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CC31 - Independent Examination of Charity Accounts (combined version) – Guidance and Notes

(Version June 2008)

You can also view the printed colour version of this publication: CC31 - Independent Examination of Charity Accounts (PDF format 292kb).

For accounting years beginning on or after 1 April 2008 those small charitable companies which are not required to have an audit may opt for independent examination. Independent examiners also have a new duty to report matters of material significance to the Commission from 1 April.

This revised guidance combines information for trustees and the examiner and explains for trustees what an independent examination is and how to go about selecting your examiner. For examiners, the guidance sets out what you have to do and how to go about making your examiner’s report with plenty of worked examples and practical advice. The guidance also explains the new duty to report to the Commission with worked examples.

Directions and guidance

Introduction: what is this guidance about and who should read it?
To which accounting periods does this guidance apply?
Guidance for trustees: what to prepare, what is an independent examination, the legal framework, who can do it and how to go about appointing an examiner
Guidance for the examiner: what is involved, what do I have to do and what do I do once I have finished my independent examination?
The Charity Commission’s Directions
Statutory duty to report to the Charity Commission
Appendices:

Introduction: what is this guidance about and who should read it?

To maintain public confidence in the work of charities, charity law requires most charities to have an external scrutiny of their accounts. Provided a charity’s gross income is not more than £500,000, or where gross income exceeds £100,000 its gross assets are not more than £2.8 million, then charity law allows trustees to choose a simpler and less expensive form of external scrutiny called an independent examination.

An independent examination is a simpler form of scrutiny than an audit but it still provides trustees, funders, beneficiaries, stakeholders and the public with an assurance that the accounts of the charity have been reviewed by an independent person. For financial years starting on or after 1 April 2008, independent examination will also be an option for eligible small charitable companies. Also charitable companies with a gross income of more than £10,000 will have to have an examination for the first time.

Trustees are responsible for deciding whether to have an independent examination instead of an audit and for selecting and appointing the independent examiner. The first part of this guidance explains what trustees need to know about independent examination and what they must do and provides some recommendations to help make the examination effective. Trustees, and in particular the Honorary Treasurer, need to know what an independent examination involves before they opt to have an examination in place of an audit. By understanding what is involved, trustees can have their accounting records, Annual Report, accounts and explanations ready to assist the examiner to complete their work in a timely way.

The second part of this guidance, the Directions and the appendices provide the essential information for the examiner. Whether acting as a volunteer or being paid a fee for their work, the role of the examiner is important and they must follow certain steps in carrying out the examination and make a report to the trustees setting out particular matters once they have finished their examination. There is a process to be followed and this guidance takes the examiner through the Directions, their reporting duties and provides practical advice at every stage.

Whilst in most cases the examiner will be reviewing receipts and payments accounts and so will not need to be a qualified accountant to carry out a proper independent examination, the examiner still needs a certain level of ability and knowledge to follow the Directions set out in this guidance and to set out their report in the way that is required by the Regulations. Where gross income is more than £250,000 charity law requires the examiner to be a member of a listed body listed in the Charities Act 1993 (the 1993 Act).

Where accruals accounts are prepared the examiner needs to have an up to date understanding of accruals accounting and to be familiar with the ‘Statement of Recommended Practice: Accounting and Reporting by Charities (2005)’, otherwise known as the SORP. The law requires that the examiner has the requisite ability and experience to carry out a competent examination and greater accountancy skills and knowledge will be needed if the charity is preparing accruals accounts.

Examiners are therefore recommended to read this guidance to find out what they must do to comply with the Directions for independent examination, the content of their report, and for practical guidance about how to go about carrying out their work.

To which accounting periods does this guidance apply?

This guidance has been updated for changes in the scrutiny (independent examination and audit) arrangements introduced by the Charities Act 2006 (the 2006 Act) and the Charities (Accounts and Reports) Regulations 2008 (the 2008 Regulations) and should be applied to the examination of accounts of non-company charities and eligible small charitable companies incorporated under company law for accounting periods beginning on or after 1 April 2008. The references provided to company law are to sections of the Companies Act 2006 as they apply from 6 April 2008.

Guidance for trustees: what to prepare, what is an independent examination, the legal framework, who can do it and how to go about appointing an examiner

What to prepare? The requirement to prepare an Annual Report and accounts

Trustees should read Charity Reporting and Accounting: The Essentials April 2008 (CC15a) to find out about the requirements for a Trustees’ Annual Report and options for preparing accounts and their external scrutiny. Details are also provided about the information update form or Annual Return to be filed with the Commission.

Small charities, which are not charitable companies registered with Companies House, can prepare either receipts and payments accounts or accruals accounts provided their gross income does not exceed £100,000. Receipts and payments accounts offer a simple and flexible alternative to more complex accruals accounts. Receipts and payments accounts are simply an analysed record of the cash received and spent in the financial year reconciling cash and bank balances held at the beginning and end of the year together with a schedule of any other assets or liabilities at the year end known as a ‘Statement of Assets and Liabilities’. Our publication Receipts and Payments Accounts Pack (CC16) provides a pro forma layout for the trustees’ annual report, the receipts and payments accounts, the statement of assets and liabilities and the examiner’s report. There is also a worked example using the pack called ‘St George’s Youth Club’ on our website.

All charitable companies must prepare accruals accounts as must all non-company charities with gross income of more than £100,000 in a financial year. Charities preparing accruals accounts must generally do so in accordance with the SORP. However, registered social landlords and higher and further education bodies have their own SORP and should use that instead but the size of these organisations is usually such that they are unlikely to be eligible for independent examination.

Accruals accounts are not simply a form of cash accounts plus debtors (money owed to the charity but not received by the year end) and creditors (money owed by the charity but not paid by the year end) because they must also include the cost or valuation of assets, depreciation of fixed assets, provisions, the market valuation of investments, the impairment of functional assets and other accounting adjustments and disclosures, for example, accounting for pension arrangements. Accruals accounting is a much more complex form of accounting than receipts and payments and follows the accounting rules set out by the Accounting Standards Board in accounting standards and interpreted by the SORP for the charity sector. Charitable companies must also comply with the accounting requirements of the Companies Act 2006.

For charities not requiring a statutory audit, the SORP offers a number of concessions and to assist smaller non-company charities and our publication Accruals Accounts Pack (CC17) provides pro forma layout for the accounts, Trustees’ Annual Report and examiner’s report which when completed fully meets legal requirements. For both company and non-company charities, there are also several worked examples of accruals accounts on our website.

What is an independent examination?

Independent examination was introduced by Part 6 of the 1993 Act and Section 43 of the 1993 Act allows trustees of smaller charities to opt for this simpler form of external scrutiny in place of an audit.

An independent examination provides an external check on the accounts and can be carried out by any person with the relevant ability and experience, except where the gross income exceeds £250,000, when only members of one of the bodies listed in the 1993 Act can undertake the examination. An examination is a less onerous form of scrutiny than an audit and provides less assurance in terms of the depth of work which is to be carried out. What the examiner must do is set out in the Directions and the content of the examiner’s report is set out in the 2008 Regulations.

An examiner, in their report, is only required to confirm that no evidence has been found that suggests certain things have not been done by the charity. This form of ‘negative assurance’ is a more limited form of scrutiny. The examiner is not acting as an auditor and so is not required to plan the work, for example, to identify fraud or to test the internal financial controls operating in the charity.

An examination involves a review of the accounting records kept by the charity and a comparison of the accounts presented with those records. It also involves a review of the accounts and the consideration of any unusual items or disclosures identified. It is important to note that verification and vouching procedures, where an item in the accounts is checked against an original document such as an invoice or a receipt, only becomes necessary where significant concerns are identified from the work of the examiner, or where satisfactory explanations cannot be obtained from the trustees.

In the examiner’s report, the examiner is only required to provide a statement on specific matters that have come to their attention as a result of the examination procedures specified in the Directions. This is a simpler requirement than that of an audit. An auditor is required to build up a body of evidence to support a positive statement of opinion on the accounts. In particular, an auditor is required to form an opinion as to whether the accounts show a ‘true and fair view’.

Where a significant concern relating to the accounts arises that the examiner considers important to the understanding of the accounts remains unresolved or other matters arise that must be included in the examiner’s report come to the examiner’s attention, then consideration will be needed as to how this is reported (see Direction 10). If a matter is identified which is of material significance to the Commission where we are likely to consider using our enquiry powers (see Appendix 5) the examiner also has to make a separate report on that matter to the Commission in addition to the examiner’s report attached to the accounts.

The legal framework: What are the thresholds for independent examination?

The thresholds for independent examination are subject to review and this guidance will be updated in the event of any changes. The thresholds detailed below were in place as at 1 April 2008. Gross income should be calculated in accordance with the Commission’s guidance, as set out in Appendix 1.

For non-company charities with accounting periods commencing on or after 27 February 2007, and for charitable companies established under company law with accounting periods commencing on or after 1 April 2008, the thresholds for statutory audit are:

gross income of more than £500,000; or
gross assets of more than £2.8 million where gross income is more than £100,000 in the financial year.

Unless gross income exceeds £100,000 then the gross asset threshold of £2.8 million does not apply. The flow chart in Appendix 2 sets out the steps for determining whether an individual charity is eligible for independent examination.

Charities below these thresholds for audit may normally opt for an independent examination unless the charity’s governing document requires otherwise. There is normally no requirement for any independent scrutiny where the gross income for the year in question is £10,000 or less.

Where the gross income of the charity exceeds £250,000 and the charity is not subject to statutory audit, the 2006 Act introduced a new requirement for the examiner to be a member of a listed body. These bodies are listed in the 1993 Act and are also set out in the ‘Selection of Examiners’ section of this guidance.

This guidance also applies to small charitable companies for accounting periods commencing on or after 1 April 2008 which are not required to have a statutory audit. Although charitable companies which are eligible for audit exemption under company law may opt for an independent examination in place of a charity audit on the same basis as non-company charities, their duty to maintain accounting records, and the form and contents of their accounts still remains subject to company law. The guidance refers to the Companies Act 2006 where appropriate.

What is the legal framework for an independent examination?

