materiality level for the financial statements as a whole and also for particular classes of transactions, account balances and disclosures, where misstatements of a lesser amount than the materiality level for the overall financial statements could be reasonably expected to influence the economic decisions of users. This concept of performance materiality is specifically mentioned in relation to restricted funds.
ISA 540: Auditing accounting estimates, including fair value accounting estimates and related disclosures
This is a new ISA which combines accounting estimates and fair values, and the related disclosures. Other than being revised for the new ISA, there are no additional changes.
ISA 550: Related parties
This new ISA requires auditors to consider the procedures adopted by a charity in respect of related party transactions. Additional guidance on the controls management may have to put in place to authorise and approve significant transactions has been included, such as a charity maintaining a declarations of interest file.
ISA 600: Special considerations - audit of group financial statements (including the work of component auditors)
The new ISA requires a greater degree of supervision and involvement by the group auditor in respect of component auditors. The guidance covers the importance of understanding the structures through which charities operate and the added complications resulting from using overseas auditors which may relate to different legal obligations and rights of access to books, documents and records.
In addition, the appendices have been updated as follows:
the appendix on the duty of auditors to report matters of material significance has been updated with additional guidance on reporting matters to regulators, including additional references to further guidance which may be useful to auditors when deciding whether matters are of material significance
the appendix on internal controls relevant to charities has been deleted
an additional appendix on examples of auditor's reports has been created which aims to cover the vast majority of situations which may arise.
Charity and Voluntary Sector Group News - December 2010