Practice Note 11: The Audit of Charities in the UK (Revised)
Comments from ACCA
July 2008
ACCA welcomes the opportunity to comment on the above Practice Note (proposed PN 11). We present our general comments in the body of this letter and attach an appendix containing suggestions made in relation to specific paragraphs of the text.
We are pleased to comment on a significant revision of proposed PN 11. In preparing our comments we have drawn upon, inter alia , the views expressed by expert members of ACCA's Charities Panel. In the main, we conclude that proposed PN 11 is well drafted and will continue to be of considerable value.
The series of PNs rightly focus on regulated industries where there is a continuing public interest case for the APB to take appropriate steps to promote the intelligent and consistently application of auditing standards. PNs are used directly by many audit practitioners and, for those firms that produce their own guidance, they act to validate the audit approach and promote consistency. It is essential that PNs are authoritative and the APB is in a unique position to ensure their relevance, consistency and quality by working with regulators, industry bodies and experts who volunteer their time.
As noted in the preface to proposed PN 11, there have been significant changes in the legal and regulatory environment for charities. Such changes have continued during the period over which the consultation has taken place and further changes are anticipated. Moreover, auditing standards have themselves evolved and continue to do so.
As a result of the Clarity project of the International Auditing and Assurance Standard Board (IAASB), redrafted, and in some cases revised, International Standards on Auditing (ISAs) are due to become effective for audits of financial statements for periods beginning after 14 December 2009. Although the nature and timing of adoption in the UK and Ireland has yet to be determined, it will be necessary to revise proposed PN 11, and indeed others in the PN series, to accord with the changed ISAs. Ideally, such revisions should occur in parallel with the adoption of the Clarified ISAs, but if APB resources do not permit that, we encourage the APB to consult stakeholders, well in advance, on the priority to be given to revisions.
We encourage the APB to widen that consultation to include the nature of industry guidance and the form of publications, such as PNs and Bulletins. Such a consultation could usefully encompass appropriate responses to the increasingly Internet-based availability of legislation, regulation and authoritative accounting guidance direct from Government and regulatory bodies.
In our view, proposed PN 11 should do more to make the case that the audit of a charity requires specialist knowledge and experience. Although similar statements could be made of other regulated 'industries', there are additional risks attaching to the audit of charities that prompt our comment: charities are diverse (as stated in paragraph 5 of proposed PN 11), audits are sometimes performed pro bono (or at marginal fee level) and charity trustees are unremunerated part-time volunteers who may look to professionals, such as auditors, for assistance. In the Appendix to this letter we suggest some additional material to give effect to this recommendation.
APPENDIX
References below are to specific paragraphs of proposed PN 11.
Paragraph 61
In the body of our letter we suggest that proposed PN 11 should do more to make the case that the audit of a charity requires specialist knowledge and experience. This could be done in the introductory materials and reinforced by extending the material in paragraph 61. Although reference is made to the requirement in paragraph 36 of International Standard on Quality Control (UK and Ireland) 1 Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements (ISQC 1), we suggest that further requirements in ISQC 1 are deserving of emphasis, in particular those relating to: the engagement partner (ISQC 1 paragraph 42(b) and consultation (ISQC 1 paragraph 51).
Paragraph 63
Paragraph 63 deals only with the level of public interest in the specific charity. ISQC 1 includes other criteria, which should be considered here. The paragraph should at least discuss the inherent difference between a commercial company and a charity, as that is vital to the absolute public interest in the charity sector, if not the relative level of public interest in individual charities.
Concerning the bullet points in paragraph 63: while we assume that auditors will interpret 'size' and 'profile' in appropriate ways, we are less sure whether auditors will interpret the third bullet consistently without further guidance. It may simply be a matter of punctuation, but the bracketed text apparently makes no distinction between the receipt of government funds and support from the general public. The former is generally subject to appropriate scrutiny by government whereas support from the general public is not. This gives rise to a wholly different level of risk of material misstatement, which may influence the degree of public interest.
Paragraph 131
While guidance is given on the duty to report, the right to report is merely noted. We suggest including guidance on the circumstances were the auditor might consider utilising the right to report. It may be that the guidance in paragraph 132, in relation to charities in Northern Ireland, could be expanded and related to other jurisdictions.
Paragraphs 151 and 152
In relation to the control environment, proposed PN 11 deals extensively with the role of trustees. In larger charities, the executive management team may be relatively more important in relation to the control environment. It may be appropriate to deal with this in paragraphs 151 and 152, or expand paragraph 29 to deal with what is really a wider terminology matter in proposed PN 11.