The 1993 Act made provisions for regulations governing the form and content of charity accounts, Trustees’ Annual Reports and the duties of charity auditors and independent examiners. These requirements are set out in the 2008 Regulations and apply to accounting periods commencing on or after 1 April 2008. The 1993 Act provides for some form of independent scrutiny for the accounts of all but the smallest charities, but this will fall short of a full requirement for an audit for the majority of charities. The legal framework applies to all charities registered with the Commission and those charities currently excepted from registration.

The 2006 Act introduced a new legal duty for independent examiners to make a written report to the Commission where, during the course of their examination, they become aware of a matter which relates to the activities or affairs of the charity, or of any connected institution, or body, and they have reasonable cause to believe that the matter is likely to be material to the Commission in the exercise of its inquiry functions. This guidance explains the legal duty, gives guidance on what must be reported and provides examples of how to set out a report.

Where can I find the Regulations?

The 1993 Act, the 2006 Act and the 2008 Regulations apply to England and Wales only. Copies of the 1993 Act and 2006 Act are available from Office of Public Sector Information’s website. The 2008 Regulations are also available on-line.

Checking for other external scrutiny requirements

Having checked whether the charity’s gross income and gross assets are below the charity audit threshold, there are a number of additional points for the trustees to consider before the examiner is appointed and starts work.

An audit may be needed for other reasons including a requirement:

under the charity’s governing document for an audit (although the trustees may be able to amend the governing document – see Appendix 2);
under another statutory or regulatory regime, such as those relating to registered social landlords and NHS charities; or
a requirement placed on the charity by a funder or lender.

Trustees may also choose an audit if they prefer the higher level of assurance that it provides. Due to the extra work an audit involves and due to developments in International Standards on Auditing, trustees need to be aware that an audit is likely to be considerably more expensive than an independent examination.

Charities that are incorporated under company law will have a memorandum and articles of association and the articles may include an audit requirement. If the charity is a company then the examiner will need to be familiar with the additional accounting and reporting requirements that apply to small companies. The trustees of charitable companies are responsible for ensuring that the content of the director’s report, which can incorporate the Trustees’ Annual Report, complies with the requirements of the Companies Act 2006.

Who can carry out an independent examination? How to select your examiner

Section 43(7)(a) of the 1993 Act allows the Commission to issue guidance to charity trustees regarding the appointment of an independent examiner. Trustees should read the following sections to ensure that they have taken all the steps they need to take in order to properly select and appoint their examiner. The prospective examiner should also consider the following guidelines prior to accepting the appointment.

The independent examiner

The charity trustees should take steps to ensure that a competent examination takes place and they will therefore consider carefully the suitability of a prospective independent examiner.

An independent examiner as described in section 43(3)(a) of the 1993 Act is “an independent person who is reasonably believed by the charity trustees to have the requisite ability and practical experience to carry out a competent examination of the accounts”. Once a charity’s gross income exceeds £250,000, the examiner must be a person who is a member of one of the following bodies listed in the 1993 Act and should be allowed by the rules of that body to undertake the role of independent examiner:

Institute of Chartered Accountants in England and Wales
Institute of Chartered Accountants of Scotland
Institute of Chartered Accountants in Ireland
Association of Chartered Certified Accountants
Association of Authorised Public Accountants
Association of Accounting Technicians
Association of International Accountants
Chartered Institute of Management Accountants
Institute of Chartered Secretaries and Administrators
Chartered Institute of Public Finance and Accountancy
Fellow of the Association of Charity Independent Examiners

Charity trustees are entitled to pay reasonable remuneration to an independent examiner for their services and if they are unable to obtain the services of a competent examiner on a voluntary basis, should be prepared to pay such remuneration and regard it as a proper cost of administering the charity.

An independent person

Independence is important because this means that the examiner is not influenced, or perceived to be, by either close personal relationships with the trustees or by day to day involvement in the administration of the charity. For an examiner to be independent that individual should have no connection with the charity trustees which might inhibit the impartial conduct of the examination. An examiner cannot independently review his or her own work and so the person who is the charity’s book-keeper cannot be the charity’s examiner. However this does not mean an examiner cannot be a member or supporter of the charity and often some involvement brings an added quality of personal enthusiasm and familiarity to the role of examiner.

Where a potential independent examiner is a member of the charity, for example a member of a church congregation, provided they have not been involved in the day-to-day decision making or administration of the charity, for example by serving on a committee or sub-committee convened by the charity, and are not connected with the charity trustees, then normally they may act as an examiner, subject to their having the necessary ability, experience and qualification required. Also the right to take part or attendance as a member in an annual general meeting would not preclude the examiner from conducting an independent examination although active participation in the administration of the charity through tabling resolutions would.

Whether a connection with the charity affects independence will depend upon the particular circumstances but the following persons will not normally be considered to be independent:

a) the charity trustees or anyone else who is closely involved in the administration of the charity;

b) a major donor to or major beneficiary of the charity; or

c) a child, parent, grandchild, grandparent, brother or sister, spouse, civil partner, business partner or employee of any person who falls within sub-paragraph (a) or (b) above.

Requisite ability

In the House of Lords’ debate on the Charities Bill which led to the 1993 Act, it was stated that “an independent examiner must obviously be competent for the task that he is to do and he must be familiar with accounting methods, but he need not be a practising accountant. We have in mind ... people such as bank or building society managers, local authority treasurers or retired accountants. They would all be suitable as independent examiners”.

The quality of the evidence of ability which is required will depend upon whether the accounts are prepared on a receipts and payments basis or an accruals basis, and the size and nature of the charity’s transactions.

It is recommended that trustees of charities preparing their accounts on an accruals basis should consider selecting a person who is a member of one of the accountancy bodies listed in the 1993 Act, or similarly skilled person, who demonstrates a good understanding of accountancy principles, accounting standards and knowledge of the SORP.

The majority of charities have a gross income below £100,000 and, unless constituted as a company under company law, are able to prepare simple receipts and payments accounts. This form of accounting is very straightforward and provides a simple alternative to accruals accounts that fully meets the legal requirements of smaller charities. Knowledge of accounting standards and the SORP is not required to examine receipts and payments accounts.

While previous experience will be very helpful, where receipts and payments accounts are prepared, any person with financial awareness and numeracy skills should be competent to act as an independent examiner provided they have read and understood this guidance and apply it when reviewing a set of receipts and payments accounts.

Whether receipts and payments accounts or accruals accounts are prepared, the examiner needs some familiarity with the certain basics principles including the different types of income funds (unrestricted and restricted) and capital funds (permanent and expendable endowment), the nature of trusts, the responsibilities of trustees, and the role of the charity’s governing document. For more information about the duties of trustees refer to our publication The Essential Trustee: What you need to know (CC3) concerning the duties of trustees.

Some charities have a trading subsidiary which is often registered as a company under company law and carries out commercial trading in order that any profits made can be Gift Aided to the charity. Unless the aggregate gross income of the group, ie the gross income of the charity together with that of any subsidiaries (after eliminating intra group transactions), exceed the statutory threshold of £500,000 there is no requirement to prepare group accounts. Where the aggregate gross income exceeds £500,000 the group accounts must be prepared and audited.

If group accounts were prepared below this threshold then they would be non-statutory accounts and any examination of those accounts would be on a voluntary basis and not covered by the Directions or guidance contained in this publication although the principles could be applied by a contractual arrangement between the charity and the examiner. For more information on group accounts please refer to the relevant section of the SORP and for details of the preparation threshold to Charity Reporting and Accounting: The Essentials April 2008 (CC15a).

Charity trustees should also satisfy themselves that prospective examiners have practical experience relevant to the charity in question which might include that person having:

an involvement in the financial administration of a charity of a similar nature; or
acted successfully as an independent examiner on previous occasions for such charities; or
relevant practical experience in accountancy or commerce.

Selection procedures

Before appointing an examiner, we recommend that the trustees should ask the prospective examiner to confirm that:

they are satisfied as to their independence from the charity and its trustees;
where accruals accounts are prepared that they believe they have the necessary ability and experience to undertake their work including knowledge of the SORP;
they have met any requirements (for example, a practising certificate) of their own professional body to act as an examiner; and where appropriate
they hold professional indemnity insurance.

Where appropriate, the trustees may ask an examiner to give details of their experience, accreditation, or qualifications and this is particularly relevant where the examiner has to be a member of a body listed in the 1993 Act or accounts prepared on an accruals basis are being examined.

By obtaining this assurance, whether by e-mail, letter, or where a fee is charged in the engagement letter, the trustees can demonstrate they have paid proper regard to the requirement to select an examiner with “requisite ability and practical experience”. Where the examiner is charging a fee the trustees should be notified by a letter of engagement setting out the basis on which the examiner has agreed to act. These terms of engagement should recognise, and not limit, the examiner’s statutory duties.

Whilst not all examiners have to hold a professional accountancy qualification, the trustees must always appoint a person suitable for the circumstances of the charity and the trustees should ensure that the Commission’s guidance concerning the requisite ability required of the examiner for accruals accounts has been followed.

Charity trustees should discuss fully with the prospective examiner the work of the charity and their expectations. They should ensure that the prospective independent examiner has a copy of this guidance and is familiar with the Charity Commission’s Directions to independent examiners and understands the duty to provide an independent examiner’s report. Where accruals accounts are prepared under section 42(1) of the Act 1993, the examiner should also be conversant with the 2008 Regulations as to the form and content of those accounts and the SORP.

Where the charity is a small company, the examiner should also be aware of the accounting requirement of the Companies Act 2006 as to the form and content of those accounts in addition to having familiarity with the SORP.

Charity trustees who follow these guidelines and gain suitable assurances from prospective examiners, and from any references, can be satisfied that they have taken all reasonable steps to appoint an examiner with the ability and experience to undertake a competent independent examination of their accounts.

A competent examination is one that is conducted with reasonable skill and care in accordance with the Directions for independent examination.

Timely filing of the Trustees’ Annual Report and accounts

Where the charity’s gross income exceeds £10,000 charities must file their report and accounts with the Commission. The trustees are responsible for ensuring that their Trustees’ Annual Report and accounts, together with the independent examiner’s report is submitted to the Commission within 10 months of the financial year end. Trustees of charitable companies should note that the filing with Companies House is required within 9 months of the financial year end and may find it convenient to file with the Commission at the same time.

The trustees should agree a timescale for completion of the examination with the examiner. The Trustees’ Annual Report, accounts and supporting records and information should be provided to the examiner early enough to allow the examination to be completed and for the accounts to be approved by the trustees before the filing deadline.

