The FRC’s revised Practice Note 11 addresses a range of developments and has implications that trustees should be aware of. The financial Reporting Council (FRC) has re issued its guidance on the audit of charities – Practice Note 11 (PN11). Trustees of charities should be aware of what it covers. Chairs of audit committees especially are expected to have recent and relevant financial experience, and knowledge of PN11 would help.
PN11 was reissued in response to new accounting standards, new audit standards, developments in charity law, and of course, Kids Company. According to the FRC: “Practice notes are intended to assist auditors in applying auditing standards of general application to particular circumstances and industries. Practice notes and bulletins are persuasive rather than prescriptive.”
The revised PN is much shorter than earlier versions, and there is a reason for this. Whereas the previous guidance read more like a comprehensive guide to auditing charities, this revision works on the assumption that an auditor already understands relevant audit standards, and so the guidance simply highlights areas that are particular to charities.
The guidance spells out what is expected of the auditor. Before commencing the audit of a charity, the engagement partner should ensure that the ﬁrm has enough staff who have adequate knowledge and experience of such audits. Incidentally, it is this expertise and commitment to quality that should form the basis of any audit appointment.
The practice note then works through the relevant audit standards and highlights issues for the auditor. Trustees may want to note the following paraphrased extracts:
- Firms need to identify which audits will require additional “engagement quality-control reviews” – they will need appropriate partner expertise available to do this.
- Trustees are responsible for the prevention and detection of fraud, and for ensuring that the necessary controls are in place to ensure compliance with applicable laws and regulations, even if they have delegated some of their executive functions to senior management.
- The auditor is required to address all communications to the trustees or a relevant sub-committee, unless the auditor concludes that a matter ought to be reported to an appropriate authority outside the charity and that it no longer has conﬁdence in the trustees.
- Communication needs to be two way. The auditor’s communications need to be understandable and clear, and written for an audience of volunteer trustees who may have different skills and experience than those found in a commercial board of directors.
- When it comes to making accounting estimates and judgements, the auditor is warned that both the executive staff and the trustees may be biased in wanting to present the accounts in a certain way.
- Conﬂict of interest is a major factor in many regulatory inquiries and so the auditor will focus on related party transactions, recognising that charities have a speciﬁc deﬁnition of the term.
- It is essential that the trustees make their own assessment of the charity’s ability to continue as a going concern. And the auditor will request the trustees to analyse the cash ﬂow forecasts between restricted and unrestricted funds, and consider reserve policies.
- The duty on auditors to report matters of material significance to the regulator has remained much the same after more controversial plans were scrapped at consultation stage, although the guidance has been updated. The auditor also considers whether any of the circumstances relating to going concern require reporting. Any modification to an audit report now results in a report to the regulator.
One reason for updating the practice note was the new requirement within international standards for auditors to consider narrative statements issued with accounts. The detailed requirements are complex in charities due to the nature of the reports they issue, and the complex legal regime under which they operate. Broadly, however, auditors are now required to consider whether annual reports are consistent with the accounts, their knowledge, and legal requirements. Auditors are given guidance on this topic within PN11, and trustees should consult with them in order to make sure it is clear how much work is involved. This may affect the timing of the annual report production.
The guidance ends with an amalgam of conditions and events that may lead to error in accounts. The list supplements issues identified within general audit standards, and are therefore supposed to be specific to charities. This list, which is reproduced below, may be helpful for trustees in assessing their own response to risk, and as a basis for discussion with the auditor.
To understand more about these conditions and events get in touch with your BDO contact or firstname.lastname@example.org.
This article was first published in Charity Finance magazine on 1st February 2018.
Don Bawtree is the co-author of Charity Administration Handbook. The 6th edition is coming out in June. To order click here
This article can also be found on the BDO website here