In relation to the bullet points in paragraph 151, we suggest including the trustees' understanding of the charity and its legal and regulatory environment, as this is not adequately addressed by referring to 'skills' (second bullet point). This could be made more concrete by referring to the induction and training of trustees, which is sufficiently important to be listed in Accounting and Reporting by Charities: Statement of Recommended Practice (the Charities SORP) as a disclosure in the Trustees' Annual Report.
Paragraph 158
We suggest the inclusion of a bullet point in paragraph 158 to highlight the catastrophic risk of loss of charitable status. In our view, this is not adequately covered by the reference to 'failure to act in accordance with those objects and powers in a charity's governing document' .
In relation to the bullet point dealing with the complexity of tax rules, we suggest that the reference to CGT gives it too much emphasis. Instead of focussing on complexity, we suggest including sector-specific tax-related risks, such as incurring unexpected liability to corporation tax or improper claiming of gift aid.
Paragraph 166 (and 174)
There is a reference in paragraph 166 to restricted funds in deficit, but no indication as to why this is actually considered to be a problem. At the most, the circumstances indicate simple incorrect accounting because, if restricted funds are reported in deficit, it will be because unrestricted income has been spent. Such circumstances do not give rise to an actual deficit that has to be remedied. We see insufficient reason to include, therefore, the fourth bullet point in paragraph 174 ( 'consideration of future funding to cover negative balances').
Comment on related potential omission
As it is mentioned in relation to restricted funds, it seems incongruous not to refer to problems of the security and liquidity of any investments or deposits.
Paragraph 200
Although paragraph 200 provides examples, we do not feel that the second bullet point is sufficient to prompt making of comparisons of major expenditures (in addition to income) against budget.
We also suggest that comparison of outcomes against expectations should include the charity's own key performance indicators as well as the auditor's expectations.
Paragraphs 205 and 207
In view of the impending Clarity project consolidation of the fair value and accounting estimates ISAs into one, a degree of repetition could be avoided by combining the guidance for ISAs (UK & Ireland) 540 and 545.
This would also avoid difficulties for users looking for guidance on specific matters, for example heritage assets which are mentioned in relation to accounting estimates ( 'valuation of heritage assets' – fifth bullet point of paragraph 205) and fair value ( 'the need to recognise some heritage assets at valuation ' – fifth bullet point of paragraph 207).
We also suggest that the proposed text could be interpreted as oversimplifying the accounting positions; to continue the above example, the statement about heritage assets in paragraph 207 is presumably not intended to indicate that some heritage assets will always be fair valued, as options are available.
Paragraph 220
The paragraph states that the going concern concept does not apply to the preparation of financial statements on the receipts and payments basis. Although disclosed receipts and payments may not be affected directly, there are strong arguments that the going concern basis is a wider concept relating to the charity as a whole and hence to its financial statements, however prepared. The financial statements could include notes disclosing items affected by going concern issues (for example, assets at valuation); moreover, Charity Commission guidance calls for disclosure of significant factors affecting the accounts and, in our view, going concern could be one such factor.
We suggest, therefore, that the paragraph be revisited to perhaps justify or remove the first sentence. Any rewriting of this paragraph should also address the ambiguity of the words 'the auditors may not agree' , which some could view as a requirement.
Paragraph 221
Several of the bullet points in paragraph 221 are difficult to interpret as they include more than one point (separated by ';'); we suggest that sub-bullets or separate bullets be used instead.
Paragraph 252
The first bullet point of paragraph 252 refers to non-charitable companies. We assume, as such would not be charities, that the intention was to refer to unincorporated charities?
Paragraph 255
Paragraph 255 mixes together genuinely extra items that might be included (for example a statement by the patron) and matters that are, in appropriate circumstances, required to be disclosed. We suggest that it would be more informative to aggregate disclosures by reference to these categories.
Our comment in relation to paragraph 221 is also relevant here.
Appendix 1 paragraph 3 (and associated definition on page 149)
The position on excepted charities has changed and will change further in future, as more charities are included in the normal regime. We feel it would be helpful to draw attention to this. Given that there are other areas of change, we suggest that an overall mechanism should be developed to highlight changing facts, for example a 'marked up' version could be made available on the APB website. This would be in addition to the high-level note in the Preface on significant developments.
Appendix 7
We appreciate that there is an appropriate warning that the tables are not intended to be comprehensive. Nevertheless, we suggest that there would be value in including:
- In Table 1: sufficient detail to refer readers to the sources of the 'legal requirements for public collections' – a factor that is also relevant to collections made house to house, raffles and car boot fairs (a market)
- In Table 3 : other common sources of income (and related controls) – service agreements with government, membership fees and fees for provision of services
- In Table 4 : the issue of allocating depreciation to restricted funds
- In Table 6 : checks over volunteers used in branches (we do not believe that this is currently covered by reference to those running branch operations in an earlier section of the table dealing with head office)