Audit reports – a new regime
Following a number of revisions to the International Standards on Auditing, all audit reports issued for periods commencing on or after 17 June 2016 will look different to the existing format.
The main changes relate to the following:
- The opinion paragraph is now at the start of the audit report rather than at the end and there is a change in the order in which the sections are presented
- The audit report now contains a specific paragraph relating to going concern – even if there are no issues to report.
- Reference to the revised FRC Ethical Framework
- Respective responsibilities of the auditor and the Trustees are now at the end of the report
So what will these changes mean for your Charity’s audit report?
As auditors we will be required to comment specifically on the going concern of the charity and this will be a prominent statement as it will follow the opinion paragraph. We are required to state whether or not we have anything to report in respect of the Trustees’ use of the going concern basis of accounting in preparing the financial statements and whether we believe this is appropriate. Even if we don’t have anything to report we have to state that in the report.
We also need to report whether the Trustees have or haven’t disclosed any identified material uncertainties that may cast significant doubt about the Charity’s ability to continue to adopt the going concern basis of accounting for a period of at least 12 months from the date when the financial statements are authorised for issue.
Previously if there have been any material uncertainties these would have been disclosed within an emphasis of matter paragraph at the end of the audit report. By introducing a specific conclusion on going concern AND including it as the second section of the audit, it makes it much more prominent, especially if there is a concern to report.
The new regime is more transparent and ensures that any going concern issues are very clearly identified. However the implications across the charity sector, given the not for profit remit, could be significant, especially for smaller charities. These charities tend to have much lower levels of reserves, with reserves policies that cover say 6 months of expenditure. Going concern has to be assessed on the 12 month period from signing the accounts – for example for December 2017 year end accounts being signed off in June 2018, the Trustees and auditor will need to assess and base their going concern conclusions on the period to June 2019. Where a charity has low levels of reserves and relies on donations, legacies and fundraising, this may result in going concern issues being raised within the audit report.
In addition, this may cause issues when applying for funding or obtaining support from donors so charities may have to explain further where the money is going and the reserves they are holding. This is turn will require charities to have good management information and reporting that includes budgeting and forecasting – again this will affect the smaller charities, as the larger charities should have this information available already. In a tough funding environment this may have significant implications for many charities.
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