If the trustees want the independent examiner to deal with filing then this should be agreed in writing with the examiner as part of the engagement. If the filing is likely to be late the trustees should alert the Commission before the deadline for filing expires setting out the circumstances, the action the trustees are taking, and the likely date filing will be made.

Guidance for the examiner: what is involved, what do I have to do and what do I do once I have finished my independent examination?

Preparatory work

It is important that examiners understand the nature of their role and are satisfied before they start that they have the necessary ability and experience to undertake a competent examination. It is important for examiners to understand what is involved. The first step is to read the first section of this guidance which sets out what the trustees have to do, and describes what an independent examination is and what the thresholds are for independent examination.

Members of professional bodies are recommended to check whether they are required to hold a practising certificate to accept the appointment, whether charging a fee or acting as a volunteer. The requirements of each professional body may differ in its requirements for a practising certificate and professional indemnity insurance.

When charging a fee, examiners should also be aware that they are considered to be providing accountancy services and so must be conversant with, and comply with the Money Laundering Regulations and the provisions of the Proceeds of Crime Act 2002. These provisions apply to anyone who carries out accountancy services for a fee, whether a member of a professional body or not. The Commission is not the regulator for this area of law; for further sources of information, refer to Appendix 7.

Familiarity with the Directions and the Regulations

The 2008 Regulations and Directions are mandatory and apply to examinations of both registered charities and those charities currently excepted from registration. The 2008 Regulations and Directions ensure that the requirements for the content of the independent examiner’s report and the processes examiners follow are consistently applied. The Directions are made by the Charity Commission under powers given in the 1993 Act. To understand what is involved, each Direction is followed by additional explanatory guidance setting out what to do. The guidance that follows each Direction is not mandatory but is recommended to help ensure examiners meet the requirements of the Directions.

The purpose of this guidance is to help examiners understand what is involved in undertaking an examination, what they have to do and what they have to report. It is recommended that examiners take some time to read this guidance before starting an independent examination.

The examiner’s report

The examiner’s role is an important one and their report provides assurance about certain specific matters and also gives the examiner an opportunity to draw the attention of the reader of the accounts any matters of concern. The examiner’s report, which is addressed to the trustees, must contain all the information required by the law.

The examiner’s report must meet all the requirements of the 2008 Regulations. The example examiner’s reports provided in Appendix 4 are not mandatory and the examiner can develop their own wording provided the report covers all the requirements of the 2008 Regulations. The specific reporting duties of the independent examiner are set out in Regulation 31 of the 2008 Regulations. Direction 10 and related guidance sets out what needs to be considered when making a report.

The independent examination report for a charitable company incorporated under company law is different to that of a non-company charity because it must also consider the accounting requirements of the Companies Act 2006. The examiner of a charitable company will therefore need some understanding of the additional accounting requirements of small companies.

Where the trustees have opted to prepare group accounts on a voluntary basis these will be non-statutory accounts and any examination would be based on agreement between the charity and the examiner rather than charity law. The examiner will need to develop their own form of report based on the work undertaken. Any voluntary examination of group accounts requires a high level of accountancy skill including an understanding of accounting standards and consolidation principles. Where group accounts are required by law because the group’s aggregate gross income exceeds £500,000 then independent examination is not an option as such accounts must be audited.

The first part of the examiner’s report confirms a number of factual matters that assure the reader that the charity is eligible for independent examination and that the examiner has followed the Directions. In particular:

the name of the charity and period covered by the accounts;
eligibility of the charity for an independent examination as opposed to an audit;
that the examiner has followed the Directions;
the examiner’s responsibility to note if particular matters set out in the 2008 Regulations have come to their attention;
the basis of the examiner’s report, which helps the reader of the report to understand what the examination involved;
where the trustees have obtained a dispensation to have an independent examination instead of an audit, the examiner refers to this fact; and
the examiner’s name, address and any relevant professional qualification held and, if the charity’s gross income exceeds £250,000, the qualification held which enables them to act as the examiner.

The second part of the report confirms whether or not particular matters were identified during the examination. Unlike an audit there is no opinion given on whether the accounts give a ‘true and fair’ view; rather the examiner confirms whether or not anything has come to attention to indicate that:

proper accounting records have not been kept, or in the case of a charitable company that adequate accounting records have not been kept;
the accounts do not accord with such records;
where accounts are prepared on an accruals basis they fail to comply with relevant accounting requirements under the 2008 Regulations or if a charitable company with section 396 of the Companies Act 2006 or are not consistent with the SORP; and
any matter which the examiner believes should be drawn to the attention of the reader to gain a proper understanding of the accounts.

Matters that the examiner must report include:

material expenditure or action contrary to the trusts of the charity;
failure by trustees to provide information and explanations to which the examiner is entitled; and
evidence that accounts prepared on an accruals basis are materially inconsistent with the Trustees’ Annual Report and in the case of a charitable company the directors’ report.

The examiner’s report must be signed by the examiner in their own name. Whilst the name of a partnership or company may be added, the appointment of an examiner relates to the individual rather than the partnership or company. Where an electronic submission is made to the Commission, it may be an image of the original or be a copy with a typed signature.

Exercising judgement

The examiner’s work involves exercising judgement in carrying out their work and in accessing the information obtained when preparing their report. This guidance uses terms material, significant and material significance which are important terms for the examiner to understand as these terms will inform an examiners judgement as to the relevance of a matter to their reporting duties. These are explained in more detail below.

Material/ materiality: Materiality is the judgement by the examiner as to whether any information omitted or misstated would affect the reader’s understanding of the accounts. Materiality depends on the size, amount or importance of the item, error or misstatement. An accounting policy is sometimes described as material where the effect is material to how an item or transaction is recognised, measured or disclosed in accounts. Where a policy does not conform with the SORP, the examiner has to consider whether the effect of that policy when applied to transactions or items in the accounts is so material as to affect the presentation or understanding of the accounts.

In this guidance materiality is used in connection with accruals accounts and requires the examiner to look at the underlying judgements, accountancy policies, or basis for amounts that are material in the context of the accounts.

Significant: This is a term that is used in this guidance in connection with the keeping of accounting records, the analytical review carried out by the examiner and in describing the considerations that affect the examiner’s report. With resp ect to accounting records, significance is the extent to which the records found are not complete or the extent to which missing information creates doubt about the adequacy of record keeping. Regarding the analytical review, it requires the examiner to think about whether a matter or an amount is significant in terms of its size or importance to require explanation. For the report, it is whether a finding that the examiner has made in their review is significant enough to need inclusion in the examiner’s report. Small amounts or minor matters will not be significant but can become significant if their occurrence is frequent or pervasive. Often significance can only be assessed when the examiner has either carried out the analytical review or has finished their work and is reflecting about what has been found and is preparing the report. A matter can be significant even if it’s not material in term of its amount alone.

Material significance: This is a particular term used in the statutory definition of the duty to report matters of material significance to the Commission. This requires an understanding of those matters that are of material significance to the regulatory functions of the Commission. Those matters that the Commission always consider to be material are listed in section 11 of this guidance with further guidance provided in Appendix 5.

What are the expectations of the Commission of the examiner?

The Commission expects all examiners to have read this guidance and followed the 10 Directions to the best of their ability and to make their examiner’s report honestly. The Commission expects the examiner when carrying out their work to be alert to any matters of material significance which they are also under a duty to report.

The Commission is aware that volunteer examiners, who are not charging a fee, are giving their time freely for the benefit of the sector. In the event of a concern arising about the adequacy of an independent examination carried out by a volunteer, the Commission will take into account the nature of the voluntary role and be proportionate in our approach when considering any failure in the examination process provided the examiner has acted honestly. This stance is consistent with the view the Courts take of volunteers who act as trustees who do not have particular professional skills.

Where the examiner is charging a fee or receiving payment they are providing accountancy services and we expect those services to be provided to a professional standard and our expectation is that a paid examiner:

will demonstrate appropriate technical knowledge, including familiarity with the SORP where accruals accounts are prepared;
carry out their work fully in accordance with the Directions; and
will be well placed, by virtue of their ability and experience, to fulfil their statutory duty to report matters of material significance to the Commission.

For charities with a gross income exceeding £250,000 in England and Wales the examiner must be a member of an accountancy body listed in the 1993 Act. In setting this threshold Parliament recognised the higher level of skill and expertise required in examining these larger charities. Consequently whether paid or not, the Commission expects the examination of these larger charities to have been carried out to a professional standard. Our expectation is that the examiner:

will demonstrate appropriate technical knowledge, including familiarity with the SORP;
carry out their work fully in accordance with the Directions; and
will be well placed, by virtue of their ability, experience and qualification, to fulfil their statutory duty to report matters of material significance to the Commission.

Overview of the Charity Commission’s Directions

The Charity Commission’s Directions provide the procedural basis or framework to define how the reporting duties of the examiner must be met. There are 10 specific Directions that the examiner must address in carrying out an examination of accrual accounts and 7 Directions applying to the examination of receipts and payments accounts. In addition, all examiners should consider if matters of material significance have come to their attention which give rise to a legal duty to report to the Commission.

Direction	Applicable to receipts and payments	Applicable to accruals accounts	Applicable to charitable companies
1. Examination and accounting thresholds	√	√	√
2. Documentation	√	√	√
3. Understanding the charity	√	√	√
4. Accounting records	√	√	√
5. Comparison with accounting records	√	√	√
6. Analytical procedures	√	√	√
7. Form and contents of accounts		√	√
8. Accounting policies, estimates and judgments		√	√
9. Trustees' Annual Report		√	√
10. Examiner's report	√	√	√
Legal duty to report certain matters of material significance to the Charity Commission	√	√	√

Although only examiners of accounts prepared on an accruals basis are required to review the Trustees’ Annual Report for consistency with the accounts, examiners of receipts and payments accounts may still find the Trustees’ Annual Report helpful in undertaking their examination.

Resources to assist trustees, the preparers of accounts and the independent examiner

The Commission has a number of publications, designed to specifically to assist in the preparation of accounts, freely available from our web site. These and other publications that may be of particular help to the examiner are listed in Appendix 7.

The Charity Commission’s Directions

Set out below are:

an explanation of the objective of each of the 10 Directions;
guidance on the circumstances which give rise to a legal duty to make a report to the Commission; and
guidance on operational procedures and methods which will help examiners to meet the requirements of the Directions.

