Whether unincorporated, a charitable company or a CIO (charitable incorporated organisation), charities are required to have certain levels of assurance over their financial statements depending on their size. The limits are much smaller than companies, meaning that many charities require some sort of external scrutiny.
The requirements by size are as follows:
|Income up to £25,000||No external scrutiny required*|
|Income £25,001 to £250,000||External scrutiny required|
|Income £250,001 to £1m and total assets below £3.26m||External scrutiny required|
|Income over £1m or gross assets over £3.26m and gross income over £250,000||External scrutiny and full audit required|
*unless the charity’s governing document requires a certain level of scrutiny
External scrutiny is a limited form of assurance where the accountant will prepare an ‘independent examiners report’ which will be attached to the charity’s financial statements. An independent examination, in contrast to a full audit, is more limited in scope than an audit as the accountant only needs to review specific matters required by charity law. For example, there is likely to be less in-depth testing, as the charity commission requires checking of the extraction of the underlying data into the accounts, and performing an analytical review.
A full audit is a reasonable form of assurance where the auditor will prepare an ‘independent auditors report’ which also be attached to the financial statements. It requires the auditor to follow detailed auditing standards, and reaching an opinion on whether the financial statements show a true and fair view of the charity. This requires auditors to review any areas of the accounts that could be ‘materially misstated’ – essentially any areas which could give rise to a large error.
In practice, a full audit is generally more wide-ranging in terms of testing, more rigorous, and must be carried out by a registered auditor. This means that charities will usually pay more for a full audit than an independent exam, as much more work is required.
Some trustees still choose to be subject to a full audit, despite not needing to by law. They often desire the additional assurance that an audit gives and believe the benefits outweigh the costs.