Chapter 14 Audits of different types of entity Flashcards
1.1 Different types of entity
Most audits are carried out on non-specialised, profit-orientated entities. Some clients are specialised in some way some as subject to regulation (banks), subject to professional rules (solicitors) and non-for-profit organisations (charities, public sector bodies).
1.2 Not-for-profit entities
These organisations do not have shareholder wealth maximisation as their primary objective. Some of these entities will be limited companies and therefore require an audit under the Companies Act 2006. It will also be important to identify any other reporting requirements.
2.1 Accounting issues
Charity accounting is governed by the Charities Statement of recommended practice. Charities will prepare accounts including:
- Statement of financial activities shows resources available, and expenditure incurred. Reconciliation of change in funds
- Summary income and expenditure account, prepared only if company prepares accounts under Companies Act 2006 or the governing instrument requires it
- Balance sheet shows assets, liabilities and funds including an indication of any restricted funds
- Cash flow statement is a reconciling profit to movements in cash
- Notes to the accounts provide further detail
The accounts must include legacies to be recognised when probable rather than certain, disclosure of total employee benefits received by key management personnel, disclosure of the number of staff receiving pay over £60,000 and a list of institutional grants.
2.2 Audit requirements – charities
Unincorporated charities have different audit rules. If gross income is more than £1 million or gross assets is more than £3.26 million and gross annual income exceeds £250k when an audit is required. If gross income is between £25k and £1m then an independent verification of the financial statement is required (this must be done by a qualified accountant if income is over £250k). if gross income is more than £25k then a copy of the accounts needs to be sent to the charity commission.
A charity’s governing document may specify a particular type of engagement, the charity must follow the higher standard of scrutiny required by either the legal framework or the governing document.
2.3 Independent verification
Independent verification is a limited assurance engagement, with work limited to procedures such as review of accounting records, enquiries of management and analytical procedures. The examiner does not give an opinion on the truth and fairness of the accounts but reports on whether matters have come to their attention indicating that proper accounting records have not been kept, the accounts do not comply with such records and the accounts fail to comply with relevant regulations.
2.4 Auditing a charity
The process will be the same for all assurance engagements. Acceptance, planning, evidence, and reporting.
General risks could include associations with cash donations, lack of segregation of duties due to use of volunteers and grant income. But charities are diverse, and the operation of a large national charity will be significantly different from a local charity.
3.1 Public sector
The public sector comprises central government, local government and companies running outsourced public services. All these organisations prepare financial statements. The structure of public sector audit in England is:
- House of commons, decided how public money is spent
- Committee of public accounts, examines public expenditure
- National audit office, audits central government departments and agencies (for example The Passport Agency)
- Public sector audit appointments Ltd manages contracts for the audit of local government, health, housing, criminal justice, fire, and rescue (previously the responsibility of the Audit commission)
3.2 Principles of public sector audit
Main purpose of public sector audit is accountability. Audit helps ensure public money is spent wisely and handled with integrity. The public audit forum is a representative of the major audit bodies in the UK, and sets out three key principals:
- Independence of public sector auditors from the bodies they audit
- The wide scope of audit in the public sector
- The ability of public sector auditors to make their results available to the public
ISAs apply to public sector audit work. Where applicable the standards contain ‘Considerations Specific to Public Sector Entities’ which highlight some of the different considerations that apply to public sector audits.
3.3 Scope of public sector audit
Public sector audits includes the audit of financial statements but also extends to:
- Regularity: transactions are carried out in accordance with legislation and regulations
- Propriety: transactions and business are carried out ethically, with integrity and according to any existing standards of conduct
- Value for money: best use is being made of resources in terms of economy (spend less), efficiency (spend well) and effectiveness (spend wisely).
