The FRC emphasis that charities have been the subject of extensive press, public and parliamentary interest of late, and this revision of the Practice Note seeks to incorporate lessons learned, particularly with respect to going concern and the auditor’s responsibility to report to charity regulators.
Some of the main proposed changes relevant to members are:
This document includes various comments on the role of the accountancy and legal firms involved with the charity. Section 156 of the Charities Act 2011 places a duty on the auditors of both a non-company charity and a company charity to report matters of ‘material significance’ to the Commission.
The report noted that the auditors did not notify the Charity Commission about the charity’s failure to address its precarious funding situation – which ultimately led to the charity’s folding, the loss of significant charitable funds and the collapse in the support framework of a large number of vulnerable people.
Legislative and regulatory framework: this section has been updated to reflect changes across the different jurisdictions in the United Kingdom. In addition, Appendix 1 (now Appendix 2) – Charity accounting and audit regulations in the United Kingdom has also been amended and updated to incorporate the material in Appendix 6 – Legislative background to auditor’s reports on charities’ financial statements.
A new appendix has been inserted into the PN (new Appendix 1 – Conditions and events that may indicate risks of material misstatement) which sets out conditions and events which may give rise to a risk of material misstatement specific to charities.
Materiality: the section on ISA (UK) 320 has been updated to provide further guidance about judgements about materiality and both the size and nature of misstatements.
Going concern: the section on ISA (UK) 570 has been expanded and updated to provide more guidance to auditors.
Other information: the section on ISA (UK) 720 has been updated to provide guidance on how the revised standard applies to the trustees’ report.
There is also a proposal to delete quite a few sections of the existing PN which are now deemed to either not have charity specific content or are no longer required:
Standards: ISA (UK) 200; ISA (UK) 300; ISA (UK) 505; ISA (UK) 520
Summary financial information and summarised financial statements
Appendix 2 – Publications
Appendix 3 – Example paragraphs for insertion into an engagement letter
Appendix 4 – Illustrative example statements of trustees’ responsibilities
Appendix 5 – The duty of the auditor to report matters of material significance to CCEW and OSCR
Appendix 6 – Legislative background to auditor’s reports on charities’ financial statements
Appendix 7 – Definitions; Appendix 8 – Some significant topics relevant to audits of charities.
This streamlining has resulted in a reduction in pages from 149 to 71. The specific aim is increase the focus of the guidance on matters specific to the audit of charities and avoid duplicating material that can be found elsewhere.
The proposed changes help to ensure that the Practice Note will continue to support the delivery of high quality audit for charities. Subject to stakeholder comments, the FRC will issue a final version of the revised Practice Note later in 2017.