The Directions (which must be followed) are reproduced in bold print, with explanatory guidance set out in light print below. As with any guidance, the examples given and procedures suggested cannot meet all circumstances that may arise in the course of examination and judgment will need to be exercised by all examiners in the context of their work.

All references to ‘sections’ of the Charities Act 1993 in the Directions and guidance which follow are to sections of the 1993 Act, as amended by the Charities Act 2006. The references provided to company law are to sections of the Companies Act 2006 as they apply from 6 April 2008.

Direction

Examination and accounting thresholds

1. The examiner shall carry out such specific procedures as are considered necessary to provide a reasonable basis on which to conclude:

(i) that an examination is required under section 43(3) of the Charities Act 1993, and that section 43(2) (audit) of the Charities Act 1993 does not apply to the charity; and
(ii) where the charity is a small company charity, that it is exempt from audit in accordance with section 477 of the Companies Act 2006; and
(iii) where accounts are prepared on a receipts and payments basis under section 42(3) of the Charities Act 1993, that the charity trustees may properly elect to prepare accounts under this sub-section.

Guidance

1.1 Trustees may elect for independent examination (under section 43(3)) and for non-company charities only, the preparation of receipts and payments accounts (under section 42(3)). For either election to be valid, the charity must be within the relevant income bands specified by legislation.

The examiner should take reasonable steps to confirm:

the charity’s gross income for the financial year or aggregate value of assets does not exceed the threshold for independent examination. If gross income exceeds £500,000 or gross income exceeds £100,000 and the aggregate value of assets (before deduction of liabilities) exceeds £2.8 million then an audit is required;
where the charity is a parent charity with one or more subsidiaries (eg. a trading company) that the aggregate gross income of the parent charity and its subsidiaries after consolidation adjustments does not exceed £500,000 as above this threshold group accounts will be required which will require an audit;
where the charity operates branches and these branches are part of the charity (and are not separately registered charities) that any income received by the branches has been included in the gross income of the charity;
if receipts and payments are being prepared, that the charity is not a company incorporated under company law and that the gross income received in the period is less than £100,000;
whether the gross income exceeds £10,000 because below this threshold no examination is required by law;
whether the charity’s governing document requires any form of professional audit; and
whether any grant condition demands an audit of the accounts.

1.2 Carrying out these procedures at an early stage should prevent the work of the examiner being duplicated by professional audit which would add to the expense for the charity. Where the charity is not eligible for independent examination the accounts should be referred back to the trustees to appoint an auditor where the threshold is exceeded or to consider a voluntary examination where the charity’s gross income is below £10,000.

1.3 Gross income for threshold purposes should be calculated in accordance with the methods set out in Appendix 1. If accounts are prepared on the accruals basis then the level of income should be considered on the accruals basis. Where accounts are prepared on the receipts and payments basis then the level of income should be considered on the basis of money actually received. Examiners should also familiarise themselves with the various other threshold bands and their effect on the accounting procedures for charities.

1.4 The examiner should consider at an early stage of the examination the level of income disclosed by the accounting records and by the trial balance. The examiner does, however, need to remain alert to any additional information which may come to attention during the course of the examination which indicates that an income threshold has been crossed.

1.5 The reasonable steps taken to confirm the income of the charity and the outcome of that research should be documented in accordance with Direction 2.

1.6 Where the trustees have requested and obtained in advance from the Commission approval for an independent examination instead of an audit, the examiner should obtain a copy of the approval letter from the Commission and make reference to it in the examiner’s report.

1.7 The thresholds for audit, independent examination and for receipts and payments accounts are kept under review. The Government has provided for a review of these thresholds following the Charities Act 2006 and consequently it is important to confirm the thresholds that apply. It is therefore recommended that prior to the independent examination taking place that the thresholds are confirmed. Details of all current thresholds can be found by viewing the accounting our website's publication pages.

Direction

Documentation

2. The examiner shall record the examination procedures carried out and any matters which are important to support conclusions reached or statement provided in the examiner’s report.

Guidance

2.1 The examiner’s working papers should provide details of the work undertaken and support any conclusions reached, and record any matters of judgment (see Direction 8) which may arise. Working papers should normally be retained by the examiner for six years from the end of the financial year to which they relate, and would include:

a communication with the trustees which confirms their appointment as the independent examiner. Independent examiners charging a fee or receiving any form of payment should prepare a letter of engagement;
a letter of engagement, where appropriate, from the independent examiner to the trustees, together with evidence that this has been accepted by the trustees (for example, a copy of the engagement letter signed by a representative of the trustees);
relevant information extracted or obtained from the governing document, trustees’ meeting minutes and a record of discussions with the charity trustees and the charity’s staff;
notes as to how any areas of concern have been resolved, including meetings with trustees and charity staff, together with details of any verification procedures used;
where verification procedures have been used, details of checks or vouching carried out during the examination, with conclusions reached and any areas of concern identified;
where items are added together as a single entry in the accounts, schedules showing the breakdown of accounting items that have been aggregated for accounts disclosure purposes;
copies of any trial balance and the accounts;
the Trustees’ Annual Report where accruals accounts are prepared (recommended but not required for receipts and payments); and
in exceptional circumstances, copies of any written assurances that the examiner required of the trustees confirming amounts included within the accounts.

2.2 Where the examiner has cause to resign or is unable to complete their independent examination, they should consider the circumstances carefully and decide if there is a duty to report to the Commission, for example, if they have been prevented from completing the examination or have been obstructed by trustees or charity staff in carrying out their examination. Even if there is no duty to report, the examiner may decide that they have identified matters which they wish to report because they consider them to be relevant to the work of the Commission. Further guidance on reporting matters to the Commission is provided in section 11 and Appendix 5.

Direction

Understanding the charity

3. The examiner shall obtain an understanding of the charity’s constitution, organisation, accounting systems, activities and nature of its assets, liabilities, incoming resources and application of resources in order to plan the specific examination procedures appropriate to the circumstances of the charity.

Guidance

3.1 For a proper examination to be carried out it is important for the examiner to have an understanding of what the charity is aiming to do and how it goes about doing it. The examiner will need to know about the operations, structure and objectives of the charity. This understanding will help the examiner to plan their independent examination by identifying major projects and important activities of the charity, possible problems or concerns and to provide background to their analytical review. The steps taken by an examiner would normally include:

consideration of the governing document of the charity, paying particular attention to the charity’s objects, powers and obligations;
consideration of any matters which would give rise to a statutory duty to make a report to the Commission (see section 11 and Appendix 5 for guidance);
discussions with trustees and, where appropriate, the charity’s staff, to understand the activities, structure, aims and objectives by which the charity seeks to achieve its objects;
discussions with the trustees and, where appropriate, the charity’s staff, about the activities of the charity in order to gain an insight into any special circumstances and problems affecting the charity;
reviewing the minutes of trustees’ meetings to find out about details of major events, plans, decisions and changes to the trustee body; and
obtaining details of the accounting records maintained and methods of recording financial transactions.

3.2 Normally a discussion with one of the trustees and the person who prepared the accounts should provide all the information or explanations required. However if during the independent examination a lack of formal trustee meetings, or of an absence of minute keeping or appropriate record keeping, or over-reliance on a key individual, is identified then the examiner may need to confirm or discuss significant matters with two or more of the trustees and/or members of the charity’s staff to gain the necessary background information for the examination.

Direction

Accounting records

4. The examiner shall review the accounting records maintained in accordance with section 41 of the Charities Act 1993, or, in the case of a charity that is a company, the accounting records maintained in accordance with section 386 of the Companies Act 2006, in order to provide a reasonable basis for the identification of any material failure to maintain such records.

Guidance

4.1 The charity trustees are responsible for maintaining the accounting records. This is an important responsibility and an absence of well organised and complete accounting records gives rise to a significant risk of misstatement and loss from fraud, theft, or the misapplication of charitable funds.

4.2 The examiner is required to review the accounting records with a view to identifying any material failure to maintain such records in accordance with the trustees’ legal duty. A simple review should indicate whether records or vouchers have been kept to support the accounts and whether they appear reasonably complete. Further evidence of the completeness of those records may come from any vouching undertaken following the analytical review. For trustees of non-company charities their duty is under section 41(1) of the 1993 Act. For trustees (normally the directors) of charitable companies their legal duty is under section 386 of the Companies Act 2006.

4.3 The review procedures are not aimed at identifying the occasional omission or insignificant error, but at any gross failure to maintain records in a manner consistent with statutory requirements.

4.4 Accounting records should be well organised and capable of ready retrieval and analysis. The records may take a number of forms, for example book form, loose-leaf binder or computer records.

4.5 The accounting records should:

be up to date;
be readily available; and
provide the basic information from which the financial position can be ascertained, not only at the year end, but also on any selected date.

4.6 The accounting records should contain:

details of all money received and expended, the date, and the nature of the receipt or expenditure; and
details of assets and liabilities.

4.7 Smaller charities do not have to maintain nominal ledgers to record assets and liabilities, and in such instances the requirements can generally be met by maintaining a simple record of transactions and files for unpaid invoices and amounts receivable. A record of stocks and fixed assets is also generally necessary to meet the accounting requirements.

4.8 Charitable companies are required by section 386 of the Companies Act 2006 to maintain accounting records that contain:

entries from day-to-day of all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place; and
a record of the assets and liabilities of the company.

4.9 Charitable companies dealing in goods must also maintain stock records, the particular requirements for which are set out in section 386(4) of the Companies Act 2006.

Direction

Comparison with accounting records

5. The examiner shall compare the accounts of the charity with the charity’s accounting records in sufficient detail to provide a reasonable basis on which to decide whether the accounts are in accordance with such accounting records.

Guidance

5.1 It is necessary to compare the accounts with the underlying accounting records to be satisfied that the accounts properly show what income the charity has received and how it has spent its charitable funds and where transactions relate to restricted or endowment funds that these have been properly recorded and identified in the accounts.

5.2 Where accounts are prepared on the accruals basis, all balances in the accounts will need to be compared with the trial balance or any nominal ledger maintained.

5.3 Where accounts are prepared on the receipts and payments basis, a direct comparison with the cash records of the charity should be carried out if no nominal ledger is kept. Records for receipts and payments accounts may amount to bank statements, a file of receipts and invoices, and a simple listing of transactions in a book, or on paper, or entries in a spreadsheet of amounts paid and received with an explanation by each amount.

