17 Not for Profit Organisations

Question 1

Give examples of not for profit

Answer 1

Charities, Schools, Associations

Question 2

An audit of a not-for-profit organisation may vary from a ‘for profit audit’ due to:

Answer 2

 Its objectives and the impact on operations and reporting  The purpose for which an audit is required

Question 3

When carrying out an audit of a not-for-profit organisation, it is vital that the auditor establishes:

Answer 3

 Whether a statutory audit is required  If a statutory audit is not required, what the objectives of the engagement are  What the engagement is to report on  To whom the report should be addressed  What form the report should take

Question 4

When planning the audit of a not-for-profit organisation, the auditors should particularly consider the following:

Answer 4

 The scope of the audit  Recent recommendations of the regulatory bodies  The acceptability of accounting policies adopted  Changes in circumstances in the sector in which the organisation operates  Past experience of the effectiveness of the organisation’s accounting system  Key audit areas  The amount of detail included in the financial statements on which the auditors are required to report

Question 5

There are certain risks applicable to not-for-profit organisations that might not necessarily be applicable to other small companies. The auditors should consider the following: (inherent risk)

Answer 5

 The complexity and extent of regulation (particularly in relation to public sector notfor-profit organisations)  The significance of donations and cash receipts  Difficulties of the organisation in establishing ownership and timing of voluntary income where funds are raised by non-controlled bodies  Lack of predictable income or precisely identifiable relationship between expenditure and income  Uncertainty of future income

Question 6

There are certain risks applicable to not-for-profit organisations that might not necessarily be applicable to other small companies. The auditors should consider the following: (inherent risk). For charities in particular:

Answer 6

 Restrictions imposed by the objectives and powers given by charities’ governing documents  The importance of restricted funds  The extent and nature of trading activities must be compatible with the entity’s charitable status  The complexity of tax rules (whether income, capital, sales or local rates) relating to charities  The sensitivity of certain key statistics, such as the proportion of resources used in administration  The need to maintain adequate resources for future expenditure while avoiding the build-up of reserves which could appear excessive

Question 7

There are certain risks applicable to not-for-profit organisations that might not necessarily be applicable to other small companies. The auditors should consider the following: (Control risk). For charities in particular:

Answer 7

 The amount of time committed by directors/trustees to the organisation’s affairs  The skills and qualifications of individual directors/trustees  The frequency and regularity of board/trustee meetings  The form and content of board/trustee meetings  The independence of trustees from each other  The division of duties between management/trustees  The degree of involvement in, or supervision of, the organisation’s transactions on the part of individual directors/trustees

Question 8

There are certain risks applicable to not-for-profit organisations that might not necessarily be applicable to other small companies. The auditors should consider the following: (Control environment). For charities in particular:

Answer 8

 A recognised plan of the organisation’s structure clearly showing the areas of responsibility and lines of authority and reporting  Segregation of duties  Supervision by management/trustees of the activities of staff where segregation of duties is not practical  Competence, training and qualification of paid staff and any volunteers appropriate to the tasks they have to perform  Involvement of the board/trustees in the recruitment, appointment and supervision of senior executives  Access of trustees to independent professional advice where necessary  Budgetary controls in the form of estimates of income and expenditure for each financial year and comparison of actual results with the estimates on a regular basis  Communication of results of such reviews to the board/trustees on a regular basis

Question 9

Using charities as an example, the following types of internal control might be typical. Collecting boxes and tins

Answer 9

Numerical control over boxes and tins Satisfactory sealing of boxes and tins so that any opening prior to recording cash is apparent Regular collection and recording of proceeds from collecting boxes Dual control over counting and recording of proceeds

Question 10

Using charities as an example, the following types of internal control might be typical. Postal receipts

Answer 10

Unopened mail kept securely Dual control over mail opening Immediate recording of donations on opening of mail or receipt Agreement of bank paying-in slips to record of receipts by an independent person

Question 11

Using charities as an example, the following types of internal control might be typical: Deeds of covenant

Answer 11

Regular checks and follow-up procedures to ensure due amounts are received Regular checks to ensure all tax repayments have been obtained

Question 12

Using charities as an example, the following types of internal control might be typical: Legacies

Answer 12

Comprehensive correspondence files maintained in respect of each legacy Regular reports and follow-up procedures undertaken in respect of outstanding legacies

Question 13

Using charities as an example, the following types of internal control might be typical: Donations in kind

Answer 13

In case of charity shops, separation of recording, storage and sale of inventory

Question 14

Using charities as an example, the following types of internal control might be typical: Fundraising activities

Answer 14

Records maintained for each fundraising event Other appropriate controls maintained over receipts Controls maintained over expenses as for administrative expenses

Question 15

Using charities as an example, the following types of internal control might be typical: Central and local government grants and loans

Answer 15

Regular checks that all sources of income or funds are fully utilised and appropriate claims made Ensuring income or funds are correctly applied by adequate monitoring

Question 16

Using charities as an example, the following types of internal control might be typical: Restricted funds

Answer 16

Separate records maintained of relevant income, expenditure and assets Terms controlling application of funds Oversight of application of fund monies by independent personnel or trustees

Question 17

Using charities as an example, the following types of internal control might be typical: Grants to beneficiaries

Answer 17

Records maintained, as appropriate, of requests for material grants received and their treatment Appropriate checks made on applications and applicants for grants, and that amounts paid are in accordance with legislation Records maintained of all grant decisions, checking that proper authority exists, that adequate documentation is presented to decision-making meetings, and that any conflicts of interest are recorded Controls to ensure grants made are properly spent by the recipient for the specified purpose

Question 18

Designing procedures for not-for-profit entities. When designing substantive procedures for not-for-profit entities the auditors should give special attention to the possibility of:

Answer 18

 Understatement or incompleteness of the recording of all income, including gifts in kind, cash donations and legacies  Overstatement of cash grants or expenses  Misanalysis or misuse in the application of funds, including the misuse of taxpayers’ funds if the entity is government funded  Misstatement or omission of assets, including donated properties and investments  The existence of restricted or uncontrollable funds in foreign or independent branches

Question 19

Completeness of income can be a particularly problematic area. Areas auditors may check include:

Answer 19

 Loss of income through fraud  Recognition of government funding  Recognition of income from professional fundraisers  Recognition of income from branches, associates or subsidiaries  Income from informal fundraising groups  Income from grants

Question 20

The auditor should ensure that they make the following matters clear:

Answer 20

 The addressees of the report  What the report relates to  The scope of the engagement  The respective responsibilities of auditors and management/trustees/directors  The work done  The opinion drawn

Question 21

All not-for-profit organisations must have a statutory audit. T/F

Answer 21

False

Question 22

Explain why income can be a problem when auditing charities

Answer 22

 Loss of income through fraud  Recognition of income from professional fundraisers  Recognition of income from branches, associates or subsidiaries  Income from informal fundraising groups  Income from grants

Question 23

Explain why the control environment in a small not-for-profit entity might be weak.

Answer 23

 Lack of segregation of duties  Unqualified staff  Lack of staff training  Voluntary staff so unclear responsibilities  High staff turnover  Lack of internal audit department

Question 24

Explain why the materiality figure when auditing local government may not be based on a benchmark linked to percentage profit.

Answer 24

Local government will need to focus on obtaining value for money and keeping costs down. Therefore percentages applied to benchmarks linked to costs are more likely to be used to set materiality.