The terms Independent Examination and Audit are often used interchangeably. I’m often asked by Charities whether I do audits, only to find what they really want is an independent examination.
While they might sound like they’re the same, and they are both forms of external scrutiny, there is a subtle but big difference:
Independent Examination provides negative assurance
Negative Assurance means there is nothing found that suggests that the accounts are wrong
Audit provides positive assurance
Positive Assurance means that the accounts are considered to give a true and fair view of the organisation’s finances.
Essentially an Independent Examination is checking that the accounts look correct and agree with the records. This assumes that the underlying records are correct.
Whereas an Audit would require verifying that the underlying records are correct. This would involve taking samples to confirm the accuracy of the records, as well as reviewing the organisation’s financial systems.
An Audit is a far more in-depth process, takes a lot more time and needs to be conducted by a qualified auditor.
As you can imagine the cost of an audit is far higher than an independent examination. Audits also put greater demands on the charity’s staff’s time.
For these reasons, not all charities are required to have an audit.
Does you Charity need an Audit?
Scottish Charities are governed by OSCR whereas charities in England and Wales are governed by the Charities Commission. This means that the criteria are different.
While a Charity might not be required by their governing body to have an audit, it might still need one if a requirement of its funders or governing documents (constitution). In some cases, the trustees might decide that an audit is more appropriate.
Scotland
An audit is required if either:
Gross income is over £500k
Assets are more than £2.8M and accounts are prepared on the accrual basis
Otherwise, an Independent Examination by an appropriate person is allowed. (More about who is an appropriate person below).
England and Wales
An Audit is required if the Gross Income is over £1M or the assets exceed £3.26M
Otherwise if:
Gross income is over £250k an Independent Examination by a member of an approved professional body is required.
Gross income is under £250k but over £25k an Independent Examination by an appropriate person is allowed.
Gross income less that £25k there is no statutory requirement for an Independent Examination.
Check your Constitution
The misconception that an audit is the same as an independent examination can even creep into an organisation’s constitution. There are charities with constitutions stating that they should have an annual audit when really there is not an external requirement for this.
This is not a problem if it is a conscious decision. However, if purely down to muddling terminology, it’s an expensive mistake and I’d suggest getting your constitution amended!
Why would you choose an Audit if not a Statutory Requirement?
As an audit puts an organisation through more scrutiny, some organisations believe it offers more value, demonstrating greater levels of accountability and transparency to funders and donors.
If this is desired, it might not necessarily be required on an annual basis
Who is an Appropriate Person for an Independent Examination?
Firstly whoever is appointed cannot be connected to the charity. This can include trustees, employees, volunteers, relations to key personnel and those with commercial connections to the charity.
They also need to be someone that the trustees believe has the necessary skills to carry out the examination. It’s true that the trustees are allowed to exercise a bit of discretion here, afterall charities can greatly vary in complexity.
If the accounts are prepared on an accrual basis the examiner should be professionally qualified to undertake the role. Here’s a link to OSCR’s guidance.
Charities fill an invaluable role in society. As they are entrusted to put other people's money to use, it's right that there is some kind of external scrutiny. The level of this scrutiny needs to be appropriate to the scale and complexity of the charity.
I'd encourage smaller charities to see this as an opportunity to engage with someone outside their organisation to help them ensure that they are taking care of this in the best way possible.
