Charity audits vs independent examinations: what’s the difference?

Charities that exceed certain thresholds must demonstrate financial accountability by undergoing a charity audit or independent examination.

While the purpose of both processes is to scrutinise a charity’s finances, a full charity audit is considerably more comprehensive than an independent examination.

Understanding the differences matters – not just for legal compliance but for building stakeholder trust, too. Read on to learn more about charity audits and how they work.

Understanding charity audits

An audit systematically reviews the organisation’s financial statements and records.

Its primary purpose is to evaluate the charity’s financial health and ensure its financial reporting’s accuracy.

This includes assessing the charity’s adherence to accounting practices, verifying the accuracy of its financial transactions, and evaluating the effectiveness of its internal controls and risk management procedures.

Who needs to have an audit?

The Charity Commission mandates audits for larger charities that have:
a gross annual income of over £1 million
or gross assets exceeding £3.26m and a gross annual income of more than £250,000.

These organisations must submit their audited accounts to the Charity Commission as part of their annual reporting obligations.

Role and responsibilities of the auditor

The auditor’s role is crucial in the audit process. They provide an independent and impartial opinion on the charity’s financial statements to determine whether they present a true and fair view of its financial position.

This role encompasses evaluating the charity’s compliance with accounting standards and relevant regulatory requirements, identifying any discrepancies or irregularities in the financial records, and ensuring that the charity adheres to accounting standards.

Impact and benefits of audits

The impact of charity audits extends beyond legal compliance; they play a vital role in enhancing public trust and confidence in charities.

By demonstrating a commitment to financial transparency, audits help build credibility and assurance among donors, beneficiaries, major stakeholders and the general public.

Beyond compliance, the insights gained from audits can be used to improve operations and processes. For example, they might expose inefficient processes that are costing the charity revenue.

What is an independent examination?

An independent examination may be less comprehensive than a full audit, but it still provides a meaningful review of a charity’s financial statements.

The process includes analysing the financial records and engaging in discussions with the charity’s staff to verify that the financial statements are prepared correctly and accurately reflect the charity’s financial position.

The examination ensures that the charity’s financial reporting is transparent and adheres to the required accounting standards, albeit with a lighter touch than an audit.

Who needs to have an independent examination?

Independent examinations are compulsory for charities with an annual income between £25,000 and £1m.

This scaled-back procedure is particularly beneficial for these organisations, as it offers a level of financial oversight appropriate for their size and complexity without the extensive requirements of a full audit.

It can also be a cost-effective way for these charities to demonstrate their commitment to financial accountability.

Examiner’s Qualifications and Role

The person conducting an independent examination must have the requisite skills and experience to perform a competent review.

Notably, the examiner must be a qualified accountant if they’re auditing charities with an annual income exceeding £250,000.

The examiner’s role is to scrutinise the financial statements and engage with personnel to ensure that the financial reporting is accurate and that the charity complies with accounting practices.

What if my charity earns less than £25,000?

For charities with an annual income below £25,000, the requirements for financial oversight are significantly more relaxed.

While these charities are not mandated to undergo independent examinations or audits, they must maintain accurate financial records.

  • Voluntary best practices: While not legally required, smaller charities are encouraged to adopt best practices in financial reporting for transparency and accountability.
  • Record-keeping: Efficient and accurate record-keeping is crucial. It ensures the charity is prepared if its financial situation changes or it chooses to undertake voluntary financial reviews for donor confidence.
  • Annual returns: Charities are required to submit annual returns if their income exceeds £10,000. While submitting these returns is not mandatory for those earning less, it is considered good practice.

Summing up

Charities must undergo either an audit or independent examination to demonstrate financial accountability and transparency.

The law requires charities to take proactive and affirmative action to ensure they’re legally compliant with audit and reporting rules.

Audits thoroughly verify accuracy across reporting. Examinations review select areas without providing full assurance.

While different in scope, audits and examinations uphold the integrity and donor trust. Larger charities commission full audits to showcase oversight, while smaller entities often opt for cost-effective examinations.

As expert accountants for charities, we can help you understand what you need and prepare.

If your charity needs an audit or internal examination now or in the near future, get in touch with P B Syddall.