5.4 Where entries for transactions are not made directly into the nominal ledger, test checks will also be necessary of the posting of entries from books of prime entry (eg cash book, any sales or purchase ledgers or other day books recording transactions) to the trial balance itself. Similar checks are necessary even where accounting records are maintained by using computer accounting packages.

5.5 A review of bank reconciliations, payroll summaries and control accounts prepared will provide a useful check as to the completeness of posting from books of prime entry.

5.6 There is no requirement for accounting entries to be checked against source documents (eg invoices, supplier statements, purchase orders, gift aid records etc) unless concerns arise during the course of the examination or following the analytical review (Direction 6) which cannot be resolved by seeking explanations or the explanations given are insufficient.

5.7 Whilst the charity trustees are responsible for the preparation of accounts, on occasion the examiner may also prepare the statutory accounts on behalf of the trustees. The preparation of accounts will not generally impinge on independence provided the examiner ensures that the requirements of the Directions are met and provided that:

the accounting records have been maintained by another person; and
the examiner has had no direct involvement in the day-to-day management or administration of the charity.

Direction

Analytical procedures

6. The examiner shall carry out analytical procedures to identify unusual items or disclosures in the accounts. Where concerns arise from these procedures, the examiner must seek explanation from the charity trustees. If, after following such procedures, the examiner has reason to believe that in any respect the accounts may be materially misstated then additional procedures, including verification of the asset, liability, incoming resource or application, must be carried out.

Guidance

6.1 The analytical review is an important part of the independent examination. For receipts and payments accounts the analytical review involves comparing the analysis of the cash received and the cash spent in the current year with the previous year to identify any significant changes from year to year. For accruals accounts the analytical review involves both the Statement of Financial Activities and the balance sheet with the analysis comparing both the income and the expenditure and the movement in balance sheet values in the current year with the previous year. The examiner of accruals accounts will be looking for material values which require review.

6.2 It is important that the examiner looks carefully at the accounts to see if they reveal any significant or unusual items, unexpected fluctuations, or inconsistencies with other financial information. It is important the analytical review is documented carefully in the examiner’s working papers.

In carrying out the analytical review, steps taken would normally include:

comparing the accounts with those for comparable prior periods;
comparing the accounts with any budgets or forecasts that have been produced;
considering whether incoming resources are consistent with known fundraising sources, for example the history of cash collections or fundraising events, grants received, income from trading, or income from the sale of donated goods;
considering whether the spending of charitable resources is consistent with the payroll details, and the activities and the objects of the charity - it is important to have obtained a proper understanding of the nature of the charity’s activities and affairs for this aspect of the review to be successful;
considering whether the liabilities and current assets disclosed are consistent with the scale and type of activities undertaken, or in the case of receipts and payments accounts whether all significant assets and liabilities are listed;
considering whether fixed assets investments are producing income consistent with the nature of assets held;
considering whether any tangible fixed assets held are consistent with the scale and type of activities undertaken by the charity; and
where accruals accounts are prepared confirming with the trustees that they are satisfied the charity is a going concern and that there are no post balance sheet events requiring adjustments to be made to the accounts or disclosure in the notes to the accounts.

6.3 Where analytical review procedures identify any unusual items, unexpected fluctuation or inconsistency then explanations should be sought from the charity trustees or, where appropriate, the charity’s staff.

6.4 Only if the explanations provided by the charity trustees, or where appropriate the charity’s staff, do not satisfy the examiner, will additional procedures be necessary. It is important to document in the working papers what items the examiner has found which require further explanation or review and any additional procedures undertaken to confirm those items or matters. Such procedures may include:

physical inspection of a tangible fixed asset;
verification of title to an asset;
inspection of third party documentary evidence (eg invoice, contract or agreement) to verify an expense or liability or to confirm an amount of income received or receivable;
third party certification of a bank balance, or other asset held including the custody of investment certificates; and
checking of a post year end receipt or payment to confirm recoverability of a debt or the amount of a liability.

6.5 A comprehensive list of analytical procedures, and of additional procedures where concerns arise, is beyond the scope of this publication, and will to an extent be an area in which the examiner will need to exercise judgment and to draw on experience as to what is reasonable given the size and nature of the charity’s activities.

Direction

Form and content of accounts

7. The examiner shall carry out such procedures as the examiner considers necessary to provide a reasonable basis on which to decide whether or not the accounts prepared under section 42(1) of the Charities Act 1993 comply with the form and content requirements of the 2008 Regulations including their preparation in accordance with the methods and principles set out in the Statement of Recommended Practice: Accounting and Reporting by Charities (the SORP). Or in the case of a charity that is a company, whether or not the accounts are prepared in accordance with sections 396 of the Companies Act 2006, and are prepared in accordance with the methods and principles of the SORP.

Guidance

7.1 By far the majority of non-company charities have a gross income below £100,000 and are eligible to prepare receipts and payments accounts. A minority of charities, those with a gross income in excess of £100,000 and all charitable companies irrespective of their income, should prepare accruals accounts in accordance with the SORP. On occasion the examiner may encounter receipts and payments accounts which are accompanied by a balance sheet instead of a Statement of Assets and Liabilities. Provided that no non-cash items have been put through the receipts and payments accounts the examiner should treat those accounts as receipts and payments accounts, otherwise the accounts should be regarded as accruals accounts and should be examined accordingly.

7.2 The 2008 Regulations draw heavily on the recommendations of the SORP. Where accruals accounts are prepared the examiner will require access to the SORP and an understanding of its principles to ensure compliance with the 2008 Regulations.

7.3 Where accounts are prepared under section 42(1) (the accruals basis), the 2008 Regulations require the accounts to be prepared in accordance with the method and principles of the SORP. The SORP requires all charities preparing accruals accounts to prepare a Statement of Financial Activities, balance sheet, and accompanying notes to the accounts. Charities eligible for independent examination enjoy greater flexibility and Appendix 5 of the SORP details all the concessions that are available for smaller charities preparing accruals accounts.

7.4 The 2008 Regulations concerning the content of accounts do not apply to the accounts of charitable companies. The accounts of charitable companies must be prepared in accordance with section 396 of the Companies Act 2006. The trustees of a charitable company must prepare accounts to give a ‘true and fair’ view and this will generally involve compliance with accounting standards and the SORP. Financial Reporting Standard 18, Accounting Policies requires particular disclosures to be made and explanations to be provided where a SORP has not been followed.

7.5 The examiner should review accruals accounts in sufficient detail to be able to identify any significant non-compliance with the 2008 Regulations and the methods and principles of the SORP. This will involve a review of the format of the Statement of Financial Activities and Balance Sheet and the inclusion of necessary notes to the accounts. These review procedures should be sufficiently detailed to enable the examiner to decide whether or not any non-compliance with the 2008 Regulations or the SORP should be identified in the examiner’s report.

7.6 A set of compliant accounts in the SORP format is available for non-company charities in our Accruals Accounts Pack (CC17).

7.7 For charitable companies, section 396 of the Companies Act 2006 requires the preparation of individual accounts. In the case of not-for-profit undertakings, including charities, the Companies Act 2006 section 474(2) substitutes an income and expenditure account for the profit and loss account. In addition a balance sheet is required and additional information is to be provided in the notes. The SORP requires all charities preparing accruals accounts to prepare a Statement of Financial Activities, balance sheet, and accompanying notes to the accounts. A charitable company will therefore usually submit a Statement of Financial Activities that incorporates an income and expenditure account, it may however opt to submit both an income and expenditure account and a Statement of Financial Activities. In such cases the examiner will review the two statements for consistency.

7.8 The 2008 Regulations do not specify the form and content of accounts prepared on a receipts and payments basis. The Commission does provide pro forma layout for such accounts in our Receipts and Payments Accounts Pack (CC16).

Direction

Accounting policies, estimates and judgments

8. When accounts are prepared under section 42(1) of the Charities Act 1993, or in the case of a charity which is a company, prepared under section 396 of the Companies Act 2006, the examiner shall review the accounting policies adopted and consider their consistency with the Statement of Recommended Practice: Accounting and Reporting by Charities (the SORP) and their appropriateness to the activities of the charity. The examiner must also consider and review any significant estimate or judgment that has been made in preparing the accounts.

Guidance

8.1 Receipts and payments accounts report cash book transactions in the period and so are not affected by this Direction. If accounts are prepared on the receipts and payments basis under section 42(3), the only fundamental accounting concept which applies is that of consistency of presentation within the accounts. Accounting policies and judgmental issues have less relevance since the receipts and payments account is simply a factual record of money actually received and spent. The statement of assets and liabilities is a simple schedule of information.

8.2 Further guidance as to the form and content of receipts and payments accounts can be found in the notes included in our Receipts and Payments Accounts Pack (CC16).

8.3 Accounts prepared on an accruals basis involve the use of accounting policies that determine how transactions and events are reflected in accounts and estimates. Judgement may be necessary to arrive at monetary values to be included in accounts, for example the length of time over which an asset is to be depreciated.

8.4 Where accounts are prepared under section 42(1) (the accruals basis) or under the Companies Act 2006 section 396 the trustees prepare accounts to give a ‘true and fair’ view, the accounting policies adopted, and also any estimates or judgments made in preparing the accounts, may have a material effect on both the financial activities and state of affairs disclosed by the accounts. Such matters therefore require careful consideration by the examiner although the examiner does not have to form an opinion on whether the accounts give a ‘true and fair’ view.

8.5 The examiner should be satisfied that accounts are prepared on a basis consistent with the going concern assumption and accruals concept, and evaluate the accounting policies adopted and applied for appropriateness to the activities of the charity and consistency with the SORP. The accounting policies adopted should ensure a relevant, reliable, comparable and understandable accounts presentation.

8.6 Where the accounts are not prepared on a going concern basis, the examiner should consider the alternative basis upon which they are prepared and ensure that the basis of preparation is adequately disclosed in the accounting policies section of the notes to the accounts.

8.7 The examiner should evaluate whether the accounting policies adopted are consistent with the methods and principles set out in SORP. Where the accounting policies are not consistent with the SORP this should be drawn to the attention of the charity trustees and if the affect on the accounts is material, the matter should be reported in the examiner’s report unless corrected.

