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Charities enhancing the quality of their audits

Audits may not be the most exciting prospect for charities, but with increasing scrutiny on audit quality, there is a pressing need to elevate the standards of the external audit process. While the focus on audit quality stems from high profile corporate failures, the benefits extend to all organisations requiring external audits, leading to enhanced value for money.

While auditors bear a significant portion of the responsibility for audit quality, the Financial Reporting Council's publication, What makes a good environment for auditor scepticism and challenge (November 2022), highlights the role of audited organisations. Charities must recognise their duty in fostering a well-functioning ecosystem that facilitates high quality audits. To this end, collaboration and cooperation between charities and auditors are key to achieving this.

Charities also play a vital role in supporting the audit process by providing necessary information and establishing effective channels of communication with auditors. Active engagement throughout the audit helps ensure comprehensive and accurate examination of financial statements. Charities should view the audit as an opportunity to showcase their commitment to transparency and accountability.

Treat audits as projects

Given the challenges faced by charity finance managers, it is crucial to treat audits as projects. By implementing structured systems and processes, charities can ensure deadlines are met, effectively manage audit fees to prevent escalation, facilitate a smooth process, and produce high quality audit documents on time. Respecting the audit process and treating it with due diligence can significantly enhance audit quality.

To support the audit process, charity finance managers should prioritise effective planning and resource allocation. Allocating sufficient time and resources, including personnel, for gathering required information and facilitating communication with auditors is essential for ensuring efficiency and effectiveness in audits. Adequate preparation helps minimise disruptions of day-to-day operations and contributes to overall audit quality.

Charities should adopt a mindset of continuous improvement throughout the audit process. Actively engaging with auditors, seeking feedback and identifying areas for enhancement in financial management practices contribute to strengthening internal controls. Implementing recommended improvements not only elevates audit quality but also paves the way for more efficient and effective audits in the future.

Good practices in reality

The following behaviours lead to great audit quality:

  • Regular communication with the auditor is top of the list – and throughout the year rather than during the main audit timetable. Going into audits with open eyes means that everyone is on the front foot and well prepared.
  • Consult with the auditor about any contentious areas of judgment or complex technical issues well in advance of the audit. If discussing these in meetings, invite the auditor to attend the discussion and seek agreement early on. Also provide full papers on these issues setting out the conclusions reached before the financial statements are prepared.
  • Ensure the charity finance team are fully engaged with and have bought into the deliverables and agreed timetable. Check in advance that these can be met, and that there is some slack built into normal daily tasks and the unexpected. The team need to be available during the agreed audit timetable.
  • Achieve brilliant basics. A first draft set of accounts that balances, that reconciles to all of the underlying records, and is fully complete in terms of the primary statements, notes, accounting policies and all disclosures is a must. Auditors are not just auditing the numbers. Ideally, this set of accounts will have gone through a robust review process by the charity before being submitted for audit.
  • Accept things don’t always go to plan and be prepared to be flexible around meeting dates and circulation deadlines – if the originally agreed audit timetable is not met, these will need to change.

Common pitfalls to avoid

There are also some common pitfalls to avoid to ensure the audit process is smooth.

Firstly, if people aren’t available during the scheduled audit visits or they provide information that is either late, incomplete or of poor quality.

Another issue would be to start the audit without a full set of draft accounts.

Good communication is also vital during the audit process so other issues would be failing to respond to queries or requests for information during the audit, not engaging in detailed discussions relating to audit findings or complex issues and insisting on an inflexible timetable. However, these are all easily avoided by thinking ahead and adopting a project management mindset to the audit process.

Preparation is key

Preparing in advance is vital and it may help to consider the following questions:

Capacity and availability:

  • Does the finance team have enough resources and capacity to deliver to the agreed plan?
  • Will the team be available to answer the auditor’s queries? Providing the initial information requested on time is great, but there will be follow up questions.

Quality and timely information:

  • Has the team been fully resourced throughout the financial year?
  • Are the underlying records of good quality, and have internal controls been operating effectively?
  • Have there been any IT or systems issues? What might need to be communicated to the auditor about this at the start of the process?
  • If preparing the statutory accounts, can the team provide these to the auditor before the start of the main audit visit? This includes all notes and narrative disclosures.
  • The trustees’ annual report is covered by the audit – this is often provided very late so consider if this can be provided along with the financial statements.

Knowledge and expertise:

  • Does the team have the expertise to prepare what has been agreed with the auditor?
  • Has the team engaged the right experts to help – surveyors for property valuations, third party firms for stock counts etc.?

Contribution to good governance

Charities may have a full audit or finance committee, or perhaps a trustee with a finance focus as a treasurer. Whoever is responsible for audit governance needs to be actively engaged in the process with a good understanding of what produces a good quality audit.

This includes overseeing the auditor and ensuring they have everything they need, as well as checking the management team are delivering. This starts with engaging with the audit plan and considering whether the timetable is realistic. It’s recommended that there is enough time allocated and that those involved are not put under unnecessary pressure.

During the process it’s prudent to check in with the management team to ensure key milestones have been delivered on time. If the timetable is behind, then look at how people can be supported to get things back on track.

Reviewing the trustees’ annual report and accounts at an early stage to check if anything is out of sync with expectations is important. This includes asking management whether the accounts contain any significant estimates or judgments which need to be understood and challenged.

Reviewing and challenging the assessment on a going concern basis (the charity’s ability to continue operating for 12 months from the date of approval of the accounts) before it is presented to the auditors is essential to ensure agreement.

Once the auditor presents the audit findings it is important to read the papers in advance and ask questions. This is the opportunity to ensure the charity is getting the assurance it wants from the process.

At the end of the process holding a debrief session with the auditor (without management) to see how things could be improved next time is recommended. Consider if there were any conflicts during the audit as well as the auditor’s feedback on how the process went and how the audit was valued.

Expecting more questions

Auditors are trained to have questioning minds and to apply professional scepticism. There are also new requirements to consider contradictory evidence, as well as corroborative evidence, so charities need to expect more questions challenging what they are sharing with them. It’s worth reiterating the earlier point that the better the quality of the underlying information that is provided, the more time is available to think and provide constructive challenge. This is where the focus of the audit should be.

Charities shouldn’t be apprehensive about an audit. Being open and valuing the purpose of the audit can drive up audit quality which will ultimately help the charity be more effective.

Sayer Vincent’s Fleur Holden – charities should view the audit as an opportunity to showcase their commitment to transparency and accountability.
"Charities should adopt a mindset of continuous improvement throughout the audit process."