Getting better value from your audit
There are two ways of viewing an audit: a statutory nuisance or a beneficial activity which gives confidence to the board of trustees and adds value to a charity. Whichever it might be, it is important to ensure that the charity is receiving value for money. In these economic conditions where every organisation is considering cost cutting measures, it is tempting to focus on the price paid, but of course value for money goes beyond that and is about quality, client service and added value, advice and support.
The primary means of ensuring that a charity derives the most value from its external audit is careful planning, continuous communication and collaborative working.
Every charity needs to close down and prepare and present a Trustees’ Report and financial statements annually. The complexity of the year end process depends largely on the size and complexity of the charity, and on the capacity and capabilities of its finance function.
The key to a successful audit is:
PREPARATION, PREPARATION AND PREPARATION. A useful means of achieving a smooth close down is to build a detailed timetable with the help of those who input into the process. The timetable should start with all the basic activities required at any month end, such as month end journals and preparing key reconciliations.
This should then be layered with specific year end information on areas such as accruals, provisions, returns from other offices or branches, related party returns, etc. The timetable should incorporate information required from those external to the charity, such as property valuers, actuaries, investment managers or other auditors.
Incorrect reconciliations
Often when problems arise in an audit this stems from incorrect reconciliations or presentation of poor supporting schedules and documentation, or inadequate explanations of changes. An internal review process should be built into the timetable to ensure the quality of the information presented for audit and thus maintain the confidence of the audit team, and manage audit costs and the timetable.
For most charities, the key dates for accounts approval and signing are set a long time in advance. Therefore, it is important that the timetable works back to these dates, ensuring that time is built in for proofing of the accounts.
Financial reporting is becoming increasingly sophisticated and includes reporting of non-financial KPIs and impact reporting in the Trustees’ Report. Maintaining the integrity of this information is as important as that of the financial statements. Given that this information is primarily maintained and prepared by teams outside of finance, it is critical that the information is collected in time and subjected to review in the same manner as other information presented for audit.
Critical tasks
The timetable should list all the critical tasks required to be performed up to the date the accounts are signed. Individuals should be named as having tasks assigned to them with dates they are required to perform the task. Importantly, wherever possible, another person should be tasked with reviewing the information provided, again with dates for performing their review.
Finally, the timetable should be communicated to all those involved in the process, ensuring that they are signed up to the process and that they have factored in their own timelines and other commitments.
Ideally, time should be built into the process to allow the finance director to stand back and carry out a sense check of the full set of financial statements before the auditors descend!
THROUGH THE YEAR COMMUNICATION. Auditing should not be viewed as a once a year activity. Talk to your auditors during the year about developments at the charity. This helps them identify any critical issues which may impact the audit and allows them to ensure they put in their request for additional information early. It will also hopefully mean you can get more added value from your audit, as it gives the auditors an opportunity to let you know about developing financial and auditing standards.
EARLY DISCUSSION AND RESOLUTION OF POTENTIALLY CONTENTIOUS ISSUES AND ACCOUNTING TREATMENTS. Too often conversations about contentious issues are left for the audit, or worse still to the clearance meeting. Significant judgments and estimates should be discussed as early as possible, especially as auditors are required to demonstrate and document their professional judgement and scepticism.
In some cases, the auditor may require additional audit evidence or independent third-party corroborative evidence, such as property valuations or impairment reviews, all of which will require additional time.
CLEAR UNDERSTANDING OF MUTUAL EXPECTATIONS. Ask your auditors in advance of the year end for a list of schedules that they will require for the audit and a list of individuals or job holders they wish to speak to. If there is anything on the list that you do not think you should be providing or you provide but in a different format, then discuss these with the auditors.
Including information
Be sure to include these in the detailed timetable and don’t forget information required from branches and other offices (both UK and overseas), other external auditors, internal audit, outside experts.
What is often left until the last minute is the information required as evidence of the “surround information”. It is useful for finance to put together a file to support the figures reported in the Trustees’ Report, for example, KPIs or fundraising statistics etc.
Build a clear reporting timetable with your auditors. This should include planning meetings and clearance meetings. For longer, more complex audits, make sure you catch up with your key audit contact at regular intervals so that you are aware of how the audit is progressing and what information has been requested by them of the charity and indeed what is outstanding.
Increasingly auditors are using document sharing portals. Some auditors use sophisticated project management tools, providing a transparent workflow and allowing the charity to see a real time summary of the audit status which can be used to keep the momentum on the audit. For larger, more complex audits, consider nominating one of the team to project manage the audit process. This pays huge dividends in reducing the time and stress for everyone.
Understand materiality
Understand early what materiality the auditors are working to so that you can evaluate adjustments and misstatements raised by the auditors. Agree who will be keeping a list of the adjustments and when these will be put through and by whom. This will help avoid version control issues.
One factor that makes an audit costly is the auditor having to check multiple sets of accounts. Try to limit these and agree with the auditors, the number of versions they will be checking before the overrun clock starts ticking.
A long gap between the on-site work being completed and accounts approval and signing can also cause issues and generate extra audit costs. This is because the auditor must keep updating their subsequent events reviews.
GOOD QUALITY AUDIT EVIDENCE. Often the stumbling block on an audit, is the nature of supporting documentation or audit evidence available to the auditors. Good audit evidence must be sufficient and appropriate, i.e. relevant and reliable.
A useful exercise is to discuss with the auditors the nature of the supporting documentation they will require (as noted above). You should also ensure that internally all those providing information and schedules for the auditors understand the concept of audit evidence, and importantly what the auditors will find acceptable. It can sometimes be helpful to ask the auditors to deliver training to the charity about what an audit is and what constitutes audit evidence. This will help save time for auditors and frustration on both sides!
Collaborative teamwork
In summary, the key to a smooth year end close down and audit is collaborative teamwork both inside the charity and with the auditors. If the auditor is bogged down with obtaining the right schedules and chasing for supporting information, then the audit becomes a sufferance and test of endurance on both sides. The auditor will be so busy with the basics that they will not be able to provide the charity with added value recommendations.
At the end of the day, an audit is about relationships and having an open and frank relationship with the auditors where issues and process problems are discussed on a timely basis can make the world of difference.