8.8 Where accounts are produced under the Companies Act the trustees must prepare the accounts to give a ‘true and fair’ view. However, the examiner is not required to provide an opinion as to whether the accounts give a ‘true and fair’ view. Where accounting policies are not consistent with the SORP, this should be drawn to the attention of the charity trustees by the examiner, and the item(s) in question, if the inconsistency is material, should be reported in the examiner’s report unless corrected.

8.9 The SORP requires a departure from its recommendations to be explained in the notes to the accounts of both company and non-company charities. A departure is only justifiable if it is necessary in order to give a ‘true and fair’ view and such circumstances will be rare. In the case of a departure the examiner will need to check that the explanation required by the SORP has been provided. Where a material departure has not been adequately justified or explained, the examiner should make a comment in their report.

8.10 The examiner must evaluate the reasonableness of any estimates or judgments made in preparing the accounts where these are material to the accounts. Matters that may require consideration include:

transfers to or from restricted fund accounts;
valuation of gifts in kind;
valuation of fixed asset investments where no market prices exist;
estimates resulting from transactions not being fully recorded in the accounting records; and
where an activity based approach has been adopted, the allocation of costs between the various expenditure categories of the Statement of Financial Activities.

Direction

Trustees’ Annual Report

9. When accounts are prepared under section 42(1) of the Charities Act 1993, or in the case of a charity which is a company, prepared under section 396 of the Companies Act 2006, the examiner shall compare the accounts to any financial references in the charity Trustees’ Annual Report (if any); identifying any major inconsistencies and consider the significance such matters will have on a proper and accurate understanding of the charity’s accounts.

Guidance

9.1 If accounts are prepared on the receipts and payments basis under section 42(3) there is no requirement placed on the examiner to consider the Trustees’ Annual Report. The examiner may, nevertheless, find the annual report a useful guide to the activities of the charity.

9.2 The Trustees’ Annual Report (or for a charitable company the combined trustees’ and directors’ report) provides a report of the charity’s activities during the financial year. Our publication Charity Reporting and Accounts: The Essentials April 2008 (CC15a) sets out the information that should be contained in the Trustees’ Annual Report and the legal requirements concerning the Trustees’ Annual Report that apply to both company and non-company charities are set out in the 2008 Regulations.

9.3 Procedures should be directed at identifying inconsistencies between the Trustees’ Annual Report and the accounts which are misleading or which contradict the financial information contained in the accounts. For example, a review should identify where amounts stated in the Annual Report are not consistent with those in the accounts or the nature or scale of activities described are inconsistent with the level of activity disclosed in the accounts. The level of reserves stated in the Annual Report should be consistent with amounts disclosed in the charity’s balance sheet.

9.4 Where inconsistencies are identified which are significant, this should be drawn to the attention of the charity trustees. If no appropriate amendment is made to the Annual Report then details of the matter should be provided in the examiner’s report.

Direction

Examiner’s report

10. The examiner shall review and assess all conclusions drawn from the evidence obtained from the examination and consider the implications on the report to be made under Regulation 31 of the 2008 Regulations. If the examiner has cause to make a positive statement on any matter arising from the provisions of Regulation 31(h) or 31(i), or to make a statement on any matter arising from the provisions of Regulation 31(j), then the examiner must ensure so far as practicable that the report gives a clear explanation of the matter and of its financial effects on the accounts presented.

Guidance

10.1 The examiner’s report is the outcome of an independent examination and is addressed to the trustees. It either confirms that all the matters the examiner is required to review as set out by the 2008 Regulations have been met, or identifies which requirements have not been met, together with any matters that need reporting for the benefit of the reader’s understanding of the charity’s accounts. The examiner needs to consider carefully the conclusions drawn from their examination, and the impact of these conclusions on their report. Appendix 4 provides illustrative examples of independent examiner’s reports.

10.2 The 2008 Regulations set out the legal requirements for an independent examiner’s report. An independent examination is not an audit and the examiner is required to consider a limited number of specified matters in their report and to confirm that nothing has come to their attention in the course of their examination which leads them to conclude that certain requirement have not been met. The report provides ‘negative’ assurance requiring the examiner to give an opinion only on a matter where they have found that a requirement has not been met. The matters to be reported on are listed in paragraph 10.4.

10.3 The first part of the examiner’s report is a factual statement. In their examiner’s report the examiner must state:

the examiner’s name and address and the name of the charity concerned;
the financial year in respect of which the accounts to which the report relates have been prepared, and where the charity is a charitable company, that the accounts do not require an audit in accordance with Part 16 of the Companies Act 2006;
if the gross income exceeds £250,000, the qualification which enables him or her to act as an independent examiner;
any relevant professional qualification the examiner holds;
in the event of the independent examination being allowed by dispensation in place of an audit, the date when the Commission dispensed with the requirement for an audit;
that the report provided relates to an independent examination carried out under section 43 of the 1993 Act and that the examination has been conducted in accordance with the Directions given by the Commission.

10.4 After making these statements, the examiner must then state whether or not any matter has come to attention, in connection with the examination, which gives reasonable cause to believe that in any material respect:

accounting records for non-company charities have not been kept in accordance with section 41 of the Charities Act 1993; or
where the charity is a charitable company, the accounting records have not been kept in accordance with section 386 of the Companies Act 2006; or
the accounts do not accord with the accounting records; or
where the accounts are prepared on an accruals basis for a non-company charity under section 42(1) of the Act 1993 and those accounts do not comply with the requirements of the 2008 Regulations setting out the form and content of charity accounts (Charity accounts consist of a Statement of Financial Activities and balance sheet and are prepared in accordance with the methods and principles set out in the Statement of Recommended Practice); or
where the accounts are prepared for a charitable company, the accounts do not comply with section 396 of the Companies Act and the methods and principles of the SORP.

10.5 Where any of the above matters have been identified, and the failure is considered material, there should be a clear explanation of the nature of the failure and, where it can be estimated its financial effects on the accounts.

10.6 Where the concern relates to non-compliance to the form and content of the accounts or material inconsistency with the SORP, the matter should be raised first with the charity trustees to seek the necessary amendment to the accounts.

10.7 The examiner in the second part of the report is also required to state whether or not any matter has come to their attention in connection with the examination to which, in the examiner’s opinion, attention should be drawn in the report to enable a proper understanding of the accounts to be reached. It is expected that only significant matters will be reported. Where accruals accounts are prepared attention is drawn to matters which are material to the accounts. These matters should be brought to the attention of the charity trustees first with a view to seeking an amendment or adjustment to the accounts but if concerns remain the matter should be addressed in the examiner’s report. Where reported the matter concerned should be fully explained together with the financial effects on the accounts.

10.8 There is also a requirement to provide a statement if the following specific matters have become apparent to the examiner during the course of the examination:

any material expenditure or action which appears not to be in accordance with the trusts of the charity;
any failure to be provided with information and explanation by any past or present trustee, officer or employee that is considered necessary for the examination; and
in the case of accruals accounts any material inconsistency between the accounts and the Trustees’ Annual Report and, in the case of a charitable company with the director’s report.

10.9 In order to identify any material expenditure or activities undertaken outside the objects of the charity, an understanding of the stated objects of the charity, as set out in its governing document, is necessary. Small or immaterial levels of expenditure on purposes outside of the objects of the charity will not generally be included in the examiner’s report. Material expenditure, or significant actions, contrary to the trusts of the charity would be a major concern and details should be included on the examiner’s report. The examiner need not carry out specific checks or procedures to identify such breaches, but such matters when identified must be included in the examiner’s report. The examiner will also need to consider whether a separate report of the matter needs to be sent to the Commission. This separate duty is explained fully in section 11 of this guidance.

10.10 Any failure to be provided with information and explanations may seriously hamper an examination. If information and explanations requested are not provided to the examiner’s satisfaction this fact must be included in the examiner’s report. A refusal to provide information or explanations is a serious matter and a separate report to the Commission may again be necessary (see section 11 of this guidance).

10.11 In the case of accounts prepared on an accruals basis any major inconsistency between the accounts and the Trustees’ Annual Report may give rise to misunderstanding. This should be brought to the attention of the charity trustees with a view to the amendment of the discrepancy. If the trustees decline to agree to change their Annual Report or where concerns still exist this must be stated in the examiner’s report.

10.12 For NHS charities independently examined by an examiner appointed by the Audit Commission or the Auditor General for Wales, the examiner has equivalent reporting duties that are set out in Regulation 32 of the 2008 Regulations.

Statutory duty to report to the Charity Commission

11. Sections 44 and 68A of the Charities Act 1993 place a duty upon the independent examiners of both the non-company and company charities to make a report to the Charity Commission, where in the course of their examination, they identify a matter, which relates to the activities or affairs of the charity or of any connected institution or body, and which the examiner has reasonable cause to believe is likely to be of material significance for the purposes of the exercise by the Commission of its functions under section 8 or 18 of the Charities Act 1993.

Guidance

11.1 In addition to making an examination report on the accounts, the examiner has a separate legal responsibility to report to the Charity Commission if a matter of material significance to the regulatory functions of the Commission is identified. This duty applies to both company and non-company charities which are registered with the Commission and to charities which are currently excepted from registration with the Commission.

11.2 It is important to emphasise there is neither a legal duty nor an expectation that the examiner will actively go looking for matters of material significance that need to be reported. However, where the examiner comes across such matters as part of their work, they must make a report to the Commission. Normally the matter will relate to the year the examiner is reporting upon and the examiner is not required to review the previous year’s accounts and records. However, where a matter comes to light relating to a previous financial year which would give rise to a duty to report, then the examiner should still make a report.

11.3 The Commission and The Office of the Scottish Charity Regulator (OSCR) have agreed a shared list of 8 matters of material significance that should always be reported by an independent examiner. These matters of material significance are set out below:

Matters suggesting dishonesty or fraud involving a significant loss of, or a major risk to, charitable funds or assets.
Failure(s) of internal controls, including failure(s) in charity governance, that resulted in a significant loss or misappropriation of charitable funds, or which leads to significant charitable funds being put at major risk.
Matters leading to the knowledge or suspicion that the charity or charitable funds have been used for money laundering or such funds are the proceeds of serious organised crime or that the charity is a conduit for criminal activity.
Matters leading to belief or suspicion that the charity, its trustees, employees or assets, have been involved in or used to support terrorism or proscribed organisations in the UK or outside of the UK.
Evidence suggesting that in the way the charity carries out its work relating to the care and welfare of beneficiaries, the charity’s beneficiaries have been or were put at significant risk of abuse or mistreatment.
Significant or recurring breach(es) of either a legislative requirement or of the charity’s trusts.
A deliberate or serious breach of an order or direction made by a charity regulator under statutory powers including suspending a charity trustee, prohibiting a particular transaction or activity or granting consent on particular terms involving significant charitable assets or liabilities.
Any notification or matter reported to the trustees on resigning as independent examiner or matter that the examiner is aware of on resignation or ceasing to act that falls within the categories of reportable matters set out above.

