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The auditor's responsibility to report to a UK charity regulator

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9 March 2018

Key points

  • The Financial Reporting Council (FRC) has issued a statement to remind the auditors of charities that they are required to carry out their audit in compliance, not only with the FRC's ethical and auditing standards, but also applicable legal and regulatory requirements.

  • Attention is drawn to the joint guidance issued by the three UK charity regulators issued in November 2017: Matters of Material Significance reportable to UK charity regulators - A guide for auditors and independent examiners.

  • Any person appointed as an auditor or independent examiner for a charity has a duty to report matters of material significance, which they become aware of during their appointment, to the appropriate UK charity regulator.

The Financial Reporting Council (FRC) has issued a statement to remind auditors of charities that they are required to carry out their audit in compliance, not only with the FRC's ethical and auditing standards, but also applicable legal and regulatory requirements.

Attention is drawn to:

  • Our previous article highlighting the joint guidance issued by the three UK charity regulators in November 2017: “Matters of Material Significance reportable to UK charity regulators - A guide for auditors and independent examiners”.
  • The FRC's statement.

Any person appointed as an auditor or independent examiner for a charity has a duty to report matters of material significance which they become aware of during their appointment to the relevant UK charity regulator. The guidance explains those matters which the UK charity regulators consider to be of material significance and provides some further explanation of each of the matters.

The statutory duty to report is not a new duty but this guidance is the first guidance to be issued jointly by the three UK charity regulators on the subject.

Under charity law, the term ‘material significance’ is used to determine which matters should be reported. Material in this context has a different meaning to that which auditors and independent examiners will be familiar with in accounting terms. In this case, it means matters which are of material significance to a UK charity regulator in carrying out its functions.

The matters in the list below are always considered reportable as matters of material significance by UK charity regulators. This list is effective for all audits or independent examinations which are conducted and/or reported after 1 May 2017 (regardless of the accounting period being examined).

A matter of material signficance becomes reportable as soon as the auditor or independent examiner:

  • becomes aware of it, or
  • in the case of an auditor, makes a modified auditor's opinion or an auditor's report with an emphasis of matter paragraph or a paragraph highlighting a material uncertainty relating to going concern, or
  • in the case of an independent examiner, issues a qualified independent examiner's report i.e. a report which identifies one or more concerns about the charity’s accounts.

Auditors and independent examiners may decide that other matters not included in this list are, in their judgement, of such a nature that they consider them reportable as a matter of material significance. In this case, in making their report they should identify the matter(s) reported as of material significance.

Reportable matters of material significance:

Serial

Title

Each matter is prefaced by the following statement - 'During the course of an audit/independent examination':

1

Dishonesty & Fraud

matters suggesting dishonesty or fraud involving a significant loss of, or a material risk to, charitable funds or assets.

2

Internal Controls & Governance

failure(s) of internal controls, including failure(s) in charity governance that resulted in, or could give rise to, a material loss or misappropriation of charitable funds, or which leads to significant charitable funds being put at major risk.

3

Money Laundering & Criminal Activity

knowledge or suspicion that the charity or charitable funds including the charity’s bank account(s) have been used for money laundering or such funds are the proceeds of serious organised crime or that the charity is a conduit for criminal activity.

4

Support of Terrorism

matters leading to the knowledge or suspicion that the charity, its trustees, employees or assets, have been involved in or used to support terrorism or proscribed organisations in the UK or outside of the CCNI EG058 November 2017 10 UK, with the exception of matters related to a qualifying offence as defined by Section 3(7) of the Northern Ireland (Sentences) Act 1998.

5

Risk to charity’s beneficiaries

evidence suggesting that in the way the charity carries out its work relating to the care and welfare of beneficiaries, the charity’s beneficiaries have been or were put at significant risk of abuse or mistreatment.

6

Breaches of law or the charity’s trusts

single or recurring breach(es) of either a legislative requirement or of the charity’s trusts leading to material charitable funds being misapplied.

7

Breach of an order or direction made by a charity regulator

evidence suggesting a deliberate or significant breach of an order or direction made by a charity regulator under statutory powers including suspending a charity trustee, prohibiting a particular transaction or activity or granting consent on particular terms involving significant charitable assets or liabilities.

8

Modified audit opinion or qualified independent examiner’s report

on making a modified audit opinion, emphasis of matter, material uncertainty related to going concern, or issuing of a qualified independent examiner’s report identifying matters of concern to which attention is drawn, notification of the nature of the modification/qualification/emphasis of matter or concern with supporting reasons including notification of the action taken, if any, by the trustees subsequent to that audit opinion, emphasis of matter or material uncertainty identified /independent examiner’s report.

9

Conflicts of interest and related party transactions

evidence that significant conflicts of interest have not been managed appropriately by the trustees and/or related party transactions have not been fully disclosed in all the respects required by the applicable SORP, or applicable Regulations.

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