11.4 Volunteer independent examiners may not encounter these situations very often when reviewing the accounts of charities and so to help them, and to help all examiners, some illustrative examples are provided in Appendix 5 of matters of material significance and where they may be identified in the course of the examiner’s work.

11.5 The examiner must make a report to the Commission only if in the course of their independent examination they identify a matter which they have reasonable cause to believe is likely to be of material significance for the purposes of the exercise by the Commission of its formal inquiry powers under section 8 or 18 of the Charities Act 1993.

11.6 The duty to report relates to information or evidence obtained from the examiner’s work undertaken in fulfilling the Commission’s Directions or whilst acting in the capacity of the examiner of a charity. A reporting requirement would not arise from minor breaches of trustees’ obligations, or isolated administrative errors that are unlikely to jeopardise the charity’s assets or amount to misconduct or mismanagement.

11.7 The duty to report applies to the examiner who must make a report whether or not the matter has already been notified to other regulators or agencies and whether or not the trustees have already advised the Commission, for example, by making a serious incident report. In any event the examiner must keep the particular matters of material significance in mind as they carry out their examination.

11.8 Where the matter to be reported concerns terrorism then the matter must be immediately reported to the Police before the examiner makes their report to the Commission.

11.9 Where the matter to be reported concerns money laundering, those examiners who are charging a fee are providing an accountancy service and so are governed by the Money Laundering Regulations and should advise the Serious Organised Crime Agency in the first instance. However, it is not expected that notifying the Commission, itself a regulator, will give rise to a ‘tipping off’ offence.

11.10 In preparing to make their report to the Commission of a matter of material significance, the examiner should gather together the relevant information or evidence about the matter and make a note of the significant concern(s) identified. The examiner may find it helpful to discuss the matter first with the trustees unless the matter concerns the honesty or integrity of the trustees. In particular, matters that involve terrorism or money laundering must always be immediately reported to the police or Serious Organised Crime Agency and care exercised to ensure risks of ‘tipping off’ do not arise.

11.11 There should not be delay in sending a report to the Commission as the duty to report is immediate. However, the Commission recognises that the examiner will need some time to consider the information or evidence identified and where appropriate to seek clarification or further explanation from the trustees. Where the trustees wish to explain the actions they have taken or propose to take this may be appended to the examiner’s report.

11.12 Where a reporting duty arises the examiner should report the matter either by email or in writing to the Complaints Team Manager, Charity Commission Direct, PO Box 1227, Liverpool, L69 3UG. The email or letter should be headed ‘Independent Examiner reporting a matter of material significance’ and should provide the following information:

the examiner’s name and contact address, telephone number and/or email address;
the charity’s name and registration number (if applicable);
a statement that the report is made in accordance with section 44A of the Act 1993;
under which of the eight headings of reportable matters (see paragraph 11.3) the report is being made;
describe the matter giving rise to concern and the information available on the matter reported, where possible, provide an estimate of the financial implications;
where the trustees are attempting to deal with the situation, a brief description of any steps being taken by trustees of which the examiner has been made aware;
if the report concerns terrorist, money laundering or other criminal activity whether you have notified the Serious Organised Crime Agency and/or Police as appropriate; and
if the report concerns the abuse of vulnerable beneficiaries whether you have informed the Police and/or Social Services.

11.13 Section 44 of the 1993 Act also provides a discretionary power or right for the examiner to make a report to the Commission where the examiner becomes aware of a matter, where there is reasonable cause to believe the matter is likely to be relevant to the exercise of any of the Commission’s functions. This is a very broad right and enables the examiner to advise the Commission of any matters that may be relevant to the Commission’s functions but where the matter does not fall clearly within the category of being of material significance. This right might be used by an examiner, for example, where a matter has been identified that the examiner believes the Commission’s input is necessary for its resolution.

11.14 It is not appropriate to give a list of issues where this discretionary power might be used because it is widely drawn and there is no obligation on the examiner to make a report. Examiners are encouraged not to report small or insignificant matters, particularly where such matters have been satisfactorily resolved internally or the matter can be resolved by the examiner through discussion with the trustees in the first instance.

11.15 Where the examiner is exercising their discretion to report a matter, the examiner should report either by email or in writing to: The Complaints Team Manager, Charity Commission Direct, PO Box 1227, Liverpool, L69 3UG.

The examiner should:

state the charity’s name and registration number (if applicable);
state the examiner’s name and contact address, telephone number and/ or email address;
state that the report is made using the examiner’s power of discretion to report a matter relevant to the work of the Commission in accordance with section 44A of the Act 1993;
describe the matter and the examiner’s view of its relevance to the work of the Commission, and, where possible, provide an estimate of the financial implications; and
where the trustees are attempting to deal with the situation, give a brief description of any steps being taken by the trustees of which the examiner is aware.

11.16 Appendix 5 provides further advice, particularly for volunteer examiners, on matters of material significance that may be reportable to the Commission. Appendix 5 also provides examples of how a letter to the Commission might be set out where a reportable matter is identified or where the examiner chooses to exercise their discretionary power or right to report a matter. Where a report is made to the Commission under these provisions, the examiner cannot be held to be in breach of any duty to the trustees or the charity, for example, breach of confidence. The examiner enjoys legal protection in relation to the information or opinions contained in the report made to the Commission.

APPENDIX 1

Calculation of gross income

Section 97 of the 1993 Act states that a reference to the gross income of a charity: “means its gross recorded income from all sources including special trusts”. This broad definition is interpreted for administrative purposes by the Commission when setting the Annual Return requirements and making the Annual Return regulations under section 48 of the 1993 Act. This administrative definition of gross income is reviewed annually in preparation for the Annual Return process.

The definition of gross income (Annual Return 2008)

Where accounts are prepared on the accrual basis ‘gross income’ should be calculated as:

the total incoming resources as shown in the Statement of Financial Activities (prepared in accordance with the SORP) for all funds but excluding the receipt of any endowment; and
including any amount transferred to income funds during the year from endowment funds in order to be available for expenditure.

(Note that the SORP excludes from total incoming resources gains on revaluation of fixed assets or gains on investments which do not form part of ‘gross income’ for these purposes.)

Where accounts are prepared on the receipts and payments basis ‘gross income’ is simply the total receipts recorded in the statement from all sources excluding the receipt of any endowment.

APPENDIX 2

Flowchart: Eligibility requirements for independent examination

APPENDIX 3

Charities based in England and Wales also operating in Scotland

Since the introduction of the Charities and Trustee Investment (Scotland) Act 2005, some charities based in England and Wales which also operate in Scotland may now also need to register with the Office of the Scottish Charity Regulator (OSCR). Examiners of charities also operating in Scotland, which are registered with OSCR, should be familiar with the guidance on the accounting framework issued by OSCR.

Examiners should also note that where a matter of material significance (see section 11 and Appendix 5) is identified the report made to the charity regulator should be forwarded to both the Commission and OSCR who will determine jointly which regulator takes the matter forward.

OSCR does not insist on separate Scottish accounts where accruals accounts are prepared under the SORP. Accounts prepared under the SORP will be accepted for filing in both jurisdictions provided some narrative in the Trustees’ Annual Report addresses activities in Scotland.

For cross-border charities that prepare receipts and payments accounts there are some additional requirements that need to be met. The main difference is that a ‘Statement of Balances’ is prepared instead of a ‘Statement of Assets and Liabilities’ and certain notes to the accounts are required. Further guidance on Scottish accounting requirements is available on OSCR’s website.

The Commission will accept receipts and payments accounts that meet Scottish requirements for the accounts and the Trustees’ Annual Report. The ‘Statement of Balances’ should however be titled ‘Statement of Balances (including a Statement of Assets and Liabilities)’ for filing with the Commission. No additional changes are needed because the Scottish requirements meet or exceed the requirements for charities in England and Wales preparing receipts and payments accounts.

You can download a ‘Receipts and Payments Work Pack’ produced by OSCR from their website.

Trustees and examiners acting for charities which are also registered in Scotland are strongly recommended to view OSCR’s website. In particular trustees should ensure the examiner meets the requirements of Scottish charity law and note that in all cases where accruals accounts are prepared by a charity registered with OSCR, the examiner must be undertaken by a ‘qualified independent examiner’ as defined in the Charities Accounts (Scotland) Regulations 2006 . In addition accounts of charities registered in Scotland must file them with OSCR within 9 months of the end of an accounting year.

Examiners should be aware that in Scotland the examiner is always required to review the Annual Report when making their report and state in their report if there is a material difference between the accounts and the Annual Report prepared by the charity trustees.

The examiner may prepare a combined examination report that satisfies the requirements of both jurisdictions. Example reports provided in this appendix for both company and non-company charities that operate in England and Wales and Scotland.

EXAMPLE 3.1: EXAMINER’S UNQUALIFIED REPORT (FOR A NON-COMPANY CHARITY ALSO REGISTERED WITH THE OFFICE OF THE SCOTTISH CHARITY REGULATOR PREPARING ACCRUED ACCOUNTS)

Independent examiner’s report to the trustees of “ABC” Trust

I report on the accounts of the Trust for the year ended 30 April 2009, which are set out on pages 00 to 00.

Respective responsibilities of trustees and examiner

The charity’s trustees are responsible for the preparation of the accounts. The charity’s trustees consider that an audit is not required for this year under section 43(2) of the Charities Act 1993 (the 1993 Act) or under Regulation 10(1)(a) to (c) of the Charities Accounts (Scotland) Regulations 2006 (the 2006 Regulations) and that an independent examination is needed. The charity is preparing accrued accounts and I am qualified to undertake the examination by being a qualified member of (named body).

It is my responsibility to:

examine the accounts under section 43 of the Charities 1993 Act and under section 44(1)(c) of the Charities and Trustee Investment (Scotland) Act 2005 (the 2005 Act);
to follow the procedures laid down in the general Directions given by the Charity Commission under section 43(7)(b) of the 1993 Act; and
to state whether particular matters have come to my attention.

Basis of independent examiner’s report

My examination was carried out in accordance with the general Directions given by the Charity Commission and is in accordance with Regulation 11 of the Charities Accounts (Scotland) Regulations 2006. An examination includes a review of the accounting records kept by the charity and a comparison of the accounts presented with those records. It also includes consideration of any unusual items or disclosures in the accounts, and seeking explanations from you as trustees concerning any such matters. The procedures undertaken do not provide all the evidence that would be required in an audit and consequently no opinion is given as to whether the accounts present a ‘true and fair view’ and the report is limited to those matters set out in the statement below.

Independent examiner’s statement

In connection with my examination, no matter has come to my attention:

(1) which gives me reasonable cause to believe that in any material respect the requirements:

to keep accounting records in accordance with section 41 of the 1993 Act and section 44 (1)(a) of the 2005 Act and Regulation 4 of the 2006 Accounts Regulations; and
to prepare accounts which accord with the accounting records and comply with the accounting requirements of the 1993 Act and section 44(1)(b) of the 2005 Act and Regulation 8 of the 2006 Accounts Regulations.

have not been met; or

(2) to which, in my opinion, attention should be drawn in order to enable a proper understanding of the accounts to be reached.

Name:
Relevant professional qualification or body:
Address:
Date:

EXAMPLE 3.2: UNQUALIFIED REPORT (FOR A NON-COMPANY CHARITY ALSO REGISTERED WITH OSCR PREPARING RECEIPTS AND PAYMENTS ACCOUNTS)

Independent examiner’s report to the trustees of “DEF” Trust
I report on the accounts of the Trust for the year ended 30 April 2009, which are set out on pages 00 to 00.

Respective responsibilities of trustees and examiner

The charity’s trustees are responsible for the preparation of the accounts. The charity’s trustees consider that an audit is not required for this year under section 43(2) of the Charities Act 1993 (the 1993 Act) or under Regulation 10(1)(d) of The Charities Accounts (Scotland) Regulations 2006 (the 2006 Accounts Regulations) and that an independent examination is needed.

It is my responsibility to:

examine the accounts under section 43 of the Charities 1993 Act and section 44(1)(c) of the Charities and Trustee Investment (Scotland) Act 2005 (the 2005 Act);
to follow the procedures laid down in the general Directions given by the Charity Commission under section 43(7)(b) of the 1993 Act; and
to state whether particular matters have come to my attention.

Basis of independent examiner’s report

Independent examiner’s statement

In connection with my examination, no matter has come to my attention:

(1) which gives me reasonable cause to believe that in any material respect the requirements

to keep accounting records in accordance with section 41 of the 1993 Act and section 44 (1)(a) of the 2005 Act and Regulation 4 of the 2006 Accounts Regulations; and
to prepare accounts which accord with the accounting records and comply with the accounting requirements of the 1993 Act and section 44(1)(b) of the 2005 Act and Regulation 9 of the 2006 Regulations

have not been met; or

(2) to which, in my opinion, attention should be drawn in order to enable a proper understanding of the accounts to be reached.

Name:
Relevant professional qualification or body:
Address:
Date:

EXAMPLE 3.3: EXAMINER’S UNQUALIFIED REPORT (FOR A COMPANY CHARITY ALSO REGISTERED WITH OSCR)

Independent examiner’s report to the trustees of “WXY Charitable Company”

I report on the accounts of the company for the year ended 30 April 2009, which are set out on pages 00 to 00.

Respective responsibilities of trustees and examiner

The trustees (who are also the directors of the company for the purposes of company law) are responsible for the preparation of the accounts. The trustees consider that an audit is not required for this year under section 43(2) of the Charities Act 1993 (the 1993 Act) or under Regulation 10 (1)(a) to (c) of The Charities Accounts (Scotland) Regulations 2006 (the 2006 Accounts Regulations) and that an independent examination is needed.

Having satisfied myself that the charity is not subject to audit under company law and is eligible for independent examination, it is my responsibility to:

examine the accounts under section 43 of the 1993 Act) and section 44(1) (c) of the Charities and Trustee Investment (Scotland) Act 2005 (the 2005 Act);
to follow the procedures laid down in the general Directions given by the Charity Commission under section 43(7)(b) of the 1993 Act; and
to state whether particular matters have come to my attention.

Basis of independent examiner’s report

Independent examiner’s statement

In connection with my examination, no matter has come to my attention:

(1) which gives me reasonable cause to believe that in any material respect the requirements

to keep accounting records in accordance with section 386 of the Companies Act 2006 and section 44(1)(a) of the 2005 Act; and
to prepare accounts which accord with the accounting records, comply with the accounting requirements of the Companies Act 2006 , section 44(1)(b) of the 2005 Act and Regulation 8 of the 2006 Accounts Regulations; and
which are consistent with the methods and principles of the Statement of Recommended Practice: Accounting and Reporting by Charities

have not been met; or

(2) to which, in my opinion, attention should be drawn in order to enable a proper understanding of the accounts to be reached.

Name:
Relevant professional qualification or body:
Address:
Date:

APPENDIX 4

Example examiner’s reports

These example reports are provided to help examiners set out their reports in a way which complies with the 2008 Regulations. The examples cover a number of situations that an examiner may come across in their work.

An ‘unqualified report’ means that at the end of their examination the examiner is able to report that nothing has come to their attention that leads them to believe that one or more of the specific matters on which they report were not met. However where there are concerns or non-compliance with the requirements of the 2008 Regulations reported by the examiner then the report is described as ‘qualified’.

Please note the new requirement, where the charity’s income is greater than £250,000, for the examiner to confirm their qualification(s) that permit them to be eligible to undertake the examination.

In exceptional circumstances, the Commission may permit an independent examination to be carried out instead of an audit. The 2008 Regulations require the examiner to disclose in their report if the examination is in place of an audit and the date of the Commission’s dispensation.

By far the majority of charities are trusts or unincorporated associations and only a small number are charities incorporated under the Companies Acts. Those charities set up under the Companies Acts are termed ‘company charities’ or ‘charitable companies’ for the purposes of this guidance and because of company law the examiner’s report is different to that of the majority of charities, termed ‘non-company’ charities in this guidance. If in doubt check the Governing Document of the charity, as a company charity has a memorandum and articles of association and will have been issued with a company number by Companies House.

The example examiner’s reports are:

4.1 Unqualified report for a non-company charity (applicable to both accruals accounts and receipts and payments accounts).
4.2 Unqualified report for a charitable company.
4.3 Qualified report where a non-company charity preparing receipts and payments accounts had failed to separately identify restricted funds.
4.4 Qualified report where a non-company charity preparing receipts and payments accounts had failed to properly maintain accounting records.
4.5 Qualified report where a non-company charity has made a cash payment overseas without evidence that the funds were properly spent. (A statutory duty to report to the Commission arose and was reported with the example report in Appendix 5.)
4.6 Qualified report where a charitable company had prepared accounts which were not consistent with the SORP.

EXAMPLE 4.1: EXAMINER’S UNQUALIFIED REPORT (FOR A NON-COMPANY CHARITY)

Independent examiner’s report to the trustees of “ABC” Trust

I report on the accou

In this section...

CC31 - Independent Examination of Charity Accounts (combined version) – Guidance and Notes

Directions and guidance

Contents

Introduction: what is this guidance about and who should read it?

To which accounting periods does this guidance apply?

Guidance for trustees: what to prepare, what is an independent examination, the legal framework, who can do it and how to go about appointing an examiner

What to prepare? The requirement to prepare an Annual Report and accounts

What is an independent examination?

The legal framework: What are the thresholds for independent examination?

What is the legal framework for an independent examination?

Where can I find the Regulations?

Checking for other external scrutiny requirements

Who can carry out an independent examination? How to select your examiner

The independent examiner

An independent person

Requisite ability

Selection procedures

Timely filing of the Trustees’ Annual Report and accounts

Guidance for the examiner: what is involved, what do I have to do and what do I do once I have finished my independent examination?

Preparatory work

Familiarity with the Directions and the Regulations

The examiner’s report

Exercising judgement

What are the expectations of the Commission of the examiner?

Overview of the Charity Commission’s Directions

Resources to assist trustees, the preparers of accounts and the independent examiner

The Charity Commission’s Directions

Direction

Examination and accounting thresholds

Guidance

Direction

Documentation

Guidance

Direction

Understanding the charity

Guidance

Direction

Accounting records

Guidance

Direction

Comparison with accounting records

Guidance

Direction

Analytical procedures

Guidance

Direction

Form and content of accounts

Guidance

Direction

Accounting policies, estimates and judgments

Guidance

Direction

Trustees’ Annual Report

Guidance

Direction

Examiner’s report

Guidance

Statutory duty to report to the Charity Commission

Guidance

APPENDIX 1

Calculation of gross income

The definition of gross income (Annual Return 2008)

APPENDIX 2

Flowchart: Eligibility requirements for independent examination

APPENDIX 3

Charities based in England and Wales also operating in Scotland

EXAMPLE 3.1: EXAMINER’S UNQUALIFIED REPORT (FOR A NON-COMPANY CHARITY ALSO REGISTERED WITH THE OFFICE OF THE SCOTTISH CHARITY REGULATOR PREPARING ACCRUED ACCOUNTS)

Independent examiner’s report to the trustees of “ABC” Trust

Respective responsibilities of trustees and examiner

Basis of independent examiner’s report

Independent examiner’s statement

EXAMPLE 3.2: UNQUALIFIED REPORT (FOR A NON-COMPANY CHARITY ALSO REGISTERED WITH OSCR PREPARING RECEIPTS AND PAYMENTS ACCOUNTS)

Respective responsibilities of trustees and examiner

Basis of independent examiner’s report

Independent examiner’s statement

EXAMPLE 3.3: EXAMINER’S UNQUALIFIED REPORT (FOR A COMPANY CHARITY ALSO REGISTERED WITH OSCR)

Independent examiner’s report to the trustees of “WXY Charitable Company”

Respective responsibilities of trustees and examiner

Basis of independent examiner’s report